T7: Creating Long-Term Loyalty Relationships

Customer management XAVI

Two Sides of Customer Value

Customer value is a two-way street. Marketing managers typically focus on one side of that street:
providing a great customer experience by delivering superior value to their customers. The customer
is king and everything must be done to delight a customer. It is important to balance this view with
the other side of customer value, where customers provide value to the firm by bringing in profits.

In its zeal to grow sales, Hoover UK ignored the long-term profitability of the company. In essence, it
focused on providing value to customers but ignored the value it could get from customers. The real
challenge for a manager is to strike a balance between these two sides of customer value (see above).

A company’s customers can be mapped to one of the four quadrants in the matrix on the slide to help
show which customers are worth keeping on both dimensions. Star customers receive high value from
and deliver high value to the company. They are the most desirable—loyal, satisfied customers who
deliver long-term profits. In effect, the company does not need to change very much to manage these
customers further.

On the other extreme, customers in the lost causes quadrant do not value the company’s goods and
services and are not very profitable either. They may cost the company more than they are worth
because they frequently complain or return products, spread bad word-of-mouth news, or lower
morale by badgering staff members. If it does not make economic sense to invest the time and effort
to nudge customers in this quadrant into another quadrant, the company should be careful not to
acquire them in the first place. If the company already has such customers, it should consider letting
them go. While it might sound strange to let customers go and lose market share, in such cases,
reduced market share may actually lead to improved company performance. Getting more customers
is not

Customer Lifetime Value and Company Value

 Financial value FIRM VALUE

Customer CUSTOMER LIFETIME VALUE

Profitability

Drivers of Customer CUSTOMER CUSTOMER CUSTOMER

Value ACQUISITION RETENTION DEVELOPMENT

Firm’s Actions MARKETING PROGRAMS

CLV → Takes into account both the value organizations get from customers and the value they give to
customers.

● Organizations can aggregate CLV across current and future customers to determine their
customer equity, which provides a proxy for firm value.
● Organizations can use CLV to distinguish high-value customers from low-value customers and
to focus marketing programs to affect three drivers of CLV: customer acquisition, customer
retention, and customer development.

Customer Lifetime Value (CLV)

It is the present value of all future streams of profits that an individual customer generates over the
life of his or her business with the firm. Important to note:

1. CLV is based on profits, not revenue; specifically, it is based on contribution - which is revenue
less direct and attributable costs. Offering low prices or attractive deals may increase sales
but could hurt profitability. Customers who are costly to serve may be less profitable, even if
they provide more revenue.
2. CLV is a measure of a customer’s profitability over the long term and is therefore defined over
the lifetime of a customer.

CLV in Strategic and Managerial Decisions

● CLV can be used to establish customer acquisition cost limits.

● CLV provides a way for an organization to segment its customer base → from high-profitability
to low-profitability customers. Knowing each customer’s profitability is the first step to
managing all of them.
● CLV is not static → An organization can improve its customers’ CLV by understanding the
factors that drive CLV and finding ways to influence those drivers.
● CLV helps managers make investment decisions
● CLV also provides an estimate of a firm’s value

Example: Profit and Retention Patterns INES

Example: CLV Calculation XAVI

Customer Lifetime Value (CLV) Calculation

mt = profit or contribution margin during year t

rt = retention probability during year t

i = constant discount rate / t = year

The equation captures key aspects of customer profitability:

Current & future revenue potential of customer Cost of providing goods & services

Time value of money Uncertainty w/ future cash flows should a

customer stop doing business w/ organization

The concept of CLV is analogous to discounted cash flow in finance, with two major differences:

● CLV → calculated at the individual customer level, not at the aggregate level, because
profitability retention and probability vary by customer.
● Customers stop doing business with the company by defecting to a competitor or getting out
of the market.

Simplified CLV

Constant profit margin (m) & rate of retention (r) over time

Discount rate constant over time & value estimated over an infinite
horizon.

Margin multiple → term in the brackets. It depends on: retention probability & the discount rate.

● If the customer has a high probability of staying with the company, then he/she is expected
to have a longer lifetime with the company, and thus a higher lifetime value.
● If the discount rate is high, then the future cash flows amount to less and thus reduce the total
lifetime value of a customer.

Margin Multiple

Based on typical retention and discount rates across a number of industries, the margin multiple is
between 1 and 4.5 (see the table above).
This suggests that if the annual profit from a customer is $100, the customer’s lifetime value is
between $100 and $450, depending on his or her retention rate and the firm’s discount rate.

Using the margin multiple, CLV can be estimated without a spreadsheet. For example, if the discount
rate is 12% and the retention rate is 90%, the margin multiple is about 4. When m =$100, CLV is
approximately $400. Such back-of-the-envelope calculations can quickly rule out some investment
decisions. The margin multiple provides a sense of the order of magnitude of CLV relative to
acquisition cost.

Remember that CLV is calculated at the individual level. So a customer who has an 80% retention rate
is worth more than twice as much as another customer with a 60% retention rate. (Compare the
margin multiples in the table)

CLV at a Customer Segment level INES

Example: Value Curve XAVI

Example: Customer profit over time

An insurance company realized this truth when it saw the profit pattern of its typical customers (see
the chart). Formerly, the company employed independent agents who were paid a commission for
each newly acquired customer. Because agents’ commissions were paid up front and the firm
generated revenue from the insurance premiums that customers paid over the years, a customer did
not become profitable until after seven to ten years. The firm should not acquire customers who stay
less than seven to ten years with the firm.

The company’s internal analysis also suggested that customers who were acquired via the agents’
listings in the Yellow Pages telephone book were far less loyal than those who were acquired through
word of mouth. The company therefore instructed agents to halt Yellow Pages advertising because it
attracted the wrong types of customers. It also changed the agents’ pay structure to reward them for
better-quality customers who stayed with the firm longer.

More and more companies are realizing that not all customers are valuable. A November 2004 Wall
Street Journal story carried the headline “Best Buy Decides Not All Are Welcome.” Bargain hunters
who cost a lot for returns and other services were draining Best Buy’s profitability. Wireless carrier
Sprint cancelled contracts with customers who were costly to serve because they called customer
service excessively. In fact, a survey found that 85% of executives had divested customers from their
portfolio. And yet firing customers should be done cautiously; such actions could hurt a company’s
brand and its public relations

Strategies to Acquire Customers Effectively INES

Expected Customer Lifetime

r = retention rate in percentage

Customer retention rates → provide one measure of customers’ satisfaction and loyalty.

