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Midterm 2 notes

Big picture
Marketing Mix what actions will we use in the marketplace to
implement marketing strategy
o Pricing
o Product
o Partnerships internal & external
o Promotion/Communication

Pricing I

Cost Plus pricing

o Price = cost + target margin on cost
o Recall GM_cost = (Rev-Cogs)/Cogs
o E.g. cost=200, margin on cost=60%
Price = 200 + 60%*200=200+120=320
o Challenges:
Cost not easy to determine i.e. allocating shared overhead
in one factory among diff. product lines
Cost to produce a product might have nothing to do with
how much consumer is willing to pay for it (cost-plus is
product oriented, and you cannot ignore the consumer in
o Consumer perceive price tag too much above cost as unfair
o Industries: supermarkets, drugstores, industrial suppliers
Value-based pricing
o Price based on monetary savings from using new product; takes
consumer perspective into account; assume rational
o 1. Compute cost of existing product
o 2. Compute max. price consumer would pay for new product
o 3. Savings from using new product
o 4. Proportion the saving b/w consumer and firm
o 5. Educate consumers about savings
o See example on paper
o In this example, p(max)=3000; Goodyear cannot charge all of it
b/c consumers want part of the 2000 savings
o Company must educate consumers about cost savings so they
would be willing to pay higher price for the new product
o Value of new tires may vary across segments; useful to identify
target segment e.g. owners who pay more for gas would be more
willing to pay for the savings
o If competition introduces competing products, Goodyear may
need to price lower
o Industries: double pane windows, LED lights, industrial products
where savings are quantifiable
E.g. performance based pricing for drugs
E.g. Firms consider savings when buying commercial electric vehicle
Dynamic pricing
o Goal: maximize profits over time
o Prices may change intentionally over time
o Planned change in price depends on expectations of market
Cream skimming

o Set high price then gradually lower

o Consumers with highest value for product buys first, then lower
price to reach consumers with lower values
Health brands
4K TVs
Canon DSLR
o See diagram
Penetration pricing
o Low price to start, and keep low; may even set below cost to
Cold water detergents
Calcium-fortified orange juice
o See diagram
Cream skimming vs. penetration pricing
o Expectation of near competition -> penetration
o Patent -> cream skim
o Differences in product value for different segments -> cream
o How quickly do costs decrease as firm makes more cumulative
o Learning curve diagram
Predatory pricing
o Charge low prices to start, drive out competition, then raise price
o Illegal in U.S.; likely to be prosecuted
o See diagram
Competitive pricing not covered

Pricing II
Charging diff. prices to diff. consumers for same product increases
profits vs. same price to all consumer, through taking more consumer
surplus (difference b/w price the consumer paid and highest price
they were willing to pay)
E.g. plane fare price discrimination
3 conditions for successful price discrimination
o 1. Different segments with different price sensitivities
o 2. Able to identify what segment a customer belongs, or have
him tell you indirectly (self-selection)
o 3. Prevent resale b/w segments (otherwise low price buyers resell
to high)
75 cent coupon for Tylenol
o 1. Yes, diff. price sensitives
o 2. Self-select by clipping/downloading coupon; could also direct
to particular zip codes
o 3. Unlikely to resell since such low cost; to prevent, could print
Check-out coupons @ CVS/Costco club cards
o Purchase habit and history; targeted
Internet retailer
o Know your purchase history or may be able to gauge interest by
time spent, where cursor is etc.
o Price may be dynamic based on history
Price discrimination can achieve social purposes
o Lower prices for drugs in countries with lower incomes
o Scholarships
o Senior citizen discounts
o Parking meters
Yield management
o Change prices quickly based on current or forecasted demand
o Combines price discrimination with dynamic pricing
o High demand or low price sensitivity increase price
o Low demand or high price - price
o Implemented with algorithms for predicting demand
o E.g. Lion King Broadway show
Draws on data for 11.5m audiences, recommends price for
5 types of performance peak dates, off-peak, periods in
between; tickets demand in different time intervals would
affect price recommendation

Psychological aspects of pricing

o Consumers do not always perceive prices rationally
o Firms need to understand psychological pricing
Perception of price endings: 9-ending discount price i.e.
0.59, 0.99 boost sales
Mental accounts: people have mental accounts for different
categories, say travel, education, and entertainment;
Marketers can influence this by packaging multiple
accounts e.g. educational software with video game
Partition prices: base price + surcharge i.e. couch costs
800, delivery costs 100; many customers ignore surcharge
or gives it less weight, so perceived to be cheaper; e.g.
airlines making baggage and other fees; stubhub
All-inclusive price advantages
o Prestige image
o Reduce financial perceived risk
Payment method: payment by credit card feels less of a
sacrifice than cash (i.e. detached from physical)

