CH-6-10 Segmentation, Targeting and Positioning – Marketing: The Core : Chapter Notes

This Document Contains Chapters 6 to 10 Chapter 6 Segmentation, Targeting and Positioning MARKETING TIP For this chapter we look to Rob Morash, managing director HEAD Canada for his MARKETING TIP on what he considers it is important for students to understand. You may wish to use these at the start of a class, after a break, or to summarize the material at the end of a session. The quote for this chapter is as follows: “Products are carefully designed to appeal to market segments and must deliver revenues that turn into profits.” LECTURE NOTES CHAPTER 6 OPENING VIGNETTE – ATOMIC SKIS Chapter 6 opens with a vignette on HEAD Canada and reviews how it uses elite athlete to market its products and how it segments the ski market. The vignette is summarized as follows: HEAD segments the ski market into clusters with common lifestyle, demographic, and product needs. There are three main segments (1) freestyle skiers, (2) racers, and (3) recreational skiers. • Freestyle skiers: This growth segments accounts for about 15 percent of the market and consists of teenagers/ young adults who live life on the edge. They are passionate about freestyle skiing, music, and sports. HEAD sponsors elite athletes and uses product placement, social media, online ads, and in-store merchandising to market to this segment. • Racers: This small declining segment of 5- 35 year old downhill skiers accounts for about 10 percent of the market and includes high performance athletes as well as higher income young families. HEAD sponsors elite athlete ski racers to market to this segment. Recreational skiers: This segment accounts for about 75 percent of the market and consists of 5 - 55 year old casual skiers that are conservative, higher income young families. Marketing programs focus on in-store merchandising, tradeshows, retail employee incentives, and signage and demos at ski resorts. An example of how HEAD markets its skis can be seen with the freestyle skiing segment where it sponsors Canadian elite athlete Kaya Turski by providing funds, skis, and ski boots. She then competes in highly televised sporting events, attends press conferences, appears in YouTube clips, and is profiled on the HEAD website, in the media, and in ski films. She also attends retail store openings, company sales meetings, and is encouraged to use social media. HEAD also uses its own social media, online ads, and in-store merchandizing to reach consumers. Reality Check As you read Chapter 6, refer back to the HEAD skis vignette to answer the following questions: • What market segmentation strategy is HEAD using: mass marketing, segment marketing, niche marketing, or individualized marketing? Answer: HEAD uses a segment marketing strategy • What is the demographic profile of HEAD’s freestyle skier segment? Answer: Demographically, the freestyle skiing segment consists of teenagers and young adults. • What is the psychographic profile of HEAD’s freestyle skier segment? Answer: Psycho-graphically, the freestyle skiing segment consists of free spirited and fearless sports lovers. They use social media and the Internet for information, updates and entertainment. They never read a hardcopy newspaper, rarely pick up magazines, and spend very little time watching TV. • What is the behavioural profile of HEAD’s freestyle skier segment? Answer: Behaviourally, the freestyle segment consists of people who get an adrenaline-rush doing back flips and spins in terrain parks, thrills from skiing down half pipes and over jumps, and enjoyment from skiing down rails. They enjoy watching their favourite skiers compete in world class events. I. MARKET SEGMENTATION Segmentation, targeting, and positioning are fundamental concepts in marketing that work together to create and reinforce a product’s image to consumers. Marketers include target market profiles, personas, and positioning statements in their strategic plans to guide marketers as they craft program to strengthen brands and ensure products stay fresh, relevant, and focused. The key to successful product differentiation and market segmentation is in finding the right balance between satisfying a customer’s individual wants and being able to do so profitably. The basis of market segmentation, target markets, and product positioning is based on three important facts: • Consumers have diverse needs and a single product cannot satisfy everyone. • Companies have finite amounts of money. • Companies channel marketing programs towards consumers who are most likely to purchase products. This has resulted in marketers following a strategy of product differentiation to position their products as distinct from competitive offerings. A market segment is a piece of the market. Market segmentation involves aggregating prospective buyers into groups that have common needs and who respond similarly to marketing programs. They are similar in their consumption behaviour, attitudes, and target market profiles. In the marketing world there are two main market segments: • The consumer market – goods and services that a person purchases for personal use. • The business market – products purchased to either run a business, or to be used as a component in another product or service. A. Forms of Market Segmentation There are four different strategies that companies can take to segment the market: • Mass marketing strategy: Marketing a product with a broad appeal to the entire market without any product or marketing differentiation This is uncommon and can be seen with utility companies. • Segment marketing strategy: Marketing a range of different products and brands to specifically meet the needs of an organization’s varied target markets. This is common with large companies such as car manufacturers and packaged goods companies • Niche marketing strategy: Marketing a limited product line to a narrow but profitable segment of the market that is of marginal interest to major competitors. This is seen with smaller companies that manufacturer or sell specialty goods. • Individualized marketing strategy: One-to-one marketing that involves customizing offers and in some cases, products to fit individual needs. Ask Yourself 1. What are the advantages of a segment marketing approach to market segmentation? Answer: The advantages of segment marketing are that products and programs are designed to appeal to specific market segments, and meet specific consumer needs. Being competitive in the market should result in sales and profits. 2. Does Kashi still use a niche market segmentation approach? Answer: The fact that Kashi is now owned by Kellogg’s, means that it is now part of Kellogg’s segment marketing strategy. This healthy breakfast category is also quite main stream, and is therefore no longer a niche category. 3. What are the disadvantages of individualized market segmentation? Answer: Individualized marketing can be costly, time consuming and ineffective unless consumer databases are up-to-date and well maintained. II. TARGET MARKETS AND PERSONAS Target Markets A target market is the specific group of existing and potential consumers to which marketers direct their marketing efforts. Developing an accurate target market profile is fundamental to marketing success as it drives all elements of the marketing mix. A target market profile describes a target market using four key variables - geographics, demographics, psychographics, and behaviouristics: • Geographics; Where a target market lives using elements such as country, region, province, city size, and types of location such as urban, suburban or rural • Demographics; Age, gender, family composition, income, occupation, education, ethnic background, and home ownership • Psychographics; Consumer attitudes to life, their values, personalities, general interests, opinions, and activities • Behaviouristics; How and why consumers use a product, why it is purchased, its desired product benefits, how often it is purchased and used, and whether consumers are brand loyal. Personas Personas take target market data and simplify and synthesize it, adding a few fictional details such as name and image, so that human traits and characteristics become memorable for marketers. They bring target market data alive in one page descriptions or snapshots of a typical consumer. Personas are character descriptions of a typical customer in the form of fictional character narrative, complete with images that capture the personalities, values, attitudes, beliefs, demographics, and expected interactions of a typical user with a brand. Ask Yourself 1. What elements are included in demographics? Answer: Demographics includes gender, age, income, family life-cycle, education, occupation, ethnicity background, and home ownership. 2. What is the difference between psychographics and behaviouristics? Answer: Psychographics refers to general attitudes to life, personality and general preferences. Behaviouristics takes a more specific view of these attitudes as they relate to the product, its benefits and usage. 3. In what ways are personas useful to marketers? Answer: Personas create vivid narratives about a person that typifies the target market. III. SEMENTATION ANALYTICS Various research companies such as Nielsen or Euromonitor provide data on the size and growth of markets to assist in segmentation analysis. Separately, various segmentation analytics companies provide more granular data on populations that assist marketers. Environics, Pitney Bowes, and SuperDemographics are three segmentation analytics companies that detail demographic, psychographic, and behavioural consumer information by postal code and provide interactive software for detailed analyses. • Navigate to the Prizm Lifestyle Lookup section of the Environics website at http://www.environicsanalytics.ca/prizm-c2-cluster-lookup and enter a postal code to see an overview of the cluster information. • Navigate to the Psyte HD Cluster Index at http://www.utahbluemedia.com/pbbi/psyte/psyteCanada.html and enter a postal code to view a cluster overview as well as a detailed breakdown of the cluster’s demographics, geographics, media habits, leisure activities, and shopping activities. • Navigate to the SuperDemographics website at http://www.superdemographics.com/, and try their free trade report area. Follow the steps and fill in the postal code to view the clusters within the area and its demographic break-down. IV. PRODUCT POSITIONING Product Positioning and Repositioning Marketers position products in the market to appeal to certain target groups and to present a particular image relative to the competition. Product positioning is the image of a branded product from a consumer perspective, relative to the competition. Marketers create positioning statements to outline the positioning of a product and then manage the marketing mix to meet this image. Companies reposition products when long-term consumer attitudes and interests have changed. There are three basic factors that tend to surface in product positioning: 1. Image: Products are often positioned as leaders, contenders, or rebels in the market also taking on roles such as trusted, prestigious, or thrifty. 2. Product Attribute: Products with features that differentiate them from the competition are often positioned on this platform bringing their product claims to the forefront. 3. Price: Products with brand parity and little product differentiation position themselves on a price platform. Positioning Maps Positioning maps are visual representations of how products/product groups/categories are positioned in the market. They are used by marketers to identify gaps in the market and to review the competitive nature of the market. They can identify new product opportunities. V. STEPS IN MARKET SEGMENTATION The steps in market segmentation are sequentially followed as outlined below: 1. Review strategic company objectives – these must be clear and quantifiable. 2. Identify specific business unit objectives – these need to outline specific sales, market share, and profit targets for the business unit. 3. Identify consumer/customer needs and common characteristics in the market – review trends and driving forces in the category and identify common interests and concerns. 4. Cluster common consumer/customer variables to create meaningful market segments – identify segments in the market by grouping common interests, usage patterns and prevailing attitudes. 5. Conduct SWOT analyses on the segments to determine strengths, weaknesses, opportunities and threats. 6. Identify the segment that best meets strategic company objectives – a marketer sifts through the facts and ideas from the SWOT analysis and assesses the opportunities and threats relative to company objectives. 7. Identify Marketing Programs and Budget Requirements Needed for this Segment – conduct a financial evaluation of the market assessing the costs of doing business, and the programs and resources needed to market the product. 8. Create a sales forecast for this segment. 9. Conduct a profit and loss financial analysis for this segment. 