Definitions Of Marketing - Management I_Kap 1-4 PDF

Definitions of Marketing ”Marketing is the activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large.” (American Marketing Association) “It is the business process of...

Definitions of Marketing ”Marketing is the activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large.” (American Marketing Association) “It is the business process of identifying, anticipating and satisfying customers' needs and wants.” how to understand, attract, and keep customers. Chair of Marketing Page 12 Prof. Christoph Fuchs, Ph.D. The Nexus Between Supply and Demand Marketing: Fundamental organizational function connecting firms to the outside (to customers) The frontier between a firm and it’s environment  Marketing ≠ Advertising / Marketing ≠ Selling / Presence 1980‘s Chair of Marketing Page 14 Prof. Christoph Fuchs, Ph.D. Misguided View of Marketing Marketing = Sell what you make Orientation = internal/product focused Chair of Marketing Page 15 Prof. Christoph Fuchs, Ph.D. Incentives & Discounts to push product out Chair of Marketing Page 16 Prof. Christoph Fuchs, Ph.D.  Customers do not buy drills, they buy… Chair of Marketing Page 17 Prof. Christoph Fuchs, Ph.D.  Customers do not buy drills, they buy… …Benefits Customers usually don’t care about RPMs …Holes (revolutions per minute) and other features of drills either, they care about what these features do for their holes. Chair of Marketing Page 18 Prof. Christoph Fuchs, Ph.D. What is value? Chair of Marketing Page 19 Prof. Christoph Fuchs, Ph.D. Marketing – Focus on the Customer ”Everything starts with the customer” − Lou Gerstner, IBM “It’s all about end-users” − Eric Schmidt, Google “Because the purpose of business is to create a customer, the business enterprise has two – and only two – basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs. ” − Peter Drucker Chair of Marketing Page 20 Prof. Christoph Fuchs, Ph.D. What Marketing SHOULD Be Marketing = Creating Value for customers Orientation: External / customer-focused Goal: Profit through customer satisfaction (relationship, ROMI, life-time value) Means: Determine (begin with) the NEEDS and WANTS of (groups of) customers. Deliver the desired benefits more effectively than competitors Chair of Marketing Page 21 Prof. Christoph Fuchs, Ph.D. What business are you in? We make blue jeans. We offer comfort, fashion, and durability in wearing apparel. We make copy machines. We automate the office. We make cameras and film. We help preserve beautiful memories. In the factory we make cosmetics… …in the drugstore, we sell hope. Chair of Marketing Page 22 Prof. Christoph Fuchs, Ph.D. Agenda Syllabus What does this course aim to do for you What is marketing Effectiveness of marketing This class: How to get it right Doing it differently Chair of Marketing Page 24 Prof. Christoph Fuchs, Ph.D. Chair of Marketing Page 25 Prof. Christoph Fuchs, Ph.D. Chair of Marketing Page 26 Prof. Christoph Fuchs, Ph.D. Chair of Marketing Page 27 Prof. Christoph Fuchs, Ph.D.  → Better determine what’s needed Source : Harvard Business Review Chair of Marketing Page 28 Prof. Christoph Fuchs, Ph.D. Kids were terrified of getting MRIs Source : Slate.com Scope and Importance of Marketing Basic principles of marketing are widely applicable consumer products design and development of new products services, including financial services consulting industrial products media and entertainment education sports politics non-profit Chair of Marketing Page 30 Prof. Christoph Fuchs, Ph.D. Field Experiment in South Africa n = 852 firms Entrepreneurs were randomly assigned to either a marketing training condition or a finance / accounting condition, and a control condition. Dependent variable (after training): Business Performance Anderson, S. J., Chandy, R., & Zia, B. (2018). Pathways to profits: The impact of marketing vs. finance skills on Chair of Marketing Page 31 business performance. Management Science, 64(12), 5559-5583. Prof. Christoph Fuchs, Ph.D. Field Experiment in South Africa Marketing versus Finance/Accounting training: Anderson, S. J., Chandy, R., & Zia, B. (2018). Pathways to profits: The impact of marketing vs. finance skills on Chair of Marketing Page 32 business performance. Management Science, 64(12), 5559-5583. Prof. Christoph Fuchs, Ph.D.  Anderson, S. J., Chandy, R., & Zia, B. (2018). Pathways to profits: The impact of marketing vs. finance skills on Chair of Marketing Page 33 business performance. Management Science, 64(12), 5559-5583. Prof. Christoph Fuchs, Ph.D. Marketing 3C - 4P Framework Understanding Customers is Key – Consumer Behavior Chair of Marketing Page 35 Prof. Christoph Fuchs, Ph.D. Understanding Customers is Key – The Example of Coca Cola Chair of Marketing Page 36 Prof. Christoph Fuchs, Ph.D. Market Research To understand markets (size), industries, customers, trends, we need insights from market research Chair of Marketing Page 37 Prof. Christoph Fuchs, Ph.D. Market Research is Key – The Example of Kodak Chair of Marketing Page 38 Prof. Christoph Fuchs, Ph.D. Market Disruptions as a Consequence of Lacking Market Insights Importance of Customer Satisfaction Keeping Customer Relationships - Customer Lifetime Value If you deliver differentiated product giving optimal benefits, satisfied