Final Exam Study PDF

Final Exam Study S2 Consumer Decision Making I #marketing Stages of Consumer Purchase Process & Experience 1. Need Recognition No need = no purchase How can we motivate consumers to recognize the need for a product? How can sellers motivate consumers to reco...

Final Exam Study S2 Consumer Decision Making I #marketing Stages of Consumer Purchase Process & Experience 1. Need Recognition No need = no purchase How can we motivate consumers to recognize the need for a product? How can sellers motivate consumers to recognize the need for a product? Don't get the stage wrong - Suppose the salesperson treats a consumer as if she is in the purchase stage, but she's actually in the need recognition stage -- she will feel rushed and unready to purchase still 2. Gather Information Gather information on product's attributes Different kinds of attributes for electric cars ​ Objective attributes ​ Charging time Range Interior space  Subjective attributes ​ Styling Comfort Handling Ease of use Attribute perceptions matter, regardless of subjective or objective Consumer doesn't gather information on all products in category -- creates consideration set Information sources - Personal: friends, word-of-mouth, family, neighbors - Commercial: advertising, salespeople, firm's website - Public, neutral: media, consumer-rating groups - Some consumer-generated ratings can be misleading -- not everyone reads the instructions, some people give out 5 stars willy-nilly - Experiential: handling the product, examining the product, using the product 3. Compare Alternatives Preferences indicate rank order ​ Why could two consumers with identical perceptions of the same set of electric cars have different preferences? Preferences require a utility function Importance of attributes often differs across consumers Consumers may determine that more than one brand is acceptable to purchase 4. Purchase  Firm does not make a sale unless and until the consumer purchases ​ Purchase intentions -> purchase behavior Consumer may be willing to purchase any acceptable alternative How can sellers influence consumers in the purchase stage? - Motivate them to buy sooner rather than later? 5. Post-Purchase Evaluation Consumers don't stop thinking about a product once they purchase Post-purchase behavior ​ Reduce cognitive dissonance ​ "Did I buy the right car?" Satisfaction perceptions ​ Satisfaction = perceived performance - expectations ​ Don't create unrealistic expectations ​ Ex. Whole Foods price cuts after Amazon takeover, didn't cut that much Satisfaction leads to loyal customers, favorable WOM, and high-customer value Post-purchase service is vital ​ Ex. Land Rover Experience: off-road training and social events for owners Consumer Involvement  Involvement increases with ​ Importance of consumer need Importance of product performance Personal efo at stake Personal security at stake Involvement is not the same as price Involvement varies across ​ Products People Usage Situations S3 Marketing Math; Environmental Analysis; Marketing Advantages over Competitors #marketing Basic Quantitative Language to Communicate The importance of monetary sales v. unit sales "volume" ​ When companies raise prices, they can hide from the fact that they're selling fewer units overall Need to understand basics of profit and loss statement Data is often presented in many different ways When these terms are used consistently, it's important to define Formulas i) sales in units & sales in monetary value S[units] = Q, where Q is quantity sold in units S[monetary] = Q P[selling], where P[selling] is selling price ii) market share Share in Units: number of units sold by the firm compared to number of units sold in the entire market M(units) MS[units] = S[units] / M[units] Share in Monetary Value: the monetary value of the firm's sales compared to the monetary value of total sales in the market M[monetary] MS[monetary] = S[monetary] / M[monetary] iii) profit margin Gross Margin Ratio per Unit: the price a firm sells a product for to the next distribution level GM = P[selling] - COGS Gross Margin Ratio: proportion that compares gross margin to COGS GM[cost] = (P[selling] - COGS) / COGS Gross Margin Ratio on Selling Price: a proportion that compares gross margin to the price the firm sells a product for to the next distribution level GM[selling price] = (P[selling] - COGS) / P[selling] iv) break-even volume Break-even Volume in Units: how many units the firm must sell to break even on the fixed costs BEV[units] = fixed cost / net profit margin per unit = FC / NM Break-even Volume in Monetary Sales: the monetary value of sales the firm must make to break even on the fixed costs BEV[mon. sales] = BEV[units] P[selling] Break-Even Volume in Market Share: the additional market share represented by BEV[units] BEV[unit market share] = BEV[units] / M[units] BEV[monetary market share] = BEV[monetary sales] / M[monetary] v) discounting and net present value Net Present Value: the difference between the present value of cash inflows and the present value of cash outflows over a period of time NPV of a cash flow received or spent t periods from now with per period discount rate of i = t N P V = cashf low ∗ (1/[1 + i] Marketing Advantages Firms with marketing advantages are - More profitable - More secure from competition - Have resources of time and money to invest in their future rather than "fighting fires" Consumer Advantage: consumer perception that the firm satisfies a critical need better than the competition Operating Advantage: something the firm does better than its competitors that allows it to