Module 4 The Marketing Program

Question 1

Marketing Program

Answer 1

• Strategic combination of four marketing mix elements (product, price, distribution or place, and promotion)
• Aimed at maximizing tangible, intangible, and perceptual attributes of a complete offering
• Commoditization
• Core product is incapable of differentiating the offering from that of the competition - _{Given the state of commoditization in many markets, the core product (the element that satisfies the basic customer need) typically becomes incapable of differentiating the offering from those of the competition.}
• Most organizations try to enhance the service and symbolic elements of their offerings by changing price, distribution, or promotion

The best marketing strategy is likely to be one that combines the product, price, distribution, and promotion elements in a way that maximizes the tangible, intangible, and perceptual attributes of the complete offering. Therefore, the best marketing strategy considers all four elements of the marketing program and the offering rather than emphasizes a single element.

Question 2

Product Strategy

Answer 2

• Most critical strategic decision in a marketing plan
• Involves design, development, branding, and positioning decisions
• Real value of offerings
• Ability to deliver benefits that enhance customer’s situation or solves a customer’s problems - _{For example, customers do not purchase pest control; they puchase a bugfree environment. BMW customers do not purchase a car; they purchase luxury, status, comfort, and social appeal.}
• Products fall into two general categories
• Consumer products - For personal use and enjoyment
• Business products - For resale, use in making other products, or use in firm’s operations - _{For example, companies do not need computers; they need to store, retrieve, distribute, network, and analyze data and information for their operations.}

Question 3

Types of Consumer Products

Answer 3

• Convenience products - _{Soft drinks, candy and gum, gasoline, dry cleaning - Inexpensive, routinely purchased products that consumers spend little time and effort in acquiring.}
• Shopping products – Appliances, furniture, clothing, vacations - _{Products that onsumers will spend time and effort to obtain. Consumers shop different options to compare prices, features, and service.}
• Speciality products – Antiques, sports memorabilia, plastic surgery, luxury items - _{Unique, one-of-a-kind products that consumers will spend considerable time, effort, and money to acquire.}
• Unsought products - Emergency medicine, repair services, insurance - _{Products that consumers are unaware of or a finished product that consumers do not consider purchasing until a need arises.}

Question 4

Types of Business Products

Answer 4

• Business products
• Raw materials - Iron ore, chemicals, agricultural products, wood pulp
• Component parts - Spark plugs, computer chips, pane glass, hard drives
• Process materials - Food additives, wood sealants, paint colorings
• Maintenance, repair, and operating products – Furniture, building security, janitorial services
• Installations - Enterprise software, buildings, heat and air systems
• Business services - Legal services, accounting services, consulting, research services

Business products

Raw materials: basic natural materials that become part of a finished product. They are purchased in very large quantities based on specifications or grades.

Component parts: finished items that become part of a larger finished product. They are purchased based on specifications or industry standards.

Process materials: finished products that become unidentifiable upon their inclusion in the finished product.

Maintenance, repair, and operating products: products that are used in business processes or operations but do not become part of the finished product.

Installations: major purchases, typically of a physical nature, that are based on customized solutions including installation/construction, training, financing, maintenance, and repair.

Business services: intangible products that support business operations. These purchases often occur as a part of outsourcing decisions.

Question 5

Product line

Answer 5

Group of closely related product items

Question 6

Product mix or portfolio

Answer 6

Total group of products offered by the firm

Question 7

Critical strategic decisions

Answer 7

• Width or variety of product mix, which refers to the number of product lines offered
• Assortment or depth of each product line

Critical strategic decisions:

(1) by offering a wide variety of product lines, the firm can diversify its risk across a portfolio of product offerings. Also, a wide product mix can be used to capitalize on the strength and reputation of the firm;
(2) Firms can attract a wide range of customers and market segments by offering a deep assortment of products in a specific line. Each brand or product in the assortment can be used to fulfill different customer needs (e.g., Hilton, Inc.: Hilton, Hilton Garden Inn, Hampton Inn, Conrad, and Embassy Suits).

Question 8

The Product Portfolio

Answer 8

• Product line
• Group of closely related product items
• Product mix or portfolio
• Total group of products offered by the firm
• Critical strategic decisions
• Width or variety of product mix, which refers to the number of product lines offered
• Assortment or depth of each product line

Most firms sell a variety of products to fulfill a variety of different needs. The products sold by a firm can be described with respect to product lines and product mix or portfolio. A product line consists of a group of closely related product items. For example, Proctor & Gamble sells a number of famous brands in its Fabric and Home Care line, including Tide, Dawn, and Cascade.

A firm’s product mix or portfolio is the total group of products offered by the company. For example, Proctor & Gamble’s entire product mix consists of Beauty, Hair, and Personal Care product; Baby, Feminine, and Family Care products; and Health and Grooming products in addition to the products in its Fabric and Home Care line.

Critical strategic decisions:

(1) by offering a wide variety of product lines, the firm can diversify its risk across a portfolio of product offerings. Also, a wide product mix can be used to capitalize on the strength and reputation of the firm;
(2) Firms can attract a wide range of customers and market segments by offering a deep assortment of products in a specific line. Each brand or product in the assortment can be used to fulfill different customer needs (e.g., Hilton, Inc.: Hilton, Hilton Garden Inn, Hampton Inn, Conrad, and Embassy Suits).

Question 9

Potential Benefits of Offering a Large Product Portfolio

Answer 9

• Economies of scale
• Offering many different product lines can create economies of scale in production, bulk buying, and promotion.
• Package uniformity
• All packages in a product line have the same look and feel.
• Standardization
• Product lines can use the same component parts.
• Sales and distribution efficiency
• Sales personnel can offer a full range of choices and options to customers.
• Equivalent quality beliefs
• Customers expect and believe that all products in a line are equal in terms of quality and performance.

Although offering a large portfolio of products can make the coordination of marketing activities more challenging and expensive, it also creates the above important benefits.