10. Check financial forecasts against specific business unit objectives. Ask Yourself 1. What are the steps involved in market segmentation? Answer: There are 8 steps involved in market segmentation are follows;(1) review strategic company objectives, (2) identify specific business unit objectives, (3) identify consumer/customer needs and common characteristics in the market, (4) cluster common consumer/customer variables to create meaningful market segments, (5) conduct SWOT analyses on the segments to determine strengths, weaknesses, opportunities and threats, (6) identify the segment which best meets strategic company objectives, (7) identify marketing programs and budget requirements needed for this segment, (8) create a sales forecast for this segment, (9) conduct a Profit and Loss financial analysis for this segment, and (10) check financial forecasts against specific business unit objectives. 2. What is product positioning and what is the purpose of a positioning statement? Answer: Product positioning is the image of a product from a consumer perspective relative to the competition. A positioning statement formalizes the product’s positioning and serves as a point of reference when creating marketing programs for the product. 3. Why do marketers use positioning maps? Answer: Positioning maps are used to identify gaps in the market for potential new products and to highlight the competitive nature of the market. Chapter 7 Products and Brands MARKETING TIP For this chapter we look to Ian Gordon, senior vice president Loblaw Companies for his MARKETING TIP. You may wish to use this at the start of a class, after a break, or to summarize the material at the end of a session. The quote for this chapter is as follows: "Brands need to be nurtured and respond to evolving consumer needs and competitive challenges while remaining true to their core DNA." LECTURE NOTES CHAPTER 7 OPENING VIGNETTE – PRESIDENT’S CHOICE BLACK LABEL Marketers understand that meeting customer needs is central to successfully marketing a brand. In this chapter Ian Gordon, senior vice president at Loblaw Companies takes us inside the development of a new sub-brand for President’s Choice, PC Black Label. The vignette is summarized as follows: • In the mid-1980s, the President’s Choice brand was launched as a premium, yet affordable private label brand for Loblaw Companies that brought exciting, fun delicious flavours and multicultural foods to Canada. It was priced higher than no name items, but below manufacturer’s brands. It is a very successful brands and stands for quality and discovery • In 2011 the PC Black Label sub-brand was created to address the ¬foodie trend that saw enthusiasts going to gourmet food stores, or online and to farmers markets to find rare ingredients and specialty products. It was a line of exceptional specialty products that strengthened the overall President’s Choice brand image. • PC Black Label is positioned as a line of gourmet food products that inspires foodies with culinary choices that excite taste buds without paying specialty store prices. Every item in the line has an exceptional wow factor and is designed to, “Satisfy your inner foodie.” • The PC Black Label collection is differentiated from the regular PC line in that its products are of exceptional quality - a step beyond the premium quality of President’s Choice. • The line consists of exceptional products such as unusual oils and vinegars, exotic spice blends, exquisite sauces and marinades, aged cheeses, fancy mustards and jams etc. It pricing strategy reflects the PC high quality/good value proposition and items are priced at approximately 20 percent below specialty store products. Its packaging is unique and creates intrigue. Marketing communications reflect its premium quality and the product is sold throughout Loblaw company store with the exception of No Frills. Reality Check As you read chapter 7, refer back to the opening vignette to answer the following questions: • What type of brand is PC Black Label: a manufacturer’s brand, a private label brand, or a generic brand? Answer: It is a private label brand for Loblaw Companies. • Review the elements of a good brand name and discuss the strength of the PC Black Label brand name in the food industry. Answer: The strength advantage of the PC Black Label name is that it borrows from the strength of the PC brand name that stands for innovation and quality and adds to this brand with a name that has connotations of high quality. I. TYPES OF PRODUCTS A. Products In marketing, a product is a good, a service, or an idea consisting of tangible and intangible attributes. Tangible attributes are physical characteristics such as colour or sweetness, and intangible attributes include product elements that can’t be “touched. Products are divided into three main categories; (1) nondurable goods, (2) durable goods, and (3) services. • Nondurable Goods - items such as fast-food products and fuel which do not last and which are consumed only once, or for a limited number of times. • Durable Goods – items such as appliances or cars that last for an extended period of time. • Services – intangible activities, benefits, or satisfactions offered for sale, such as banking, visits to a doctor, taking a vacation, or going to a movie. Most products are neither “pure goods” nor “pure services,” but range from the tangible to the intangible on the service continuum. B. Services There are four unique elements to services: intangibility, inconsistency, inseparability, and inventory. These four elements are referred to as the four I’s of services. • Intangibility – services generally cannot be held, touched, or seen before purchase. • Inconsistency – services are often hampered by inconsistency. Delivery of a service varies according to the people who provide it. • Inseparability – consumers do not usually separate the deliverer of the service from the service itself. • Inventory – inventory problems arise due to the fluctuating demand for services that occur during the day. • II. PRODUCT ELEMENTS Marketers view products as having three different layers: the core product, the actual product, and the augmented product. We call this the total product concept which is explained below: A. The Total Product Concept • The Core Product – the benefit a consumer derives from having the product • The Actual Product – the physical good or the service a consumer purchases when buying a product. It includes the product’s branding, design, and features • The Augmented Product – the additional features and attributes which accompany a product such as a warranty, a service contract, delivery options, installation assistance, or a website B. Packaging and Labelling For many products, packaging and labelling are an integral part of the product. A package and its label provide purchasers with detailed information and face-to-face communication at the time when a purchase is being made. C. Product Lines and Product Mixes • Product Line – a group of products with the same product and brand name that are generally marketed together. • Product Mix – the combination of product lines marketed by a company. • Product Width – refers to the number of different categories offered by the company. • Product Depth – refers to the variety of product offerings within a product category, product group, or product line. Ask Yourself 1. Explain the difference between nondurable goods, durable goods, and services. Answer: Nondurable goods are tangible items that do not last, are consumed only once, or for a limited time. Durable goods are tangible items that last for an extended period of time. Services are intangible items such as banking, visits to a doctor, taking a vacation, or going to a movie. 2. What elements make services unique? Answer: Services are unique in terms of intangibility, inconsistency, inseparability, and inventory. 3. What is included in the total product concept? Answer: The core product, the actual product and the augmented product are part of the total product concept. III. THE CLASSIFICATION OF CONSUMER AND BUSINESS PRODUCTS Products are classified as either consumer or business products depending on their usage. Consumer products are purchased by the ultimate consumer for their own personal use. Business products are purchased to either run a business, or to be used as a component in another product or service. A. Consumer Products These are categorized into convenience, shopping, specialty, and unsought products. • Convenience Products – inexpensive items such as newspapers or chocolate bars that are purchased frequently with minimal shopping effort and risk. • Shopping Products – products such as jeans and books for which the consumer comparison shops, assessing the attributes and prices of different products and brands. These products are more expensive than convenience products, require greater shopping-time, and require a greater assurance of purchase satisfaction. • Specialty Products – products such as a Rolex watch which require considerable time and effort to purchase. These products tend to be expensive products needed for special occasions. They include specialty brands, and require high purchase satisfaction. • Unsought Products – products that the consumer does not know about, or is not interested in purchasing. Examples of unsought products may be diapers for a person who does not have a baby. B. Business Products A major characteristic of business products is that their sales are often directly related to the sales’ levels of the final product they are manufacturing or offering for sale. They are categorized as follows: • Production Goods – items used in the manufacturing process that become part of the final product, such as raw materials or component parts. • Support Goods and Services – items used to assist in producing other goods and services and include: o Installations - buildings and fixed equipment o Accessory Equipment - tools and office equipment purchased in small-order sizes by buyers o Supplies - smaller items used continually to run the business such as stationery, paper clips, and brooms o Services - intangible activities needed to assist the business in its operations such as transportation, maintenance and repairs Ask Yourself 1. What is the difference between consumer products and business products? Answer: A consumer product is purchased for use by the ultimate consumer while a business product is purchased for use or inclusion in a business. 2. What are the four main types of consumer goods? Answer: Consumer goods are classified into convenience products, shopping products, specialty products, and unsought products. 3. What are the classifications of business products? Answer: Business products are classified as either production goods or support goods. Support goods can be installations, accessory equipment, supplies, or services. IV. BRANDING A. Brands and Legal Protection A brand is a name or phrase uniquely given by a company to a product to identify and distinguish it in the market. Brand equity is the term used to describe the strength of a brand which is built up over time from its image in the market place. Brands can be legally protected as outlined below: • Patents - used to legally protect new technologies, unique processes, or specific formulations. In Canada, patents currently protect the owner for 20 years, providing maintenance fees are paid during this time-period. • Copyrights - used to legally protect the written word, sound recording, or form of communication from being copied. It covers music, literature, performances, and slogans. • Trademarks - used to legally protects a brand name, and brand marks in terms of logos and their respective colours and fonts. Trademarks are limited to 15 years, but can be renewed. B. Brand Loyalty This refers to the degree consumers insist on purchasing a specific brand. Marketers try to create connections between brands and consumers so that their brand loyalty remains high. C. Brand Personality Over time brands become associated with an image that has been developed over time. In this way brands can take on a brand personality which can be describe in human terms. D. Brand Names A good brand name should include the following characteristics: • The name should suggest the product benefits • The name should be memorable, distinctive, and positive • The name should fit the company or product image • The name should have the ability to be legally protected • The name should be simple to spell and remember Ask Yourself 1. In what instances are patents, copyrights and trademarks used? Answer: Patents are used to protect unique processes, technologies, or formulations. Copyrights protect written words, sound recordings, or performances. Trademarks protect brand names, brand marks, logos and their design. 2. Explain the concepts of brand equity and brand loyalty. Answer: Brand equity refers to the long-term strength of a brand. Brand loyalty examines the degree of insistence consumers have when purchasing a specific brand. 3. What are components of a good brand name? Answer: A good brand name should suggest something about the product benefits, be memorable, distinctive, and positive, fit the company/product image, be legally protected, and be simple to spell and remember. E. Types of Brands There are three types of brands: • Manufacturer’s Brand – a brand owned and produced by the manufacturer • Private Label Brand – a store brand, contracted out for manufacturing • Generic Brand – an unbranded product Brands are classified as either individual brands or family brands depending on whether their name has been extended to cover more than one product category. • Individual Brands – a brand name (such as YOP for yoghurt drinks) that is used solely for a specific product or product line. • Family Brands – a brand name (such as Crest) that is sued for a number of different products. Ask Yourself 1. What are the advantages and disadvantages of using a family brand rather than an individual brand to launch a new product? Answer: A family brand can help leverage a new product into high awareness levels very rapidly. This can also add a luster and credibility to the new product. The problem with using a family brand is that sometimes the image is not quite appropriate for the new products. There is also the risk of having an unproven new product associated with the already well-established family brand. 