achieve its objectives (Hyundai -> lower cost producer, Hershey's -> relations with distributors, Dyson -> expertise in moving air) Ex. Patent, access to natural resources, political access or influence, cheaper R&D, experience with new products, experience in international markets, financial resources  Firms can lose their consumer or operating advantages ​ 1. Change your product in response to changing consumer tastes 2. Extend existing consumer or operating advantages to new products 3. Build a new consumer or operating advantage internally 4. Buy an existing consumer or operating advantage Marketing Ethics What is considered unethical v. acceptably by ​ Governments? ​ Ex. Well Fargo fined $250 million for problems in its mortgage business Consumer? ​ Ex. Amazon faces wider fight over labor practices Industry organizations and investors? Ethical standards vary between countries and regions ​ Some companies may expand to other countries, and ethical standards could change Environmental Analysis How can firms make sure they have consumer and operating advantages? Elements of Environmental Analysis ​ 1. Demographic changes  ​ Ex. Japan's population shrinking and getting older 2. Change in consumer taste ​ Ex. More women are buying houses on their own in China 3. Find emerging trends ​ Ex. Parental backlash against screen time and use that as a driver 4. Economic factors ​ Ex. Shrinking middle class in the US 5. Regulatory trends ​ Ex. Short flights banned in France 6. Technological factors ​ Ex. Build with wood, not concrete When analyzing a firm, ask: ​ 1. What are their consumer and operating advantages? 2. Are these advantages being threatened by changes in the marketing environment? 3. Do they need to add new advantages? ​ 1. If so, how difficult, expensive, time-consuming to add them? 4. Do changes in the marketing environment create new opportunities? S4 Consumer Behavior II #marketing #lecturenotes Consumers Worry The product may not give them the satisfaction they expected ​ Perceived performance < expectations -> low satisfaction Worry in stages before purchase Creates perceived risk Perceived Risk Perceived risk can cause consumers to delay purchasing or never purchase Reducing perceived risk creates consumer value Marketing strategies and marketing mix can reduce perceived risk ​ 1. Performance risk: the risk that the product does not perform as expected ​ Reduced through guarantees/warranties, quality control, test drive, and demonstrations of using the product 2. Social Risk: other people do not approve of your purchase as highly as you'd hope, especially when you care about the approval of people in the group you belong to or aspire to belong to ​ Reduced through influencer promotion, celebrity endorsement 3. Psychological Risk: the product isn't "right" for me  ​ Reduced through free trials, return/refund policy, "rent-to-buy" 4. Financial Risk: the product can hurt financial wellbeing ​ Reduced through returns/refund policy, financing Firms should ask: ​ 1. What perceived risk do consumers experience for our product/competitor? 2. How can we reduce perceived risk? One effective strategy to reduce perceived risk is to use a well-known brand name Behavioral Decision Theory Framing: the context in which consumer decisions are made Ex. general price level of product, previous prices/states of being We can frame products in different ways to gain favorability ​ Ex. Framing a burger as 75% lean as opposed to 25% fat How do past prices affect perceptions of our current prices and demand? S6 Customer Segmentation Strategy #marketing #lecturenotes Segmentation Strategy  Goals of segmentation strategy ​ Identify target segment(s) of consumers instead of mass marketing Create a product that satisfies the target segment's needs Communicate with the target segment effectively and efficiently ​ Sometimes, firms must find the best target segment for existing product Mass marketing has disappeared ​ Doesn't satisfy all consumers' needs well Creates ineffective and inefficient communications -> wastes marketing resources Three characteristics of a good market segment ​ Differential response: preferences differ from other segments Differential accessibility: can focus communications on this segment without the need to reach other segments High segment potential: focusing on this segment helps firm achieve its objectives Must compare segments to find the "best" target segment ​ Segments only have meaning compared to each other A segment makes a "good" or "bad" target segment only compared to other segments Good segmentation research compares several segments Three most popular consumer segments - Demographic: objective characteristics of consumer - The most popular kind of consumer segmentation because it's easy to do, cheap, fast, and can forecast many demographic changes - Segmentation of age and gender - Ex. Young men tend to lean more conservative than young women - Segmentation by income and rural/urban - Ex. Dollar General - Good segmentation requires good market research - Ex. Lodge cast iron frying pans - Once mass market, but no longer - Competitors include Cuisinart and Bialetti Chef Fabio Viviani - Market research for demographic segmentation - Identify demographic characteristics potentially functional for segmentation - Ask consumers to answer survey - Demographic characteristics - Purchase intentions or liking for your product and competition - Compare purchase intentions or liking across demographic segments to see if a particular demographic variable is valid for segmentation - Identify best segment(s) for your product - Benefit: common