Question 10

Unique Characteristics of Services and Resulting Marketing Challenges

Answer 10

• Intangibility
• Simultaneous production and consumption
• Perishability
• Heterogeneity
• Client-based relationships

It is important to remember that products can be intangible services and ideas as well as tangible goods. Service firms (e.g., hotels, hospitals, hair stylists, nonprofit organizations, governmental agencies) develop and implement marketing strategies designed to match their portfolio of intangible products to the needs of target markets. Here are five unique characteristics of services and resulting marketing challenges:

1. Intangibility: (1) it is difficult for customers to evaluate quality, especially before purchase and consumption; (2) it is difficult to convey service characteristics and benefits in promotion. As a result, the firm is forced to sell a promise; (3) many services have few standardized units of measurement. Therefore, service prices are difficult to set and justify.
2. Simultaneous production and consumption: (1) customers or their possessions must be present during service delivery; (2) other customers can affect service outcomes including service quality and customer satisfaction; (3) service employees are critical because they must interact with customers to deliver service; (4) converting high-contact services to low-contact services will lower costs but may reduce service quality.
3. Perishability: (1) services cannot be inventoried for later use. Therefore, unused service capacity is lost forever (unsold hotel room and flight seat); (2) service demand is very time-and-place sensitive. As a result, it is difficult to balance supply and demand, especially during periods of peak demand; (3) service facilities and equipment sit idle during periods of off-peak demand.
4. Heterogeneity: (1) service quality varies across people, time, and place, making it very difficult to delivery good service consistently; (2) there are limited opportunities to standardize service delivery; (3) many services are customized by nature. However, customization can dramatically increase the costs of providing the service.
5. Client-based relationships: (1) most services live or die by maintaining a satisfied clientele over the long term; (2) generating repeat business is crucial for the service firm’s success.

Question 11

Developing New Products

Answer 11

• Crucial to a firm’s effort to sustain growth and profits
• Factors affecting sales potential of new product
• Firm’s ability to create differential advantage
• Market characteristics
• Defined market opportunity
• Customer perception

The development and commercialization of new products is a vital part of a firm’s efforts to sustain growth and profits over time. The success of new products depends on the product’s fit with the firm’s strengths and a defined market opportunity. Market characteristics and the competitive situation will also affect the sales potential of new products.

For example, GPS manufacturers are consistently developing new GPS devices. However, the future of standalone GPS devices is unclear given that GPS functionality is now an option on most new cars and is fully integrated into every smartphone. As these GPS-enabled devices add more features, consumers are going to be much less likely to purchase standalone GPS units. This is why many GPS units can now sync with telephones or serve as music players. Garmin has expanded beyond GPS devices into areas such as wearables, action cameras, and smartphone apps.

Question 12

Strategic Options Related to Newness of a Product

Answer 12

• New-to-the-world products (discontinuous innovations)
• Involve a pioneering effort by a firm that eventually leads to the creation of an entirely new market.
• New product lines
• Represent new offerings by the firm, but the firm introduces them into established markets.
• Product line extensions
• Supplement an existing product line with new styles, models, features, or flavors.
• Improvements or revisions of existing products
• Offer customers improved performance or greater perceived value.
• Repositioning
• Involves targeting existing products at new markets or segments.
• Cost reductions
• Involves modifying products to offer performance similar to competing products at a lower price.

Many firms base their new product introductions on key themes such as product or technological superiority. Also, in other firms and industries, new product introductions may stem from only minor tweaking of current products. This approach is common in packaged goods and household items. Truthfully, what is considered to be a new product depends on the point of view of both the firm and its customers. Although some product introductions are actually new, others may only be perceived as being new. The above six strategic options related to the newness of products.

Question 13

New Product Development Process

Answer 13

1. Idea generation: new product ideas can be obtained from a number of sources, including customers, employees, basic research, competitors, and supply chain partners.
2. Screening and evaluation: new product ideas are screened for their match with the firm’s capabilities and the degree to which they meet customers’ needs and wants.
3. Development: at this stage, product specifications are set, the product design is finalized, and initial production begins.
4. Test marketing: as a final test before launch, the new product is test marketed in either real or simulated situations to determine its performance relative to customer needs and competing products.
5. Commercialization: in this final stage, the product is launched with a complete marketing program designed to stimulate customer awareness and acceptance of the new product.

Although the new product development process varies across firms, most firms will go through the above stages (from idea generation to commercialization through screening and evaluation, development, and test marketing).

Question 14

Importance of a Pricing Strategy

Answer 14

1. Relation to revenue equation (revenue = price × quantity sold)
2. Easily changeable marketing variable
3. Important consideration in competitive intelligence
4. Only real means of differentiation in highly commoditized markets

There is no other component of the marketing program that firms become more infatuated with than pricing. There are at least four reasons for this attention:

1. There are only two ways for a firm to grow revenue: increase prices or increase the volume of product sold.
2. Pricing is the easiest of all marketing variables to change.
3. Firms take considerable pains to discover and anticipate the pricing strategies and tactics of other firms.
4. Price is considered to be one of the few ways to differentiate a product in commoditized and mature markets.

Question 15

Issues in Pricing Strategy: Using the Firm’s Cost Structure

Answer 15

•Breakeven in units

Total Fixed Costs

Unit Price – Unit Variable Costs

•Selling price

Average Unit Cost

1 – Markup Percent (decimal)

A firm that fails to cover both its direct costs (e.g., finished goods/components, materials, supplies, sales commission, transportation) and its indirect costs (e.g., administrative expenses, utilities, rent) will not make a profit. A popular way to associate costs and prices is through breakeven pricing as indicated above.

Cost-plus pricing is another strategy that is commonly used in retailing. As indicated above, the firm sets prices based on average unit costs and its planned markup percentage.

However, a firm’s cost structure should not be the driving force behind pricing strategy because different firms have different cost structures.

Question 16

A Simple Example of a Break-Even Analysis

(See slide 14 and 15)

Answer 16

• There are assumptions:
• This café opens six days per week for 50 weeks.
• The open hours are from 7:00 am until 3:00 pm.
• 3 baristas get paid $15 per hour.
• The owner sells his coffees at $3.00

Question 17

Issues in Pricing Strategy: Perceived Value

Answer 17

• Value
• Customer’s subjective evaluation of benefits relative to costs
• Helps determine worth of a firm’s product-offering relative to other product offerings
• Intricately tied to all marketing program elements
• Key factor in customer satisfaction and retention
• Customer benefits
• Everything customers obtain from an offering
• Customer costs
• Everything the customer must give up

Value can be defined as a customer’s subjective evaluation of benefits relative to costs to determine the worth of a firm’s product offering relative to other product offerings. A simple formula: Perceived Value = Customer Benefits / Customer Costs

Value is a key component in setting a viable pricing strategy. In fact, value is intricately tied to every element in the marketing program and is a key factor in customer satisfaction and retention.