Customer churn rate → which is defined as 100% minus the customer retention rate.

Both retention and churn rates are defined on a monthly, quarterly, or annual basis. Retention rates
are also directly linked to the expected lifetime of a customer.

Example: Churn Rated in the US Wireless Industry

● No typical retention rate in marketing

● Retention & chun rates→ vary
dramatically by industry & by company
within a industry
● 2n quarter T-Mobile’s chin rate was +
than 2,5 times that of Verizon
● In financial services → chun rates for
checking accounts are much lower than
credit churn rates, which can be as high as 30% per year

Example: Churn Rates by Industry and Country

Retention and churn rates can vary

dramatically by industry and by company
within an industry.

For example, in the second quarter of 2012,

T-Mobile’s churn rate was more than 2.5
times that of Verizon.
In financial services, churn rates for checking accounts are much lower than credit card churn rates,
which can be as high as 30% per year.

Culture and competition within the

industry affect norms around
customer defection.

The churn rates of the Internet and

mobile phone industries in Europe are
about two to four times that of the
European credit card industry, while
the reverse pattern is true for the
United States.

The US credit card industry churn rate is almost twice the churn rate of the mobile phone industry
(see slide).

Contractual settings → easy to determine customer churn rate, because a customer has to cancel a
contract in order to end the relationship with the company.

Non-contractual settings → much harder to know churn rates.

Customer retention rate is critical for the long-run health of a company. If a company has a 70%
retention rate, it loses almost one-third of its customer base every year. Put differently, the firm has
to undertake the costly acquisition of its entire customer base almost every three years

CLV and Churn Rate Reduction

● The single most important metric for

determining the value of cloud computing
companies because customer retention is
the main driver of CLV
● Retention rate improves 50-70% → average
customer lifetime grows from 2 to 3 years
● Small increase retention rate → large
increases in expected lifetime and CLV
● 5% reduction in churn → increase customer
lifetime value by 35-95% across a number of industries

Preventing Customer Defection XAVI

Given the importance of customer retention, how can organizations prevent defection?

Diagnose the reasons for defection

- Dissatisfied switchers - poor experience with the company

- Deliberative switchers - better options elsewhere
 - Lifestyle switchers - external reasons (e.g., moving out of the area of their utility company, or
outgrowing their initial need, such as when their baby no longer needs diapers)

Design an early detection system to predict defection : A detection system is a forward-looking

program to predict which customers are likely to defect in the future.

Create programs to target defectors: short-term incentives to encourage customers to stay

Reasons for customer defection

● Split of customer defection types across different industries

● Most customer defection arises from customer lifestyle changes, such as moving out of a
bank’s geographic region in industries like retail deposits (accounts in retail banking)
● Addressing lifestyle switchers can be expensive → involves dramatically changing the product
offering or geographic markets
● In groceries & apparel, deliberate switchers dominate customer defection, reflecting highly
competitive environment

Net Promoter Score (NPS)

● Method to diagnose customer sentiment that goes beyond traditional masure

● Allows organizations to learn the extent to which the customer is willing to spread positive
word of mouth
● Measurement → firm starts by surveying a sample of customer base with the following
○ Questions on scale 0 -10, how likely are you to recommend your company
○ Calculated by subtracting the % of detractors from the % of promoters

NPS Respondents

Respondents fall into three groups:

● Detractors (0–6) → unhappy with the company. Not only will they likely defect, but they also
might spread negative word of mouth. If the company cannot improve the relationship in a
way that makes economic sense, it should not acquire these kinds of customers in the future.
● Passives (7–8) → neither enthusiastic about nor dismayed with the company. They might stay
in the short term, but they could defect to a competitor in the future.
● Promoters (9–10) → delighted with the company and loyal to its products and services. They
also spread positive word of mouth, encouraging their friends to use the company.

Customer Development

As a rule, it costs eight to ten times more to acquire a new customer than to sell additional products
and services to an existing customer.
Achieving growth from existing customers:

- Share of wallet:

Imagine that you have a credit card from BBVA. The bank tracks your purchases and evaluates your
lifetime value to determine how much investment it wants to make in you compared with other
customers.

Estimating customers’ share of wallet is challenging. Companies rarely know how much their
customers spend with competitors. Some industries have third-party data vendors who collect
information from various companies and aggregate it into industry-level reports. This provides a high-
level view of competition, but it does not give insight into each individual customer’s wallet share.

You may spend $10,000 per year on credit cards but use your BBVA credit card for only $1,000 per
year of purchases. Bob may also spend $1,000 per year on the BBVA card, but perhaps he spends only
$2,000 per year on all cards, including the BBVA card. This additional information shows that BBVA
has only 10% of your share of wallet while it has 50% of Bob’s share of wallet. So even if Bob and you
spend the same amount of money with the bank, your upside potential is much higher.

One possible way to estimate wallet share is to conduct a survey with a small sample of your customers
to get information on their share of wallet; then you can use this information to deduce share of wallet
for your entire customer database by using sophisticated model

- Cross-selling and upselling

- Redefining the business

A third way that organizations foster growth is by expanding into adjacent categories to deepen their
relationship with their existing customers.

Customer and firm value INES

Customer metrics such as CLV are relevant not just to marketing departments. Because cost reduction
and investment decisions affect customer value, organizations also use customer metrics to inform
financial and strategic decisions. Perhaps that is why CFOs and senior executives are also paying more
attention to customer metrics to drive company value.

For example, the former CFO and subsequent CEO of Rackspace, Lanham Napier, organized a number
of customer-focused initiatives and reduced customer churn by onethird. And the finance group at
Philips, the global conglomerate, regularly benchmarks its customer metrics against competitor peers
in relevant sectors.
As important as CLV is to customer management, recall that it is a metric applicable to the individual
customer level only. Customer equity, on the other hand, is a firm-level metric that summarizes the
entire customer base. It represents the total CLV across all existing and future customers. Because
customers are the source of profit for a company, customer equity is a good proxy for company value.
During the first dot-com bubble in the late 1990s, when it was hard to estimate the value of Internet
companies, researchers used customer equity to assess the value of several companies and found a
fair approximation for some, but not all, of them (see above). Customer equity gave the poorest
estimate for successful companies such as Amazon and eBay, partly because they grew at an
accelerated pace that outstripped the growth assumptions in the model. Later studies adapted this
approach to confirm the close relationship between customer equity and analysts’ estimates of firm
value (see following two slides).

