1. BUAD 307 MARKETING MIX II Lars Perner, Instructor 1 BUAD 307—Spring, 2016 MARKETING MIX II: PUTTING IT ALL TOGETHER

2. BUAD 307 MARKETING MIX II Lars Perner, Instructor 2 Learning Objectives Identify strategic opportunities within the marketing mix Identify relationships and interdependencies among marketing mix variables Identify tradeoffs between strategies

3. BUAD 307 MARKETING MIX II Lars Perner, Instructor 3 PRODUCT: STRATEGIC ISSUES The diffusion of innovation –Spreading new products –Educating consumers about new products

4. BUAD 307 MARKETING MIX II Lars Perner, Instructor 4 Types of Innovations A continuum of “newness:” –Continuous—same product, just small improvements over time—e.g., automobiles –Dynamically continuous—product form changed, but function and usage are roughly similar—e.g., cell phones, HDTV, video streaming, Blu-ray –Discontinuous—entirely new product; usage approach changes— e.g., fax, GPS The more “new” a product category is, the greater the need to educate the customer on benefits and basic idea of how the product works

5. BUAD 307 MARKETING MIX II Lars Perner, Instructor 5 Some Diffusion Examples ATMs (*) –Easy observability –Significant relative advantage Credit cards (*) –“Chicken-and-egg” problem –“Jump-starting the cycle” Faded, torn jeans –Fads –Innovations do not have to be high tech Fax machines (*) –Network economies Rap music –Low barriers to entry –Spread to a new consumer group Hybrid corn (*) –Trialability –Imitation *You should be able to discuss these case histories on the final

6. BUAD 307 MARKETING MIX II Lars Perner, Instructor 6 Diffusion Themes Observability: Products that can be seen being used to others tend to spread faster “Chicken-and-egg” problem: A certain infrastructure is needed to make adoption attractive, but motivation to provide the infrastructure depends on market size—e.g., –Coupons and clearinghouses –Hydrogen/electric cars –HDTV –Entertainment media Trialability: People tend to prefer “trying out” a potentially costly innovation rather than having to commit before trial Network economies: Some innovations become more valuable when more others have that innovation—e.g., –Text messaging –E-mail –Online personals sites –Other online communities –Auction sites

7. BUAD 307 MARKETING MIX II Lars Perner, Instructor 7 DISTRIBUTION: STRATEGIC ISSUES Distribution intensity and selectivity Direct to customer sales vs. use of distributors Diversion Retail trends

8. BUAD 307 MARKETING MIX II Lars Perner, Instructor 8 Approaches to Distribution These strategies require tradeoffs: –Wide--essential to low involvement goods –Selective--desire to maintain image –Exclusive--very high prestige needed or very high service requirements

9. BUAD 307 MARKETING MIX II Lars Perner, Instructor 9 Product Characteristics That May Favor Direct-to-Customer Sales High need for customization— especially if the work can be done by the customer Rapid decline in the value of inventory High value/bulk ratio Low need for customer to manually inspect the product Highly specialized product requiring a very large assortment of inventory

10. BUAD 307 MARKETING MIX II Lars Perner, Instructor 10 Parallel Distribution Structures (Multi-channel Distribution) MANUFAC- TURER DISTRI- BUTOR RETAILER MAJOR CHAIN (e.g., Wal-Mart) FACTORY OUTLET DIRECT MARKETING

11. BUAD 307 MARKETING MIX II Lars Perner, Instructor 11 Diversion Products often end up where manufacturers did not intend them to go –Trade promotions in one region Within countries (Difficult to do today since sales at a given time can be verified by scanner data) Between countries--different price sensitivities and structures may exist (e.g., pharmaceuticals, luxury autos –“Over-purchases” by small authorized retailers to supply unauthorized distributors (e.g., Levis’ for Costco)—disliked by full service retailers who have to compete

12. BUAD 307 MARKETING MIX II Lars Perner, Instructor 12 Over-Purchase Diversion Example Joe’s Jeans Shop normally buys and sells 500 pairs of Levi’s XBM/P jeans per week at $22.00 and sells at $32. A “consolidator” asks Joe to buy his usual 500 plus an extra 200. This increase is not big enough to make Levi’s suspicious. The consolidator pays Joe 200*($22+$3)=$5,000. Joe makes an extra $3*200=$600. The consolidator resells to a large discount chain.