Question 18

Issues in Pricing Strategy: Price/Revenue Relationship

Answer 18

• Myth #1 - When business is good, a price cut will capture greater market share
• Myth #2 - When business is bad, a price cut will stimulate sales
• Price cutting should be offset by increase in sales volume to maintain revenue level
• To stimulate sales and revenue, build value into the product offering at the same, or even a higher price

Virtually all firms face intense price competition from their rivals, which tends to hold prices down. Although it is natural for firms to see price-cutting as a viable means of increasing sales, all price cuts affect the firm’s bottom line. There are two general pricing myths:

1. Myth #1: When business is good, a price cut will capture greater market share.
2. Myth #2: When business is bad, a price cut will stimulate sales.

However, the reality is that any price cut must be offset by an increase in sales volume just to maintain the same level of revenue. It is often better for a firm to find ways to build value into the product and justify the current price, or even a higher price, rather than cut the price.

Question 19

Description of Common Pricing Objectives

Answer 19

• Profit-oriented: designed to maximize price relative to competitors’ prices, the product’s perceived value, the firm’s cost structure, and production efficiency. Profit objectives are typically based on a target return, rather than simple profit maximization.
• Volume-oriented: sets prices to maximize dollar or unit sales volume. This objective sacrifices profit margin in favor of high product turnover.
• Market demand: sets prices in accordance with customer expectations and specific buying situations. This objective is often known as “charging what the market will bear.”
• Market share: designed to increase or maintain market share regardless of fluctuations in industry sales. Market share objectives are often used in the maturity stage of the product life cycle.
• Cash flow: designed to maximize the recovery of cash as quickly as possible. This objective is useful when a firm has a cash emergency or when the product life cycle is expected to be quite short.
• Competitive matching: designed to match or beat competitors’ prices. The goal is to maintain the perception of good value relative to the competition.
• Prestige: sets high prices that are consistent with a prestige of high-status product. Prices are set with little regard for the firm’s cost structure or the competition.
• Status quo: maintains current prices in an effort to sustain a position relative to the competition.

Pricing objectives must be realistic, measurable, and attainable. Firms make money on profit margin, volume, or some combination of the two. A firm’s pricing objectives will always reflect this market reality. A firm’s pricing objectives will always reflect this market reality.

Question 20

Profit-oriented pricing objective

Answer 20

designed to maximize price relative to competitors’ prices, the product’s perceived value, the firm’s cost structure, and production efficiency. Profit objectives are typically based on a target return, rather than simple profit maximization.

Question 21

Volume oriented pricing objective

Answer 21

sets prices to maximize dollar or unit sales volume. This objective sacrifices profit margin in favor of high product turnover.

Question 22

Market demand pricing objective

Answer 22

sets prices in accordance with customer expectations and specific buying situations. This objective is often known as “charging what the market will bear.”

Question 23

Market share pricing objective

Answer 23

designed to increase or maintain market share regardless of fluctuations in industry sales. Market share objectives are often used in the maturity stage of the product life cycle.

Question 24

Cash flow pricing objective

Answer 24

designed to maximize the recovery of cash as quickly as possible. This objective is useful when a firm has a cash emergency or when the product life cycle is expected to be quite short.

Question 25

Competitive matching pricing objective

Answer 25

designed to match or beat competitors’ prices. The goal is to maintain the perception of good value relative to the competition.

Question 26

Prestige

Answer 26

sets high prices that are consistent with a prestige of high-status product. Prices are set with little regard for the firm’s cost structure or the competition.

Question 27

Status quo pricing objective

Answer 27

maintains current prices in an effort to sustain a position relative to the competition.

Question 28

Issues in Pricing Strategy: Price Elasticity

Answer 28

• Customers’ sensitivity to changes in price
• Relative impact on the demand for a product
• Specific increases or decreases in the price charged for that product is given
• Situations that increase price elasticity:
• Availability of substitute products
• Higher total expenditure
• Noticeable price differences
• Easy price comparisons
• Situations that decrease price elasticity:
• Lack of substitutes
• Real or perceived necessities
• Complementary products
• Perceived product benefits
• Situational influences
• Product differentiation

Price elasticity refers to customers’ responsiveness or sensitivity to changes in price. A more precise definition defines elasticity as the relative impact on the demand for a product, given specific increases or decreases in the price charged for that product.

Firms cannot base prices solely on price elasticity calculations because they will rarely know the elasticity for any product with great precision over time.

Since the same product can have different elasticities in different times, places, and situations, firms often consider price elasticity in regard to differing customer behavior patterns or purchase situations.

Question 29

Situations that Increase Price Elasticity

Answer 29

• Availability of substitute products
• Higher total expenditure
• Noticeable price differences
• Easy price comparisons

1. Availability of substitute products: when customers can choose among a number of different substitutes, they will be much more sensitive to price differences. This situation occurs very frequently among name-brand products and in markets where product offerings have become commoditized, such as airlines.
2. Higher total expenditure: As a general rule, the higher the total expense, the more elastic the demand for that product will be. This effect is actually easier to see if we look at a low-priced product (e.g., A 20% increase in the price of a newspaper, from $1.00 to $1.20 would not have a large impact on demand).
3. Noticeable price differences: Products having heavily promoted prices tend to experience more elastic demand. For example, an increase of 3 cents per gallon is only 45 cents more on a 15-gallon fill-up. However, many customers will drive several miles out of their way to find a lower price (often spending more in gas consumption than they save). Noticeable price differences sometimes occur at specific pricing thresholds. For example, many customers will not notice price increases until gas reaches $4.00 per gallon. At this price, these customers suddenly move from an inelastic mindset to an elastic mindset. The move from $3.80 to $3.90 may not have an impact on these customers, but the jump from $3.90 to $4.00 totally changes their mental framework.
4. Easy price comparisons: Regardless of the product or product category, customers will become more price sensitive if they can easily compare prices among competing products.