needs make them value particular product attributes - Market research for benefit segmentation - Identify important product benefits - Ask consumers to rate how important each benefit is for them - Group into segments consumers that rate similar importance for these benefits - Use cluster analysis - Interpret segment meanings - See if one of the segments is appropriate for your product - Sometimes, collect demographics to help choose media and aid in interpretation - Ex. Sensodyne toothpaste caters to those who would benefit from - Psychographic: consumers want a product that expresses the person they are or aspire to be (personality, lifestyle, attitudes, interests, opinions, etc.) - Ex. FitnessSingles is a website that skews towards single people who enjoy fitness - Ex. Special interest cruises that cater to people with niche  interests S7 Positioning Strategy, Market Maps #marketing #lecturenotes Market Maps Elements of Market Maps  Dimensions ​ Position on only one attribute? ​ Easy to communicate to consumers Can limit our market segment Position on several attributes? ​ Which attributes give us a distinctive position? Why focus on only a few positioning attributes, at least to start? Products ​ Locations represent consumers' perception of products on positioning attributes Measure consumers' perceptions with market research, usually with surveys **Consumers ​ Represent each consumer at their "ideal" product Need not be an existing product Liking for product increases as a product gets closer to an ideal point Positioning Strategy Strategies for Positioning Identify potential segments to focus on positioning Identify best positions for new products Find products that face high competition -> reposition?  Find products that do not meet the needs of many consumers -> reposition? Repositioning Pro-active firm will change a position it doesn't like - Repositioning can be expensive and risky, but not repositioning can be worse Repositioning Strategies 1. Move a segment's ideal point closer to the product 2. Move perceptions of the product closer to a segment's ideal point 3. Move perceptions of a competitor further from a segment's ideal point 4. Add an attribute that competition lacks S8 Market Research #marketing #lecturenotes Why do firms need market research? What information do we need to improve the quality of our marketing decisions? ​ Identify the marketing problem: a decision the firm wants to make, action it is considering, or an issue it faces, usually concerning marketing strategy or the marketing mix  What must we learn about consumers, competitors, and important environmental trends? ​ Research problem: the information the firm wants to obtain to help it make a better decision regarding the marketing problem ​ Examine competitor prices/actions Examine consumer reactions to current and potential new positions Identify and evaluate market segments Market Research Process Good market research is difficult, time-consuming, and expensive Benefits should exceed costs Can be done in-house or externally ​ Depends on internal expertise and sometimes internal politics Types of Market Research Data ​ Primary ​ Collected for a specific research problem Secondary - Existing ​ Not collected with this research problem in mind, but data may still be useful for the question Transaction ​ Data on your firm's actual transactions and interactions with consumers, but not collected with  a particular research problem in mind ​ Ex. purchases, promotions, web browsing, etc. Types of Primary Data Collection ​ Exploratory Research ​ First look - helps focus a research project Descriptive Research ​ More guided investigations, often surveys Often produces numerical results that can be used for statistical hypothesis tests Causal Research ​ Manipulate marketing environment to look at the impact of manipulated variables on variables of interest Exploratory Research Objectives Create initial insights for further study Develop hypotheses to test Discover practical issues in researching this topic Clarify key concepts and definitions ​ Ex. How should we define "customer satisfaction for movie theaters?" Focus and reduce the scope of research Characteristics Small sample of consumers  Qualitative data collection, usually does not generate "hard data" Should be quick Do not use exploratory research to - draw final research conclusions - recommend a final course of action Types of Exploratory Research Focus groups Depth interviews Projective techniques Observation Focus Groups A moderated group discussion ​ Focused on a series of topics, introduced, and guided by moderator Participants are encouraged to ​ Express their own views Elaborate on or react to views expressed by other focus group members Advantages ​ Rich information -- especially regarding consumers' thoughts, feelings, and behaviors Versatility and flexibility Impact on managers who observe Disadvantages - Lack of generalizability - Opportunity for misuse -- interpretation and action  - High cost: $6,000-$12,000 per focus group Depth Interviews Interviews conducted face-to-face with consumers ​ Usually singly, occasionally a couple or family Subject matter explored in depth - Probe deeper motivations - Identify key product benefits - Trigger creative insights for marketers Projective Technique Unstructured and indirect forms of questioning Encourages respondents to project their underlying motivations, beliefs, attitudes, or feelings regarding the issues of concern Some popular methods ​ List analysis Word association/sentence completion Draw pictures Advantages ​ Elicit information that consumers are