2. Explain the difference between a private label and a manufacturer’s brand. Answer: A private label brand is not owned by a manufacturer but instead by a retailer. A manufacturer’s brand is owned by the manufacturer. 3. What type of price differences would you expect to see for manufacturer’s brand, a private label brand, and a generic brand for products within the same category? Answer: Generally a manufacturer’s brand is more expensive than both a private label and generic brand. A generic brand is the cheapest of them all. V. A PRACTICAL LOOK AT MARKETING PRODUCTS AND BRANDS In practical terms, marketers need to understand the dynamics of the market and quickly assess the financial impact of any changes which are needed to maintain a product’s competitiveness and relevancy. Marketers need to be analytical, creative, and strategic. They must juggle market research information, consumer insights, and manage the competitive environment while working on future programs. A marketer is responsible for: • bringing revenues or profits into a company • creating marketing plans and programs for each element of the marketing mix • evaluating planned programs against changing needs • recommending necessary changes to planned activities as the year unfolds • providing future direction for the business • analyzing daily sales numbers • reviewing profit targets • being aware of changes in product costs • understanding changes in the selling environment. Chapter 8 New Product Development MARKETING TIP For this chapter we look to Morgan Matthews, owner and senior partner at Impact Machine for his MARKETING TIP on what he considers is important for students to understand. You may wish to use these at the start of a class, after a break, or to summarize the material at the end of a session. The quote for this chapter is as follows: “New products only succeed if they sell and make a profit.” LECTURE NOTES CHAPTER 8 OPENING VIGNETTE – TACKLA HOCKEY SKATES This chapter looks at new products and how they are developed and managed. This vignette looks at the innovative TACKLA QuikBlade Shift251 hockey skate with replaceable blades to show the intricacies of new product development. The vignette is summarized as follows: • Impact Machine is a product design company that focuses on sports products and promotional items. It takes a product from its initial research stage through to concept development, and engineering and provides consulting services on production, supply chain management, and sales and marketing strategies. • Impact Machine launched the TACKLA QuikBlade Shift251 hockey skate with Canadian Tire in August 2012 as the first of its kind on the market. The skate comes with a set of replaceable blades that can be easily latched into the skate, allowing hockey players to quickly replace dull blades without having to visit pro-shops for skate sharpening. • The idea of this skate started with an ex-NHL player who was unable to get it off the ground. Impact Machine reviewed the idea and its market potential by reviewing price points, upfront costs, manufacturing requirements, royalty payment to the patent holders, retailer margins, potential retailer support, branding, marketing support, and profit potential. • The process of bringing the product to market started with a feasibility and profit analysis. Then its branding was determined as TACKLA, (under license from Finnish company TACKLA), and Canadian Tire was approached to determine interest. Canadian Tire came on board but demanded the product be certified for safety. This required rapid engineering and the creation of prototypes and testing labs in China. The patent holders then wanted their own safety testing which left only 4 months for a manufacturer to be located off-shore and for the skates to be made and shipped to Canadian Tire on spec and at the required costs. Reality Check As you read chapter 8, refer back to the opening vignette to answer the following questions: • What type of innovation is the TACKLA QuikBlade Shift251; a minor innovation, a continuous innovation, or a radical innovation? Answer: This new product can be considered a continuous or a radical innovation, depending on your point of view. • What stage in the product life cycle is the TACKLA QuikBlade Shift251; introductory, growth, maturity, or decline? Answer: The TACKLA QuikBlade Shift251 is in the introductory stage of its product life cycle. • Looking at the adoption curve, which group of consumers is TACKLA targeting with its new hockey skate; (1) innovators, (2) the early majority, (3) the late majority, or (4) laggards? Answer: The TACKLA QuikBlade Shift251 is targeting innovators and the early majority. I. THE PRODUCT LIFE CYCLE The product life cycle describes the stages a new product goes through in the marketplace; introduction, growth, maturity, and decline. The shape of the product life cycle is influenced by consumer demand, competition, and economic, legislative and technological factors. A. Introduction Stage The introduction stage of the product life cycle occurs when a product is first introduced to its intended target market. During this period, sales grow slowly, and profit is minimal. The marketing objective is to create consumer awareness and stimulate trial. Companies often spend heavily on advertising and other promotion tools to build awareness. Gaining distribution can be a challenge because channel intermediaries may hesitate to carry the new product. During the introduction stage pricing can be either high or low. A high initial price, or a skimming strategy, may be used to help recover development costs and capitalize on the price insensitivity of early buyers. To discourage competitive entry and increase demand, a company can introduce a product at a low price, a strategy known as penetration pricing. B. Growth Stage The second stage of the product life cycle, growth, is characterized by increased competition and a rapid increase in sales. Profits peaks during the growth stage as a result of economies of scale and increased demand. Product and promotional efforts focus on brand and product differentiation. Distribution levels tend to increase. C. Maturity Stage The maturity stage is characterized by a slow-down in the growth rate and an increased focus on price competition to differentiate products in the market. Promotional efforts focus on price. Distribution levels tend to be saturated. Weaker competitors begin to leave the market. D. Decline Stage During the decline stage category sales begin to decline and many competitors fall out of the market. There is very little promotional support other than price discounts. E. Shape of the Product Life Cycle The shape of a product life cycle varies according to the industry, the competition, technological innovation, and marketing approaches. These are the different types of product life cycles: • The Generalized Life Cycle - has a consistent shape but his does not apply to all products. • A High-Learning Product Life Cycle - for a product that requires significant consumer education. These products have extended introductory periods. • A Low-Learning Product Life Cycle - for a product that requires little new learning and the benefits are clearly understood. • A Fashion Product Life Cycle - for a product that has been discontinued but returns after years to flourish again. • A Fad Product Life Cycle - for a product that experiences rapid growth and decline within a short period of time. These products are novelties and have very short life cycles. Ask Yourself 1. What are the four stages in the product life cycle? How do they differ in terms of sales and profits? Answer: The stages in the product life cycle are introduction, growth, maturity, and decline. During the introductory stage sales and profits are low. During the growth stage sales and profits increase rapidly. In the maturity stage sale and profits level off. In the decline stage both sales and profits decline steadily. 2. How do high-learning and low-learning products differ? Answer: High-learning products tend to be complicated or radically different that other products currently in the market. Low learning products are generally a slight variation to products that already exist in the market. 3. What is the shape of the product life cycle for a smartphone in today’s marketplace? Answer: A smartphone is characterized by short product life cycles which span about 18 months. II. PRODUCT LIFE CYCLE STRATEGIES Product life cycles can be extended in a number of ways; (1) targeting current users with extended usage strategies, (2) targeting new consumers through new marketing approaches, (3) revitalizing a product with product improvements and line extensions, (4) repositioning a product, (5) introducing a new product, and (6) finding new uses for a product. These approaches are explained below: A. Targeting Current Users with Extended Usage Strategies This approach is used by marketers for products with strong brand equity and a loyal consumer base. Current consumers are encouraged to consume more of the product. B. Targeting New Consumers through New Marketing Approaches Companies may decide that their current product is under represented with certain consumer groups and see an opportunity to target these consumers. C. Revitalizing the Product with Product Improvements and Line Extensions Product improvements are often used by marketers to ensure products remain competitive, to appeal to evolving needs, and also to address new trends in the market. D. Repositioning a Product Once a product has reached its maturity stage it often needs an injection of newness. This can be achieved through new product development initiatives and/or a repositioning of the product to more readily meet changing consumer needs. E. Introducing a New Product Adding a new product can provide the focus a mature product needs, bringing it back in the product life cycle to either the growth or early maturity stage. F. Finding New Uses for a Product Finding new uses for an existing product is not a simple task as many products do not lend themselves to this approach. Ask Yourself 1. What six approaches can be used to extend a product’s life cycle? Answer: The six stages are: (1) targeting current users with extended usage strategies, (2) targeting new consumers through new marketing approaches, (3) revitalizing a product with product improvements and line extensions, (4) repositioning a product, (5) introducing a new product, and (6) finding new uses for a product. 2. If you were the marketer of a large SUV what approach would you use today to extend its product life cycle? Answer: Making the product is more energy efficient could be a focus. 3. Tim Hortons introduced single serve Tassimo products for home brewing. What approach is Tim Hortons using to extend the product life cycle of its coffee products? Answer: The single serve addition of Tassimo products is an example of adding a line extension to its already existing line of products. Tim Hortons already sold canisters and packages of its coffee for home brewing and Tassimo added a new format to satisfy this growing single serve trend. III. NEW PRODUCTS A. Types of New Products New products are categorized depending on the degree of newness involved, and how much time a consumer needs to learn how to use the product. Based on these factors we classify innovations as: (1) minor innovations, (2) continuous innovations, or (3) radical innovations. • Minor Innovations - product modifications that require no adjustments by the consumer. Marketers work to build awareness of the innovation and market along current lines. • Continuous Innovations - new products which include more than a minor product improvement but do not require radical changes by consumers. Continuous innovations require extensive product development by the company. • Radical Innovations - these involve the introduction of products which are entirely new to the market. Extensive advertising and public relations efforts are needed. B. The Adoption Curve The acceptance of a new product in the market is shown by the adoption curve. This theory states that approximately 2.5% of the population are risk takers who readily purchase innovative products, 34% of the population are the early majority, 34% are the late majority who are less adventurous, while 16% of the population are laggards who are either reluctant or late purchasers. B. Why New Products Succeed or Fail New products fail for the following reasons: • Insignificant point of difference • Incomplete new concept definition. • Insufficient market attractiveness. • Inadequate marketing support. • Insensitivity to critical customer needs • Bad timing • Limited access to buyers Ask Yourself 1. Describe the three types of product innovations and explain which ones are most common. Answer: The three types of innovations are; (1) minor innovations, (2) continuous innovations, and (3) radical innovations. The most common form is for a minor innovation. 