Question 30

Situations that Decrease Price Elasticity

Answer 30

• Lack of substitutes
• Real or perceived necessities
• Complementary products
• Perceived product benefits
• Situational influences
• Product differentiation

1. Lack of substitutes: when customers have few choices in terms of substitutes, they will be much less sensitive to price. Also, the more unique or specialized the product, the more customers will pay for it.
2. Real or perceived necessities: Food, water, medical care, and prescription drugs have extremely inelastic demand because customers have real or perceived needs for them. Some product categories are price inelastic because customers perceive those products as true necessities. It matters little whether a customer truly has a need for a specific product.
3. Complementary products: complementary products have an effect on the price sensitivity of related products. If the price of one product falls, customers will become less sensitive to the price of complementary products. For instance, when the price of a cruise goes down, the price of shore excursions becomes more inelastic. With more travelers on board, and each having more money to spend, excursion operators realize that travelers are less sensitive to the prices they charge.
4. Perceived product benefits: For some customers, certain products are just worth the price. For these purchases, the phrase “expensive but worth it” comes to mind, such as fine wines, imported coffee, or gourmet chocolates. Since these products do not comprise the bulk of our purchasing activities, customer rarely notice, or simply ignore, price increases.
5. Situational influences: the circumstances surrounding a purchase situation can vastly alter the price elasticity for a product. Many of these situational influences occur because time pressures or purchase risk increase to the point that an immediate purchase must be made (e.g., emergencies). Other common situational influences revolve around purchase risk, typically the social risk involved in making a bad decision. In a general sense, customers tend to be much less price sensitive when they purchase items for others or for gift giving.
6. Product differentiation: Differentiation reduces the number of perceived substitutes for a product. Product differentiation does not have to be based on real differences to make customers less price sensitive. Many times the differences are perceptual. For example, blindfolded, a person may not know the difference between Pepsi and Coke, but consumers do not buy or consume soft drinks blindfolded. The look of the can, the advertising, and prior experiences all come together to differentiate the product. In a strategic sense, product differentiation is the best way to ensure that customers are not sensitive to price changes. The ultimate goal of this effort is to differentiate the product so well that customers perceive that no competing product can take its place. When this happens, customers will become brand loyalty and the demand for the product will become very inelastic.

Question 31

Pricing Service Products

Answer 31

• Critical since price may be the only cue to quality prior to purchase
• Becomes important and difficult when:
• Service quality is hard to detect prior to purchase
• Costs are difficult to determine
• Customers are unfamiliar with service process
• Brand names are not well established
• Customers can perform the service themselves
• Advertising within the service category is limited
• Total price of service is difficult to state beforehand

When it comes to buying services, customers have a difficult time determining quality prior to purchase. Therefore, service pricing is critical because it may be the only quality cue that is available in advance of the purchase experience. If the service provider sets prices too low, customers will have inaccurate perceptions and expectations about quality. If prices are too high, customers may not give the firm a chance. In general, services pricing becomes more important and more difficult in the above situations.

Question 32

Service Pricing and Yield Management

Answer 32

• Service pricing
• Helps balance supply and demand during peak and off-peak demand times
• Yield management
• Allows firms to simultaneously control capacity and demand
• Control capacity by limiting available capacity at certain price points
• Control demand through price changes and overbooking capacity
• Allows service firms to segment markets based on price elasticity

Due to limited capacity, service pricing is also a key issue with respect to balancing supply and demand during peak and off-peak demand times. Therefore, many service firms use yield management to balance pricing and revenue considerations with their need to fill unfilled capacity.

Yield management allows the service firm to simultaneously control capacity and demand in order to maximize revenue and capacity utilization:

1. The service firm controls capacity by limiting the available capacity at certain price points. For example, airlines do this by selling a limited number of seats at discount prices three or more weeks prior to a flight’s departure.
2. The service firm controls demand through price changes over time and by overbooking capacity. These activities ensure that service demand will be consistent and that any unused capacity will be minimized. These practices are common in services characterized by high fixed costs and low variable costs. Since variable costs in these services are quite low, the profit for these firms directly relates to sales and capacity utilization. Consequently, these firms will sell some capacity at reduced prices to maximize utilization.

Yield management systems are also useful in their ability to segment markets based on price elasticity. That is, yield management allows a firm to offer the same basic service to different market segments at different price points. For example, customers who are very price sensitive with respect to travel services-vacation travelers and families with children-can get a good deal on a hotel if they book it early. Conversely, business travelers book flights on the spur of the moment, so they are more forgiving of the higher prices just prior to departure. Other firms can reach different market segments with attractive off-peak pricing.

Question 33

Base Pricing Strategies

Answer 33

• Price skimming: occurs when a firm intentionally sets a high price relative to the competition.
• Price penetration: occurs when a firm sets a relatively low initial price to maximize sales, gain widespread market acceptance, and capture a large market share quickly.
• Prestige pricing: setting prices at the top end of all competing products in a category to promote an image of exclusivity and superior quality.
• Value-based pricing (EDLP): setting reasonably low prices, but still offering high quality products and adequate customer services.
• Competitive matching: focuses on matching competitors’ prices and price changes.
• Non-price strategies: building a marketing program around factors other than price.

A firm’s base pricing strategy establishes the initial price and sets the range of possible price movements throughout the product’s life cycle. The above strategies are the base pricing approaches.

Question 34

Adjusting the Base Price

Answer 34

• Discounting: using sales or other temporary price reductions to attract customers and create excitement.
• Reference pricing: comparing the actual selling price to an internal or external reference price.
• Price lining: occurs when a firm creates lines of products that are similar in appearance and functionality but are offered with different features and at different price points.
• Odd pricing: prices are rarely set at whole, round numbers.
• Price bundling: bringing together two or more complementary products for a single price.

The above are about how to adjust base prices in consumer markets.

