Marketing Second Midterm Chapter Outline Chapter 8: Marketing Research: From Information to Action The Role of Marketing Research We can describe (1) what it is, (2) some of the difficulties in conducting it, and (3) the five steps marketing executives can use in conducting marketing research What is Market Research? Marketing Research- The process of defining a marketing problem and opportunity, systematically collecting and analyzing information, and recommending actions. Goal is to identify and define both marketing problems and opportunities and to generate and improve marketing actions. Reduce risk and uncertainty to improve decisions Why Good Marketing Research is Difficult Consumers may not be able to compare products to anything currently existing Sometimes difficult to get true answers Five-Step Marketing Research Approach to Making Better Decisions Decision- A conscious choice from among two or more alternatives Decision making- the act of consciously choosing from alternatives Step 1: Define the Problem Set the Research Objectives Objectives are specific measurable goals the decision maker seeks to achieve in solving a problem 3 Types of Research 1) Exploratory Research- provides ideas about a relatively vague problem 2) Descriptive Research- generally involves trying to find the frequency that something occurs or the extent of the relationship between two factors 3) Causal Research-tries to determine the extent to which the change in one factor changes another one. (most sophisticated) Identify Possible Marketing Actions Measures of Success- criteria or standards used in evaluating proposed solutions to a problem Step 2: Develop the Research Plano Specify Constraints on the marketing research activity Constraints- the restrictions placed on potential solutions to a problem Common constraints are limitations on the time and money available Identify Data Needed for Marketing Actions Often times extra information may be interesting but irrelevant, Important to collect information that will solve the specified problem Determine How to Collect Data Concepts Concepts- ideas about products or services New-product concept- a picture or verbal description of a product or service the firm might offer Methods Methods- that can be used to collect data to solve all or part of a problem 2 types of methods Sampling- selecting representative elements from a population Probability Sampling- using precise rules to select the sample such that each element of the population has a specific known chance of being selected No probability sampling- the use of arbitrary judgments to select the sample so that the chance of selecting a particular element may be unknown or 0 Statistical inference- drawing conclusions about a population from a sample taken from that population Step 3: Collect Relevant Information Data- The facts and figures related to the problem Secondary Data- Facts and figures that have already been recorded before the project at hand Internal (inside the firm): eg. Financial statements, research reports, files, customer letters, sales call reports, and customer lists External (outside the firm): eg. U.S. Census reports, trade association studies and magazines, business periodicals, and Internet-based reports Advantages of Secondary Data: 1) the tremendous time savings if the data have already been collected and published 2) the low cost, such as free or inexpensive Census reports 3) a greater level of detail is often available though secondary data, i.e. U.S. Census bureau data Disadvantages of SD: Secondary data may be out of date The definitions or categories might not be quite right for your project b/c data is collect for another purpose, it may not be specific enough for your project Primary Data- facts and figures that are newly collected for the project Observational Data- facts and figures obtained by watching people, either mechanically or in person, how people actually behave e.g. Nielsen Media Research observing what television people watch. Mystery shoppers Ethnographic research- anthropologists and other trained observes seek to discover subtle emotional reactions as consumer encounter products in their ?natural use environment? Personal observation is flexible and useful but can be costly and unreliable Questionnaire Data- facts and figures obtained by asking people about their attitudes, awareness, intentions, and behaviors Individual Interviews Focus groups- informal session of 6 to 10 past, present, or prospective customers in which a discussion leader, or moderator, asks their opinions about the firm?s and its competitors? products, how they use their products, and special needs they have that these products don?t address Conventional questionnaires- Mall intercept interviews- personal interviews of consumers while on visits to shopping centers Disadvantage: individuals may not be representative giving biased results Open-ended question- allows respondents to express opinions, idea, or behaviors Closed-end or fixed alternative questions- require respondents to select one or more responses from a set of choices Dichotomous question- yes or no question Semantic differential scale- a five-point scale in which the opposite ends have one- or two-word adjectives that have opposite meanings Likert scale- the respondent indicates the extent to which he or she agrees or disagrees with a statement Panels and Experiments Panel- a sample of consumers or stores from which researchers take a series of measurements. Disadvantages: the marketing research firm needs to recruit new members continually to replace those who drop out. These new recruits must match characteristics of those they replace Experiment- obtaining data by manipulating factors under tightly controlled conditions to test cause and effect Disadvantages: outside factors can distort the results of an experiment and affect the dependent variable Advantages and Disadvantages of primary data Advantage: more specific to the problem being studied Disadvantage: far more costly and time consuming to collect Using Information Technology to Trigger Marketing Actions The Marketing Manager?s View of Sales Drivers These drivers include both the controllable marketing mix factors like product and distribution as well as uncontrollable factors like competition and the changing tastes of households and organizational buyers. Information technology- involves a computer and communication system to satisfy an organization?s