Example: Customer Equity and Analysts’ Estimates

Orgs Structures around Product vs. Customers XAVI

Example: Customer Referral Value for CLV Declines

These social interactions could be direct, such as referrals, or indirect, as in the case of network effects.
They could involve friends through word of mouth or strangers via social media.

Two customers may have the same CLV but represent different value to the company if they have a
different impact through word of mouth.

One study polled 9,900 customers of a telecom firm to find out their referral intentions and then
tracked their behavior and the behavior of the prospective customers brought in through referral. It
then estimated the CLV of these customers as well as their customer referral value (CRV), or the total
value of their referrals. It concluded that the most valuable customers based on CLV were not the ones
responsible for the most referrals (see above). Those who made the most valuable referrals were
customers close to the median CLV. You can see that the top 10% of customers, ranked by CLV, had
an average CRV of only $40.

- Customers with both high CLV and CRV are most valuable, so organizations should target their
investment at retaining those customers.
- Customers with high CLV but low CRV should be encouraged to make more referrals.
- Conversely, those with high CRV but low CLV can be targeted for customer development
strategies to increase wallet share.

One way to encourage referrals is to provide incentives to customers.

Value of a free customer

What is the value of a free customer, such as a buyer at eBay or a job seeker at Monster?

Indirect network effects - exist when an increase in the size or usage of a product (e.g., video game
consoles) expands the range of complementary products (e.g., video games), which in turn increases
the value and usage of the original product

Sample Network of Cyworld Users

Our friends influence our purchase behavior—whether it is for music, an iPad, or clothes. In the age
of online social networks, it is even easier for people to share information with their friends.

Consider a sample network of the Korean social networking site Cyworld (see above). The person in
the middle of this network (labeled Point A) is well connected to many people around him. Even if this
person does not buy much from the company and has low CLV, he may still be highly valuable to the
firm, due to the potential influence he may exert on his friends.

Research has shown that adoption of an instant messenger app by a consumer is nine times as likely
if someone in this consumer’s network had already adopted this app. Adoption is fifteen times as likely
if two people in the consumer’s network had adopted the app. In other products, adoption probability
increased by three to five times due to social influence.

Social influence can also affect customer retention. A study of cell phone customers found that a
customer’s risk of cancellation increased by 80% if one of his or her friends had canceled the service
recently.

Measuring social influence is tricky because it is usually hard to separate this effect from homophily,
or the idea that people who are similar are more likely to know each other in a social network. If you
and your Facebook friend buy the same product, it may simply reflect that both of you have similar
preferences, rather than any kind of social influence.
In other words, similar tastes that made these people friends in the first place were responsible for
the results, not social influence. The distinction between homophily and social influence, therefore,
remains an active area of research in the social science

Example: Power of CRM - Canadian Banking Industry

What is Important to the Clients?

High Comfort - mutual benefit (reciprocity) Comfort - mutual benefit (reciprocity) -

- trust - understanding - ressaurance trust - understanding - ressaurance
Importance
to client 1-800 number - online banking 24x7 - ATM
access - convenient hours - short lines -
Low generic mail

Low Bank Proficiency at delivery High

We want to attract, develop & retain profitable relationships → moving from the 1rst to 2nd

What Clients Really want?

● Show me that you care

● That you appreciate and value my business
● Treat me as an individual, not a number
● Demonstrate to me you understand me, regardless of where, when i interact w/ you
● Though Challenge → How do you deliver?

Reinvesting in the business

Timeline on CRM capabilities introduced

Up to 1996 1997/1998 1999/2000 2001 2001

Real Time New & more Campaign eOffers via Online Pricing based on
operational client precise client management Banking. calient value.
information. value model. automation.
Enterprise client Client Preference
Client and Life Stage data warehouse. and Choice -
account Segmentation enterprise
information and Potential. Business Markets consent and
available data mart solicitation
internally online. First client integrated into management.
strategies and data warehouse.
Client profitability automated leads
model & to the desktop. Contract centre
segmentation. queuing based on
Automated client value.
New sales decisions.
 routines and
processes. Retention
management.
Implemented
industry leading Client
Marketing data risk/collection
mart. management.

Re-designed sales
and service
desktop
supporting new
sales routines.

Average Client Profitability 2000-2002

Cross-Enterprise Clients are the Most Profitable →Example Banking cross.enterprise clients

Average profitability per Online Brokerage Banking Private Client Division

client

3 Relationships $8x

2 Relationships $5X $5X

Single Relationships $.4X $X $X

● Profit potential of clients who deal with the company across platforms
● Average profit per personal client using only 1 service → $40-$100 range
● Client uses 3 services → profit jumps to 8-15 times and if they use Business Banking services,
average profit doubles again to just over $1.600
● The economics of achieving bank’s goal of undisputed leader provider of integrated financial
services in Canada are very compelling
● Broadening the client relationship across business also increases client loyalty
● Clients who us 2 or + platforms → more likely to recommend the company to others
How do we further grow client relationships across the businesses? → doing 3 things

1. Developing & implementing a common client segmentation framework

2. Use that framework, excellent customer information & collective know-how to develop &
implement integrated, targeted value propositions
3. Ensure those value propositions, will satisfy the needs of the targeted client groups in a
profitable, sustainable way

Bank Client Segmentation Framework

Segment strategy - Strategic Codes → client risk / profitability / segment code / vulnerability
/commitment / consolidation, current potential / lifetime value, channel preference

Tactical Codes → Propensity to buy & growth models, product attrition models, activation models

CSS Desktop - Glance INES

CSS Desktop - Proactive Lead List XAVI

Relationship pricing model

foto no posem

Relationship pricing model INES

Relationship Marketing XAVI

Product Execution

Product Execution INES

Segment Focus and Product Superiority

The flight of the Canadian Snowbird → you guide part-time in the US

Cross-Border Snowbirds

● Speak to bank’s Snowbird clients to understand their most important needs

● They wanted to “replicate their Canadian banking experience while they were in Florida” →
Technically and Emorrionaly
● They want a worry free stay → not to worry about high cost of medical care in the US
● Integrated US Banking & Travel Insurance offer that is unique in the Canadian market
● Service solution → dedicated 1-800# for Snowbirds to deal with all cross-border banking and
insurance needs
● Bank sales in Florida eager to give Canadians a warm welcome

T8: IDENTIFYING MARKET SEGMENTS AND TARGETS

STP - Segmentation, Targeting and Positioning

● Segmentation → Group customers based on similar needs. Profile each segment.