1. Discounting: customers love a sale, and that is precisely the main benefit of discounting. Virtually all firms, even those using value-based pricing, will occasionally run special promotions or sales to attract customers and create excitement.
2. Reference pricing: as an example, consumers’ experiences have given them a reasonable expectation of how much to pay for a combo meal at McDonald’s (internal reference). In other cases, the firm will state a reference price, such as “Originally $99, Now $49” (external reference). These comparisons make it easier for customer to judge prices prior to purchase.
3. Price lining: this strategy, where the price of a competing product is the reference price, takes advantage of the simple truth that some customers will always choose the lowest-priced or highest-priced product. For example, Sony can cut a few feature off its top-of-the-line Model A1 digital camcorder, and Model B2 can be on the shelf at $799 rather than the original $999. Cut a few more features and the price can drop to $599 for Model C3. Here, each model in the Sony line establishes reference prices for the other models in the line.
4. Odd pricing: for example, the concert tickets are $49.95, the breakfast special is $3.95, and the gallon of gas is $2.799. The prevalence of odd pricing is based mostly on psychology: Customer perceive that the seller did everything possible to get the price as fine (and thus as low) as he or she possibly could.
5. Price bundling: at its best, the bundled price is less than if a company sold the products separately. Slow moving items can be bundled with hot sellers to expand the scope of the product offering, build value, and manage inventory.

Question 35

Pricing Strategies in Business Markets

Answer 35

• Trade discounts: manufacturers will reduce prices for certain intermediaries in the supply chain based on the functions that the intermediary performs.
• Discounts and allowances: business buyers can take advantage of sales and other price breaks including discounts for cash, quantity or bulk discounts, seasonal discounts, or trade allowances for participation in advertising or sales support programs.
• Geographic pricing: selling firms often quote prices in terms of reductions or increases based on transportation costs or the actual physical distance between the seller and the buyer.
• Transfer pricing: transfer pricing occurs when one unit in an organization sells products to another unit.
• Barter and countertrade: in business exchanges across national boundaries, companies sometimes use products, rather than cash, for payments.
• Price discrimination: it occurs when firms charge different prices to different customers. When this situation occurs, firms set different prices based on actual cost differences in selling products to one customer relative to the costs involved in selling to other customers.

The above are about how to adjust base prices in business markets.

• Trade discounts: in general, discounts are greater for wholesalers than for retailers because the manufacturer wants to compensate wholesalers for the extra functions they perform, such as selling, storage, transportation, and risk taking.
• Geographic pricing: the most common examples of geographic pricing are uniform delivered pricing (same price for all buyers regardless of transportation expenses) and zone pricing (different prices based on transportation to redefined geographic zones).
• Barter and countertrade: Barter involves the direct exchange of goods or services between two firms or nations. Countertrade refers to agreements based on partial payments in both cash and products, or to agreements between firms or nations to buy goods and services from each other.

Price discrimination: it is a viable technique because the costs of selling to one firm are often much higher than selling to others.

Question 36

Supply Chain Strategy

Answer 36

• Marketing channels
• Organized system of marketing institutions
• Facilitate flow of products, resources, information, funds, or product ownership from point of production to final user
• Physical distribution
• Coordinating flow of information and products among members of the channel
• Helps ensure that products are available in right places, in right quantities, at right times, and in a cost-efficient manner
• Supply chain
• Connection and integration of all members of the marketing channel

Supply chain management is essentially invisible to customers because the process occurs behind the scenes. Customers take these processes for granted and only notice interruptions of the supply chain. The picture is drastically different from the firm’s perspective. Supply chain concerns now rank at the top of the list for achieving a sustainable advantage and true differentiation in the marketplace. Supply chain management consists of two interrelated components:

1. Marketing channels: an organized system of marketing institutions, through which products, resources, information, funds, and/or product ownership flow from the point of production to the final user.
2. Physical distribution: coordinating the flow of information and products among members of the channel to ensure the availability of products in the right places, in the right quantities, at the right times, and in a cost- efficient manner.

The term supply chain expresses the connection and integration of all members of the marketing channel. Creating an extended enterprise requires investments in and commitment to three key factors: connectivity, community, and collaboration (described in the next slide). The goal of channel integration is to create a seamless network of collaborating suppliers, vendors, buyers, and customers.

Question 37

Factors Affecting Supply Chain Integration

Answer 37

• Connectivity
• Informational and technological linkages among firms in the supply chain network. Connectivity ensures that firms can access real-time information about the flow in the supply chain network.
• Community
• Compatible goals and objectives among firms in the supply chain network. All firms must be willing to work together to achieve a common mission and vision.
• Collaboration
• Recognition of mutual independence among firms in the supply chain network. Collaboration goes beyond contractual obligations to establish principles, processes, and structures that promote a level of shared understanding. Firms learn to put the needs of the supply chain ahead of their own, because they understand that the success of each firm separately has a strong connection to the success of other firms, as well as entire supply chain

Question 38

Factors in Successful Supply Chain Integration

Answer 38

1. Stability: (1) reliability; (2) consistency; (3) long-term relationships
2. Cooperation: (1) commitment; (2) sense of fair play; (3) giving extra effort
3. Mutual benefit: (1) strategic advantages; (2) customer satisfaction; (3) reduced costs; (4) better prices; (5) reduced lead times
4. Interdependence: (1) shared technical information; (2) shared processes; (3) mutual goals and objective
5. Trust: (1) trustworthiness; (2) integrity; (3) reputation; (4) faith

Supply chain integration and creating an extended enterprise are extremely challenging goals. In the most seamlessly integrated supply chains, the boundaries among channel members blur to the point where it is difficult to tell where one firm ends and another firm begins. As indicated above, this level of integration requires a tenuous balance of stability, cooperation, mutual benefit, interdependence, and trust in order to create mutual benefits.

Question 39

Strategic Supply Chain Issues: Marketing Channel Functions

Answer 39

• Basic benefit is contact efficiency
• Marketing channel functions

1. Sorting
2. Breaking bulk
3. Maintaining inventories
4. Maintaining convenient locations
5. Provide services

•All functions must be performed regardless of who does them

The importance of the supply chain ultimately comes down to providing time, place, and possession utility for consumer and business buyers. However, the expense of distribution requires that firms balance customers’ needs with their own need to minimize costs. There are give marketing channel functions

1. Sorting: manufacturers make one or a few products while customers need a wide variety and deep assortment of different products. Intermediaries overcome this discrepancy of assortment.
2. Breaking bulk: manufacturers produce large quantities of a product; however, customers typically want only one of a particular item. Intermediaries-particularly retailers-overcome this discrepancy of quantity.
3. Maintaining inventories: manufacturers cannot make products on demand, so the channel must store products for future purchase and use. Intermediaries overcome this temporal (time) discrepancy. This issue does not apply to services.
4. Maintaining convenient locations: since manufacturers and customers have a geographic separation, the channel must overcome this spatial discrepancy.
5. Provide services: channels add value to products by offering facilitating services and standardizing the exchange process.