needs for data storage, processing, and access Data Mining- the extraction of hidden predictive information from large databases Step 4: Develop Findings Analyze the Data Present the Findings Findings should be clear and understandable from the way the data are presented Step 5: Take Marketing Actions Make Action Recommendations Implement the Action Recommendations Evaluate the Results Evaluating the decision itself Evaluating the decision process used Chapter 10: Developing New Products and Services The Variations of Products Product Line and Product Mix Product- a good, service, or idea consisting of a bundle of tangible and intangible attributes that satisfies consumers and is received in exchange for money or some other unit of value Product Line- a group of precuts that are closely related because they satisfy a class of needs, are used together, are sold to the same customer group, are distributed through the same types of outlets, or fall within a given price range. A broad product line enables both consumer and retailer to simplify their buying decisions Within each product line is the product item, a specific product as noted by a unique brand, size, or price, Product mix- the number of product lines offered by a company Classifying Products Type of User Consumer goods- products purchased by the ultimate consumer Business goods-products that assist directly or indirectly in providing products for resale Difficulties in classification: some products are both consumer and business items Degree of Tangibility Nondurable good- and item consumed in one or a few uses. i.e. food, fuel, ect. Consumer advertising and wide distribution is essential Durable good- one that usually lasts over an extended number of uses. i.e. appliances, automobiles, and stereo equipment personal selling is important Services- activities, benefits, or satisfactions offered for sale. i.e. marketing research, health care, and education Special marketing effort to communicate their benefits to potential buyers Services and New-Product Development Classifying Consumer and Business Goods Classification of consumer goods Convenience goods- items that the consumer purchases frequently, conveniently, and with a minimum of shopping effort Shopping goods- items which the consumer compares several alternatives on criteria, such as price, quality, or style Specialty goods- items that a consumer makes a special effort to search out and buy Unsought goods- items that the consumer either does not know about or knows about but does not initially want Classification of Business Goods Sales are often the result of derived demand Production Goods Items used in the manufacturing process that become part of the final goods Raw materials such as grain or lumber Support Goods: Items used to assist in producing other goods and services Installations: consist of buildings and fixed equipment Accessory equipment: tools and office equipment and is usually purchased in small-order sizes by buyers Supplies: similar to consumer convenience goods and consist of products such as stationary, paper clips, and brooms Industrial services: intangible activities to assist the industrial buyer New Products and Why They Succeed or Fail What is a New Product? Newness Compared with Existing Products If a product is functionally different from existing products Additional features are added to an existing product Newness in Legal Terms Use with a product up to six months after it enters regular distribution Newness from the Company?s Perspective Product line extension: incremental improvement of an existing product for the company Significant jump in the innovation or technology True innovation, a truly revolutionary product Newness from the Consumers Perspective Continuous innovations: no new behaviors must be learned to use product E.g. first flat panel television Dynamically continuous innovation: only minor changes in behavior are required for use Discontinuous innovation: the consumer must learn entirely new consumption patterns in order to use the product Why Products Succeed or Fail Marketing Reasons for New-Product Failures Insignificant point of difference Most important factor Incomplete market and product definition before product development starts Protocol- a statement that, before product development begins, identifies: (1) a well-defines target market; (2) specific customers? wants, and preferences; and (3) what the product will be and do. Too little market attractiveness Poor execution of the marketing mix: name, package, price, promotion, distribution Poor product quality or sensitivity to customer needs on critical factors One or two factors can kill the product, even though general quality is high Bad timing Product is introduced too soon, too late, or at a time when consumer tastes are shifting dramatically No economical access to buyers The New Product Process The stages a firm goes through to identify the business opportunities and convert them to a salable good or service. New-Product Strategy Development Definition: the stage of the new product process that defines the role for a new product in terms of the firm?s overall corporate objectives Objectives of the Stage: identify markets and strategic roles Company uses the environmental scanning process Relevant company strengths and weaknesses are also identified Cross functional teams and Six Sigma Cross functional teams: a small number of people from different departments in an organization who are mutally accountable to a common set of preformace goals Six Sigma: means to ?delight the customer? by achiving quality thorugh a highly disciplined process to focus on developing and delivering near-perfect products and services Idea Generation Definition: developing a pool of concepts as candidates for new products, must build on the previous stage?s results Developed through: Customer and Supplier suggestions: focusing on what the new product will actually do for them rather than simply what they want Employee and Co-Worker Suggestions Research and Development Breakthroughs Competitive Products Screening and Evaluation Definition: The stage of the new-product process that involves internal and external evaluations of the new-product ideas to eliminate those that warrant no further effort. Internal Approach The firm evaluates the technical feasibility of the proposal and whether the idea meets the objectives defined in the new-product strategy development sage External