13. BUAD 307 MARKETING MIX II Lars Perner, Instructor 13 Retail Trends Divergence—growth in both low cost, low service and high cost, high service stores more than in the middle Growth of –Mega stores: large stores with a wide assortment (e.g., Wal- Mart) – Category killers: stores emphasizing in one area (e.g., Best Buy, Staples, Home Depot, Toys “R” Us) Large buying power based on large volume purchases within select categories Tendency to make large deals early on in order cycle –Manufacturer gets a large quantity guaranteed sale –Category killer gets a low price

14. BUAD 307 MARKETING MIX II Lars Perner, Instructor 14 Product Characteristics That May Favor Direct-to-Customer Sales High need for customization—especially if the work can be done by the customer Rapid decline in the value of inventory High value/bulk ratio Low need for customer to manually inspect the product Highly specialized product requiring a very large assortment of inventory

15. BUAD 307 MARKETING MIX II Lars Perner, Instructor 15 PRICING: STRATEGIC ISSUES Legal issues Consumer reference prices Introductory price strategies

16. BUAD 307 MARKETING MIX II Lars Perner, Instructor 16 Legal Issues Banned by Federal law: –Discrimination in prices paid by firms which compete against each other unless supported by evidence of cost savings OK to charge restaurants more than grocery stores Can only charge Wal-Mart less than Joe’s Supermarket if volume savings can be proven—and the price difference must be no greater than the actual provable cost savings. Banned by some state laws: –Gender discrimination (e.g., charging more for dry cleaning women’s clothes than men’s clothes) –Discrimination between consumers in general Senior citizen discounts are explicitly permitted in California

17. BUAD 307 MARKETING MIX II Lars Perner, Instructor 17 More Legal Issues Federal and State bans on: –Collusion (coordinating or even discussing prices with competitors) –Tying: Requiring the customer to buy one product to be allowed to buy another –Predation (offering temporary prices below cost of production to drive competitors out of business and then raising prices) In general, fully absorbed average cost must be used—cannot use marginal cost –Using monopoly power in one market to “subsidize” new market

18. BUAD 307 MARKETING MIX II Lars Perner, Instructor 18 Price Maintenance In 2007, the U.S. Supreme Court reversed the longstanding ban on explicit agreements between manufacturers that the branded product would not be sold below an agreed upon “floor” price –Although setting minimum retail prices for a brand reduces intra-brand competition (competition between different retailers selling the brand), some believe that minimum prices may encourage investment in service and brand building to the extent that competition between brands increases (inter-brand competition) –Manufacturers generally cannot enforce minimum price agreements on existing inventory, but they can “cut off” offending retailers “Gray market” goods: Retailers in the U.S. generally have an absolute right to sell products that they have bought legally at a price lower than the suggested retail price. –Diversion: Legitimate retailers buy up extra quantity to be resold to unauthorized dealers and/or geographic shipment. (More details will be given under distribution).

19. BUAD 307 MARKETING MIX II Lars Perner, Instructor 19 Other Manufacturers’ “Suggested” Retail Prices (MSRPs) U.S. manufacturers often put an exorbitantly high “suggested” price on a product so that even full service retailers can look good by selling below the MSRP In some EU countries, selling below the MSRP is generally not legal—manufacturers must therefore be careful not to “recommend” excessive prices

20. BUAD 307 MARKETING MIX II Lars Perner, Instructor 20 REMINDER INCOME ≠ WILLINGNESS TO SPEND! It makes more sense to segment on price sensitivity than on income or wealth

21. BUAD 307 MARKETING MIX II Lars Perner, Instructor 21 Price Adjustments For and Discrimination Among Consumers Cars: List price – manufacturer discounts and rebates – dealer discount Tuition: List price – scholarships – financial aid Text, p. 263. Copyright © 2005 McGraw-Hill.

22. BUAD 307 MARKETING MIX II Lars Perner, Instructor 22 Introductory Effects In an experiment, laundry detergent was introduced at $0.49 in one condition and $0.79 in another. After 8 weeks, price was raised to $0.79 for low price intro condition. There were higher cumulative sales in high price intro.

23. BUAD 307 MARKETING MIX II Lars Perner, Instructor 23 Consumer Price Awareness A survey revealed of consumers who had just selected a product suggested: Avg. time spent before departing from product area: 12 seconds Avg. no. of products inspected: 1.2; only 21.6% claimed to check price of non-chosen brand 55.6% could state price of just chosen product within 5%

24. BUAD 307 MARKETING MIX II Lars Perner, Instructor 24 Consumer Reference Prices Consumers typically have some expectation of what they will pay. This is based on: Previous experience Common sense Perceived fairness Two kinds of reference prices: Internal: Based on consumer’s memory. External: Based on environment (e.g., signs, other products in the store)