customers return. Returning customers is where the big profits are. Source : HBR Chair of Marketing Page 41 Prof. Christoph Fuchs, Ph.D. Apple iPhones (customer lock-in) Keeping Customer Relationships - Customer Lifetime Value But this is specifically the case when customers are satisfied. Source : HBR Chair of Marketing Page 43 Prof. Christoph Fuchs, Ph.D. Customer Retention vs. Acquisition Cost of attracting a new customer can be up to 5 times the cost of keeping a current one happy Source : HBR Chair of Marketing Page 44 Prof. Christoph Fuchs, Ph.D. Framework PRODUCT SEGMENTATION Marketing Research PRICE TARGETING PROMOTION Consumer Behavior POSITIONING PLACE PREREQUISITES MARKETING STRATEGY MARKETING PLAN Chair of Marketing Page 45 Prof. Christoph Fuchs, Ph.D. Key Takeaways Marketing is creating and delivering value externally oriented a critical business function wide-ranging in scope dynamic and proactive art & science Chair of Marketing Page 46 Prof. Christoph Fuchs, Ph.D. VO Management I - Marketing (MA) Week 2 – Segmentation, Targeting, Positioning Univ.-Prof. Dr. Christoph Fuchs Chair of Marketing, [email protected] http://marketing.univie.ac.at Office hours: upon request Course Framework PRODUCT SEGMENTATION Marketing PRICE Research TARGETING PROMOTION Consumer Behavior POSITIONING PLACE PREREQUISITES MARKETING STRATEGY MARKETING PLAN Chair of Marketing Prof. Christoph Fuchs, Ph.D. 2 Developing a Marketing Strategy “Slice” the market: Identify Segmentation Variables SEGMENTATION and Segment the Market Develop profiles of resulting segments Where do I want to go? MARKETING STRATEGY TARGETING POSITIONING Chair of Marketing Prof. Christoph Fuchs, Ph.D. 3 Let me introduce you to Dr. Howard Markowitz Insight: There is no perfect Pepsi, there are only Pepsis There was nothing such as a bell curve Chair of Marketing Prof. Christoph Fuchs, Ph.D. 5 Campbell: Tomato sauce for Prego Prego: How can we make the best tomato sauce? − chunky − spicy − garlic − sweet − sour He created 45 different variants of tomato sauces and asked consumers to rate them Chair of Marketing Prof. Christoph Fuchs, Ph.D. 6 Insight: Not all customers are equal But this time, he analyzed the data differently and tried to cluster consumers Chair of Marketing Prof. Christoph Fuchs, Ph.D. 7 What is Segmentation? The process of identifying relatively homogeneous groups of customers with respect to perceptions, evaluations, needs, and wants. Chair of Marketing Prof. Christoph Fuchs, Ph.D. 8 Why Segmentation? Insufficient segmentation is a main reason for new product failure Chair of Marketing Prof. Christoph Fuchs, Ph.D. 10 The importance of segmentation (understanding customer needs) Chair of Marketing Prof. Christoph Page 11 Fuchs, Ph.D. Why Segmentation? One fits all mindset Difficult or costly to satisfy the market with one product/service Limited resources to attract all customers Less opportunities to make profit (and be competitive; otherwise winner takes it all) Chair of Marketing Prof. Christoph Fuchs, Ph.D. 12 Segmentation based on customer needs: Carpet market Segment customers on those needs and factors that actually drive purchase decisions, not on peripheral characteristics Chair of Marketing Prof. Christoph Fuchs, Ph.D. 13 Segmentation based on customer needs: Carpet market Create a small number of mutually exclusive, collectively exhaustive groups using statistical techniques such as cluster analysis. Chair of Marketing Prof. Christoph Fuchs, Ph.D. 14 Segmentation based on customer needs: Carpet market For each need-based segment, determine which variables (demographics, etc.) make the segment distinct and identifiable (actionable). Chair of Marketing Prof. Christoph Fuchs, Ph.D. 15 Bases for segmenting consumer markets Segmentation Geographic Demographic Psychographic Behavioural Nations Age Segmentation based on Benefits sought States Gender traits, values, or User status Regions Family lifecycle lifestyles; AIO factors User rate Counties Life stage that describe lifestyles: Loyalty status Cities Income Activities Neighborhoods Generation Interests Social class Opinions Chair of Marketing Prof. Christoph Fuchs, Ph.D. 16 Geographic segmentation (international marketing) Chair of Marketing Prof. Christoph Fuchs, Ph.D. 17 Geographic segmentation Starbucks Example In the US, Starbucks revenue is driven by the speed and frequency of transactions. The typical US consumer wants to grab a coffee and perhaps a sandwich and leave. In China, coffee is still more of a social event than a daily necessity. Starbucks is a destination restaurant rather than a take-out coffee place. People come to meet their friends and talk. Chair of Marketing Prof. Christoph Fuchs, Ph.D. 18 Geographic segmentation Mc Donalds Example Chair of Marketing Prof. Christoph Fuchs, Ph.D. 19 Demographic segmentation Chair of Marketing Prof. Christoph Fuchs, Ph.D. 20 Demographic segmentation Age Chair of Marketing Prof. Christoph Fuchs, Ph.D. 21 Demographic segmentation Gender Chair of Marketing Prof. Christoph Fuchs, Ph.D. 22 Demographic segmentation Income Chair of Marketing Prof. Christoph Fuchs, Ph.D. 23 Psychographic segmentation Chair of Marketing Prof. Christoph Fuchs, Ph.D. 24 Psychographic segmentation Quidel – Segmentation tactics You could segment the market for early