● Targeting → Assess attractiveness of each segment. Select segments to target.
● Positioning → Define value proposition for target segments. Develop an action plan.

Recognizing differences in customer preferences & needs when designing product offerings. The
marketing process of STP identifies a firm’s potential customers, selects which customers a firm
should pursue, and formulates its value proposition for its target customers.

● Marketing → 2 questions: Which customer will we serve? & How will we serve them?
● Goal→ create more value for the customers we serve than competitors do.

4 steps in designing a customer-driven marketing strategy:

● 1. Select customers to serve:

○ Segmentation → Divide the total market into smaller segments
○ Targeting → Select the segment or segments to enter
● 2. Decide on a value proposition:
○ Differentiation → Differentiate the market offering to create superior customer value
○ Positioning → Position the market offering in the minds of target customers.
Example: Segmentation Hypertension Patients

McKinsey conducted a study to understand the attitudes of people with hypertension (high blood
pressure) toward the disease in order to improve their compliance with treatment. Using a survey of
810 patients, McKinsey uncovered six patient segments, based on their attitudes and self reported
adherence to medication regimens.

● Proactive patients (24%) → who actively managed their health and considered medication
critical to controlling their blood pressure.
● skeptics (17%) → who did not trust their physicians and did not consider high blood pressure
a serious condition.

Concerned patients were more likely to respond to information about their medication’s safety, while
the compliance of confident patients was influenced more by programs that reward consistent, long-
term usage. This insight can help pharmaceutical companies and policy makers design better programs
to improve drug adherence.

Bases for Segmenting Consumer Markets

Segmentation → Separation of a heterogenous group of customers with different needs into

homogenous subgroups or segments of customers with similar needs and preferences.

● Without segmentation companies will often overlook opportunities as they continue to

provide a single solution for everybody.
● Informs a company about potential new opportunities.
● Firms do not create segments, they only uncover them.

Benefits of segmentation

Benefits to the Organization Benefits to the Customer

Sustainable Profit Growth Compelling Customer Experiences

Identification of unfulfilled needs Convenience and time savings

Better product design Tailored products and services
More targeted promotions Relevant offers
Increased customer satisfaction Personalised experience

Effective Segmentation Criteria

● Measurable → Identify customers in each segment & measure their characteristics, such as
demographics or usage behavior.
● Substantial →the segment is large enough for a firm to serve profitably. Is useless for an
automobile manufacturer to develop cars for people who are under four feet tall.
● Accessible → Segment needs to be reachable through communication & distribution
channels independent of other segments.
 ● Stable → A segment should be stable over a long enough period of time that any marketing
effort would be successful and profitable. For example, lifestyle is used as a variable but the
stability appears to be low.
● Differentiable → Consumers in a segment should have similar needs, & these needs should
differ from the needs of consumers in other segments. Segments are distinguishable &
respond differently to different marketing mix elements and programs.
● Actionable → Create products and marketing programs for attracting and serving customers
in the segments identified.

Identifying Segments: Cluster Analysis

Cluster analysis → method to group customers based on a set of variables so that customers in one
group are similar to each other but are different from customers in another group.

Example: Segment customers based on their annual income & the amount of money they spent on
the company’s product last year, then we plot each customer in a two-dimensional space.

Attempts to group these customers & determine the number of clusters or groups so that the distance
between two customers in a cluster is small, but the average distance between the two groups is large.
Cluster A is the group of customers with low incomes but high expenditures on the company’s
products, while Segment C represents high-income consumers who spend relatively less on the
company’s products.

Identifying Segments: Preference-Based Segments

● 1st approach: Multi-attribute model → asks consumers about their preferences for a variety
of attributes that a manager may consider relevant for their purchase decision.
○ Example: in choosing a mobile phone, consumers may consider the brand, screen
size, data storage capacity, etc. A survey would then ask consumers to divide 100
points across these attributes in the order of importance, and then group consumers
with similar preferences. As a result, we may find that 30% of consumers find price to
be the most important variablen and so on.
● 2nd approach: Conjoint analysis → Forces consumers to make tradeoffs between several
pairs of products that differ on a carefully designed combination of attributes.
○ Example: would you choose a house with a large kitchen but a small backyard or a
similar house with a small kitchen but large backyard? Your choice tells researchers
about your preferences and what you consider more important. Repeated paired
comparisons of this kind can be used to infer how a consumer weighs different
attributes. Consumers can then be grouped into different segments based on the
similarity of their preferences.

Bars → show the % deviation of a segment’s attribute importance from that of the average customer.
Identifying Segments: Response-Based Segmentation

Results based on customer-stated intentions in a survey or a conjoint experiment. It is simple if we

have a large data series to run a statistical analysis, such as regression analysis, to infer each individual
consumer’s price sensitivity, which in turn can be used as a variable in a cluster analysis for
segmentation.

Using data from many years is problematic, since consumer behavior may change over time. In such
cases we can use a statistical technique called latent class analysis that allows us to infer latent, or
hidden, segments from limited individual-level data.

Example: we randomly divide consumers into 2 groups and run a regression on each group separately
to assess its price sensitivity. We find that Group 1 is more price-sensitive than Group 2. We then go
back to each customer in Group 1 and statistically assess his or her chance of belonging to this group.
For example, if a customer has always bought at a regular price, she probably does not belong to the
price-sensitive Group 1. In such a case, this person is reassigned to Group 2, and the process is
repeated.

This iterative process converges to give us the appropriate allocation of consumers in the 2 groups
and the price sensitivity of the two segments. Since our choice of two segments was arbitrary, the
process is repeated with three or more segments, and statistical measures are used to assess the right
number of segments

Segmentation Variables for Consumer Markets

Geographic region Pacific Mountain, West North Central, West South Central, East North Central,
East South Central, Atlantic, Middle Atlantic, New England

City or metro size Under 5,000; 5,000-20,000; 20,000-50,000; 50,000-100,000; etc

Density Urban, suburban & rural

Climate Northern & Southern

Demographic age Under 6; 6-11; 12-17; 18-34; etc

Family size 1-2; 3-4; 5+

 Family life cycle Young, single; young married, no children; young married, youngest child
under 6; etc

Gender Male & Female

Income Under $10,000; $10,000-$15,000; $15,000-$20,000; etc

Occupation Professional and technical; manager, officials, and proprietors; clerical sales;
etc

Education Grade school or less; some high school; high school graduate; some college;
college graduate; post college

Religion Catholic, Protestant, Jewish, Muslim, Hindu, Other

Race White, Black, Asian, Hispanic, Other

Generation Silent Generation, Baby Boomers, Gen X, Millennial

Nationality North American, Latin American, British, French, German, Italian, etc

Social class Lower lowers, upper lowers, working class, middle class, upper middles, lower
uppers,etc

Psychographic Culture oriented, sports oriented, outdoor oriented

lifestyle

Personality Compulsive, gregarious, authoritarian, ambitious

Behavioral Regular occasion, special occasion

occasions

Benefits Quality, service, esconomy, speed

User status Nonuser, ex-use, potential user, first time user, regular user

Usage rate Light user, medium user, heavy user

Loyalty status None, medium, strong, absolute

Readiness stage Unaware, aware, informed interested, desirous, intending to byu

Attitude toward Enthusiastic, positive, indifferent, negative, hostile

product

Geographic Segmentation units → Nations, states, regions, counties, cities or neighborhoods.