With the exception of highly tangible services, the fulfillment of these functions occurs in every marketing channel. Also, these functions must be fulfilled in order for the channel to operate effectively. It does not matter which intermediary performs these functions; the fact remains that they must be performed.

Question 40

Strategic Supply Chain Issues: Marketing Channel Structure

Answer 40

• Exclusive distribution
• Giving one merchant or outlet sole right to sell a product within a defined geographic region
• Selective distribution
• Giving several merchants or outlets the right to sell a product within a defined geographic region
• Intensive distribution
• Making a product available to maximum number of merchants or outlets
• Helps gain exposure and enhance sales opportunities

Marketing channel strategies are complex and very costly to implement. However, a good distribution strategy is essential for success because once a firm selects a channel and makes commitments to it, distribution often becomes highly inflexible due to long-term contracts, sizable investments, and commitments among channel members. There are three basic structural options for distribution in terms of the amount of market coverage and level of exclusivity between vendor and retailer:

• Exclusive distribution: the most restrictive type of market coverage, occurs when a firm gives one merchant or outlet the sole right to sell a product within a defined geographic region.
• Selective distribution: a somewhat restrictive type of market coverage, occurs when a firm gives several merchants or outlets the right to sell a product in a defined geographic region.
• Intensive distribution: the least restrictive type of market coverage, occurs when a firm makes a product available in the maximum number of merchants or outlets in each area to gain as much exposure and as many sales opportunities as possible.

Question 41

Strategic Supply Chain Issues: Power in the Supply Chain

Answer 41

• Basis of conflict in the supply chain:
• Each firm is different and has its own goals and objectives
• Mutual interdependence goes against natural tendency of firms to seek their own self-interests
• Sources of power in a supply chain:
• Legitimate power
• Reward power
• Coercive power
• Information power
• Referent power

True supply chain integration requires a fundamental change in how channel members work together, including moving from a “win-lose” competitive attitude to a “win-win” collaborative approach. Each firm in a supply chain has its own mission, goals, objectives, and strategies. It is not surprising that firms often assess their own interests before considering others in the supply chain.

Power can be defined as the influence one channel member has over others in the supply chain.

• Legitimate power deals with the firm’s position in the supply chain—this power balance shifted to large retailers in the 1990s.
• Reward power involves the ability to help other parties reach their goals and objectives.
• Coercive power stems from the ability to take positive outcomes away from other channel members, or the ability to inflict punishment on other channel members.
• Information power comes from having and sharing knowledge among members of the supply chain.
• Referent power is based in personal relationships and the fact that one party likes another party.

Today, discount mass merchandise retailers—like Walmart, Costco, and Target hold the power in most consumer channels. Manufacturers typically must pay hefty fees, called slotting allowances, just to get a single product placed on store shelves.

Question 42

Trends in Supply Chain Strategy

Answer 42

• Technological improvements - _{Significant advancements in information processing and digital communication have created new methods for placing and filling orders for both business buyers and consumers. E-commerce now accounts for 52 percent of transactions in manufacturing, 26 percent of transactions in wholesaling, and 5.2 percent of retail transactions. Radio frequency identification (RFID) involves the use of tiny computer chips that can be attached to a product or its packaging.}
• E-commerce
• Radio frequency identification (RFID)
• Outsourcing channel functions - _{Outsourcing has traditionally been used as a way of cutting expenses associated with labor, transportation, or other overhead costs. Today, the desire of many firms to focus on core competencies drives outsourcing decisions. Many firms have shifted to offshoring their own activities (rather than outsourcing) to maintain some control over operations. Information technology is the primary activity outsourced today.}
• Outsourcing versus offshoring
• Growth of nontraditional channels - _{Customer’s demands for lower prices and greater convenience have put pressure on all channel intermediaries to justify their existence. When margins get squeezed, the channel typically evelves into a more direct form. The mmost obvious example of this evolution is the growth of e-commerce. Other forms of nontraditional channels:}

_{1)Catalog and direct marketing}

_{2)Direct selling}

_{3)Home shopping networks}

_4)Vending

_{5)Direct response advertising}

_{Dual distribution (the use of multiple channels to offer two or more lines of the same merchandise) is a direct outgrowth of the increased us of nontraditional channels. However, it often creates conflict between the manufacturer and its supply chanin members.}

• Catalog and direct marketing
• Direct selling
• Home shopping networks
• Vending
• Direct response advertising

In addition to the strategic supply chain, a number of trends have shaped the structure of marketing channels and the ways that supply chains function. Please refer to each memo in this slide to deeply understand each trend.

Question 43

Integrated Marketing Communication (IMC)

Answer 43

• Strategic, coordinated use of promotion
• Used to create one consistent message across multiple channels
• Ensures maximum persuasive impact on firm’s current and potential customers
• Takes a 360-degree view of the customer
• Importance
• Fosters long-term relationships
• Reduces or eliminates promotional redundancies
• Technology helps target customers directly

Integrated marketing communications (IMC) refers to the strategic, coordinated use of promotion to create one consistent message across multiple channels to ensure maximum persuasive impact on the firm’s current and potential customers.

IMC takes a 360-degree view of the customer that considers each and every contact that a customer or potential customer may have in their relationship with the firm.

By coordinating all communication “touch points,” firms using IMC convey an image of truly knowing and caring about their customers that can translate into long-term customer relationships. Likewise, IMC reduces costs and increases efficiency because it can reduce or eliminate redundancies and waste in the overall promotional program. Many firms have embraced IMC because mass-media advertising has become more expensive and less predictable than in the past.

Marketers are being forced to adopt new marketing strategies as advancing technology and customer preferences are threatening to make traditional forms of promotion obsolete. Many firms are also embracing technology in order to target customers directly through product placement and online promotion. This increased focus on individual customers requires that the overall promotional program be integrated and focused as well.