pregnancy tests based on demographics such as age and income, or you could segment the market based on consumers' price sensitivity. But in this situation, it is useful to ask why: Why would a woman want to take a pregnancy test? And are these reasons the same for everyone? What do you think? Chair of Marketing Prof. Christoph Fuchs, Ph.D. 25 Psychographic segmentation Quidel – Segmentation tactics You could segment the market for early pregnancy tests based on demographics such as age and income, or you could segment the market based on consumers' price sensitivity. But in this situation, it is useful to ask why: Why would a woman want to take a pregnancy test? And are these reasons the same for everyone? A little bit of thought would suggest that there are two groups of women: hopefuls, those who want to be pregnant, and fearfuls, those who are afraid that they might be pregnant. Chair of Marketing Prof. Christoph Fuchs, Ph.D. 26 Psychographic segmentation Quidel – Segmentation tactics You could segment the market for early pregnancy tests based on demographics such as age and income, or you could segment the market based on consumers' price sensitivity. But in this situation, it is useful to ask why: Why would a woman want to take a pregnancy test? And are these reasons the same for everyone? A little bit of thought would suggest that there are two groups of women: hopefuls, those who want to be pregnant, and fearfuls, those who are afraid that they might be pregnant. Chair of Marketing Prof. Christoph Fuchs, Ph.D. 27 Psychographic segmentation Quidel Chair of Marketing Prof. Christoph Fuchs, Ph.D. 28 Psychographic segmentation Quidel - Segmentation tactics Chair of Marketing Prof. Christoph Fuchs, Ph.D. 29 Bahavioral segmentation Behavioral variables Occasions (night, day, foreign,....) User status (regular, non-user,...) Usage rate (light, medium, or heavy) Adoption status (early adopter vs. follower,...) Loyalty status Attitude (enthusiastic, indifferent, hostile...) Chair of Marketing Prof. Christoph Fuchs, Ph.D. 31 Bahavioral segmentation Internet usage Segmentation on online behavior… Word search Sites/pages visited Purchases Abandoned carts Online engagement level Social network Chair of Marketing Prof. Christoph Fuchs, Ph.D. 32 The role of predictive analysis Chair of Marketing Prof. Christoph Fuchs, Ph.D. 33 To be useful, market segments MUST be… Measurable Substantial Accessible Differentiable Actionable Chair of Marketing Prof. Christoph Fuchs, Ph.D. 34 Key Takeaways Segmentation involves separating customers into groups, so as to maximize within group homogeneity, and between group heterogeneity Segments usually differ in terms of consumer needs / benefits sought (and differ in how they react to your 4Ps) Use segmentation variables that allow segments to be identified and actionable. Choose variables that lead to good differentiation on underlying needs. Putting yourself in consumers’ shoes (why do customers buy our products) - Based on data, analyses, & insight Chair of Marketing Prof. Christoph Fuchs, Ph.D. 35 Now, it‘s your turn: How would you segment the dog food market? Chair of Marketing Prof. Christoph Fuchs, Ph.D. 36 Now, its your turn: How would you segment the dog food market? Chair of Marketing Prof. Christoph Fuchs, Ph.D. 37 Developing a Marketing Strategy “Slice” the market: Identify Segmentation Variables SEGMENTATION and Segment the Market Develop profiles of resulting segments Evaluate the attractiveness of each segment Select the target segment(s) Where do I want to go? MARKETING STRATEGY TARGETING POSITIONING Chair of Marketing Prof. Christoph Fuchs, Ph.D. 38 Targeting Which segment(s) you will invest your scarce resources in Do they want us? (Importance-Performance) Do we want them? (General segment attractiveness) Segment size & growth Capacity utilization Effects on other segments (cannibalization, conflict, and synergy between segments) Pricing, cost to serve, acquisition cost Chair of Marketing Prof. Christoph Fuchs, Ph.D. 39 Patterns of target market selection M1 M2 M3 M1 M2 M3 M1 M2 M3 P1 P1 P1 P2 P2 P2 P3 P3 P3 P = Product M = Market Question: What are some risks of going after one segment? Chair of Marketing Prof. Christoph Fuchs, Ph.D. 40 Developing a marketing strategy “Slice” the market: Identify Segmentation Variables SEGMENTATION and Segment the Market Develop profiles of resulting segments Evaluate the attractiveness of each segment Select the target segment(s) Where do I want to go? MARKETING STRATEGY TARGETING Decide on a unique “position” in the minds of consumers in the target segment(s) POSITIONING Select, develop, signal and maintain the chosen positioning concept Chair of Marketing Prof. Christoph Fuchs, Ph.D. 41 Positioning Positioning results in the successful creation of a customer-focused value proposition How can you convince customers in the target segment to choose our offering (and not somebody else’s offering)? Chair of Marketing Prof. Christoph Fuchs, Ph.D. 42 Defining Associations Points-of-difference (PODs) Attributes or benefits consumers strongly associate with a brand, positively evaluate and believe they could not find to the same extent with a competitive brand. Points-of-parity (POPs) Associations that are not necessarily unique to the brand but may be shared