Firms can operate in 1 or a few areas or operate in all but pay attention to local variations. In that way
it can tailor marketing programs to the needs and wants of local customer groups in trading areas,
neighborhoods, even individual stores.

Regional marketing → marketing right down to a specific zip code. Nielsen Claritas has developed a
geo clustering approach called PRIZM that classifies residential neighborhoods into distinct groups
and lifestyle segments called PRIZM Clusters. The groupings take into consideration 39 factors in five
broad categories. The clusters have descriptive titles.

Example: Nelson PRIZM Cluster

● Young Digerati → nation’s tech-savvy singles and couple living in fashionable neighborhoods
on the urban fringe. Affluent, highly educated, and ethnically mixed, they live in areas typically
filled with trendy apartments and condos, fitness clubs and clothing boutiques, casual
restaurants, and all types of bars—from juice to coffee to microbrew.
● Beltway Boomers → huge baby boomer cohort—college-educated, upper-middle-class, and
home-owning—is Beltway Boomers. Like many of their peers who married late, these
boomers are still raising children in comfortable suburban subdivisions and pursuing kid-
centered lifestyles.
● The Cosmopolitans → Educated, midscale, and multiethnic, the Cosmopolitans are urban
couples in America’s fast-growing cities. Concentrated in a handful of metros—such as Las
Vegas, Miami, and Albuquerque—these households feature older homeowners, empty
nesters, and college graduates. A vibrant social scene surrounds their older homes and
apartments, and residents love the nightlife and enjoy leisure-intensive lifestyles.

Demographic Segmentation

● Age and life cycle stage → Our wants and abilities change with age. People in the same part
of the life cycle may still differ in their life stage.
● Life stage → Defines a person’s major concern, such as going through a divorce, going into a
2 marriage, taking care of an older parent, deciding to cohabit with another person, buying a
new home....
● Race and culture → Multicultural marketing: approach recognizing that different ethnic and
cultural segments have sufficiently different needs and wants to require targeted marketing
activities and that a mass market approach is not refined enough for the diversity of the
marketplace. These markets are all growing the rate of a non-multicultural population.
● Gender → Men and women have different attitudes and behave differently. Women are more
communal-minded and men more self-expressive and goal-directed.
● Generation → Each generation is influenced by the times in which it grows up - the music,
movies, politics, and defining events of that period. Members share the same major cultural,
political, and economic experiences and often have similar outlooks and values. Marketers
choose to advertise by using the icons and images prominent in its experiences or try to
develop products & services that uniquely meet the particular interests or needs of a
generational target.
● Income → Income segmentation is a long-standing practice. Income does not always predict
the best customers for a given product.

Example: Segmenting US Millennials

● BCP → used consumer lifestyles to segment US millennials into 6 distinct segments

● Millennials often showed a strong affinity for technology, they differed markedly in their
attitudes and behaviours
 ● Firm has been able to identify & access these segments & be able to design distinct products
and marketing programs for each segment

Psychographics Segmentation

Buyers → divided into groups on the basis of psychological / personality, traits, lifestyle or values

● Psychographics → using psychology & demographics to better understand consumers

● People in the same demographic group can exhibit different psychographic profiles
● Fast-casual restaurant Panera caters to a lifestyle segment of people who want more than just
good-tasting food—they want food that’s good for them, too. To better meet the needs of
this healthy-living lifestyle segment, Panera recently announced that it would soon banish
more than 150 artificial preservatives, sweeteners, colors, and flavors from its food

Example: VALS Segmentation System

Strategic Business Insight’s framework → One of the

most popular commercially available classification
systems based on psychographic measurements

● Main dimensions → consumer motivation

(horizontal) & consumer resources (vertical)
● Consumers are inspired by one of 3 primary
motivations → idea, achievement, self-expression
● Those primarily motivated by ideals are guided by
knowledge and principles
● Those motivated by achievement look for products
and services that demonstrate success to their peers
● Consumers whose motivation is self-expression →
desire social / physical activity, variety and risk
● Personal traits such as energy, self-confidence,
intellectualism, novelty seeking, innovativeness, leadership, and vanity - in conjunction with
key demographics - determine an individual’s resources
● Different levels of resources enhance or constrain a person’s expression of his or her primary
motivation

Behavioral Segmentation

● Divide buyers into groups on basis of their knowledge of attitude toward, use of or response
to a product
● Some marketers fault it for being somewhat removed from actual consumer behavior
● Many believe that behaviour variables are the best starting point for building market
segments
● Occasion segmentation → segments divided according to occasion, when the buyers
○ Get the idea to buy
○ Make their purchase
○ Use the purchased item
 ● Companies tries to boost consumption by promoting usage during nontraditional occasions
○ Example: most consumers drink orange juice in the morning, but orange growers have
promoted drinking orange juice as a cool, healthful refresher at other times of the
day.
● Benefit segmentation → divided according to the different benefits that consumers seek from
a product
○ Example: to meet varying benefit preferences, Fitbit makes health and fitness tracking
devices aimed at buyers in 3 major benefit segments: Everyday Fitness, Active Fitness,
and Performance Fitness.
● Needs / benefits-segmentation → identifies distinct market segments with clear marketing
implications
● Decision roles in a buying decision → initiator, influencer, decider, buyer, user
○ Example: , assume a wife initiates a purchase by requesting a new treadmill for her
birthday. The husband may then seek information from many sources, including his
best friend who has a treadmill and is a key influencer in what models to consider.
After presenting the alternative choices to his wife, he purchases her preferred model,
which ends up being used by the entire family. Different people are playing different
roles, but all are crucial in the decision process and ultimate consumer satisfaction.