Question 44

Components of IMC Strategy

Answer 44

• Advertising: (1) print; (2) broadcast; (3) online/interactive; (3) mobile; (4) direct marketing
• Public relations: (1) publicity; (2) press releases; (3) newsletter
• Sales promotion: (1) consumer promotion; (2) trade promotion
• Personal selling: (1) account management; (2) prospecting; (3) retail sales

The key to IMC is consistency and uniformity of message across all elements of promotion as indicated above. Due to the many advantages associated with IMC, most marketers have adopted integrated marketing as the basis for their communication and promotion strategies.

Question 45

Strategic Issues in Integrated Marketing Communications

Answer 45

• IMC requires clear promotional goals and objectives
• AIDA model - _{The classic model for outlining promotional goals is the AIDA model:}

_{a) Attention: the first major goal of any promotional campaign is to attract the attention of potential customers.}

_{b) Interest: the firm must spark interest in the product by demonstrating its features, uses, and benefits.}

_{c) Desire: good promotion will stimulate desire by convincing potential customers of the product’s superiority and its ability to satisfy needs.}

_{d) Action: promotion must push customers toward the actual purchase.}

• Attention
• Interest
• Desire
• Action
• Promotional goals regarding supply chain - _{Pull strategy: firms use a pull strategy when they focus their promotional efforts toward stimulating demand among final customers, who then exert pressure on the supply chain to carry the product.}

_{Push strategy: firms use a push strategy when they focus their promotional efforts when they focus their promotional efforts on members of the supply chain to motivate them to spend extra time and effort on selling the product.}

• Pull strategy - Focus promotional efforts toward stimulating consumer demand
• Push strategy - Focus promotional efforts toward supply chain

When selecting elements to include in the IMC program, it is important to take a holistic perspective that coordinates not only all promotional elements but also the IMC program with the rest of the marketing program (product, price, and supply chain strategy). Taking this approach allows a firm to communicate a consistent message to target customers from every possible angle, thereby maximizing the total impact on those customers. For example, if the advertising campaign stresses quality, the sales force talks about low price, the supply chain pushes wide availability, and the website stresses product innovation, then what is the customer to believe? Not readily seeing that a product can deliver all these benefits, the customer is likely to become confused and go to a competitor with a more consistent message.

All too frequently, firms rush to launch an intensive IMC campaign that has no clear promotional objectives. The vast majority of promotion activities do not create results in the short term, so firms must focus on long-term promotional objectives and have the patience to continue the program long enough to gauge true success.

Ultimately, the goals and objectives of any promotional campaign culminate in the purchase of goods or services by the target market. The classic model for outlining promotional goals and achieving this ultimate outcome is the AIDA Model (Attention, Interest, Desire, and Action). For more detailed descriptions of each component, please refer to the memo in this slide.

The firm must also consider its promotional goals with respect to the supply chain, such as pull strategy and push strategy. For more detailed description of each, please refer to the other memo in this slide.

Coordinating promotional elements within the context of the entire marketing program requires a complete understanding of the role, function, and benefits of each element.

Question 46

Advertising and Its Challenges

Answer 46

• One of the most visible elements of IMC program
• Paid and non-personal communication transmitted via media
• Cost efficient when used to reach a mass audience
• Decline in traditional media has caused increase in the use of Internet-based advertising
• Mobile advertising is the fastest growing segment
• Challenges
• High initial expense for advertising, especially for television
• Difficulty in allocating advertising funds
• Difficulty in evaluating effectiveness of advertisements
• Permissibility of advertising content

Advertising is paid, nonpersonal communication transmitted through mass media such as television, radio, magazines, newspapers, direct mail, outdoor displays, the Internet, and mobile devices.

Online advertising is growing rapidly due to its ability to reach highly specialized markets at a relatively low cost.

Though the initial expense for advertising can be quite high, it can be a cost-efficient means of reaching a large number of people.

Setting the advertising budget too high will obviously result in overspending, waste, and lower profits. However, setting the budget too low may be even worse. Firms that do not spend enough on advertising find it very difficult to stand out in an extremely crowded market for customer attention.

Evaluating the effectiveness of advertising is one of the most challenging tasks facing marketers:

1. Many of the effects and outcomes of advertising take a long time to develop.
2. The effect of advertising on sales is lagged in some cases, with the effect occurring long after the campaign has ended.

Most marketers struggle with the fine line between what is permissible and not permissible in advertising.

Question 47

Public Relations

Answer 47

• Part of firm’s corporate affairs
• Goals
• Track public attitudes
• Identify issues that may elicit public concern
• Develop programs to create and maintain positive relationships between a firm and its stakeholders
• Uses
• Promote the firm, its people, ideas , and image
• Create an internal shared understanding among employees
• Improve general brand awareness
• Often confused with publicity, which is created to gain media attention

Public relations is one component of a firm’s corporate affairs activities. It has particular goals that are indicated above.

A firm uses public relations to communicate with its stakeholders for the same reasons that it develops advertisements. Public relations can be used for the above reasons (promotion, creation, and improvement). Because various stakeholders’ attitudes toward the firm affect their decisions relative to the firm, it is very important to maintain positive public opinion. Public relations can improve the public’s general awareness of a company and can create specific images such as quality, innovativeness, value, or concern for social issues.

Question 48

Public Relations Methods

Answer 48

• News (or press) releases - _{They are used to draw attention to a company event, product, or person affiliated with the firm. News releases can be submitted to newspapers, magazines, television contact, suppliers, key customers, or even the firm’s employees.}
• Feature articles - _{They are full-length stories prepared for a specific purpose or target audience. Feature articles typically focus on the implications or economic impact of a firm’s actions. They are also very useful when responding to negative events or publicity.}
• White papers - _{They are similar to feature articles; however, they are more technical and focus on very specific topics of interest to the sirm’s stakeholders. White papers promote a firm’s stance on important product or market issues and can be used to promote the firm’s own products and solutions. White papers have been used extensively in the information technology firld where firms continually work to establish standards and keep up with technological innovation.}
• Press conferences - _{They are a meeting with news media called to announce or respond to major events. Multimedia materials may be distributed to broadcast stations in hopes that they will air some of the activities that occurred at the press conference. Firms typically hold press conferences when announcing new products, patentss, mergers, or acquisitions, philanthropic efforts, orn internal administrative changes.}
• Event sponsorship - _{It has become an entire industry in itself. Sponsorships can range from local events to international events. Another popular sponsorship strategy involves the naming of sports stadiums and venues.}
• Employee relations - _{They are every bit as important as public and investor relations. Employee relations’ activities provide organizational support for employees with respect to their jobs and lives. Employee relations can encompass many differenct activities including internal newsletter, training programs, employee assistance programs, and human resource programs.}