unable or unwilling to provide Helpful when underlying motivations, beliefs, and attitudes are primarily subconscious Disadvantages - Requires highly trained interviewers and skilled interpreters for analysis - Can still have interpreter bias Observation  Record the behavior of people, objects, and events in a systematic manner Observation Methods ​ Natural setting v. artificial Disguised v. undisguised Human observer human v. mechanical Sampling Consumers Sampling Consumers Who is the population of interest? ​ Determined by the marketing problem Determing population of interest is sometimes easy ​ Satisfaction of existing customers → Non-response error bigger sample sizes don’t always create higher accuracy Causal Marketing Research Goals of Causal Marketing Manipulates the marketing environment using experiments Examine how changing one or more marketing variables causes a change in other marketing variables ​ Ex. Different coupon amounts → sales Ex. Salesforce training methods → satisfaction  Field Experiment: Manipulate consumers’ actual marketing environment, more realistic Laboratory Experiment: Try to replicate much of marketing environment in market research “laboratory” that consumers visit ​ Can control external factors Can vary more factors at once More confidential Online experiments are very popular ​ Easy to randomly assign people to different “conditions” ​ Price Webpage layout Offer to get “chat” help to stay on page Price endings “Free shipping” v. “Shipping included” Easy to run experiment for set period, adjust marketing variables quickly S10 Pricing I #marketing #lecturenotes Keys to Pricing Why is Price important? Price: how firms earn revenue, create cash flow, make a profit  Most other marketing activities use cash - Pricing too high or too low can cost a firm profits - Possible to have high sales but low profits Cost Plus Pricing Price = cost + gross margin on cost Costs are not always easy to determine ​ How do we allocate cost of “shared overhead” to each of several products? Costs to produce a product may have nothing to do with the amount consumers are willing to pay for it - Cost-plus is product oriented, but we can’t ignore the consumer in marketing Value-Based Pricing Price product based on consumer’s monetary savings from using new product Considers consumers perspective from a rational POV Qualitative Steps for Value-Based Pricing 1. Compute costs if consumer uses existing “status quo” product 2. Compute maximum price consumer would pay for “new” product 3. Compute savings from using new product 4. Recommend a specific price that shares savings between firm and consumers 5. Educate consumers about savings Products where Value-Based Pricing Makes Sense Double pane windows  Florescent or LED bulbs that fit into a regular light socket Many industrial products where savings are quantifiable Dynamic Pricing Objective: maximize profits over time Prices may change, or not change, intentionally over time Types of dynamic pricing ​ Cream Skimming: set a high price and gradually lower it ​ Consumers with highest value for product buy first, then lower price to reach consumers with lower values Ex. 4K TVs and monitors, civilian drones, electric cars, plant-based meat Penetration Pricing: set a low price to start and keep it low ​ May even price below cost to start Ex. Cold water detergents, toothbrushes, etc. Predatory Pricing: Charge low price to start, drive out competitors, then raise prices ​ Illegal in the US Much more likely to be prosecuted than price discrimination Planned change in price depends on expectations of how market conditions will change When should a firm use cream skimming or penetration pricing? 1. Expect competitor to introduce a similar product soon 2. Product protected by patent  3. Differences in product value for different segments 4. How quickly do costs decrease as firm makes more cumulative units S11 Pricing II #marketing #lecturenotes Segmented Pricing & Price Discrimination Charge different prices to different consumers for what is essentially the same product or service Increases profits compared to charging the same price to all consumers Profit increases because firm takes more consumer surplus Consumer Surplus: the difference between price the consumer paid and the highest price they were willing to pay Conditions for Successful Price Discrimination 1. Different segments with different price sensitivities 2. Must be able to identify which segment consumers are in or get them to tell you indirectly 3. Must prevent resale between segments Coupons - Another Example of Price Discrimination Ex. 75¢ coupon for Tylenol ​ Different price sensitivities  Consumers self-select by clipping or downloading the coupon ​ Only price-sensitive consumers will clip Could also direct to particular blocks or zipcodes Consumers are unlikely to resell or exchange coupons, except very high-value ones ​ Can send consumers coupons with their names on it Yield Management Yield Management: change prices quickly based on current or forecasted demand – can increase/decrease prices Combines price discrimination with dynamic pricing ​ Raise prices → when demand is higher, predicted to be higher, or price sensitivity is lower Reduce prices → when demand is lower, predicted to be lower, or price sensitivity is higher S13 New Products #lecturenotes #marketing Product Development  Many great marketing successes (and failures) involve new products Some products stay in the introductory stage for a long time Products can stall in the rapid growth stage The Mature stage extends PLC with product improvements and increased segmentation - Some attempts at improving mature products are not successful Firms need new products to replace declining ones ​ New products are the firm’s lifeblood Firms that cannot create successful new products disappear Many firms are scared of new products ​ Expensive → $10-100 million for new food product  Risky → 80% failure rate for consumer package foods Characteristics of Successful New Products Relative Advantage → satisfy consumer needs better than existing products because they’re cheaper, easier, faster, etc. Communicability → relative advantage must be easy to communicate to consumers Minimal Behavior Change →new products that do not require consumers to change their behavior or beliefs radically are more likely to succeed Compatibility → with consumers’ existing systems, beliefs, ideas Complexity → using product, need for extensive consumer education Continuous innovations → ex. digital camera, cellphone Discontinuous innovations → ex. iPod, Keurig Kold Observability → consumers are more likely to adopt new products when they observe other consumers using them New Product Development Process Objective: increase success rate, but do not need to achieve 100% success Process  1. Idea generation → generate as many new product ideas as possible ​ Be non-judgmental - encourage creativity Include customers, potential customers 2. Idea screening → evaluate ideas in harsh light of reality ​ Expect to eliminate 90-95% of ideas Use pre-determined criteria for all ideas 3. Concept testing → test consumer reactions to concept ​ Extend original ideas, create a mockup Present concept to consumer → 4. Business development and planning forecast profits ​ Become an internal “contract” that new product must meet in-market testing stages 5. Product Development → create actual product that meets concept ​ Translate desired product perceptions Stage can be expensive and lengthy Test product-concept fit with consumers Create packaging and name 6. Market testing → introduce the product to a few cities/markets to see effectiveness of the product S18 Internal Marketing Partners #marketing #lecturenotes Internal Partners Internal partners are usually salespeople and perform many of the same functions as external partners ​ Not just salespeople who visit customers → in-store salesforce, telemarketers, customer service personnel Personal selling in the modern firm is a very sophisticated skill Personal Selling Skills 1. Ask questions ​ Determine consumers’ needs Consumer may not know their needs, so questions can help consumers realize what their needs are 2. Active listening 3. Stress benefits, not features ​ Consumers usually interested in benefits, not technical features 4. Establish interpersonal influence 5. Negotiate skillfully S20 Customer Value #marketing #lecturenotes What is Customer Value? Customer Value: economic value of a customer to the firm  Includes costs to attract and to retain customers as well as profits from sales to customers Firms must attract high-value customers to flourish Questions Firms Need to Answer about Customer Value How much is a customer worth to us in the long run – lifetime value? How much should we be willing to attract a customer? To keep a customer? How does customer value vary across customers? Forecasting Customer Value Key Components of Customer Value Attraction costs “Net” margin on first sale Retention costs “Net” margin in future periods Forecast: add up the above factors, with discounting How to Increase Customer Value 1. Identify & pamper your customers 2. Get rid of low-value customers  3. Increase value of existing customers 4. Win back former customers 5. Reduce attracting costs ​ May be spending too much to attract customers ​ Little hope of making customer profitable Amazon Prime now charges for Whole Foods home delivery Find more efficient attraction methods ​ Emails, word-of-mouth, online recommendations 6. Increase retention rate 7. Reduce retention costs ​ Base retention costs on customer value Cheaper customer service methods 8. Use more sophisticated metrics to forecast customer value S21 Marketing Communication #marketing #lecturenotes Types of Marketing Communications Unearned Media Communications that the firm pays for Advertising, website, search results Earned Media  Coverage in neutral media who find your product or story of interest to their audience Press and internet coverage, “organic” search results User-Generated Content Created by a noncommercial user who is not paid to communicate it Online or old-fashioned word-of-mouth Unearned UGC Website or influencer paid to mention or endorse a product Apparently “neutral” media who are paid, or given something else of value, to mention or endorse Message Strategies Rational v. Emotional Messages Rational messages emphasize product attributes and benefits / emotional messages seek to create an overall good feeling about the brand or psychographic image Use of either depends on: - Involvement level - Differences between benefits offered by competing brands - Consumers’ understanding and comprehension of essential product attributes - Type of segmentation Comparative Advertising Compare your product to the competition Name the competition ​ Use if not the market leader since everyone knows about the leader anyway Don’t name competition - Use if the market leader - Why give free publicity to an underdog with a smaller advertising budget than you? Fear Appeals “Use our product or else bad things will happen” or “use competing product and bad things happen” Fear appeals are sometimes used in public service advertising ​ Drug use, drunk driving, STD prevention