Customer Value
Customer value is economic value of a customer to the firm
Includes NPV of future profit from customer
Firm must attract high-value customers to flourish
E.g. Spring bought Nextel for the targets high-valued customer base
E.g. Apple has high customer loyalty (retention rate)
o How much to spend to attract & keep a customer
o How much is customer worth in the long run
o How does customer value vary across customers
Forecasting Customer Value see written
o 1. Attraction costs
o 2. Net margin on first sale
o 3. Retention costs
o 4. Net margin in future periods
o 5. Forecast: steps 1-4 added together, with discounting
Do not have to make profit on first sale (net margin on 1st sale
attraction costs>0); e.g. credit cards; first year usually at a loss, but
annual profit climbs quickly
Slides 25,26 skipped
How to increase customer value
o 1. Identify and pamper best customers e.g. Chase private client
branch, Starbucks rewards program which gives more rewards to
people who spend more, pay flat fee to get unlimited coffee
o 2. Get rid of low-value customers e.g. Time Warner Table prefers
people who have $$$ packages, retailers reject returns from
serial exchangers
o 3. Increase value of existing customers
Get people to buy more
Special promotions
Reduce prices
Free shipping
Opposite of pampering best customers
E.g. delta private jets increasing value of existing
customers who are already valuable
o 4. Win back former customers
Find out why they left, if they are satisfied with current
firm, and see what you have to offer

o 5. Reduce attraction costs

E.g. amazon prime might not be profitable
More efficient methods might include emails, word of
mouth (e.g. reward referrals), on-line recommendations
E.g. Prepaid plans where you get a free phone costing too
o 6. Increase retention rate
o 7. Reduce retention costs
Base retention costs on customer value; e.g. automated
system keeps lower value customers waiting longer
Cheaper customer service e.g. email statement as opposed
to mailing
o 8. Find new sources of high-value customers
E.g. Uber partnering up with big banks
Christies auction house treats high net worth potential
clients to all inclusive trips
o 9. Use better metrics to forecast customer value
Change criteria for which customer segments to attract
Find consumer characteristics that best predict total
customer value
E.g. could be amount of 1st purchase, intervals b/w
E.g. Miles program penalizes average fliers people
who fly often but spend less, and rewards first class
fliers more

New Products

o Introductory stage
E.g. wireless charging for electric cars
Sometimes introductory stage lasts a long time e.g. VR,
o Rapid growth stage
Standing desk, drones
o Mature stage
o Decline stage
Itunes (losing to app store as % of services revenue mix
o Some products have a second life after decline
E.g. butter making a comeback after margarine took its
market share
o Product life cycles are getting shorter (high tech)

E.g. playstation and xbox upgrades at faster intervals;

touchscreen tablets
Firms need new products to replace declining ones
o E.g. Dyson always innovative; ipad for vacuums
o Toyota Mirai hydrogen car, 23 yrs of development and 5000+
Many firms are scared of new products
o Expensive to develop
o Risky not sure if will be well received
o E.g. Apple deciding not to take on Detroit in autonomous vehicles
o E.g. Keurigs KOLD was a flop
o E.g. Bristol-Myers replacement for chemotherapy failed clinical
Firms need to encourage new products
Not all new products cost millions e.g. Lifestraw, dollars to make
Four characteristics of successful new products
o Relative advantage
Satisfy consumer needs better than existing products
E.g. cheaper/easier/faster; smart appliances
o Communicability
Relative advantage easy to communicate to consumers
E.g. Stride gum supposedly lasts longer; Google glass
caused confusion
o Minimal behavior change
Do not require consumers to radically change behavior
Compatible with existing systems/beliefs/ideas
Easy to use; if complex, need extensive consume
Continuous vs. discontinuous innovations
Continuous: digital camera, cell phone; i.e.
precedents, evolved slowly
Discontinuous: iPod, Keurig Kold; i.e. revolutionary,
no precedents, set new standard
o Observability
Consumers more likely to adopt new product when they
see other consumers using them
E.g. wearing nike product is observable, whereas using
shampoo or air wax is low observability

New Products Market Testing

Market testing gives insight to if new product will succeed
o Forecast product sales
o Fine tune marketing mix if do decide to introduce
o Most market testing is a marketing experiment
Full-scale test markets
o Introduce in test-market cities
o Use full scale marketing effort scale to actual budget in
business plan for new product
o Typically, 6-18 months; measure sales and survey customers
o Choose test cities that best represent a microcosm of the type of
audience you will be targeting when you introduce product
o E.g. McDonalds all day breakfast concept was first introduced in
select cities, then expanded nationally after initial success
o E.g. NYT using Canada as test market for pay wall
Test objective 1: Go, no go?
o Set benchmarks in advance
GO: >30m in sales
No Go: <20m
Unsure: 20-30
o Explain deviations from Business Plan
o Full Scale Test Market sales alone do not provide enough info. To
make good decision
o Must diagnose test market results