with other brands Category POPs: viewed as essential for offering within certain product category (in order to be considered) Competitive POPs: negate competitors’ PODs (you match or neutralize their features and benefits). Chair of Marketing Prof. Christoph Fuchs, Ph.D. 43 Question: When to focus on Points of Difference and When on PoP? Maturity of the market? Positioning of the company (e.g., leader vs. me-too)? When the market is highly price-sensitive? When the market is fast growing? Chair of Marketing Prof. Christoph Fuchs, Ph.D. 44 Positioning maps Understand the competitive structure of a market: How do customers view the brand? Which brands do customers perceive to be the closest competitors? What attributes are responsible for these perceived differences? Chair of Marketing Prof. Christoph Fuchs, Ph.D. 46 Criteria for a successful positioning concept Important and meaningful (to the segment) Credibly superior (e.g., quality tests, 3* on NCAP) Pioneering (first mover advantage) Distinctive Sustainable Communicable Feasible (at reasonable cost) Chair of Marketing Prof. Christoph Fuchs, Ph.D. 47 Negatively correlated PoD and PoPs Companies need to manage the tradeoff (to convince customers) Chair of Marketing Prof. Christoph Fuchs, Ph.D. 48 Types of positioning concepts Features and benefits Price/Quality Product user Competitor Product class Symbol and imagery Chair of Marketing Prof. Christoph Fuchs, Ph.D. 52 Types of positioning concepts Features and benefits Price/Quality Product user Competitor Product class Symbol and imagery Chair of Marketing Prof. Christoph Fuchs, Ph.D. 53 Types of positioning concepts Features and benefits Price/Quality Product user Competitor Product class Symbol and imagery Chair of Marketing Prof. Christoph Fuchs, Ph.D. 54 Types of positioning concepts Features and benefits Price/Quality Product user Competitor Product class Symbol and imagery Chair of Marketing Prof. Christoph Fuchs, Ph.D. 55 Types of positioning concepts Features and benefits Price/Quality Product user Competitor Product class Symbol and imagery Please write them down and watch: Chair of Marketing Prof. Christoph Fuchs, Ph.D. 56 Course Framework PRODUCT SEGMENTATION Marketing PRICE Research TARGETING PROMOTION Consumer Behavior POSITIONING PLACE PREREQUISITES MARKETING STRATEGY MARKETING PLAN Chair of Marketing Prof. Christoph Fuchs, Ph.D. 2 What would you do? A company has annual sales of 100,000 units for one of its products. The selling price for this product is $100, variable cost is $60, and the allocation of fixed overheads is $3 million. The analysis of the market suggests that you have the following two options for the next year: – Increase unit sales by 1% by keeping the current price, or – Increase price by 1% and have the same sales as this year. Which option would you choose and why? Chair of Marketing Prof. Christoph Fuchs, Ph.D. 3 The leverage of price Operating Profit Price Costs (var) Volume Costs (fix) Profit Chair of Marketing Prof. Christoph Fuchs, Ph.D. 4 The leverage of price a 10% improvement of …. Operating Profit old new old new Price Costs (var) Volume Costs (fix) 27 Mio. 13 30% Chair of Marketing Prof. Christoph Fuchs, Ph.D. 5 The leverage of price a 10% improvement of …. Operating Profit old new old new Price Costs (var) Volume 1.1 Mio. 14 40% Costs (fix) 27 Mio. 13 Chair of Marketing Prof. Christoph Fuchs, Ph.D. 6 The leverage of price a 10% improvement of …. Operating Profit old new old new Price Costs (var) 54 16 60% Volume 1.1 Mio. 14 Costs (fix) 27 Mio. 13 Chair of Marketing Prof. Christoph Fuchs, Ph.D. 7 The leverage of price a 10% improvement of …. Operating Profit old new old new Price 110 20 100% Costs (var) 54 16 Volume 1.1 Mio. 14 Costs (fix) 27 Mio. 13 Chair of Marketing Prof. Christoph Fuchs, Ph.D. 8 Price Volume Trade Off Can I reduce my price and get enough additional volume to increase profits? (incremental break- even analysis) 17.5% Price Decrease Based on average income Volume Increase statements of 1,200 largest publicly held companies in 2002. to Break Even Source: The Price Advantage, by -5.0% Marn, Roegner, and Zawada Chair of Marketing Prof. Christoph Fuchs, Ph.D. 9 Overview Price is the only component of the marketing mix that brings in revenue. It has a sizeable impact on profitability. Key requirements of pricing policy It should complement your strategic goals It should be based on perceived value to customer Pricing is subject to psychological biases Chair of Marketing Prof. Christoph Fuchs, Ph.D. 10 BUT… What is the relationship between Price & Demand? Chair of Marketing Prof. Christoph Fuchs, Ph.D. 11 Basic Demand Curve Chair of Marketing Prof. Christoph Fuchs, Ph.D. 12 BUT: What is the Relationship between Price and Demand? Have you heard about Elasticity? Chair of Marketing Prof. Christoph Fuchs, Ph.D. 13 Price elasticities are important and have to be taken into account for pricing strategies! Price elasticity of demand illustrates the response of demand to a change in price Inelastic demand occurs when demand hardly changes when there is a small change in price Elastic demand occurs when demand changes greatly for a small change in price Price elasticity of demand = % change in quantity demand % change in price Chair of Marketing Prof. Christoph Fuchs, Ph.D. 14 