Approach Concept tests are external evaluations that consist of preliminary testing of the new-product idea with consumers These tests are more useful with minor modification of existing products then with really new, innovative products not familiar to consumers Business Analysis Definition: The stage of the new=product process that involves specifying the product features and marketing strategy and making necessary financial projections needed to commercialize a product The last checkpoint before significant capital is invested in creating a prototype, a full-scale operating model of the product under development Economic analysis, marketing strategy review, and legal examination of the proposed product are conducted at this stage Development Definition: the stage of the new-product process that involves turning the idea on paper into a prototype Market Testing Definition: the stage of the new-product process that involves exposing actual products to prospective consumers under realistic purchase conditions to see if they will buy Test Marketing involves offering a product for sale on a limited basis in a defined area Used to determine whether consumers will actually buy the product and to try different ways of marketing it Gives an indication of potential sales volume and market share in test area Very time consuming and expensive Competitors can also try to sabotage test markets Simulated Test Marketing, a technique that simulates a full-scale test market but in a limited fashion Often run in shopping malls When Test Markets Don?t Work Test markets are difficult for services Test markets for expensive consumer products such as cars or VCRs or costly industrial products are impractical Commercialization Definition: the stage of the new-product process that involves positioning and launching a new product in full-scale production and sales Most expensive stage Large companies use regional rollouts, introducing the product sequentially into geographical area of the US to allow production levels and marketing activities to build up gradually to minimize the risk of new-product failure Risks and Uncertainties of the Commercialization stage slotting fee- a payment a manufacturer makes to place a new item on a retailer?s shelf failure fee- a penalty payment a manufacture makes to compensate a retailer for sales its valuable shelf space failed to make Speed as a Factor in New-Product Success Speed and time to market (TtM) is vital in introducing a new product Parallel development- cross-functional team members who conduct the simultaneous development of both to product and the production process stay with the product from conception to production Fast prototyping, ?do it, try it, fix it? Chapter 11: Managing Products and Brands The Product Life Cycle Introduction Stage Occurs when a product is first introduced to its intended target market Sales grow slowly, and profit is minimal The marketing objective at this stage is to create consumer awareness and stimulate trial- the initial purchase of a product by a consumer Companies spend heavily on advertising during this stage Companies tend to restrict the number of variation of the product to ensure control of product quality A high initial price may be Skimming Strategy to help the company recover the costs of development as well as capitalize on the price insensitivity of early buyers A low initial price is referred to as penetration pricing, used to build unit volume Growth Stage This stage is characterized by rapid increases in sales Profit usually peaks during this stage Product sales grow because of new people using the product and growing proportion of repeat purchasers- people who tried the product, were satisfied, and bought again. Changes start to appear in the product, improved version or new features are added to the original design, and product proliferation occurs Important to gain as much distribution for the product as possible Maturity Stage Characterized by a slowing of total industry sales or product class revenue. Marginal competitors begin to leave the market Sales increase at a decreasing rate as fewer new buyer enter the market Profit declines because there is fierce price competition among many sellers Marketing attention is directed toward holding marker share though further product differentiation and finding new buyers Decline Stage Occurs when sales and profits begin to drop A product usually enters this stage because of environmental change Technological innovation often precedes the decline stage as new tech replaces old Products in decline stage tend to consume a disproportionate share of management time and financial resources relative to their potential future worth. 2 ways to handle declining product Deletion- dropping the product from the company?s product line Harvesting- when a company retains the product but reduces the marketing costs. Purpose of harvesting is to maintain the ability to meet customer requests Some Dimensions of the Product Life Cycle Length of the Product Life Cycle No exact time a product takes to move through its life cycle Consumer products have a shorter life cycle then business products Technological change tends to shorten product life cycles Shape of the Product Life Cycle High-learning product- significant education of the customer is required and there is an extended introductory period Low-learning product- sales begin immediately because little learning is required by the consumer, and the benefits are readily understood Fashion product- is introduced, declines, and then seems to return Fad- experiences rapid sales on introduction and then an equally rapid decline The Product Level: Class and Form Product Class- refers to the entire product category or industry, such as video game consoles and software Product form- pertains to the variations within the class The Life Cycle and Consumers The shapes of the life-cycle indicate that most sales occur after the product has been on the market for some time Common reasons for resisting a product in the introduction stage: Usage barriers- the product is not compatible with existing habits value barriers- the product provides no incentive to change risk barriers- physical, economic, or social psychological barriers- cultural differences or image Companies attempt to overcome these barriers by providing: Warranties Money back guarantees Extensive usage instructions Demonstrations And free samples 5 categories and profiles of product