Awareness-Trial-Repeat model
Forecast market share
Forecast market share = awareness rate * trial rate *
repeat rate * market size
Awareness rate: % of consumers in target segment
who are aware of product
Trial rate: % of aware consumers who try the product;
a conditional probability; i.e. % of total market who
try = awareness rate * trial rate
Repeat rate: % of triers who buy again
o % of total market who repeat = awareness rate
* trial rate * repeat rate
High repeat rate ~ high success rate of product
Market share among repeaters: what % of their
purchase in category are our product?
Tying together,
o Forecast market share = awareness rate *
trial rate * repeat rate * market size
Market share forecast sales forecast
o Forecast market share * total market
estimate = projected annual sales
o If this figure > GO benchmark, introduce
Forecast sales
Forecast sales = forecast market share * market size
Another way to forecast sales:
Use usage rate among repeaters
% of total market who repeat = awareness rate * trial
rate * repeat rate
% of total market who repeat * total number of
consumers * purchase frequency * amount per
purchase = forecasted sales
Compare FSTM results with goals in business plan
Identify what went wrong i.e. target trial rate in plan
was 60%, but actual was only 45%; identify problem
Use FSTM to fine tune marketing mix if decide to GO
Can test different levels of
o Price
o Package
o Distribution intensity
o Advertising message or level
FSTMs have high external validity, but is
o Expensive
o Time consuming

o Not confidential
o Can be interfered by competitors (interfere with marketing action
or copy product)
Pre-test market
o 1. Controlled test market (field)
Release in a few actual stores
Little or no marketing effort outside of store
o 2. Sales wave (lab is the home)
Receive at home
Contact buy again?
Excellent for measuring multiple repeats and wearout
o 3. Simulated market test ASSESSOR (lab)
Recruit consumers, ask what they buy now, product
Show ads for new product and existing competitors
awareness rate
Give opportunity to buy in simulated store with products
trial rate
If they buy, contact at home for repurchase intent repeat
o Use Awareness-Trial-Repeat model to evaluate Pre-test market
o Can use PTM as screen to decide whether to go to more
expensive FSTM

Managing Brand Names and Product Lines

A brand name is a valuable asset
Firms need to carefully develop and build brand names
Must understand
o How consumers perceive brand name
o How to manage brand name
Legal perspective:
o firm has exclusive to use its brand name on its products;
counterfeits is a problem
Consumer perspective:
o A promise
o Something consumers identify with a personal statement
o Relationship exchange vs. communal
o A way to simplify decision making
Firm perspective:
o A consumer advantage
o An operating advantage
o An asset that he firm can leverage brand name extensions

Successful brand names have strong meaning to consumers

o What need does it satisfy
o How is it different from others
o How do I identify with it
o What does using it say about me
Brand names with meaning
o E.g. Nike, Ferrari
o Some have no meaning e.g. Kmart; better to have positive but
limited meaning than no meaning at all
o Brand name can be strengthened through ads
Brand name personality
o Consumer perceive brand names to have personalities; attracted
to similar personalities
o Five dimensions:
Brand name extension putting brand name on additional products
o Jeep stroller, starbucks ice cream
o Consumer advantages
Easier decision making
Lower perceived risk
Strengthens identity with brand
o Operating advantages
Brand loyalty
Costs less to introduce new products (generating
awareness and trial)
Distributors more willing to carry brand extension
Leverage valuable asset
o E.g. movie sequels; ancillary sales think frozen toys
o Pitfalls:
Overstretching brand name when consumers feel brand
meaning does not work for a product
Crystal Pepsi, Life Saver Soda
Can hurt original products
Confuse customers
Dilutes brand name meaning
o Upward extension pushing higher into luxury e.g. Ralph Lauren
o Downward extension Mercedes lower sedan

International Marketing
Reasons to go international
o Slow growth in home markets
o Diversify risk
o Economies of scale and scope
o Friendlier regulatory environment
o If you dont, competitors will
o International consumers may like your products better than
domestic consumers
International involvement
o 1. Export, but let distributors control international strategy
o 2. Use distributors, but play active role in international strategy
o 3. Contract or JV with local partner
o 4. Wholly owned subsidiary purchase existing firm
o 5. Greenfield subsidiary start from scratch
Decide right level of involvement
o Financial resources
o Risk tolerance

o Regional expertise
o Past international experience
Choosing location
o Similarity of consumers
o Can use existing consumer and operating advantages
o Growth
o Competition
o Political stability
o Political and regulatory environment
Global international strategy
o Same product/positioning/target segment/market mix in all
o Benefits:
Power of global brand transcends national borders
Centralized coordination saves money and improves
More efficient product line
Local international strategy
o Different product/positioning/target segment/market mix in each
o Benefits:
Recognizes cultural differences
A mix Glocal
o E.g. McD; menus similar, but exists regional variations to cater to
local tastes
E.g. Disney in Europe and HK
o Europe emphasized European roots of characters; multilingual
guides; at first misjudged European habits, which include alcohol
with meals and strict eating times as opposed to frequent snacks
o HK, too small, people did not feel like it was a theme park