Price elasticities are important and have to be taken into account for pricing strategies! Price elasticity of demand = % change in quantity demand % change in price Chair of Marketing Prof. Christoph Fuchs, Ph.D. 15 Price elasticity in the product life cycle… Chair of Marketing Prof. Christoph Fuchs, Ph.D. 16 Example of assessing value (and determining demand curves) Demand curves based on consumers‘ WTP WTP 10 8 Producer made personal Control 6 4 2 0 1 11 21 31 41 51 61 71 81 91 101 111 121 131 141 151 161 171 181 191 201 Frequency Major Pricing Approaches Chair of Marketing Prof. Christoph Fuchs, Ph.D. 19 Pricing Approaches What affects price setting in the first place? Chair of Marketing Prof. Christoph Fuchs, Ph.D. 20 #1 Cost-Based Pricing Chair of Marketing Prof. Christoph Fuchs, Ph.D. 21 #2 Cost Based Pricing – Break Even Pricing Break-even pricing is the price at which total costs are equal to total revenue and there is no profit Target return pricing is the price at which the firm will break even or make the profit it’s seeking Chair of Marketing Prof. Christoph Fuchs, Ph.D. 22 #3 Competition-Based Pricing Setting prices based on competitors’ strategies, costs, prices, and market offerings. Consumers will base their judgments of a product’s value on the prices that competitors charge for similar products. Question: What is the problem with cost-based and competitor-based pricing? Chair of Marketing Prof. Christoph Fuchs, Ph.D. 23 #4 Customer-Value Based Pricing (!) Chair of Marketing Prof. Christoph Fuchs, Ph.D. 24 #4 Customer-Value Based Pricing (!) Chair of Marketing Prof. Christoph Fuchs, Ph.D. 25 Pricing Strategies Chair of Marketing Prof. Christoph Fuchs, Ph.D. 27 #1 Penetration vs. Skimming Pricing Chair of Marketing Prof. Christoph Fuchs, Ph.D. 28 #1 Penetration vs. Skimming Pricing Examples Chair of Marketing Prof. Christoph Fuchs, Ph.D. 29 Pricing strategy – penetration vs. skimming When would you pursue penetration pricing and when skimming? #1 Pricing strategy – penetration vs. skimming Fox 2015 (Lecture Slides) #1 Penetration vs. Skimming Pricing Chair of Marketing Prof. Christoph Fuchs, Ph.D. 32 #2 Loss Leader Chair of Marketing Prof. Christoph Fuchs, Ph.D. 34  #3 Price Differentiation (also known as Price Discrimination) Chair of Marketing Prof. Christoph Fuchs, Ph.D. 35  #3 Price Differentiation (customized value discrimination) Forms of price discrimination Quantitative (e.g., small vs. large quantities) Qualitative (e.g., depending on WTP of segments) Temporal (e.g., morning vs. evening), Location-based (e.g., urban vs. rural). Dynamic/demand/real-time pricing Different price at different time Based on demand, competition, capacity,… Personalized pricing Different price for different buyers (based on segments – either they can select or not) Based on estimate of individual’s value price #3 Price Differentiation Red can be default color and more expensive Chair of Marketing Prof. Christoph Fuchs, Ph.D. 38 #3 Price Differentiation Differentiation based on social groups (by socio demographics) A simple classification is, for example, according to age. Schoolchildren, students and pensioners regularly benefit from discounted offers. Or by Gender? Chair of Marketing Prof. Christoph Fuchs, Ph.D. 39 #4 Complementary Pricing What is the maximum amount you would spend for 1kg coffee beans? Chair of Marketing Prof. Christoph Fuchs, Ph.D. 40 #4 Complementary Pricing Who owns a Nespresso machine? Chair of Marketing Prof. Christoph Fuchs, Ph.D. 41 #4 Complementary Pricing Who owns a Nespresso machine? Approx.: Chair of Marketing Prof. Christoph Fuchs, Ph.D. 42 #4 Complementary Pricing Razor-Blade-Model Chair of Marketing Prof. Christoph Fuchs, Ph.D. 43 #4 Complementary Pricing → Threat Chair of Marketing Prof. Christoph Fuchs, Ph.D. 44 #5 Dynamic Pricing Dynamic pricing is a pricing strategy in which companies adjust prices for products or services on the basis of current market demand (also referred to as surge pricing). It is a model that calculates prices using automatic algorithms. Factors such as competitor pricing, supply and demand and other external factors are taken into account (e.g., Uber pricing). Chair of Marketing Prof. Christoph Fuchs, Ph.D. 45 The Psychology of Price (and its relationship to STP) Chair of Marketing Prof. Christoph Fuchs, Ph.D. 47 Close your Eyes… Chair of Marketing Prof. Christoph Fuchs, Ph.D. 48 Please rate the “expected quality“ on a 5 point scale (1=low expected quality, 5=high expecxted quality) A B 1.99 EUR 0.49 EUR Chair of Marketing Prof. Christoph Fuchs, Ph.D. 49 Please rate the “expected quality“ on a 5 point scale (1=low expected quality, 5=high expected quality) A B 0.49 EUR 1.99 EUR Chair of Marketing Prof. Christoph Fuchs, Ph.D. 50 Price Quality Inference higher quality lower quality lower higher price price Chair of Marketing Prof. Christoph Fuchs, Ph.D. 51 Price = Message consumers extract meaning from price inference about valence of an experience price communication should follow evidence-based principles Chair of Marketing Prof. Christoph Fuchs, Ph.D. 52  People believe that “you get what you pay for” especially for credence goods (quality is hard to judge even after use) Chair of Marketing Prof. Christoph Fuchs, Ph.D. 53 Expensive Wine tastes better!! Plassmann, O'Doherty, Shiv, & Rangel PNAS (2008) Chair of Marketing Prof. Christoph Fuchs, Ph.D. 54 Expensive Wine tastes better!! liking with price Plassmann, O'Doherty, Shiv, & Rangel PNAS (2008) Chair of Marketing Prof. Christoph Fuchs, Ph.D. 55 Pricing Tactics Communicating the Price Chair of Marketing Prof. Christoph Fuchs, Ph.D. 58 What is the Price? 