adapters Innovators- venturesome, higher educated, use multiple information sources Early adopters- leaders in social setting, slightly above average education Early majority-deliberate, many informal social contacts Late majority- skeptical, below average social status Laggards- fear of debt, neighbors and friends are information sources Managing the Product Life Cycle Role of a Product Manager Sometimes called a brand manager Manages the marketing efforts for a close-knit family of products or brands Modifying the Product Product modification- involves altering a product?s characteristics, such as its quality, performance, or appearance, to try to increase the product?s sales new features, packages, or scents can be used to change a product?s shcarteristics and give the sense of a revised product Modifying the Market Finding New Users Increasing Use Creating New Use Situation Repositioning the Product Product repositioning- changing the place a product occupies in a consumer?s mind relative to competitive products Reacting to a Competitor?s Position Reposition a product because a competitor?s entrenched position is adversely affecting sales and market share Reaching a New Market Catching a Rising Trend Changing consumer trends can lead to repositioning i.e. growing consumer interest in foods that offer health and dietary benefits Changing the Value Offered Trading up- involves adding value to the product (or line) through additional features or higher quality materials Trading down- involves reducing the number of features, quality, or price Trading down often exists when companies engage in downsizing?reducing the content of packages without changing package size and maintain or increasing the package price Branding and Brand Management Branding- when an organization uses a name, phrase, design, symbols, or combination of these to identify its products and distinguish them from those of competitors Brand Name- any word, device (design, sound, shape, or color), or combination of these used to distinguish a sellers goods or services Trade name- a commercial, legal name under which a company does business Trademark- identifies that a firm has legally registered its brand name or trade name so the firm has its exclusive use Product counterfeiting- low-cost copies of popular brands not manufactured by the original producer Brand Personality and Brand Equity Brand Personality- a set of human characteristics associated with a brand name Brand Equity- the added value a given brand name gives to a product beyond the functional benefit provided, Brand equity provides a competitive advantage Consumers are often willing to pay a higher price for a product with brand equity Creating Brand Equity First, develop positive brand awareness and an association of the brand in consumer?s minds with a product class or need to five the brand an identity Next, a marketer must establish a brand?s meaning in the minds of the consumers. Third, elicit the proper consumer responses to a brand?s identity and meaning Finally, create a consumer-brand resonance evident in an intense, active loyalty relationship between consumer and the brand. Valuing Brand Equity Brand equity provides a financial advantage for the brand owner Brand Licensing- is a contractual agreement whereby one company (licensor) allows its brand name(s) or trademark(s) to be used with products or services offered by another company (licensee) for a royalty or fee Successful brand licensing requires careful marketing analysis to assure a proper math between the licensor?s brand and the licensee?s products Picking a Good Brand Name Suggest the product benefits Be memorable, distinctive, and positive Fit the company or product image Have no legal or regulatory restrictions Should be simple Branding Strategies Multiproduct Branding- a company uses one name for all its products in a product class Sometimes called family branding or corporate branding when the company?s trade name is used Advantages include: capitalizing on brand equity, lower advertising and promotion costs, Line extension- the practice of using a current brand name to enter a new market segment in its product class Risks: sales of an extension may come at the expense of other items in the company?s product line Subbranding-combines a corporate or family brand with a new brand Brand extension- using a current brand name to enter a completely different product class Too many uses for one brand name can dilute the meaning of a brand for consumers Co-branding- the pairing of two brand names of two manufacturers on a single product Multibranding- giving each product a distinct name Multibranding is a useful strategy when each brand is intended for a different market segment Some companies array their brands on the basis of price-quality segments E.g. hotels Other multibrand companies introduce new product brands to counteract competition. Fighting brands- their chief purpose is to confront competitor brands compared to multiproduct branding, promotional costs tend to be higher with multibranding advantages: each brand is unique to each market segment and there is no risk that a product failure will affect other products in the line Private Branding- when a company manugactures products but sells them under the brand name of a wholesaler or retailer Private branding is popular because it typically produces high profits for its manufacturers and reseller Mixed Branding- where a firm markets products under its own name(s) and that of a reseller because the segment attracted to the reseller is different from its own market. Packaging and Labeling Packaging refers to any container in which it is offered for sale and on which label information is conveyed Label- identifies the product or brand, who made it, where and when it was made, how it is to be used, and package contents and ingredients Creating Customer Value and Competitive Advantage through packaging and Labeling Communication Benefits Label information conveyed to the consumer Directions on how and when to sue the product Composition of the product Packaging can have brand equity benefits for a company Functional Benefits Storage- shape can allow for more efficient stacking Convenience- e.g. easy squeeze bottles Protection- e.g. tamper resistant containters Product quality-. E.g. cylindrical chip containers prevents breaking Perceptual Benefits The packaging can convey a perceptual advantage Global Trends in Packaging