AFM 131 - Chapter 15 Notes.docx

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University of Waterloo
Accounting & Financial Management
AFM 131
Robert Sproule

Chapter 15 Notes 1 Managing the Marketing Mix: Product, Price, Place, and Promotion Product Development and the Total Product Offer:  Value is quality at a fair price. When consumers calculate the value of a product, they look at the benefits and then subtract the cost to see if the benefits exceed the costs. (pg. 450) Developing a Total Product Offer  A total product offer (value package) is everything that consumers evaluate when deciding whether to buy something (ex. Price, brand name, convenience, package, store surroundings, service, Internet access, buyer’s past experience, guarantee, speed of delivery, image created by advertising, and reputation of the producer).  A successful marketer must be able to think like a consumer to evaluate the total product offer as a mixture of various elements (as listed above).  Sometimes multiple products or services will be offered to satisfy different consumers (ex. Offering cars with either zero-percent financing or providing a rebate of thousands of dollars). (pg. 450-451) Product Lines and the Product Mix  A product line is a group of products that are physically similar or are intended for a similar market (ex. Procter & Gamble’s product lines include hair care, oral care, and household cleaners).  A product line may even include competing brands (ex. Procter & Gamble offers competing laundry items in their product line such as Tide, Cheer, and Ivory).  A product mix is the combination of product lines offered by a manufacturer (ex. All of Procter & Gamble’s products are included in its product mix). (pg. 451) Product Differentiation  Product differentiation is the creation of real or perceived product differences.  Product differences are sometimes small, so marketers must use a creative mix of pricing, advertising, and packaging to create a unique and attractive image. (pg. 452) Branding and Brand Equity:  For sellers, their brand name facilitates new-product introductions help promotional efforts, add to repeat purchases, and differentiate products so that prices can be set higher.  A trademark is a brand that has been given exclusive legal protection for both the brand name and the pictorial design. (pg. 453) Generating Brand Equity and Loyalty  Brand equity is the combination of factors-such as awareness, loyalty, perceived quality, images, and emotions-that people associate with a given brand name.  The core of brand equity is brand loyalty. Chapter 15 Notes 2  Brand loyalty is the degree to which customers are satisfied, enjoying the brand, and is committed to future purchases. A loyal group of customers represents great value to a firm.  Brand awareness refers to how quickly or easily a given brand name comes to mind when a product category is mentioned. (pg. 453) Brand Management  A brand manager is a manager who has direct responsibility for one brand or one product line; called a product manager in some firms.  Many large consumer product companies created the position of brand manager to have greater control over new-product development and product promotion. (pg 453-454) Competitive Pricing:  Pricing is the most difficult of the 4 Ps for a manager to control because price is a critical ingredient in consumer evaluations of the product. Pricing Objectives 1. Achieving a targetreturn on investment or profit. Goals of marketing mainly deal with making a profit and maximizing profit in the long-run. 2. Building traffic. Groceries often advertise certain products at or below cost to attract people to the store. These products are called loss leaders and provide the long-run objective of building a customer base. 3. Achieving greater market share. 4. Creating an image. Certain products (watches, perfume, etc.) that are socially visible are priced high to give them an image of exclusivity and status. 5. Furthering social objectives. A firm may want to price a product low so that people with little money can afford the product. (pg. 454-455 Major Approaches to Pricing Cost-Based Pricing o Producer set up cost accounting systems to measure production costs (materials, labour, and overhead), add in a margin of profit, and come up with a price. o In the long-run, the market will determine what the price will be. It will be based on costs in producing, expected costs of product updates, the objectives for each product, and competitor prices. Demand-Based Pricing o Bundling means grouping two or more products together and pricing them as a unit (ex. Selling a washer and dryer together at a special price). o Psychological pricing is pricing goods and services at price points that make the product appear less expensive than it is (ex. Pricing a house at $299,000 with the idea that it sounds a lot less than $300,000). o Target costing is designing a product so that it satisfies customers and meets the profit margins desired by the firm. Target costing makes the final price an input to the product development process, not an outcome of it. You estimate the selling price people would be willing to pay for a product and subtract the desired profit margin. Competition-Based Pricing Chapter 15 Notes 3 o Competition-based pricing is a strategy based on what all the other competitors are doing. The price can be set at, above, or below competitors’ prices. Pricing depends on customer loyalty, perceived differences, and the competitive climate. o Price leadership is the procedure by which one or more dominant firms set the pricing practices that all competitors in an industry follow. (pg. 455) Break-Even Analysis  Break-even analysis is the process used to determine profitability at various levels of sales. Break-even Point (BEP) = Total Fixed Cost (TC) / (Price of one unit (P) – Variable Cost (VC) of one unit) Pricing Strategies for New Products  A skimming price strategy is one in which a new product is priced high to make optimum profit while there’s little competition (the large profits will attract competitors).  A penetration price strategy is one in which the product is priced low to attract more customers and discourage competitors. (pg. 457) Retailer Pricing Strategies  Everyday low pricing (EDLP) is the pricing strategy in which prices are set lower than competitors and then not having any special sales (ex. Walmart). The idea is to have consumers come to those stores whenever they want a bargain rather than waiting until there is a sale, as they do with most department stores.  High-low pricing strategy is setting prices that are higher than EDLP stores, but have many special sales where the prices are lower than competitors. The problem is that it teaches consumers to wait for sales, thus cutting profits. (pg. 457) How Market Forces Affect Pricing  Demand-oriented pricing is pricing based on consumer demand rather than by cost or some other calculation (ex. Movie theatres having lower prices for children). (pg. 457) Non-Price Competition:  When prices are similar between products (gas, men’s haircuts, candy bars, etc.), price will not be used as a major promotional appeal. Instead, marketers tend to stress product image and consumer benefits such as comfort, style, convenience, and durability. Organizations promote the services that accompany basic products rather than price to be compet
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