450 gr. Nutella Chair of Marketing Prof. Christoph Fuchs, Ph.D. 59 Reference Prices People have little knowledge about the typical price of a product Use reference price to indicate “good” price “original price is …” “regularly priced at …” “compare elsewhere at …” “manufacturer’s suggested list price is …” Chair of Marketing Prof. Christoph Fuchs, Ph.D. 60  show the price to be a good value against a reference price the price of a condom seems a bargain compared to a Maxi Cosi Chair of Marketing Prof. Christoph Fuchs, Ph.D. 61 Chair of Marketing Prof. Christoph Fuchs, Ph.D. 62 In Comparison to 42.79 a price of 68.14 is ok! Chair of Marketing Prof. Christoph Fuchs, Ph.D. 63 Don‘t be fooled by reference prices Chair of Marketing Prof. Christoph Fuchs, Ph.D. 64  What is better? €29.99 vs. €30 Chair of Marketing Prof. Christoph Fuchs, Ph.D. 69 People are persuaded by odd prices! Chair of Marketing Prof. Christoph Fuchs, Ph.D. 70 9 Endings Effect of Advertised 9 Endings on Sales of Margarine Buyers perceive odd Price/lb ($) Unit Sales ______________________________________________________________ number prices as significantly lower Parkay Brand Regular price 0.83 2,817 than the slightly Discount price 0.63 8,283 (+194%) higher round Odd discount price 0.59 14,567 (+406%) numbers that they Imperial Brand approximate. Regular price 0.89 5,521 (e.g., $1.99 and $2.00) Discount price 0.71 9,120 (+65%) Odd discount price 0.69 17,814 (+222%) ______________________________________________________________ Source: Kenneth Wisniewski, and Robert Blattberg, Center for Research in Marketing, University of Chicago. Chair of Marketing Prof. Christoph Fuchs, Ph.D. 71 29.99 vs. 30.00 price = odd increases sales in short-run (odd price communicates “sale!”), but only interesting when it reduces left-most digit (€29.99 vs. €28.99 is not helpful) disadvantages harms recall, takes 1/3 time longer to think about, harms decision making, waste of time for customers & employees price = round preferred by 66% of customers perceived as more honest suggests higher quality Chair of Marketing Prof. Christoph Fuchs, Ph.D. 72 Price: Key take aways Price is important It is the only component of the marketing mix that brings in revenue. It has a significant impact on profitability But it’s not the only tool in your toolbox (not the only element in value equation) It should be based on your STP Key requirements of pricing policy – It should complement your strategic goals – It should be based on perceived value to customer Pricing is subject to psychological biases Chair of Marketing Prof. Christoph Fuchs, Ph.D. 74 Course Framework PRODUCT SEGMENTATION Marketing PRICE Research TARGETING PROMOTION Consumer Behavior POSITIONING PLACE PREREQUISITES MARKETING STRATEGY MARKETING PLAN Chair of Marketing Prof. Christoph Fuchs, Ph.D. 2 Introduction to Channels Chair of Marketing Prof. Christoph Fuchs, Ph.D. 3 Definition of distribution Distribution entails all stakeholders (persons and/or organizations) that are involved in creating a revenue stream between a manufacturer and a consumer. Production Distribution Consumption Chair of Marketing Prof. Christoph Fuchs, Ph.D. 4 What is distribution (place)? Making goods/services available at: the right TIME at the correct LOCATION in the correct QUANTITY to the right CUSTOMER in a way that is BETTER than your competitors Chair of Marketing Prof. Christoph Fuchs, Ph.D. 5 Why is Channel Management important? In the US, channel members collectively earn margins of 30-50% of the selling price. Channel decisions are often structural, long-term, and sticky. Superior channel strategy can lead to sustainable competitive advantages Changing role of retailers (online) Chair of Marketing Prof. Christoph Fuchs, Ph.D. 6 Why is Channel Management important? Immense share of Wall Mart in the US market. Dependency? Chair of Marketing Prof. Christoph Fuchs, Ph.D. 7 Objectives of Channel Management Reduction of distribution costs Image of the channel Cooperation and Steering of channels Flexibility and time to market Chair of Marketing Prof. Christoph Fuchs, Ph.D. 8 How important is distribution? Read the article by Ataman et al. (2008) Please read the paper after the session https://faculty.fuqua.duke.edu/~mela/ bio/papers/Ataman_Mela_Van_Heerde _2007_b.pdf Chair of Marketing Prof. Christoph Fuchs, Ph.D. 9 Answer: Very important! VERY important! Access to distribution breadth plays the largest role in the success of new brands Increases sales more than discounting, advertising, and features/displays Interacts with other strategies, increasing their effectiveness ! → Take home message: must reinforce overarching strategy Chair of Marketing Prof. Christoph Fuchs, Ph.D. 10 Answer: Very important! Chair of Marketing Prof. Christoph Fuchs, Ph.D. 11 What is a Channel? A distribution channel is a set of firms or individuals who participate in the flow of products from manufacturers to customers. These firms/individuals