Environmental Sensitivity Recycling packaging Life-cycle analysis to examine the environmental effect of their packaging at every stage from raw material sources and production through distribution and disposal Health and Safety Concerns Child-proof caps on pharmaceutical products and household cleaners Sealed lids on food packages Product Warranty Warranty- a statement indicating the liability of the manufacturer for product deficiencies Express warranties- written statements of liabilities Limited coverage warranty- specifically states the bounds of coverage and areas of noncoverage Full warranty- has no limits of noncoverage Implied warranties- assign responsibility for product deficiencies to the manufacturer Chapter 12: Managing Services The Uniqueness of Services Services are intangible activates or benefits that an organization provides to consumers in exchange for money or something else of value The Four I?s of Services Intangibility Services can?t be held, touched, or seen before the purchase decision More difficult for consumers to evaluate Inconsistency Quality of service is often inconsistent Services depend on the people who provide them, their quality varies with each person?s capabilities and day-to-day performance Inseparability In most cases, the consumer cannot (and does not) separate the deliverer of the service from the service itself. The amount of interaction between the consumer and the service provider depends on the extent to which the consumer must be physically present to receive the service Inventory Inventory problems exist with goods because many items are perishable and because there are costs associated with handling inventory Idle production capacity-when the service provider is available but there is no demand The inventory cost of a service is the cost of paying the person used to provide the service along with any needed equipment Airlines have high inventory carrying costs because of high-salaried pilots and very expensive equipment The Service Continuum Service continuum- the range from the tangible to the intangible or good-dominant to service-dominant offerings. Classifying Services Delivery by People or Equipment Equipment-based (no inconsistency) Automated (self-service): ATMs, online brokerages, automated car washes Operated by relatively unskilled operators: movie theaters, dry cleaners, taxies Operated by skilled operators: electric utilities, airlines, computer networks People-Based Unskilled Labor: lawn care, security guards, janitorial services Skilled Labor: appliance repair, plumbers, caterers Professionals: management consultants, accountants, lawyers Profit or Nonprofit Organizations Nonprofit Organizations? excess revenue over expenses are not taxed or distributed to shareholders Any excess revenue goes back into the organization?s treasury to allow continuation of the service Government Sponsored Although there is no direct ownership and they are nonprofit organizations, governments at the federal, state, and local levels provide a broad range or services. i.e. The United States Postal Service How Consumers Purchase Services The purchase Process Search properties Apply more to tangible goods: clothing, jewelry, furniture Color, size, and style can be determined before purchase Experience properties Apply to services: restaurants, child care Can only be discerned after purchase or during consumption Credence properties Apply to specialized professionals: medical diagnoses and legal services Characteristics that the consumer may find impossible to evaluate even after purchase and consumptions To reduce uncertainty created by these properties, service consumers turn to personal sources of information such as early adopters, opinion leaders, and reference group members during the purchase decision process. Assessing Service Quality Gap Analysis- Differences between the consumer?s expectations and expierences Expectations are influenced by word-of-mouth communications, personal needs, past experiences, and promotional activities Experiences are determined by the way an organization delivers its service Customer Contact and Relationship Marketing Customer contact audit- a flowchart of the points of interaction between consumer and service provider Important in high contact services such as hotels, educational institutions, and automobile rental agencies A Customer?s Car Rental Activities 1) contacts the rental company 2) receive customer information (access reservation system) 3) customer arrives 4) Receive customer information (access reservation system) 5) Assign car 6) Customer takes bus to car and departs 7) Customer returns car to receiving lot 8) Customer checks in 9) Receive customer information 10) Customer Received bill Italicized lines indicate customer activity Relationship Marketing The contact between a service provider and a customer represents a service encounter that is likely to influence the customer?s assessment of the purchase These encounters represent opportunities to develop social bonds, or relationships, with customers These relationships may be developed thought loyalty incentives (e.g. airline frequent flyer programs) Relationship marketing provides several benefits for service customers including: Continuity of a single provider Customized service delivery Reduced stress due to a repetitive purchase process Absence of switching costs Managing the Marketing of Services Internal Marketing is based on the notion that a service organization must focus on its employees, or internal market, before successful programs can be directed at customers Suggests that employee development though recruitment, training, communication, coaching, management, and leadership are critical to the success of service organizations Marketing Mix Product Exclusivity Ability to be patented (exclusive rights for 17 years) Services cannot be patented, allows for copiers Many businesses today try to distinguish their core product with new or improved supplementary services though outsourcing Branding Because services are intangible and more difficult to describe the brand name or indentifying logo of the service organization is important to consumer decisions Logos are a good sign at determining how successful companies have been in branding their service with a name and symbol Capacity Management Capacity Management-the service component of the marketing mix must be integrated with efforts to influence consumer demand Service organizations