25. BUAD 307 MARKETING MIX II Lars Perner, Instructor 25 Internal Reference Prices Consumers tend to develop some memory of prices of frequently purchased items ---> to make store prices look low, you may want to price especially salient products lower More knowledgeable consumers typically have tighter price range expectations Reference prices are constantly updated to some extent, but are hard to change upwards--certain unreasonable “stimuli” (prices) may be rejected as unreal Consumer reference prices tend to be lower than actual prices ---> “sticker shock”

26. BUAD 307 MARKETING MIX II Lars Perner, Instructor 26 External Reference Prices Reference prices provided by seller or environment E.g., “MSRP $3.99; our price $2.49” “Sold elsewhere for $20.00; our price $14.99” “Was $100.00; now $69.95”

27. BUAD 307 MARKETING MIX II Lars Perner, Instructor 27 The Promotion Signal A segment of consumers will respond to negligible discounts--e.g., “SALE! $3.95 (Was $4.02). However, merely placing a sign “EVERYDAY LOW PRICE” randomly also increased sales of affected products.

28. BUAD 307 MARKETING MIX II Lars Perner, Instructor 28 Odd/Even Pricing--Does It Have an Impact? Theory: $3.00 is rounded to $3.00 while $2.99 is rounded to “$2.00 plus change” Reality: Studies in U.S. have found a small impact (the price elasticity is greater going from $5.00 to $4.95 than from $5.10 to $5.05). This is a very small impact. Sales increase only a slight amount. The loss of the extra cents may cancel out profit from increased quantity sales. Note that odd pricing may signal receiving a bargain, which may nor may not be compatible with the desired product image Odd pricing has typically been used by tradition (initially implemented to force cashiers to ring up purchases in order to give change).

29. BUAD 307 MARKETING MIX II Lars Perner, Instructor 29 REMINDER The increase in sales that results from using “odd” prices is tiny!

30. BUAD 307 MARKETING MIX II Lars Perner, Instructor 30 PROMOTION: STRATEGIC ISSUES Promotional objectives vs. tactics Promotion across the product life cycle (PLC) Advertising strategies

31. PROMOTION ELEMENTS ADVERTISING SALES PROMOTIONS PERSONAL SELLING PUBLIC RELATIONS (MEDIA OUTREACH) DIRECT MARKETING SALES (DISCOUNTS) COUPONS PREMIUMS REBATES SPECIAL RETAIL SPACE /DISPLAY

32. BUAD 307 MARKETING MIX II Lars Perner, Instructor 32 Some Promotional Objectives Brand awareness –Knowledge of product category Existence Benefits Functions Technology –Knowledge of brand differences Brand attitude –Favorable beliefs about the brand Overall Relative to competitors Product category or brand trial Brand preference –Willingness to pay a premium for the brand –Resistance to competitor promotions (e.g., sales, coupons) –Willingness to buy under less convenient circumstances Increase in product category or brand usage –Quantity used –Frequency used –Scope of uses Increase in short term sales Objectives involve what we are trying to achieve rather than the specific methods of accomplishing these goals.

33. BUAD 307 MARKETING MIX II Lars Perner, Instructor 33 Increase in Product Category or Brand Usage—Product Category Potential Examples Scope of uses –Orange juice: “It isn’t just for breakfast anymore” –Baking soda –ZipLock™ bags –WD-40™ (lubrication and sticker removal) Quantity used –Calcium supplements –Milk Frequency used –Cosmetics –Deodorant –Wine –Greeting cards –Phone calls Cell phone minutes Call to family/friends –Hotels, airlines –Conference calls –Car engine oil –Canned soup

34. BUAD 307 MARKETING MIX II Lars Perner, Instructor 34 Promotional Objectives Across the Product Life Cycle (PLC) Introduction –Advertising and public relations  awareness –Sales promotion  trial –Personal selling  distribution Growth –Advertising and PR  brand loyalty –Less emphasis on sales promotion Maturity –Advertising  persuasion, reminder –Sales promotion  market share Decline –Reduction in advertising and PR –More emphasis on sales promotions  temporary sales

35. BUAD 307 MARKETING MIX II Lars Perner, Instructor 35 Some Advertising Strategies Comparative ads –Illegal in most countries –Generally very disliked by U.S. consumers but still relatively effective Humor appeal –A way to get attention to the advertisement— but the consumer may remember the humor and not what the product featured was Adding beliefs Classical conditioning (association) Fear appeal –To be effective: Feared stimulus must be of medium intensity—enough to motivate action but not so intense that the individual “tunes out” the ad A clear solution must be offere d—e.g., use Listerine™ to avoid tooth loss due to gingivitis Repetition Celebrity endorsements