User and Usage-Related Variables:

● Occasions → mark a time of a day, week, month, year or other well-defined temporal aspects
of a consumer’s life. Distinguish buyers according to the occasions when they develop a need,
purchase a product, or use a product.
● User status → Every product has its nonusers, ex-user, potential users, first-time users, and
regular users. Included in the potential-user group are consumers who will become users in
connection with some life stage or event.
● Attitude → attitudes product: enthusiastic, positive, indifferent, negative and hostile.
● Usage rate → segment the market into light, medium and heavy product users. Heavy users
are often a small portion but represent a high percentage of total consumption.
● Buyer-readiness stage → Some people are unaware of the product, some are aware, some
are informed, some are interested, some desire the product, and some intend to buy. To help
characterize how many people are at different stages and how well they have converted
people from one stage to another, marketers can employ a marketing funnel to break the
market into buyer-readiness stages
● Loyalty status → marketers usually envision 4 groups based on brand loyalty status:
○ Hard-core loyals: Consumers who buy only one brand all the time
○ Split loyals: Consumers who are loyal to two or three brands
○ Shifting loyals: Consumers who shift loyalty from one brand to another
○ Switchers: Consumers who show no loyalty to any brand
Behavioral Segmentation Breakdown:

Combining different behavioral bases can provide a more comprehensive and cohesive view of a
market and its segments. The pic depicts one possible way to break down a target market by various
behavioral segmentation bases.

Bases for segmentation → group 3 segmentation variables into 3 categories

● WHO buys → Demographics, media habits, lifestyle

● WHAT they buy → Usage, loyalty, profitability
● WHY they buy it. → Needs, preferences, decision process

Example Segmenting the Dog food market: How would you segment the dog food market? Would you
segment the dogs, the owners, or both?

How should the business market be segmented? → Demographic / Operating variables / Purchasing
approaches / Situational factors / Personal characteristics

We can segment business markets with variables we use in consumer markets, such as geography,
benefits sought, and usage rate, but business marketers also use other variables

Demographic variables are the most important, followed by the operating variables - down to the
personal characteristics of the buyer.

Business Market Segmentation Variables

Demographic
1. Industry: Which industries should we serve?
2. Company size: What size companies should we serve?
3. Location: What geographical areas should we serve?

Operating Variables
4. Technology: What customer technologies should we focus on?
5. User or nonuser status: Should we serve heavy users, medium users, light users, or nonusers?
6. Customer capabilities: Should we serve customers needing many or few services?

Purchasing Approaches
7. Purchasing-function organization: Should we serve companies with a highly centralized or
decentralized purchasing organization?
 8. Power structure: Should we serve companies that are engineering dominated, financially
dominated, and so on?
9. Nature of existing relationships: Should we serve companies with which we have strong
relationships or simply go after the most desirable companies?
10. General purchasing policies: Should we serve companies that prefer leasing? Service contract?
Systems purchases? Sealed bidding?
11. Purchasing criteria: Should we serve companies that are seeking quality? Service? Price?

Situational Factors
12. Urgency: Should we serve companies that need quick and sudden delivery or service?
13. Specific application: Should we focus on a certain application of our product rather than all
applications?
14. Size or order: Should we focus on large or small orders?

Personal Characteristics
15. Buyer-seller similarity: Should we serve companies whose people and values are similar to ours?
16. Attitude toward risk: Should we serve risk-taking or risk-avoiding customers? 17. Loyalty: Should
we serve companies that show high loyalty to their suppliers?

Example business segmentation:

Key Customers Pime Customers

Decision Making

Primary decision Nurses Administrators

maker

Purchase drivers Patient satisfaction Necessity

Physician requirements Low maintenance costs
Return on investment Low risk, low liability

Deciding factor on Performance Reliability

brand Patient outcomes and safety Ease of use
Caregiver safety Price

Product preferences

Product configuration HIgh-end to moderate Moderate to low-end

System or Stand-alone System Stand-alone

Replacement cycle Shorter Longer

Required response
times: Shorter Longer
Product service Longer Shorter
Shipment lead time
Steps in segmentation process:

Steps Description

1. Need-Based Segmentation Group customers into segments based on

similar needs and benefits sought by customers
in solving a particular consumption problem.

2. Segment Identification For each needs-based segment, determine

which demographics, lifestyles, and usage
behaviors make the segment distinct and
identifiable (actionable).

3. Segment Attractiveness Using predetermined segment attractiveness

criteria (such as market growth, competitive
intensity, and market access), determine the
overall attractiveness of each segment

4. Segment Profitability Determine segment profitability

5. Segment Positioning For each segment, create a “value proposition”

and product-price positioning strategy based on
that segment’s unique customer needs and
characteristics.

6. Segment “Acid test” Create “segment storyboard” to test the

attractiveness of each segment’s positioning
strategy.

7. Marketing-Mix Strategy Expand segment positioning strategy to include

all aspects of the marketing mix: product, price,
promotion, and place.

Market Targeting

Market segmentation → firm’s market segment opportunities. Evaluate the various segments and
decide how many and which segments it can serve best.

1. Segment size and growth

2. Segment structural attractiveness → Strong & aggressive competitors or if it is easy for new
entrants to come into the segment, actual or potential substitute products, the relative power
of buyers, and powerful suppliers
3. Company objectives & resources → attractive segments can be dismissed because they do
not mesh with the company’s long-run objectives.

Selecting target market segments → After evaluating different segments, the company must decide
which and how many segments it will target.

Target market → Set of buyers who share common needs or characteristics that the company
decides to serve. Market targeting→ carried out at several different levels
Example: Jaguar Land Rover Seminar Case

Selecting Market Segments → 3 factors should influence the selection of segments:

1. Characteristics → various segments, how large & fast they are growing, and how profitable
they are likely to be.
2. Company Fit → Consider its own competencies and resources that are available to address
the needs of the different segments. (Objectives, competences, resources)
3. Competition → Current & potential competition in each segment (strengths, intensity and
resources)

Market-Targeting Strategies → Possible levels of segmentation that can guide their target market
decisions.