must manage the availability of the offering so: 1) Demand matches capacity over the duration of the demand cycle 2) the organization?s assets are used in was that will maximize the return on investment (ROI) Pricing To affect consumer perceptions Price can indicate the quality of service To be used in capacity management Off-peak pricing- consists of charging different pricing during different times of the day or days of the week to reflect variation in demand for the service Place (Distribution) Major factor in developing a service marketing strategy because of the inseparability of service from the product Historically in services marketing, little attention has been paid to distribution Promotion The value of promotion is to show the benefits of purchasing the service Valuable to stress availability, location, consistent quality, and efficient, courteous service. Types of promotion: Publicity has played a major role in the promotional strategy of nonprofit service and some professional organizations Public Service Announcements are free and often used by nonprofit organizations The timing and location of a PSA are under the control of the medium, not the organization Chapter 13: Building the Price Foundation Nature and Importance of Price What is Price? Price is the money or other considerations (including other goods and services) exchanged for the ownership or use of a good or service Barter- the practice of exchanging goods and services for other goods and services rather than money The amount paid is not always the same as the list, or quoted, price because of discounts, allowances, and extra fees Final Price= List Price ? (incentives + Allowances) + Extra Fees Price as an Indicator of Value Value- the ratio of perceived benefits to price Value= Perceived Benefits/ Price Value Pricing- the practice of simultaneously increasing product and service benefits while maintaining or decreasing price Value involves the judgment by a consumer of the worth and desirability of a product or service relative to substitutes that satisfy the same need Price in the Marketing Mix Profit = Total Revenue ? Total Cost Profit= ( Unit Price X Quantity sold) ? Total cost Price affects the quantity sold Pricing decisions influence both total revenue (sales) and total costs Six steps in pricing Indentify pricing objectives and constraints Estimate the demand and revenue Determine cost, volume, and profit relationships Select an approximate price level Set list or quoted price Make special adjustments to list or quoted price Step 1: Identify Pricing Objectives and Constraints Pricing objectives- specifying the role of price in an organizations marketing and strategic plans. Profit Managing for long-run profits- products are priced relatively low compared to their cost to develop, but the firm expects to make greater profits later because of its high market share Maximizing current profit is common in many firms because the targets and be set and performance measured quickly Target return- when a firm sets a profit goal (such as 20% pretax ROI Sales- a goal may be to increase sales revenue, which will in turn lead to increases in market share and profit Market share- the ratio of the firm?s sales revenues or unit sales to those of the industry (competitors plus the firm itself) Companies often pursue a market share objective when industry sales are relatively flat or declining While market share may be a primary goal, others see it as a means to other ends: increasing sales and profits Unit Volume- the quantity produced or sold Firms often sell multiple products at very different prices and need to match the unit volume demanded by customers with price and production capacity Using unit volume as an objective can be counterproductive if a volume objective is achieved by drastic price cutting that drives down profit Survival-simply not failing Social Responsibility A firm forgoing higher profits on sales and follow a pricing objective that recognizes its obligations to customers and society in general. Drug pricing- setting a price low enough to make the drug affordable by consumers needing it but high enough for drug companies to cover research costs and make a profit Pricing Constraints- factors that limit the range of prices a firm may set Demand for the Product Class, Product, and Brand The number of potential buyers for a product class (cars), product (sports cars), and brand (bugatti) clearly affects the price a seller can charge The greater the demand for a product, the higher the price that can be set Newness of the Product: Stage in the Product Life Cycle The newer a product and earlier it is in its life cycle, the higher the price that can usually be charge Sometimes nostalgia or fad factors come into play, prices may rise later in the product?s life cycle Single Product versus a Product Line If a product is the only one of its type (1st Sony walkman CD player) a firm has great range in setting a price, but if there is a whole product line, the product has to be consistent with others based on features provided Cost of Producing and Marketing the Product In the long run, a firm?s price must cover all the costs of producing and marketing a product Cost of Changing Prices and Time Period They Apply Most firms change the prices of their major products one a year On a website prices can change minute to minute Changing prices can be very costly Type of Competitive Market Pure Monopoly- one seller who sets the price for a unique product E.g. Microsoft Oligopoly- few sellers who are sensitive to each other?s prices try to avoid price competition because it can lead to disastrous price wars in which all lose money e.g. aluminum sellers, large jetliners, retail gas Monopolistic Competition- many sellers who compete on non-price factors e.g big mac vs. whopper Pure Competition- many sellers who follow the market price for identical commodity products E.g. pick your own strawberries Competitors? prices A firm must know or anticipate what specific price its present and potential competitors are charging now or will charge Step 2: Estimate Demand and Revenue Fundamentals of Estimating Demand The Demand Curve- a graph relating the quantity sold and price, which shows the maximum number of units what will be sold at a given price Demand Factors- factors that determine consumers? willingness and ability to pay for goods and services Consumer tastes: depend on factors such as demographics, culture, and