2. How does the adoption curve apply to the diffusion of new products in the marketplace? Answer: The adoption curve shows that once a product is accepted by the innovators and early adopters, it quickly accepted by the early majority and late majority who are influenced by this group. Finally laggards may become aware of the product but they may be reluctant to buy. 3. What are the main reasons that new products fail? Answer: New products fail generally due to an insignificant point of difference, an incomplete new concept definition, insufficient market attractiveness, inadequate marketing support, insensitivity to critical customer needs, bad timing, or limited access to buyers. IV. NEW PRODUCT DEVELOPMENT A. Approaches to New Product Development The most common approaches to product innovation are market penetration, (focusing on current consumers with promotional tactics) and product development (developing a new product for current consumers). A market development or diversification strategy take a riskier approach of targeting new markets with either current products (market development), or moving into new arenas with totally new products (diversification). Companies can use a number of different structures to encourage innovation as outlined below: They can: • Appoint a new product development cross-functional team • Appoint a new product development manager • Create a new product development department • Allocate the new product development function to the regular marketing group • Appoint a new venture team B. New Product Development Process New product development follows a step by step procedure as outlined below: • Step 1: New Product Development Strategy – setting the new product strategy for the project. • Step 2: Idea Generation – brainstorming sessions to prompt new ideas. • Step 3: Screening and Evaluation – screening ideas down to a list of promising concepts. • Step 4: Business Analysis – creating financial projections on commercializing the product. • Step 5: Development –creating prototypes for consumer research and manufacturing tests. • Step 6: Test Marketing – selling the product on a limited basis to determine potential success. • Step 7: Commercialization – launching the product with full sales and marketing support. Ask Yourself 1. What occurs in the screening and evaluation step of the new product development process? Answer: Brainstorming ideas are reduced down to those with the most potential. 2. What is the purpose of the business analysis step in the new product development process? Answer: The purpose of this stage is to determine whether the product has financial viability 3. What are the advantages and disadvantages of a test market? Answer: The main advantage is that financial exposure is limited and marketing approaches can be tested. The disadvantages are that the competition can see the product and its marketing approaches. A test market is not always easy to evaluate. Chapter 9 Pricing MARKETING TIP For this chapter we look to Hilary Zaharko – Director of Marketing for H&R Block Canada for her MARKETING TIP. You may wish to use this at the start of a class, after a break, or to summarize the material at the end of a session. The quote for this chapter is as follows: “We want to first understand if our clients know what price they are paying for the service. From there we determine the price they are willing to pay for the service.” LECTURE NOTES CHAPTER 9 OPENING VIGNETTE – H&R BLOCK CANADA Not only does H&R Block have an effective pricing strategy, it effectively trains the future tax preparers for Canada. Each year, more than 10,000 students enroll in H&R Block’s Income Tax School. Graduates of the school potentially become H&R Block employees, but also work for major banks, mutual fund companies and brokerage firms in Canada. Furthermore, H&R Block values students as future clients. Its tax preparation services in Canada offer student pricing offers. • The organization aspires to be the preferred tax and financial partner of its clients in every market it serves. This vision is led by Rick Brown – President, H&R Block Canada and communicated by the company’s Director of Marketing, Hilary Zaharko. From the headquarters in Calgary, Alberta, • H&R Block prepares tax returns for Canadians from more than 1200 offices across Canada. Not only do H&R Block’s tax professionals have the best training in the industry, they also use the latest technology to prepare personal, small business, corporate, U.S. and estate returns. • In the 1940s Henry and Richard Bloch started a company called United Business Company that provided bookkeeping services to small businesses. To add value to the offering, the brothers prepared individual income tax returns of the executives of the client companies. Through word-of-mouth advertising, the organization’s reputation grew, and H&R Block Inc. was formed. • H&R Block opened its first franchised operation in Canada in 1964 and opened its first company-owned operation in Canada the following year. • It may seem difficult for such a large organization to keep its service offering consistent among so many locations, but H&R Block finds a way to do it. Hilary explains, “H&R Block spends a great deal of time educating its employees on the value they offer clients. • Through effective training on position pricing, H&R Block employees explain the value their services offer in the context of perceived benefits in relation to price.” The value of the organization’s services increase as the benefits clients receive increase. • Pricing strategy is an important element of H&R Block’s business. When determining if the prices for the services the organization offers are appropriate, H&R Block researches its competitors. This allows the company to decide if it should be offering prices at, above, or below market pricing. • More importantly, H&R Block conducts research on its clients. As Director of Marketing, Hilary leads the market research efforts. • What Hilary has noticed is that clients are actually willing to pay more if they receive a level of service that exceeds their expectations. Reality Check As you read chapter 9, refer back to this opening vignette to answer the following questions: • As a professional service provider, what approaches to pricing should H&R Block consider when determining the prices for the services it offers? Answer: Given it is in a service-oriented business, one approach H&R Block should consider (and does consider) is the Competition Oriented Approach of Above-, At- or Below- Market Pricing. It also uses conducts market research to determine what its clients are willing to pay. Students may have other types of approaches they believe H&R Block should consider. These should be encouraged and tied into to rationale to the General Pricing Approaches in the text. • What are some of the major constraints H&R Block should consider when setting prices? Answer: The main constraint to consider is the pricing of competitors or other alternatives. H&R Block needs to ensure that the perceived benefits of their services create value in the eyes of its clients. Students may want to discuss other types of constraints they believe H&R should consider. These should be encouraged and tied back to the Identifying Pricing Constraints section in the text. I. NATURE AND IMPORTANCE OF PRICE The price paid for goods and services goes by many names: tuition, rent, interest, premium, fees, dues, fare, and of course, price. A. What Is a Price? • From a marketing viewpoint, price is the money or other considerations, including other goods and services, exchanged for ownership or use of a product. • The practice of exchanging goods and services for other goods and services rather than for money is called barter. • For most products, money is exchanged. However, the amount paid is not always the same as the list, or quoted, price because of discounts, allowances, and extra fees. • All the different factors that increase or decrease the price are put together in a “price equation,” as shown in Figure 9-1. • Applying the price equation shown in Figure 9-1 to buying a Bugatti Veyron involves subtracting incentives and allowances from the sum of list price and extra fees—for a final price of $1,442,624! B. Price as an Indicator of Value • From a consumer’s standpoint, price is often used to indicate value when it is compared with the perceived benefits such as quality, durability, and so on of a product or service. • Creative marketers engage in value pricing, which is the practice of increasing a product’s benefits while maintaining or decreasing price. “Super-sizing” at fast-food restaurants is an example. C. Price in the Marketing Mix • Pricing is a critical decision because price has a direct effect on a firm’s profits. This is apparent from a firm’s profit equation: Profit = Total Revenue – Total Cost = (Unit Price x Quantity Sold) – Total Cost • Price affects quantity sold, which sometimes affects a firm’s costs because of efficiency of production. So price also indirectly affects costs. Thus, pricing decisions influence both total revenue (sales) and total cost, which makes pricing one of the most important decisions marketing executives face. Ask Yourself 1. What is the profit equation? Answer: The profit equation is: Profit = Total Revenue – Total Cost = (Unit Price x Quantity Sold) – Total Cost 2. What is the difference between skimming and penetration pricing? Answer: A firm introducing a new product can use either skimming pricing to set the highest initial price that customers desiring the product are willing to pay or penetration pricing to set a low initial price to appeal immediately to the mass market. 3. What is odd-even pricing? Answer: Odd-even pricing involves setting prices a few dollars or cents under an even number ($599.99 vs. $600.00). Psychologically, the $599.99 price feels lower than $600.00, even though the difference is 1¢. II. GENERAL PRICING APPROACHES Four common approaches to finding an approximate price level are (1) demand-oriented, (2) cost-oriented, (3) profit-oriented, and (4) competition-oriented approaches: A. Demand-Oriented Approaches Demand-oriented approaches emphasize factors underlying expected customer tastes and preferences more heavily than such factors as cost, profit, and competition when selecting a price level. 1. Skimming Pricing. • A firm introducing a new or innovative product can use skimming pricing, setting the highest initial price that customers really desiring the product are willing to pay. As the demand of these customers is satisfied, the firm lowers the price to attract another, more price-sensitive segment. • Firms may adopt a skimming strategy because many prospective customers are willing to buy the product immediately at the initial high price to make these sales profitable. 2. Penetration Pricing. • Setting a low initial price on a new product to appeal immediately to the mass market is penetration pricing, the exact opposite of skimming pricing. • Sometimes penetration pricing may follow skimming pricing so that firms may first recoup initial research and development costs and then appeal to a broader segment of the population to increase market share. 3. Prestige Pricing. • Prestige pricing involves setting a high price so that quality- or status-conscious consumers will be attracted to the product and buy it. • Products with an element of prestige pricing in them may sell worse at lower prices than at higher ones because buyers tend to associate a lower price with lower quality. 4. Price Lining • Often a firm that is selling not only a single product but a line of products may price them at a number of different specific pricing points, which is called price lining. 5. Odd-Even Pricing. • Odd-even pricing involves setting prices a few dollars or cents under an even number ($599.99 vs. $600.00). • The effect is psychological and there is some evidence that this does work. However, research suggests that overuse of odd-ending prices tends to reduce its effect on demand. 6. Target Pricing. • Manufacturers will sometimes estimate the price that the ultimate consumer would be willing to pay for a product. They then work backward through markups taken by retailers and wholesalers to determine what price they can charge wholesalers for the product. • Target pricing results in the manufacturer deliberately adjusting the composition and features of a product to achieve the target price to consumers. 7. Bundle Pricing • Bundle-pricing is the marketing of two or more products in a single “package” price and is based on the idea that consumers value the package more than the individual items. It often provides a lower total cost to buyers and lower marketing costs to sellers. 8. Yield Management Pricing. • Yield management pricing is the charging of different prices to maximize revenue for a set amount of capacity at any given time. • This is often used by airlines, hotels, and car rental firms engaged in capacity management by varying prices based on time, day, week, or season to match demand and supply. B. Cost-Oriented Approaches With cost-oriented approaches, a price is more affected by the cost side of the pricing problem, not the demand side. Price is set by looking at the production and marketing costs and then adding enough to cover direct expenses, overhead, and profit. 