● Undifferentiated (mass) marketing: Full market coverage, a firm attempts to serve all
customer groups with all the products they might need. Only very large firms such as
Microsoft, General Motors & Coca-Cola can undertake a full market coverage strategy..
● Differentiated (segmented) marketing: Target several market segments & designs separate
offers for each. P&G markets at 6 different laundry detergent brands in the US which compete
with each other on supermarket shelves. Multiple segments
● Concentrated (niche) marketing: Firm gains deep knowledge of the segment’s needs and
achieves a strong market presence by specializing its production, distribution, and
promotion.The firm can earn a high return on its investment. Marketers identify niches by
dividing a segment into subsegments. Single segments
● Micromarketing (local or individual): “segments of one,” “customized marketing,” or “one-
to-one marketing.” As companies are better at gathering information about individual
customers and business partners and their factories are more flexible, they increase their
ability to individualize market offerings, messages, and media.

Mass customization → ability of a company to meet each customer’s requirements - to prepare on a

mass basis individually designed products, services, programs, and communications.

One - To - One Marketing → D. Peppers & M. Roger made 4 step for individual marketing

1. Identify your prospects and customers

2. Differentiate customers in terms of their needs and value to your company
3. Interact to improve your knowledge about customers’ needs and to build relationships
4. Customize products, services, and messages to each customer

Choosing a Targeting Strategy → Factors to consider for the market-targeting strateg:

● Company resources: firm’s resources are limited → concentrated marketing

● Product variability : The degree the company have of product variability
● Product’s life-cycle stage
● Market variability : If most buyers have the same tastes, buy same amounts, and react the
same way to marketing → undifferentiated marketing is appropriate
 ● Competitors’ marketing strategies: When competitors use differentiated or concentrated
marketing → undifferentiated marketing can be suicidal

Legal and Ethical Issues → Some consumers resist being labeled, market targeting also can generate
public controversy.

Marketers must avoid backlash

● Labeling consumers: Elders, Singles, Married, ...

● Vulnerable groups : Children
● Disadvantaged groups : such as inner-city residents
● Potentially harmful products

From Segm. & Targeting to Strategy Formation → the process can influence an organization’s
resource allocation and marketing strategy

● Product: Gap Inc. has mapped out a product-line strategy based on its consumers’ shared
values of being urban and fashionable, but has differentiated its offerings based on age,
aspirations, and income. While Gap’s apparel is moderately priced, clothing at Old Navy, its
sister store, is aimed at younger people and is even more affordable. Gap Inc.’s top-end
clothing store, Banana Republic, is aimed at people with even higher incomes and aspirations.
● Pricing : Airlines segment their customers into leisure and business travelers. Leisure travelers
→ price-sensitive, business travelers → care more about schedule, frequent flier miles, and
the ability to book at the last minute. It is difficult to identify leisure or business travelers
based on demographics or similar variables.
● Communication : Knowing the target audience for a product helps advertising agencies design
appropriate ads and choose the right media. Companies → reach younger audiences are
investing more advertising dollars into digital and mobile channels.
● Sales force and Channel str: Business-to-business companies often segment their customers
based on the volume of transactions and their potential value to the firm, as we saw earlier in
the case of Hill-Rom, the healthcare equipment manufacturer.
● Customer management strategies: Airlines’ loyalty programs reward their best customers by
offering them free upgrades, lounge access, and priority boarding.

T9: VALUE PROPOSITION AND POSITIONING

Brand positioning → art of staking out a particular piece of mental real estate for a brand in the
consumer’s mind by crafting and communicating a differentiated positioning statement.

● Provides a strategic roadmap for creating powerful, resonant, and unique messages to help a
company’s products and services stand out.

Making Choices → stake a particular claim of superiority that resonates with a particular type of
consumer.

● Beyond these functional differences, each brand tells its own unique story.
 ● The consumer’s choice will depend on how strongly she perceives that a particular brand
offers the best solution to her needs.
● A company’s deep understanding of its customers is the key to creating a value proposition
that allows consumers to perceive a product as a differentiated solution that meets their
specific needs, rather than as a commodity.
● The problem does not lie with the products themselves, but exists within the minds of
consumers.

“Positioning is not what you do to a product, is what you do to the mind of a prospect”

● Important to measure in positioning → brand positioning’s actual result - how consumers

catalog, classify, and remember a brand
● A brand’s position represents its location vis-à-vis its competitors in the mental maps that
consumers construct to represent the range of possible solutions to their problems
● Positioning → act of designing a company’s offering and image to occupy a distinctive place
in the minds of the target market.
○ Strong brand positions are powerful because they help consumers categorize brands
by their similarities and distinguish and differentiate brands based on their
differences.
● Position→ cold-hearted, no-nonsense statement of how you are perceived in the minds of
your prospects. A positioning statement, by contrast, expresses how you wish to be perceived.

Crafting a Positioning Statement

● Positioning statements answers the question → “Why should I buy?”

● Positioning statements → strategic in nature, developed for an internal managerial audience
● Beginning of brand positioning process → strategic document that communicates the unique
value the brand would offer to a particular target market segment.
● Provocative positioning statements can make the difference between a brand’s getting lost
in the sea of choices and standing out as the best solution for the consumer.

Example → Hertz (car rental) → Busy professionals (target customers) → Value proposition: Fast,
convenient way to rent the right type of a car at an airport.

Competitive Frame of Reference → Defines a brand’s competition and which should be the focus of
competitive analysis.

● Identifying and analyzing competitors

● Decisions linked to target market decisions → deciding the target can define the nature of
competition because certain firms have decided to target that segment
● A good starting point in defining a competitive frame of reference → category membership
○ Sets of products with which a brand competes and that function as close substitutes.
● Gather info about each competitor’s real and perceived strengths and weaknesses.
4 Essential Components of a Positioning Statement

For whom, for when, for where? → Description of the target market segment that helps consumers
easily discern which brands directly address their needs and which don’t.

What value? → Description of the unique value the brand offers, written from the customer's
viewpoint. What the brand is known for. 4 types of value that customers can drive:

● Economic → tangible monetary savings either at purchase or over long-term use

● Functional → comparing products consumers often consider these different features
● Experimental → buying products from the intangible psychological and emotional values
associated with the brand
● Social → consumers drive social values from products or services

Why and how? → Evidence that provides consumers with reasons to believe brand claims. From
logical arguments, scientific and technological data, consumer testimonials ...

Relative to whom? → Description of the competitive set in which the brand classifies itself and the
alternatives consumers may be considering. Helps customers establish a frame of reference for the
purchase decision. Can either help consumers classify the brand as similar to other brand or product
categories they are familiar with or differentiate it as something different.