technology Price and availability of similar products: as the price of substitutes fall or their availability increases, the demand for a product will fall Consumer income: In general, as real consumer income (allowing for inflation) increases, demand for a product also increases Movement Along versus Shift of a Demand Curve Change in price is a movement along a demand curve Change demand factors is a shift in the demand curve Fundamentals of Estimating Revenue Total revenue (TR) is the total money received from the sale of the product if: TR= Total Revenue P= Unit price of the product Q= Quantity of the product sold Then, TR= P x Q Average revenue (AR) is the average amount of money received for selling one unit of a product, or simply the price of that unit. Average revenue is the total revenue divided by the quantity sold: AR= TR/Q = P Marginal revenue (MR) is the change in total revenue that results from producing and marketing one addition unit: MR= Change in TR / 1 unit increase in Q = ?TR/?Q= Slope of TR curve For any downward-sloping , straight-line demand curve, the marginal revenue curve always falls at a rate twice as fast as the demand curve Price elasticity of Demand- the percentage change in quantity demanded relative to a percentage change in price. Price elasticity of demand (E) is expressed as follows: E= % ? in quantity demanded/ % ? in price Usually a negative number, however, elasticity figures are shown as positive numbers Elastic Demand- when a 1% decrease in price produces more than a 1% increase in quantity demanded price elasticity > 1 a slight decrease in price results in a relatively large increase in demand or units sold A slight increase in price results in a relatively large decrease in demand Examples: a new sweater, shirt, or blouse, airline tickets for a vacation, cars and yachts Inelastic Demand When a 1% decrease in price produces less than a 1% increase in quantity demanded Price elasticity < 1 slight increases or decreases in price will not significantly affect the demand or units sold Concern is that while lowering price will increase the quantity sold, revenues will actually fall Examples: gasoline, open heart surgery, books Unitary Demand When the percentage change in price is identical to the percentage change in quantity demanded so that sales revenue remains the same Price elasticity = 1 Price elasticity of demand is determined by a number of factors: The more substitutes a product or service has, the more likely it is to be price elastic Products and services considered to be necessities are price inelastic Items that require a large cash outlay compared with a person?s disposable income are price elastic Step 3: Determine Cost, Volume, and Profit Relationships The Importance of Controlling Costs Total cost (TC) is the total expense incurred by a firm in producing and marketing a product. Total cost is the sum of fixed cost and variable cost. Fixed cost (FC) is the sum of the expenses of the firm that are stable and do not change with the quantity of a product that is produced and sold. Examples: rent on a building, executive salaries, and insurance Variable costs (VC) are the sum of the expenses of the firm that vary directly with the quantity of a product that is produced and sold. Unit Variable costs are variable cost expressed on a per unit basis UVC= VC/Q Marginal cost (MC) is the change in total cost that results from producing and marketing one addition unit of a product: MC= ?TC/?Q = slope of TC curve Marginal Analysis and Profit Maximization Marginal Analysis- the continuing, concise trade-off of incremental costs against incremental revenues If MR > MC, a firm will expand output Break-Even Analysis- analyzes the relationship between total revenue and total cost to determine profitability at various levels of output Calculating Break-Even Point BEP is the quantity at which total revenue and total cost are equal BEPquantity=Fixed Cost/ (Unit Price ? Unit variable cost) = FC/ (P ? UVC) Break-even chart- a graphical representation of the break-even analysis Applications of Break-Even Analysis Study the impact on profit of changes in price, fixed cost, and variable cost. Chapter 14: Arriving at the Final Price Step 4: Select an Approximate Price Level Demand-Oriented Approaches-look at customer tastes and preferences Skimming Pricing- setting the highest initial price that customers really desiring the product are willing to pay Once the demand of these initial customers is satisfied, the firm lowers the price to attract another, more price-sensitive segment Effective Strategy when: 1) enough prospective customers are willing to buy the product immediately at the high initial price to make these sales profitable 2) the high initial price will not attract competitors 3) lowering price has only a minor effect on increasing the sales volume and reducing the unit costs 4) customers interpret the high price as signifying high quality Penetration Pricing- setting a low initial price on a new product to appeal immediately to the mass market Opposite of skimming prices Effective strategy when: 1) many segments of the market are price sensitive 2) a low initial price discourages competitors from entering the market 3) unit production and marketing costs all dramatically as product volumes increase A firm using penetration pricing may: 1) maintain the initial price for a time to gain profit loss from its low introductory level 2) lower the price further, counting on the new volume to generate the necessary profit Prestige Pricing- setting a high price so that quality- or status-conscious consumers will be attracted to the product and buy it Examples: Rolls-Royce cars, Chanel perfume, Cartier jewelry, Lalique crystal, and Swiss watches Price Lining- Setting the price of a line of products at a number of different specific pricing points Example: a line of pants at $59, $79, and $99. Assumes demand is elastic at each of these price points, but inelastic between them Often items might be purchased for the same cost and then marked up at different percentages to achieve these price points based on color, style, and expected demand. Odd-Even Pricing-setting prices a few dollars or cents under and even number Example: $499.99 instead of 500, 99 cents, $14.99 Deals with perceptions Target Pricing- Estimating the price that the ultimate consumer would be willing to pay for a product, working backward through markups taken by retailers and