1. Standard Markup Pricing • Standard markup pricing entails adding a fixed percentage to the cost of all items in a specific product class. • Manufacturers commonly express markup as a percentage of cost, which is the difference between selling price and cost, divided by the cost. • Wholesalers and retailers who buy and sell goods are nearly always dealing with selling price often express markup as a percentage of price, which is the difference between selling price and cost, divided by the selling price. Using the same markup percentage for both of the above approaches will result in a different selling price (see text for example). • The percentage markup varies depending on the type of retail store and the product involved. • High-volume products usually have smaller markups than do low-volume products. 2. Cost-Plus Pricing • Many manufacturing, professional services, and construction firms use a variation of standard markup pricing. Cost-plus pricing involves summing the total unit cost of providing a product or service and adding a specific amount to arrive at a price. • Cost-plus pricing is the most commonly used method to set prices for business products. Increasingly, this method is finding favor among business-to-business marketers in the service sector, such as law firms and advertising agencies. C. Profit-Oriented Approaches Profit-oriented approaches attempt to balance both revenues and costs to set price. These might either involve setting a target of a specific dollar volume of profit or expressing this target profit as a percentage of sales or investment. 1. Target Profit Pricing • When a firm sets an annual target of a specific dollar volume of profit, this is called target profit pricing. For example, a small frame shop might set a goal of an annual profit of $7,000. • To calculate a target profit price (see text for an example): Target Profit = Total Revenue – Total Cost = (Quantity Sold x Price/Item) – [(Cost/Item x Quantity Sold) + Overhead Cost] • This method depends on an accurate estimate of demand. Because demand is difficult to estimate, this method has the potential for disaster if the estimate is too high. 2. Target Return-on-Sales Pricing • Firms such as supermarkets often use target return-on-sales pricing to set prices that will give them a profit that is a specified percentage of sales volume because of the difficulty in establishing a benchmark of sales or investment to show how much of a firm’s effort is needed to achieve the target. 3. Target Return-on-Investment Pricing • Target return-on-investment pricing is a method of setting prices to achieve an annual return-on-investment (ROI) target mandated by the board of directors or regulators. D. Competition-Oriented Approaches Rather than emphasize demand, cost, or profit factors, a price setter can stress what competitors or “the market” is doing. 1. Customary Pricing • For some products where tradition, a standardized channel of distribution, or other competitive factors dictate the price, customary pricing is used. • A significant departure from the customary price may result in a loss of sales for the manufacturer of, for example, candy bars, offered through standard vending machines for greater than the customary price. 2. Above-, At-, or Below-Market Pricing • The “market price” of a product is what customers are generally willing to pay, not necessarily the price that the firm sets. • For most products or product classes, it is difficult to identify a specific price. Still marketing managers often have a subjective feel for the competitors’ price or market price. Using this benchmark, they may deliberately choose a strategy of above-, at-, or below-market pricing. 3. Loss-Leader Pricing • For a special promotion, retail stores deliberately sell a product below its customary price to attract attention to it. The purpose of this loss-leader pricing is not to increase sales of that particular product but to attract customers in hopes they will buy other products as well, particularly discretionary items with large markups. Ask Yourself 1. What is loss-leader pricing? Answer: For a special promotion, retail stores deliberately sell a product below its customary price to attract customers in hopes they will buy other products as well, particularly the discretionary items with large markups. 2. What are three demand factors other than price, that are used in estimating demand? Answer: Price, consumer tastes, price and availability of similar products, and consumer income. 3. What is the difference between movement along a demand curve and a shift in a demand curve? Answer: A movement along a demand curve occurs when the price is lowered and the quantity demanded increases (and vice versa), assuming that other factors remain unchanged. However, if these factors change, then the demand curve will shift. III. ESTIMATING DEMAND AND REVENUE Basic to setting a product’s price is to estimate the demand for it, which then must be translated into an estimate of the revenues the firm expects to receive. A. Fundamentals of Estimating Demand How much money would you pay for your favourite magazine? The higher the price per copy, the lower the demand. Conversely, the lower the price per copy, the higher the demand. The publisher wants to sell more magazines, but will it sell enough additional copies to make up for the lower price per copy? 1. Forecasting Methods. There are various methods that can be used to forecast: qualitative methods, regression methods, multiple equation methods, and time-series methods. 2. Profit and Loss. Accurate profit and loss statements help organizations measure financial performance. 3. The Demand Curve. A demand curve shows the number of products that will be sold at a given price. In addition to price, there are three other factors in estimating demand.” • Consumer tastes. These depend on factors, such as culture, demographics, and technology, which can change quickly. • Price and availability of similar products. The laws of demand work for a firm’s competitors, too. If the price of substitutes (such as Time) fall or their availability increases, the demand for a product (such as Newsweek) will fall. • Consumer income. As real consumer income increases, allowing for inflation, demand for a product also increases. • Along with price, these are called demand factors that determine consumers’ willingness and ability to pay for goods and services. 4. Movement Along versus Shift of a Demand Curve. • Movement along a demand curve occurs when the price is lowered and quantity demanded increases, assuming that other demand factors remain unchanged. (Refer to Figure 9-4A in the text.) • If some of these factors change (such as an increase of advertising, distribution, or if consumer incomes rise), a shift in the demand curve results. This means that more of a product is wanted for a given price—in this case, the demand curve shifts to the right, as shown in Figure 9-4B. 5. Price Elasticity of Demand. • Price elasticity refers to how sensitive consumer demand and the firm’s revenues are to changes in the product’s price. • A product with elastic demand is one in which a slight decrease in price results in a relatively large increase in demand, or units sold while a slight increase in price results in a relatively large decrease in demand. • In contrast, a product with inelastic demand means that slight increases or decreases in price will not significantly affect the demand, or units sold, for the product. B. Fundamentals of Estimating Revenue Demand curves lead directly to an essential revenue concept critical to pricing decisions: • Total revenue (TR) equals the unit price (P) times the quantity sold (Q). • Total revenue is only a part of the profit equation: Total Profit = Total Revenue – Total Cost IV. DETERMINING COST, VOLUME, AND PROFIT RELATIONSHIPS Break-even analysis is often used to relate revenues and costs. A. The Importance of Controlling Costs Understanding the role and behavior of costs is critical for all marketing decisions, particularly pricing decisions. Three cost concepts are important in pricing decisions: • Total cost (TC) is the total expense incurred by a firm in producing and marketing the 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 product that is produced and sold. • Variable cost (VC) is the sum of the expenses of the firm that vary directly with the quantity of product that is produced and sold. Variable cost expressed on a per unit basis is called unit variable cost (UVC). B. Break-Even Analysis • Break-even analysis is a technique that analyzes the relationship between total revenue and total cost to determine profitability at various levels of output. • The break-even point (BEP) is the quantity at which total revenue and total cost are equal. Profit comes from any units sold beyond the BEP. This is shown in Figure 9-7. The break-even point (BEP) is calculated as follows: BEP = Fixed Cost Unit Price – Unit Variable Cost BEP = FC / (P – UVC) 1. Calculating a Break-Even Point. • Using the small picture frame store example in the text, a BEP quantity for the number of pictures needed to be sold to cover fixed costs can be calculated as follows if FC = $28,000, P = $100, and UVC = $30: BEP = $28,000 $100 – $30 BEP = 400 pictures • In Figure 9-7, the row shaded in blue shows that the break-even quantity at a price of $100 per picture is 400 pictures. Figure 9-7 also shows that if annual picture sales doubled to 800, store profit is $28,000—the row shaded brown. • Figure 9-8 shows a graphic presentation of the break-even analysis, called a break-even chart. It shows that total revenue and total cost intersect and are equal at a quantity of 400 pictures sold, which is the break-even point where profit is exactly $0. 2. Applications of Break-Even Analysis. Because of its simplicity, break-even analysis is used frequently in marketing to estimate the impact on profit of changes in price, fixed cost, and variable cost. The break-even analysis is the basis for spreadsheets that allow managers to ask “what if…” questions about the effect of changes in price and cost on their profit. Ask Yourself 1. What is the difference between fixed costs and variable costs? Answer: Fixed cost is the sum of the expenses of the firm that are stable and do not change with the quantity of the product that is produced and sold. Variable cost is the sum of the expenses of the firm that vary directly with the quantity of the product that is produced and sold. 2. What is a break-even point? Answer: A break-even point (BEP) is the quantity at which total revenue and total cost are equal. V. PRICING OBJECTIVES AND CONSTRAINTS In setting a price, a marketing manager must consider both pricing objectives, which reflect corporate goals, and pricing constraints, which relate to conditions that exist in the marketplace, the narrow the range of choices. A. Identifying Pricing Objectives • Pricing objectives specify the role of price in an organization’s marketing and strategic plans. • But these objectives may change, depending on the financial positon of the company as a whole, the success of the products, or the segments in which it is doing business. 1. Profit. Three different objectives relate to a firm’s profit, usually measured in terms of return on investment (ROI): • Managing for long-run profits, in which a company gives up immediate profit in exchange for achieving a higher market share. • Maximizing current profit, such as for a quarter or year, is common in many firms because the targets can be set and performance measured quickly. North American firms are sometimes criticized for this short-run orientation. • A target return objective involves a firm setting a goal (such as 20%) for pretax return on investment (ROI). • But firms, such as movie producers, must also set prices to ensure that channel members—in this case movie theaters, remain profitable as well. 2. Sales. • An objective to increase sales revenue may lead to increases in market share and profit. • Pricing objectives related to sales revenue or unit sales have the advantage of being translated easily into meaningful targets for marketing managers. 3. Market Share. • Market share is 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. 4. Volume. • Many firms use unit volume—the quantity produced or sold—as a pricing objective. • These firms often sell multiple products at very different prices and need to match the unit volume demanded by customers with price and production capacity. 5. Survival • At times, profits, sales, and market share are less important objectives than mere survival, when low prices are needed to generate revenues to improve a firm’s cash flow. 6. Social Responsibility • A firm may forgo higher profits on sales and follow a pricing objective that recognizes its obligations to customers and society in general. B. Identifying Pricing Constraints Factors that limit the range of price a firm may set are pricing constraints. Consumer demand, and other factors within and outside the organization can affect the price that can be charged. 1. Demand for the Product Class, Product, and Brand. The number of potential buyers for a product class, product, and brand affects the price a seller can charge. So does whether the item is a luxury or a necessity. 2. Newness of the Product: Stage in the Product Life Cycle. The newer a product and the earlier it is in its life cycle, the higher is the price that can usually be charged. Sometimes, when nostalgia or fad factors are present, prices may rise later in the product’s life cycle, such as with collectibles. 3. 