Firms use a number of public relation methods to convey messages and to create the right attitudes, images, and opinions. Public relations is sometimes confused with publicity. Although publicity is one part of public relations, it is more narrowly defined to include the firm’s activities designed to gain media attention through articles, editorials, or news stories. By encouraging the media to report on a firm’s accomplishments, publicity helps maintain positive public awareness, visibility, and a desired image. Publicity can be used for a single purpose, such as to launch a new product or diminish the public’s opinion regarding a negative event, or it can be used for multiple purposes to enhance many aspects of the firm’s activities. Having a good publicity strategy is important because publicity can have the same effect as advertising, though typically with greater credibility. For more detailed descriptions about each method, please refer to memos in this slide.

Question 49

Personal Selling

Answer 49

• Paid personal communication
• Informs customers about offerings and persuades them to buy
• Most precise form of communication, but has very high cost per contact
• Goals vary based on role in the IMC strategy
• Has evolved to take on elements of customer service and marketing research
• Frontline knowledge held by the sales force is one of the most important assets of the firm

Personal selling is paid personal communication that attempts to inform customers about products and persuade them to purchase those products. Compared to other types of promotion, personal selling is the most precise form of communication because it assures companies that they are in direct contact with an excellent prospect. The most serious drawback of personal selling is the cost per contact. Because firms depend on repeat sales and ongoing customer relationships, personal selling activities must include elements of customer service and marketing research.

Question 50

Sales Management

Answer 50

• Effective sales management process includes:
• Developing sales force objectives
• Determining sales force size
• Recruiting and training salespeople
• Controlling and evaluating the sales force
• Impact of technology on personal selling:
• Reduction in size of sales force
• Difficult to reduce costs and increase productivity while maintaining personalized, one-to-one client relationships

Because the sales force has a direct bearing on sales revenue and customer satisfaction, the effective management of the sales force is vital to a firm’s marketing program. In addition to generating performance outcomes, the sales force often creates the firm’s reputation, and the conduct of individual salespeople determines the perceived ethicalness of the entire firm. The strategic implementation of effective sales management requires the following activities:

1. Developing sales force objectives: objectives must be fully integrated with the objectives and activities of other promotional elements.
2. Determining sales force size: size is a function of many variables, including the type of salespeople used, specific sales objectives, and the importance of personal selling within the IMC program.
3. Recruiting and training salespeople: should be a continuous activity as firms must ensure that new salespeople are consistently available to sustain the sales program.
4. Controlling and evaluating the sales force: requires a comparison of sales objectives with actual sales performance. [Exhibit 6.12]

Many sales activities are now done through sales automation systems and customer relationship management (CRM) systems to push integrated customer, competitive, and product information to the sales force. By automating many repetitive selling tasks, sales technology can actually increase sales, productivity, and one-to-one client relationships at the same time. By pushing integrated customer, competitive, and product information toward the salesperson, technology can increase salesperson productivity and sales revenue by allowing the sales force to serve customers’ needs more effectively.

Question 51

Sales Promotion

Answer 51

• Accounts for the bulk of promotional spending in many firms
• Activities that create buyer incentives to purchase a product
• Add value for buyer or the trade
• Universal goal
• To induce product trial and purchase
• Used to support other promotional activities rather than as a stand-alone promotional element

Despite the attention paid to advertising, sales promotion activities account for the bulk of promotional spending in many firms. This is especially true for firms selling consumer products in grocery stores and mass-merchandise retailers where sales promotion can account for up to 70 percent of the firm’s promotional budget. Sales promotion involves activities that create buyer incentives to purchase a product or that add value for the buyer or the trade. Sales promotion can be targeted toward consumers, channel intermediaries, or the sales force.

Roughly a third of all sales promotion expenditures are targeted toward the trade (wholesalers and retailers). Direct main comprises the next largest expense at between 15 and 20 percent. Regardless of the activity and toward whom it is directed, sales promotion has one universal goal: to induce product trial and purchase.

Most firms use sales promotion in support of advertising, public relations, or personal selling activities rather than as a stand-alone promotional element. Advertising is frequently coordinated with sales promotion activities to provide free product samples, premiums, or value-added incentives.

Question 52

Methods of Consumer Sales Promotion

Answer 52

• Coupons
• Rebates
• Samples
• Loyalty programs
• Point-of-purchase promotion
• Premiums
• Contests and sweepstakes
• Direct mail

For more detailed descriptions of each method, please refer to this note:

• Coupons are used to reduce the price of a product and encourage customers to try new or established brands.
• Rebates are similar to coupons except that they require much more effort on the consumer’s part to obtain the price reduction. Most firms prefer rebates to coupons.
• Samples stimulate trial of a product, increase volume in the early stages of the product’s life cycle, and encourage consumers to actively search for a product.
• Loyalty programs reward loyal customers who engage in repeat purchases.
• Point-of-purchase promotion includes displays, counter pieces, display racks, or self-service cartons that are designed to build traffic, advertise a product, or induce impulse purchases.
• Premiums are items offered free or at a minimum cost as a bonus for purchasing a product.
• Contests and sweepstakes encourage potential consumers to compete for prizes or try their luck by submitting their names in a drawing for prizes.
• Direct mail, which includes catalog marketing and other printed material mailed to individual consumers, is a unique category because it incorporates elements of advertising, sales promotion, and distribution into a coordinated effort to induce customers to buy.

Question 53

Methods of Business (Trade) Sales Promotion

Answer 53

• Trade allowances
• Free merchandise
• Cooperative advertising
• Training assistance and sales incentives

For more detailed descriptions of each method, please refer to this note:

• Trade allowances include both merchandise and price allowances for bulk buying or for special promotional considerations.
• Free merchandise is sometimes offered to intermediaries instead of quantity discounts.
• Cooperative advertising is an arrangement where a manufacturer agrees to pay a certain amount of an intermediary’s media cost for advertising the manufacturer’s products.
• Training assistance and sales incentives are sometimes offered to intermediaries. Sales incentives come in two general forms: push money and sales contests.