are known as channel intermediaries Chair of Marketing Prof. Christoph Fuchs, Ph.D. 14 The Logic behind Distribution Channels Chair of Marketing Prof. Christoph Fuchs, Ph.D. 16 Decision process when setting up distribution channels Decision 1 Structure of Distribution system Vertical Structure Direct Indirect Channel Channel Chair of Marketing Prof. Christoph Fuchs, Ph.D. 17 What is a Channel? Please think about respective ! examples of A. B. & C. Write them down. Chair of Marketing Prof. Christoph Fuchs, Ph.D. 18 What is a Channel? Please think about respective ! examples of A. B. & C. DIRECT INDIRECT Write them down. Chair of Marketing Prof. Christoph Fuchs, Ph.D. 19 What is a Channel? Your Examples: DIRECT Chair of Marketing Prof. Christoph Fuchs, Ph.D. 20 What is a Channel? Your Examples: INDIRECT Chair of Marketing Prof. Christoph Fuchs, Ph.D. 21 Channel members and function? Direct Sales Force Keep title, work for you, direct control, only company’s products Distributors Captive or sole distributors Take title, work for you, only your products Wholesalers Take title, not tied to any company Agents Manufacturer’s representative Don’t take title, work for you and others Brokers Free agents, don’t take title, no ties to manufacturers Retailers/Dealers Often don’t work for you, usually take title Chair of Marketing Prof. Christoph Fuchs, Ph.D. 22 Decision process when setting up distribution channels Decision 2 Structure of Distribution system Vertical Structure Horizontal Structure Intensity: Direct Indirect Type of intermediate: Channel Channel intensive distribution selective distribution exclusive distribution Length: Number of intermediates Chair of Marketing Prof. Christoph Fuchs, Ph.D. 24 Levels of Distribution Intensity Intensive Distribution: All intermediaries who are willing to stock and sell Coke: “Within an arm’s reach of desire” (but more competition and conflict) Selective Distribution: Rely on only some intermediaries who are willing to stock and sell Exclusive Distribution: Severely limiting the number of intermediaries (dealer has exclusive right) Chair of Marketing Prof. Christoph Fuchs, Ph.D. 25 Channel breadth – why to go exclusive? https://www.retaildetail.eu/en/news/fashion/s uitcase-brand-rimowa-cancels-all-dealer- contracts Chair of Marketing Prof. Christoph Fuchs, Ph.D. 26 Channel length and vertical control – Why does Tesla have no dealers? Tesla does not have Franchise dealerships Chair of Marketing Prof. Christoph Fuchs, Ph.D. 27 Function & Distribution Channel Chair of Marketing Prof. Christoph Fuchs, Ph.D. 28 Tea Party (Tea distribution in Taiwan) 20,000 tea farmers in the hills of Taiwan -> 280 middlemen -> 60 tea refineries on the oceanfront (Ta-tao-cheng). Tea middlemen had a bad reputation among both farmers and refineries “Exploit the market by buying low and selling high” The governor-general of Taiwan set up a tea auction house in 1923 near the refineries. Farmers could ship directly to the auction house. Tea would be bought by the highest bidding refinery Despite this, the middlemen survived and continue to operate to this day. The auction house has been closed. Chair of Marketing Prof. Christoph Fuchs, Ph.D. 29 Role of the middleman? Facilitating search – They’d visit many farms -> finding high quality teas -> take samples to refineries -> ask for purchase orders – Searched for buyers for the farmer’s harvest and suppliers for the refineries Sorting – The process of appraising different species of tea and assessing their quality is highly skilled Contact efficiency – No. of possible contacts w/o middlemen: 20k farmers X 60 refineries = 1.2M contacts to get the best price Chair of Marketing Prof. Christoph Fuchs, Ph.D. 30 Intermediaries can streamline number of transactions Chair of Marketing Prof. Christoph Fuchs, Ph.D. 31 Functions of Distribution Channel Overcoming discrepancies Manufacturers make narrow assortments in large quantities, but… …customers want wide assortments in small quantities Contact efficiency (specialized in distribution) Physical distribution (and transportation) Inventory: risk reduction (and warehousing) Sales and returns Service: before and after sales Information/market feedback (up and down the channel) Chair of Marketing Prof. Christoph Fuchs, Ph.D. 32 Functions of Distribution Channel: Contact Efficiency Chair of Marketing Prof. Christoph Fuchs, Ph.D. 33 When to go direct -- Trend towards DISINTERMEDIATION? Chair of Marketing Prof. Christoph Fuchs, Ph.D. 34 Trend towards DISINTERMEDIATION? Example: Amazon Chair of Marketing Prof. Christoph Fuchs, Ph.D. 35 Trend towards DISINTERMEDIATION? (direct selling) Not suitable for every product! When is direct working: if Manufacturer * Customer direct contacts are relatively small < Small number of customers Large orders Low order frequency (can’t visit every week for small order, prefer fewer, larger orders) but not so clear if frequent orders are straight rebuys. In that case, high might be fine for direct. High importance to customer. If core product is important to customer, will make time for dedicated sales meeting (cf. detailing in pharma). High product customization. Information: When lots of information needed, sometimes better to go direct. Chair of Marketing Prof. Christoph Fuchs, Ph.D. 36 Verticalization