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 or the firm will fail. Thus, a firm’s costs set a floor under its price. 4. Competitors’ Prices. A firm must know or anticipate what specific price its present and potential competitors are charging now or will charge. A firm has three choices: (1) set a higher price than competitors, (2) set the same price as competitors, (3) set a lower price than competitors. • Set a higher price. This sends the message to consumers that the organization believes it offers better value that its competitors – value being quality, brand image, benefits and unique features. • Charging the same price. This usually indicates that the organization is relying on some other aspect other than price to position and differentiate its product. • Set a lower price. Lower prices can be a challenge but many firms rely on this strategy. Lower prices can lead to lower profits which can mean requiring higher volumes. • If being perceived as the best brand is an objective higher prices may be part of the answer. Firms of this nature are referred to as the market leader. • Charging prices in line with the competition earns the firm the title of market follower. C. Legal and Ethical Considerations Four pricing practices involving legal and ethical issues are: • Price fixing is a conspiracy among firms to set prices for a product. This practice is illegal – the Competition Act prohibits it. • Price discrimination is the practice of charging different prices to different buyers of goods of like grade and quality. It also is illegal under the Competition Act. There must be evidence that it is ongoing and not simply a one-time event. • Deceptive pricing includes price deals that mislead consumers. • Predatory pricing is charging a very low price for a product with the intent of driving competitors out of business. D. Global Pricing Strategy Global companies face many challenges in determining a pricing strategy. Pricing too low or too high can have dire consequences. 1. When prices appear too low in one country, companies can be charged with dumping, which is when a firm sells a product in a foreign country below its domestic price or below its actual cost. 2. When companies price their products very high in some countries but competitively in others, they face a grey market or parallel importing problem. A grey market is a situation where products are sold through unauthorized channels of distribution. • Grey marketing occurs when individuals buy products in a lower-priced country from a manufacturer’s authorized retailer, ship them to higher-priced countries, and then sell them below the manufacturer’s suggested retail price through unauthorized retailers. • Parallel channels are not strictly illegal in Canada but is legal the U.S.; it is illegal in the European Union. Ask Yourself 1. What is the difference between pricing objectives and pricing constraints? Answer: Pricing objectives specify the role of price in an organization’s marketing and strategic plans. Pricing constraints are factors that limit the range of price a firm may set. 2. Explain what bait and switch is and why it is an example of deceptive pricing. Answer: This occurs when a firm offers a very low price on a product (the bait) to attract customers to a store, who then are persuaded to purchase a higher-priced item (the switch). Misleading consumers is both illegal and unethical. VI. SETTING A FINAL PRICE The final price set by the marketing manager serves many functions. It must be high enough to cover cost and meet the objectives of the company. It must be low enough that customers are willing to pay it. But not too low, as customers may think they are purchasing an inferior product. Four generalized steps are used to set the final price. A. Step 1: Select an Approximate Price Level • Marketing managers consider pricing objectives and constraints first, then choose among general pricing approaches—demand-, cost-, profit-, or competition-oriented—to arrive at an approximate price level. • Break-even analyses may be run at this point to assess cost, volume, and profit relationships. B. Step 2: Set the List or Quoted Price A seller must decide whether to follow a one-price or flexible-price policy. • A one-price policy involves setting one price for all buyers of a product or service. • A flexible price policy involves setting different prices for products and services depending on individual buyers and purchase situations in light of demand, cost, and competitive factors. Flexible pricing is not without its critics because of its discriminatory potential. For example, car dealers have traditionally used flexible pricing on the basis of buyer -seller negotiations to agree on a final price. Is it any wonder that 60 percent of prospective car buyers dread negotiating the price? C. Step 3: Make Special Adjustments to the List or Quoted Price Three special adjustments to the list or quoted price are: discounts, allowances, and geographical adjustments. 1. Discounts. Discounts are reductions from list price that a seller gives a buyer as a reward for some activity of the buyer that is favorable to the seller. Four kinds of discounts are especially important: quantity, seasonal, trade (functional), and cash. • Quantity discounts. To encourage customers to buy larger quantities of a product, firms at all levels in the channel of distribution offer quantity discounts, which are reductions in unit costs for a larger order. • Seasonal discounts. To encourage buyers to stock inventory earlier than their normal demand would require, manufacturers often use seasonal discounts. This enables them to smooth out seasonal manufacturing peaks and troughs, thereby contributing to more efficient production. It also rewards wholesalers and retailers for the risk they accept in assuming increased inventory carrying costs and having supplies in stock at the time they are wanted by customers. • Trade (functional) discounts. To reward wholesalers and retailers for marketing functions they will perform in the future, a manufacturer often gives trade, or functional, discounts. These reductions off the list or base price are offered to resellers in the channel of distribution on the basis of (1) where they are in the channel and (2) the marketing activities they are expected to perform in the future. • Cash discounts. To encourage retailers to pay their bills quickly, manufacturers offer them cash discounts. For example, a bill quoted at $1,000, 2/10 net 30 means the bill for the product is $1,000, but the retailer can take a 2 percent discount ($20) if payment is made within 10 days, and send a check for $980. If the payment cannot be made within 10 days, the total amount of $1,000 is due within 30 days. It is usually understood by the buyer that an interest charge will be added after the first 30 days of credit. 2. Allowances. Allowances—like discounts—are also reductions from list or quoted prices to buyers for performing some activity. • Trade-in allowances. Are price reductions given when a used product is part of the payment on a new product? • Promotional allowances. Are actual cash payments or an extra amount of “free goods” sellers in the channel of distribution can qualify for by undertaking certain advertising or selling activities to promote a product? 3. Geographical Adjustments. Geographical adjustments are made by manufacturers or even wholesalers to list or quoted prices to reflect the cost of transportation of the products from seller to buyer. Two general methods for quoting prices related to transportation costs are FOB origin pricing and uniform delivered pricing: • FOB origin pricing. FOB means “free on board” some vehicle at some location, which means the seller pays the cost of loading the product onto the vehicle that is used. FOB origin pricing usually involves the seller’s naming the location of this loading as the seller’s factory or warehouse (such as “FOB Detroit” or “FOB factory”). The title to the goods passes to the buyer at the point of loading, so the buyer becomes responsible for picking the specific mode of transportation, for all transportation costs, and for subsequent handling of the product. • Uniform delivered pricing. With uniform delivered pricing, the price the seller quotes includes all transportation costs. It is quoted in a contract as “FOB buyer’s location,” and the seller is responsible for any damage that may occur because the seller retains title to the goods until delivered to the buyer. D. Step 4: Monitor and Adjust Prices Rarely can a firm set a price and leave it at that. There are constraints that affect setting prices and company objectives may change. A key activity is the monitoring of competitor activity, legislative changes, economic conditions, and – the ultimate measure – consumer demand. These factors must be examined and their impact on the company measured and action taken, when necessary. Ask Yourself 1. Why would a seller choose a flexible-price policy over a one-price policy? Answer: A flexible-price policy involves setting different prices for products and services depending on individual buyers and purchasing situations in light of demand, cost, and competitive factors instead of setting one price for all buyers. 2. What is the purpose of (a) quantity discounts and (b) promotional allowances? Answer: (a) Quantity discounts encourage customers to buy larger quantities of a product. (b) Promotional allowances are used to encourage sellers to undertake certain advertising or selling activities to promote a product. Chapter 10 Marketing Channels and Supply Chain MARKETING TIP For this chapter we look to Lenny Malley from AMJ Campbell for his MARKETING TIP. You may wish to use this at the start of a class, after a break, or to summarize the material at the end of a session. The quote for this chapter is as follows: ““A reliable supply chain is a safety net for the manufacturers to ensure satisfied customers.” LECTURE NOTES CHAPTER 10 OPENING VIGNETTE – AMJ CAMPBELL Businesses that are part of the marketing channel are crucial components to the client experience. They are trusted partners that ensure that manufacturers deliver their products to consumers in a timely manner. AMJ Campbell has become Canada’s largest moving company. Lenny Malley is one of the partners of his AMJ Campbell franchise. He is responsible for the overall operations of his transportation company and has over 20 years of experience in logistics and supply chain management. “A critical skill marketers need is an appreciation of logistics,” Lenny says with a grin. “Individuals with that appreciation help us reasonably negotiate deadlines and delivery dates. They help foresee obstacles to getting products from point A to point B and work with us to find solutions that meet the needs of all parties.” • “The time and organization required to coordinate multiple suppliers is sometimes taken for granted by marketers,” explains Lenny. “Our clients want us to figure things out for them, and we do that. But we understand that there are some parts of the process out of our control that we have to be prepared to address.” • Lenny is referring to experiences where their truck may be 90 percent full and ready to leave, but requiring an item from another supplier that is arriving late to their warehouse. • Fortunately, Lenny’s experience and ingenuity allows AMJ Campbell to address many of these challenges. “We plan our trips starting with target delivery dates, but then use a logistical setup that is cost-effective and timely.” Other challenges include parts of the supply chain being too efficient. “Manufacturers may not receive their purchase order until the delivery van has been waiting there for 15 minutes!” • Lenny describes the role of AMJ Campbell as the “last mile” of the marketing channel. It uses a form of cross-docking that allows trucks from manufacturers to unload at their warehouse, allowing them to determine the best setup and delivery system to get the final product out on time. • Reality Check As you read chapter 10, refer back to the opening vignette to answer the following questions: • Why do you believe that the logistics of marketing channels are challenging and sometimes taken for granted? Answer: You have the opportunity to draw various ideas from students with this question and promote a lively discussion. • What skills are required for the individuals that plan the logistics of a supply chain? Answer: Although there are no right or wrong answers to this question, emphasize that marketing is not just about creativity, but individuals that have an analytical or process driven approach thinking have opportunities to play important roles in marketing. I. NATURE AND IMPORTANCE OF MARKETING CHANNELS Potential buyers benefit from distribution systems that reach them either directly or indirectly. A. What is a Marketing Channel? • A marketing channel consists of individuals and firms involved in the process of making a product or service available. Marketing channels make possible the flow of goods from a producer, through intermediaries, to a buyer. • Some intermediaries actually purchase items from the producer, store them, and resell them to buyers. Others represent sellers but do not actually ever own the products. B. Value Created by Intermediaries Intermediaries perform functions that create value for buyers. 