wholesalers to determine what price to charge to wholesalers, and then deliberately adjusting the composition and features of a product to achieve the target price to consumers Bundle Pricing- marketing two or more products in a single package price Based on the idea that consumer value the package more than the individual items Lower cost to buyers and lower marketing costs to sellers Examples: vacation packages that include airfare, car rental, and lodging Yield Management Pricing- charging different prices to maximize revenue for a set amount of capacity at any given times Complex approach that continually matches demand and supply to customize the price for a service Examples: airlines lowering prices of seats when it looks like there might be vacant spots Cost-Oriented Approaches- focus on production and marketing costs Standard Markup Pricing- adding a fixed percentage to the cost of all items in a specific product class The percentage markup varies depending on the type of retail store (Such as furniture, clothing, or grocery) and on the product involved High volume products usually have smaller markups Movie theaters have extremely high markups Cost-Plus Pricing- summing the total unit cost of providing a product or service and adding a specific amount to the cost to arrive at a price Cost-plus percentage-of-cost pricing- a fixed percentage is added to the total unit cost Often used to price one or few-of-a-kind items Cost-plus fixed-fee pricing- the supplier is reimburse for all costs, but is allowed only a fixed fee as a profit that is independent of the final cost of the project Cost-plus pricing is the most commonly used method to set prices for business products Experience Curve Pricing- A method of pricing based on the learning effect, which holds that the unit cost of many products and service declines by 10 percent to 30 percent each time a firm?s experience at producing and selling them doubles Profit Oriented Approaches- target a specific dollar volume of profit or express this target profit as a percentage of sale or investment Target Profit Pricing- when a firm sets an annual target of a specific dollar volume of profit Example: Given Information Variable cost is a constant at $22 per unit Fixed cost is a constant at $26,000 Demand is insensitive to price up to $60 per unit A target profit of $7000 is sough at an annual volume of 1000 units The Price can be calculated as follows Profit = Total Revenue ? Total cost Profit = (P x Q) ? [FC + (UVC x Q)] $7000 = (P x 1000) ? ($26000 + ($22 x 1000)] 7000 = 1000P- (26000+22000) 1000P = 7000 + 48000 P = $55 Target Return-on-Sales Pricing- set typical prices that will give them a profit that is a specified percentage, say, 1 percent, of the sales volume there is no benchmark of sales or investment to show much of the firm?s effort is needed to achieve the target typically used by supermarket chains example: given information target of 20% return on sales annual volume of 1,250 units this gives Target return on sales = target profit/ target revenue 20% = TR ? TC / TR .2 = P X Q ? [FC + (UVC X Q)] / TR .2 = P X 1250 ? [26000 + 22 X 1250)]/ P X 1250 P = $53.50 Target Return-on-Investment Pricing- a method of setting prices to achieve a target return-on-investment (ROI) Managers uyse computerized spreadsheets to project operating statements based on a diver set of assumptions Competition-Oriented Approaches- stresses what competitors or ?the market? is doing Customary Pricing- used for products where tradition, a standardized channel of distribution, or other competitive factors dictate the price Example: The customary price for a candy bar in a vending machine is 75 cents Above-, At-, or Below-Market Pricing- Setting a market price for a product or product class based on a subjective feel for the competitors? price or market price as the benchmark Example: rolex takes pride in pricing over other brands, jcpenny use at-market pricing Loss-Leader Pricing-Deliberately selling a product below its customary price, not to increase sales, but to attract customers? attention, in hopes that they will buy other products as well, particularly the discretionary items with large markups Example: best buy, target, and wal-mart sell CDs at about half of their suggested retail price to attract customers to their stores Step 5: Set the List or Quoted Price One-Price versus Flexible-Price Policy One-price policy (fixed pricing)- setting one price for all buyers of a product or service Flexible-price policy (dynamic pricing)- setting different prices for products and services depending on individual buyers and purchase situations Gives sellers considerable discretion in setting the final price in light of demand, cost, and competitive factors Yield management pricing is a form of flexible pricing Price customization is particularly prevalent for products and service bought online Constraints under the Robinson-patman act to prevent carrying a flexible price policy tot e extreme of price discrimination Company, Customer, and Competitive Effects on Pricing Company Effects Product-line pricing- setting prices for all items in a product line The manager seeks to cover the total cost and produce a profit for the complete line, not necessarily each item Involves determining 1) the lowest-prices product and price 2) the highest-priced product and price 3)price differentials for all other products in the line Examples: under priced video consoles that expect to make their money in the software part of the product line Customer Effects Retailers weigh factors heavily that satisfy the perception or expectation of ultimate consumers Retailers have found that they should not price their store brands 20 to 25 percent below manufactures? brands. Customers view lower price as signaling lower quality Competitive Effects Price War- successive price cutting by competitors to increase or maintain their unit sales or market shares Marketers are advised to consider price cutting only when one or more conditions exist: The company has a cost or technological advantage over its competitors Primary demand for a product class will grow if prices are lowered The price cut is confines to specific products or customers, and not across-the-board Balancing Incremental Costs and Revenues marginal analysis- a continuing, concise trade-off of incremental costs against incremental revenues Incremental = extra FC / P ? UVC
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