of Distribution Channels – Vertical Control! Manufacturer (starts Distributor starts taking over taking over tasks of tasks of manufacturer (own distributor (own stores, production, brands, etc.) online channel, etc..) M D The strategy of controlling more of your product's supply chain is called vertical integration. Chair of Marketing Prof. Christoph Fuchs, Ph.D. 37 Channel Conflicts Chair of Marketing Prof. Christoph Fuchs, Ph.D. 38 Chair of Marketing Prof. Christoph Fuchs, Ph.D. 39 Channel Conflicts Vertical Horizontal Multichannel Chair of Marketing Prof. Christoph Fuchs, Ph.D. 40 Channel Conflicts Vertical Dealer A Dealer B Dealer C Horizontal Chair of Marketing Prof. Christoph Fuchs, Ph.D. 41 Divergent interests Manufacturer Distributor You must carry a full line of all the products We can try, but we can’t sell ‘dogs.’ We we make. No cherry-picking. should concentrate on our strong points. We need you to concentrate on our We need exclusive territories. products. We need your active involvement in selling It is very costly to do so. How will you new products and developing new markets. compensate us for the effort? We need to know about y(our) customers We don’t keep such records. (“... not a in greater detail. chance – they’ll start selling direct.”) You need to improve sales effort. You need to improve your sales promotion. Your channel margins are too high. Your prices are too high. Chair of Marketing Prof. Christoph Fuchs, Ph.D. 42 Multichannel conflicts Customer Chair of Marketing Prof. Christoph Fuchs, Ph.D. 43 Multichannel Example Chair of Marketing Prof. Christoph Fuchs, Ph.D. 44 Incentives for Intermediaries: Push vs. Pull Strategies Chair of Marketing Prof. Christoph Fuchs, Ph.D. 45 Push vs. Pull Strategies Chair of Marketing Prof. Christoph Fuchs, Ph.D. Any tactic that results in a third party to stocking your products 46 Push vs. Pull Strategies PUSH STRATEGY PULL STRATEGY Directing marketing efforts to channel Directing marketing efforts to end members to gain their cooperation consumers to gain their cooperation When appropriate: When appropriate: Low brand loyalty High brand loyalty Brand choice is made in the store High category involvement Product purchase is on impulse Brand choices are made before trip to retail store Consumers perceive brand differences Emphasis on trade promotions Emphasis on advertising, consumer promotions Chair of Marketing Prof. Christoph Fuchs, Ph.D. 48 Online Channels Chair of Marketing Prof. Christoph Fuchs, Ph.D. 49 How online is different from offline? Transparency about availability and pricing can increase competition (esp. if identical merchandise). Buying process? (Can use different channels for different stages in decision process) Information about customers (big data) Easy customization of e.g., prices. Reduction in impulse buying Chair of Marketing Prof. Christoph Fuchs, Ph.D. 50 What does a physical store do for consumers that on-line doesn’t? Touch and feel, see. Try before you buy. Information and help by a person Immediate availability Fun, entertainment (end of dreary malls, comeback of inner-city pedestrian malls) Low price for bulky items Physical pick-up location (important in many places outside US) Service Chair of Marketing Prof. Christoph Fuchs, Ph.D. 51 Effect of Distribution Channel on Customers Chair of Marketing Prof. Christoph Fuchs, Ph.D. 53 Example Imagine you are lying on the beach on a hot day, and all you have to drink is water. For the last hour you have been thinking about how much you would enjoy a nice cold bottle of your favorite brand of beer. A friend gets up to go make a phone call and offers to bring back a beer from the only nearby place where beer is sold: [Fancy resort hotel] or [Small, run-down grocery store] He says that the beer might be expensive and asks how much you are willing to pay for the beer. Chair of Marketing Prof. Christoph Fuchs, Ph.D. 54  People are willing to pay 73% more at the fancy resort relative to the run down grocery store. (seller’s costs are higher) Chair of Marketing Prof. Christoph Fuchs, Ph.D. 55 Example When run in the early 1980s (replication with MBAs): Store scenario = $1.50 Hotel Scenario = $2.65 Why is this interesting? 1) Identical consumption experience: same beer, same beach 2) No atmosphere is being consumed to justify price differential 3) No strategic reason to justify a price below perceived value (cannot haggle with store owner) Perceived value should be identical across groups Chair of Marketing Prof. Christoph Fuchs, Ph.D. 56  EXPECTATIONS MATTER! Place can shape expectations. Chair of Marketing Prof. Christoph Fuchs, Ph.D. 57 Chair of Marketing Prof. Christoph Fuchs, Ph.D. 58 Chair of Marketing Prof. Christoph Fuchs, Ph.D. 59 Key Takeaways Chair of Marketing Prof. Christoph Fuchs, Ph.D. 60 Key Take Aways Hardest marketing mix element to change. Can be a source of competitive advantage A distribution channel serves several important functions; it is not just an additional cost. Manufacturers need to balance between push and pull strategies More exclusive distribution can lead to greater focus by channel members on providing customer service, better merchandising, etc. Direct sales aligns incentives but adds cost Should be based on STP! Chair of Marketing Prof. Christoph Fuchs, Ph.D. 61