1. Functions Performed by Intermediaries. Intermediaries make possible the flow of products from producers to buyers by performing three basic functions: • Transactional functions. Intermediaries buy, sell, and share risk with the producer when it stocks merchandise in anticipation of sales. • Logistics functions. Intermediaries gather, store, and transport products. • Facilitating functions. Intermediaries make a transaction easier for buyers by providing financing, grading, and information to them. • All three groups of functions must be performed in a marketing channel, even though each channel member may not participate in all three. Instead, channel members often negotiate which specific functions they will perform. 2. Consumer Benefits from Intermediaries. Marketing channels help create value for consumers through the four utilities described in Chapter 1: • Time utility. Having a product or service when you want it. • Place utility. Having a product or service available where consumers want it. • Form utility. Enhancing a product or service to make it more appealing to buyers. • Possession utility. Helping buyers to take possession of a product or service. Ask Yourself 1. What is meant by a marketing channel? Answer: A marketing channel consists of individuals and firms involved in the process of making a product or service available. 2. What are the three basic functions performed by intermediaries? Answer: Intermediaries perform transactional, logistical, and facilitating functions. II. CHANNEL STRUCTURE AND ORGANIZATION A product can take many routes on its journey from a producer to buyers and there are important differences between these marketing channels for consumer goods and those for industrial goods. A. Marketing Channels for Consumer Goods and Services Figure 10-4 shows the four most common marketing channels for consumer goods and services and the number of levels in each channel based on the number of intermediaries between a producer and ultimate buyers. As the number of intermediaries between a producer and buyer increases, the length of the channel increases. For example, the producer → wholesaler → retailer → consumer channel is longer than the producer → consumer channel. • A direct channel has a producer and ultimate consumers dealing directly with each other. As a result, the producer must perform all channel functions. • Indirect channels have intermediaries that are inserted between the producer and consumers and who perform numerous channel functions. a. The producer → retailer → consumer channel is the most common if the retailer can buy large quantities from a producer or when the cost of inventory makes it too expensive to use a wholesaler. b. The producer → wholesaler → retailer → consumer channel is most common for low-cost, low-unit value items that are frequently purchased by consumers. c. The producer → agent → wholesaler → retailer → consumer channel is used when there are many small manufacturers and many small retailers and an agent is used to help coordinate a large supply of the product. B. Marketing Channels for Business Goods and Services Figure 10-4 shows the four most common marketing channels for business goods and services and the number of levels in each channel based on the number of intermediaries between a producer and ultimate buyers. Business channels typically are shorter and rely on one intermediary or none at all because business users are fewer in number, tend to be more concentrated geographically, and buy in larger quantities. • A direct channel has a producer and industrial user dealing directly with each other. a. Firms using this channel maintain their own sales force and perform all channel functions. b. A direct channel is used when buyers are large and well defined, the sales effort requires extensive negotiations, and the products are of high unit value and require hands-on expertise in terms of installation or use. • Indirect channels have intermediaries that are inserted between the producer and industrial users and who perform numerous channel functions. a. The producer → industrial distributor → industrial user channel performs a variety of marketing channel functions, including selling, stocking, and delivering a full product assortment and financing. In many ways, industrial distributors are like wholesalers in consumer channels. b. The producer → agent → industrial user channel is when an agent serves primarily as the independent selling arm of producers and represents a producer to industrial users. c. The producer → agent → industrial distributor → industrial user channel is the longest channel and includes both agents and distributors. C. Electronic Marketing Channels Interactive electronic technology has made possible electronic marketing channels, which employ the Internet to make goods and services available to consumers or business buyers. A unique feature of these channels is that they combine electronic and traditional intermediaries to create time, place, form, and possession utility for buyers. Figure 10-5 shows the electronic marketing channels for books, automobiles, and reservation services. Each have similar channel functions described earlier. • Electronic intermediaries can and do perform transactional and facilitating functions effectively and at a relatively lower cost than traditional intermediaries because of efficiencies made possible by information technology. • However, electronic intermediaries are incapable of performing elements of the logistical function, which remains with traditional intermediaries or with the producer. • Many services are distributed through electronic marketing channels, such as travel reservations, financial services, and insurance, while other services, such as health care and auto repair, still involve traditional intermediaries. D. Multiple Channels and Strategic Alliances • In some situations, producers use dual distribution, an arrangement whereby a firm reaches different buyers by employing two or more different types of channels for the same basic product. • Multiple channels may be paired with a multibrand strategy to minimize cannibalization of the firm’s family brand and to differentiate channels. • A recent development in marketing channels is the use of strategic channel alliances, whereby one firm’s marketing channel is used to sell another firm's products. Strategic alliances are popular in global marketing, where the creation of marketing channel relationships is expensive and time consuming. E. Multichannel Marketing to the Online Customer Customers and companies populate two market environments today; (1) the traditional marketplace where buyers and sellers engage in face-to-face exchange and (2) marketspace – a web enabled digital environment. The existence of two environments has benefited consumers. With so many people browsing and buying in two markets, few companies limit their marketing program to the traditional marketplace to the online marketspace. This dual presence is called multichannel marketing. 1. Integrating Multiple Channels with Multichannel Marketing Companies often employ multiple channels for their products and services. Catalogues, retails stores and websites are but a few examples. Multichannel marketing is the blending of different communication and delivery channels that are mutually reinforcing in attracting, retaining and building relationships with consumers. The hoped for end result is to allow consumers to browse and buy anytime, anywhere and any when, expecting that the experience will be similar regardless of channel. 2. Implementing Multichannel Marketing Not all companies use websites for multichannel marketing the same way. Websites play multiple roles in multichannel marketing because they can serve either as a communication or delivery channel, or as both. There are two types of websites, classified based on their intended purpose: (1) transactional websites and (2) promotional websites. • Transactional websites are essentially electronic storefronts. They focus mainly on converting an online browser into an online, catalogue, or in-store buyer using the website design elements. • Transactional websites are used less frequently by manufacturers of consumer goods. For manufacturers the threat of channel conflict and the potential harm to trade relations with retailing intermediaries limits the usefulness of transactional websites. • No actual selling takes place on promotional websites. They are simply a place to provide information and promote the product. F. Global Channel Strategy The availability and quality of retailers and wholesalers as well as transportation, communication, and warehousing facilities are determined by a country’s economic infrastructure. 1. Headquarters is responsible for the successful distribution to the ultimate consumer. 2. Intermediaries, which bring buyers and sellers together, can distribute the product from one country to another. 3. Once the product is in the foreign nation, its distribution channels take over. The length can be long or short, depending on the product line. G. Vertical Marketing Systems Vertical marketing systems are professionally managed and centrally coordinated marketing channels designed to achieve channel economies and maximum marketing impact. The three major types of vertical marketing systems are: 1. Corporate Systems. The combination of successive stages of production and distribution under a single ownership is a corporate vertical marketing system. • Forward integration occurs when a producer owns an intermediary at the next level down in the channel. • Conversely, backward integration occurs when a retailer owns a manufacturing operation. • Companies seeking to reduce distribution costs and gain greater control over supply sources or resale of their products pursue forward and backward integration. 2. Contractual Systems. Under a contractual vertical marketing system, independent production and distribution firms integrate their efforts on a contractual basis to obtain greater functional economies and marketing impact than they could achieve alone. Three variations of contractual systems include: • Wholesaler-sponsored voluntary chains involve a wholesaler that develops a contractual relationship with small, independent retailers to standardize and coordinate buying practices, merchandising programs, and inventory management efforts to gain economies of scale and volume discounts so as to compete with chain stores. • Retailer sponsored cooperatives exist when small, independent retailers form an organization that operates a wholesale facility cooperatively so they can concentrate their buying power through the wholesaler and plan collaborative promotional and pricing activities. • The most visible variation of contractual systems is franchising, a contractual arrangement between a parent company (a franchiser) and an individual or firm (a franchisee) that allows the franchisee to operate a certain type of business under an established name and according to specific rules. Four types of franchising arrangements are: a. Manufacturer-sponsored retail franchise systems, where a manufacturer licenses dealers to sell its products subject to various sales and service conditions (autos). b. Manufacturer-sponsored wholesale franchise systems, where a manufacturer licenses wholesalers that purchase the product and then distributes it retailers (Pepsi-Cola). c. Retail franchise systems, where a firm has designed a unique approach for performing a service and wishes to profit by selling the franchise to others (McDonald’s). d. Service franchise systems, where a franchiser licenses individuals or firms to dispense a service under a trade name and guidelines (H&R Block). 3. Administered Systems. Administered vertical marketing systems achieve coordination at successive stages of production and distribution by the size and influence of one channel member rather than through ownership. Ask Yourself 1. What is the difference between a direct and an indirect channel? Answer: A direct channel is one in which a producer of consumer or business goods and services and ultimate consumers or industrial users deal directly with each other whereas an indirect channel has intermediaries that are inserted between the producer and consumers or industrial users and who perform numerous channel functions. 2. What is the major distinction between a corporate vertical marketing system and an administered vertical marketing system? Answer: A corporate vertical marketing system combines the successive stages of production and distribution under a single ownership, whereas an administered vertical marketing system achieves the same thing by the size and influence of one channel member rather than through ownership. III. CHANNEL CHOICE AND MANAGEMENT A. Factors Affecting Channel Choice The final choice of a marketing channel by a producer depends on a number of factors. 1. Market Factors • Geographic concentration of the market • Number of potential customers • Type of Market • Order size 2. Product Factors o Technical factors o Perishability o Unit value o Product life cycle 3. Company Factors o Financial resource and ability of management o Desire for channel control B. Channel Design Considerations Marketing executives typically consider three questions when choosing a marketing channel and intermediaries: • Which will provide the best coverage of the target market? • Which will best satisfy the buying requirements of the target market? • Which will be the most profitable? 1. Target Market Coverage. Achieving the best target market coverage requires attention to the density—the number of stores in a given geographical area—and type of intermediaries to be used at the retail level of distribution. Three degrees of distribution density exist: • Intensive distribution means that a firm tries to place its product or services in as many outlets as possible. It is usually chosen for convenience products or services. • Exclusive distribution is the extreme opposite of intensive distribution because only one retail outlet in a specified geographical area carries the firm’s products. It is typically chosen for specialty products or services. • Selective distribution lies between these two extremes and means that a firm selects a few retail outlets in a specific geographical area to carry its products. It weds some of the market coverage benefits of intensive distribution to the control over resale evident with exclusive distribution. For this reason, selective distribution is the most common form of distribution density. It is usually used for shopping goods or services. 2. Satisfying Buyer Requirements. A second objective in channel design is gaining access to channels and intermediaries that satisfy at least some of the interests buyers might have when they purchase a firm’s products and services. These interests fall into four categories: • Information is important when buyers have limited knowledge or desire specific data about a product or service. Properly chosen intermediaries communicate with buyers though in-store displays, personal selling, etc. • Convenience has multiple meanings to buyers, such as proximity or driving time to a retail outlet or hours of operation. For other consumers, convenience means a minimum of time and hassle. • Variety reflects buyers’ interest in having numerous competing and complementary items from which to choose. Variety is seen in both the breadth and depth of products carried by intermediaries, which enhances their attractiveness to buyers. • Pre- or post sale services provided by intermediaries are important buying requirements for products that require delivery, installation, and credit. 3. Profitability. The third consideration in designing a channel is profitability. Channel cost is the critical dimension—and includes distribution, advertising, and selling expenses associated with different types of marketing channels. C. Channel Relationships: Conflict and Cooperation Because channels consist of independent individuals and firms, there is always potential for disagreements concerning who performs channel functions, how profits are distributed, which products and services will be provided by whom, and who makes critical channel-related decisions. 1. Conflict in Marketing Channels. • Channel conflict arises when one channel member believes another channel member is engaged in behavior that prevents it from achieving its goals. Two types of conflict occur in marketing channels—vertical and horizontal. • Vertical conflict occurs between different levels in a marketing channel, e.g., a manufacturer and a retailer. Three sources of vertical conflict are most common: a. Conflict arises when a channel member bypasses another member and sells or buys products direct, a practice called disintermediation. b. Disagreements over how profits are distributed among channel members produce conflict. c. A conflict arises when manufacturers believe wholesalers or retailers are not giving their products adequate attention. • Horizontal conflict occurs between intermediaries at the same level in a marketing channel, such as between two or more retailers or two or more wholesalers that handle the same manufacturer’s brands. 2. Cooperation in Marketing Channels. • One means of securing cooperation among channel members is through a channel captain, a channel member that coordinates, directs, and supports other channel members. • Typically, a firm (either a producer, wholesaler, or retailer) becomes a channel captain because it is the channel member with the ability to influence the behavior of other members. Influences can take four forms: a. Economic, which arises from the ability of a firm to reward other members, given its strong financial position. b. Expertise, in the form of inventory management, order processing, etc. c. Identification, or the desire to be associated with a channel member gives that firm influence over others. d. The legitimate right of one channel member to direct the behavior of other members, such as under contractual vertical marketing systems where a franchisor can legitimately direct how a franchisee behaves. Ask Yourself 1. What are the three degrees of distribution density? Answer: intensive, exclusive, and selective. 2. What are the three questions marketing executives consider when choosing a marketing channel and intermediaries? Answer: Which channel and intermediaries will: (1) provide the best coverage of the target market? (2) best satisfy the buying requirements of the target market? and (3) be the most profitable. IV. LOGISTICS AND SUPPLY CHAIN MANAGEMENT A marketing channel relies on logistics to make products available to consumers and industrial users. • Logistics involves those activities that focus on getting the right amount of the right products to the right place at the right time at the lowest possible cost. • The performance of these activities is logistics management, the practice of organizing the cost-effective flow of raw materials, in-process inventory, finished goods, and related information from point of origin to point of consumption to satisfy customer requirements. a. Logistics deals with decisions needed to move a product from the source of raw materials to consumption—the flow of the product. b. Those decisions have to be cost-effective. c. A firm needs to drive down logistics costs as long as it can deliver expected customer service, which means satisfying customer requirements. • Logistics management is embedded in a broader view of physical distribution. Getting the right items needed for consumption or production to the right place at the right time in the right condition at the right cost is often beyond an individual firm’s capabilities and control. Instead, collaboration, coordination, and information sharing among manufacturers, suppliers, and distributors are necessary to create a seamless flow of goods and services to customers. A. Supply Chains versus Marketing Channels • A supply chain is a series of firms that perform activities required to create and deliver a good or service to consumers or industrial users. It differs from a marketing channel in terms of the firms involved. A supply chain includes suppliers who provide raw material inputs to a manufacturer as well as the wholesalers and retailers who deliver finished goods. • Supply chain management is the integration and organization of information and logistics activities across firms in a supply chain for the purpose of creating and delivering goods and services that provide value to consumers. • An important feature of supply chain management is its application of sophisticated information technology that allows companies to share and operate systems for order processing, transportation scheduling, and inventory and facility management. B. Sourcing, Assembling, and Delivering a New Car: The Automotive Supply Chain • All companies are members of one or more supply chains. A car maker’s supplier network includes thousands of firms that provide the parts in a typical auto, as shown in Figure 10-9. • Logistical aspects of the automobile marketing channel are an important part of the supply chain. Major responsibilities including transportation, the operation of distribution centers, the management of finished goods inventories, and order processing for sales. Logistics cost an estimated 25% to 30% of the retail price of a typical new car. C. Supply Chain Management and Marketing Strategy The goals to be achieved by a firm’s marketing strategy determine whether its supply chain needs to be more responsive or efficient in meeting customer requirements. 1. Aligning a Supply Chain with Marketing Strategy • The choice of a supply chain follows from a clearly defined marketing strategy and involves three steps: a. Understand the customer. A company must identify the needs of the customer segment being served to define the relative importance of efficiency and responsiveness in meeting customer requirements. b. Understand the supply chain. A company must understand what a supply chain is designed to do well. Supply chains range from those that emphasize being responsive to customer requirements and demand to those that emphasize efficiency with a goal of supplying products at the lowest possible delivered cost. c. Harmonize the supply chain with the marketing strategy. A company needs to ensure that what the supply chain is capable of doing well is consistent with the targeted customer’s needs and its marketing strategy. If a mismatch exists, the company will either need to redesign the supply chain to support the marketing strategy or change the marketing strategy. 2. Dell Computer Corporation: A Responsive Supply Chain The Dell marketing strategy targets customers who desire having the most up-to-date personal computer equipment customized to their needs. Dell has opted for a responsive supply chain. • It relies on more expensive express transportation for receipt of components from suppliers and for delivery of finished products to customers. • Dell achieves product variety and manufacturing efficiency by designing common platforms across several products and using common components. • It has located manufacturing facilities worldwide to ensure rapid delivery. • Dell has invested heavily in information technology to link itself with suppliers and customers. 3. Wal-Mart, Inc.: An Efficient Supply Chain. Wal-Mart’s marketing strategy is to be a reliable, lower-price retailer for a wide variety of mass consumption consumer goods. This strategy favors an efficient supply chain designed to deliver products to consumers at the lowest possible cost. • Wal-Mart keeps relatively low inventory levels, and most is stocked in stores so it is available for sale. • Low inventory arises from Wal-Mart’s innovative use of cross-docking—a practice that involves unloading products from suppliers, sorting products for individual stores, and quickly reloading products onto its trucks for a particular store. Cross-docking allows Wal-Mart to operate only a small number of distribution centers to service its vast network of stores. • The company runs its own fleet of trucks to service its stores. This increases costs and investment, but the benefits in responsiveness justify the cost. • Wal-Mart has invested significantly in information technology to operate its supply chain. Information from stores about customer requirements and demand is fed to its suppliers, which manufacture only what is being demanded. This investment has improved the efficiency of Wal-Mart’s supply chain and made it responsive to customer needs. A technology, called RFID, improves the efficiency of inventory tracking. Wal-Mart says that RFID will result in a 30% reduction of out-of-stock items and less excess inventory in the supply chain. Three lessons from these two examples are: • There is no one best supply chain for every company. • The best supply chain is the one that is consistent with the needs of the customer segment being served and that complements a company’s marketing strategy. • Supply chain managers are often called upon to make trade-offs between efficiency and responsiveness on various elements of a company’s supply chain. V. KEY LOGISTICS FUNCTIONS IN A SUPPLY CHAIN The four key logistics functions in a supply chain include transportation, order processing, inventory management, and warehousing. These functions have become so complex that many companies are outsourcing them to third party logistics providers. The four logistics functions are described next. 1. Transportation. There are five basic modes of transportation: railroads, motor carriers, air carriers, water carriers, pipelines and combinations involving two or more modes, such as highway trailers on a rail flatcar. 2. Order Processing. Order processing is much more sophisticated these days with the use of electronic data interchange (EDI) 3. Inventory Management. Inventory management entails maintaining the delicate balance between keeping too little and too much inventory. 4. Warehousing. There are two types of warehouses, public and private. Distribution centres can be divided into three types: traditional, cross-docking, and combinations. Ask Yourself 1. Explain the concept of cross-docking. Answer: cross-docking is a practice that involves unloading products from suppliers, sorting products for individual stores, and quickly reloading products onto its trucks for a particular store. No warehousing or storing of products occurs, except for a few hours or, at most, a day. 2. Describe a just-in-time inventory system. Answer: A just-in-time inventory system is designed to deliver less merchandise on a more frequent basis than traditional inventory systems. This system requires fast on-time delivery. The firm gets the merchandise “just-in-time” for it to be used in production of another product, or for sale, when the customer wants it, in the case of consumer products. Instructor Manual for Marketing: The Core Roger A. Kerin, Steven W. Hartley, William Rudelius, Christina Clements, Harvey Skolnick, Arsenio Bonifacio 9781259030703, 9781259269264, 9781259107108