Unique Selling Proposition (UPS)

● Positioning statement should focus on a single, most important claim that distinguishes the
product from the competition rather than attributes, benefits, values offers
● Simple messages → increase brand recall and receptivity
● Unique selling proposition (UPS) → a type of value claim that offers a prospective customer a
specific, unique and superior reason to purchase a product

Examples → Domino’s Pizza: “You get fresh, hot delivered to your door in 30 min or les or its free”

The three Cs Model of Brand Positioning

It encourages managers to analyze three key dimensions of their market situation before deciding on
a single most important claim regarding their product or service.

Consumer analysis Competitive analysis Company analysis

Relevant Distinctive Feasible

Resonant Defensible Favorable
Realistic Durable Faithful

Relevance → Established by clearly specifying a target market in the positioning statement and
aligning the value claim with the specific needs of that target market.

Creating Resonance → Strong value claims should resonate with consumers, providing them with a
narrative that feels personally meaningful. And those can be made at 3 levels:
 ● Feature or attribute claims→ focus on a special feature, ingredient, or capability of the
product or service (“What’s in it?”)
● Benefit-based claims → focus on the specific benefits customers receive from using the
product or service (“What’s in it for me?”)
● Value-based claims → focus on helping consumers achieve the values they hold to be
important (“Why is it important to me?”)

Laddering up from feature-based claims to value-based claims can increase brand resonance.
Resonant value claims address consumers’ deep-seated needs. They offer the meaning required for
living in consumers’ unique cultural space and time.

Positioning statements → can be so resonant that they constitute symbols of the values of a particular
subculture at a particular historical moment.

Examples of Resonance

Harley-Davidson’s “No Cages” H-D1 Commercial → It achieved iconic status by positioning its
motorcycles as an antidote to the tedium and lack of adventure that comes with being an upstanding
citizen and professional.

Apple’s “1984” Macintosh Commercial → It achieved its iconic status by positioning its brand to
creative types who felt stifled by the uniformity and conformity of the yuppie-fueled 1980s.

Being realistic → Strong value claims should be realistic, many use exaggerations or other kinds of
overstatement that makes their claims less believable. Sometimes emotional or social evidence is
more effective than hard, scientific evidence.

Being Distinctive

● Unique attributes → Something that only one competitor has

● Shared attributes → Things in common with competitors
● Irrelevant attributes → Distinguish characteristics of the product that provide consumers with
no actual economic, functional, experimental or social value.

Points of parity (POP) → attribute/benefit associations that are not necessarily unique to the brand
but may in fact be shared with other brands. These features don’t usually make a brand stand out.

Points of difference (POD) → attributes/benefits that consumers strongly associate with a brand,
positively evaluate, and believe they could not find to the same extent with a competitive brand. These
features make a brand stand out. Strong brands often have multiple points-of-difference.

POD Criteria → 3 criteria determine if a brand association can function as a point-of difference:

● Desirable → Consumers must see the brand association as personally relevant to them.
● Deliverable → internal resources and commitment to feasibly and profitably create and
maintain the brand association in the minds of consumers. The product design and marketing
offering must support the desired association.
 ● Differentiating → Consumers must see the brand association as distinctive and superior to
relevant competitors.

POP Forms

● Category → attributes or benefits that consumers view as essential.

● Correlation →potentially negative associations that arise from the existence of positive
associations for the brand.
● Competitive → associations designed to overcome perceived weaknesses of the brand in light
of competitors’ points-of-difference.

POP vs. POD

Straddle two frames of reference with one set of POD & POP. .POD for one category becomes POP for
the other and vice versa. Straddle positions → expand their market coverage and potential customer
base.

Challenge positioning → benefits that make up POP and POD are negatively correlated..

Low price vs. High Taste vs. Low Powerful vs. Safe Ubiquitous vs. Varied vs. Simple
quality calories Exclusive

Leveraging POD → 2 strategies allow managers to leverage their product or service’s:

● Vertical positioning →attributes that are shared among brands, but stresses a particular
brand’s superior performance on those attributes, using words such as smaller, faster, and
cheaper to delineate a natural pecking order.
● Horizontal positioning → adding new attributes, benefits, or values to attract customers.

Perceptual Mapping → Visually represent the positions of brands, which provides a visual image of
consumers’ mental landscapes.

● Graphical representation of how consumers perceive the brands in a product category.

● Allows managers to identify gaps in the market, represented by pieces of mental real estate
to which no brand has yet laid claim.
● Construct a perceptual map by observing the artifacts of their daily interactions with brands
(from online forums, blogs, and product reviews)
 Example: Text-Mining and PM of the Car Industry

They’ve used text-mining processes and semantic network analysis

that collects brand-related content from the web and positions
brands spatially based on patterns of occurrence.

Nilsen’s Brand Association Mapping (BAM)

Brand association maps → type of perceptual map that are generated from the data, where the
proximity of words to each other indicates their statistical correlation.

The Nielsen Company → has developed a tool that scans the web for consumer conversations about
brands and then plots the words and phrases that most closely correlate with a particular brand.

Analyzing a Perceptual Map → Strategic questions for managers

What real estate do we/competitors claim? Which is more valuable?

Which brands come closer to our location? How crowded is the space in which we are
positioned?

Which areas of the map are not claimed by any How valuable are these areas?
brand?

Choosing a Defensible Terrain → think about which competitors must be overcome and whether the
company has the resources to occupy and hold that position over time.

● Patents and trademarks / Being first (becoming “the original”) / Authenticity of brands /
Outspending competitors /Focusing on benefits rather than on features and attributes (as for
quick competitive imitation)

Being Durable brand positions → appeal lasts over prolonged periods of time, providing continuity to
a brand.

Being Feasible → Being able to deliver against their own positioning statement.

● Managers should assess the feasibility of various positioning statements to determine which
ones the company can actually deliver against in its everyday practices.

Greenwashing labelling → at every customer touch point and during every customer interaction, the
positioning statement must be consistently and reliably delivered. If not they can be accused of
“greenwashing.”
Being Favorable → create a direct and reinforcing link between what it says and what it does.

● Managers should evaluate favorability of various value claims to judge which ones allow the
company to capture more value in the marketplace.
● Revenue → some positioning statements may offer the firm the opportunity to capture more
value, while others may offer less.

Being Faithful → An authentic brand demonstrates genuineness in the claimed position; its
messaging, assertions and behaviors are all supportive and aligned.

Brand-Positioning Bull’s-Eye → communicate brand positioning strategy to everyone in the

organization, so it guides their words and actions → brand-positioning bull’s-eye.

● Which consists on the Brand mantra in the centre followed by POPs & PODs, Substantilatorsa
and Values / Personality / Character / Executional Properties / Visual Identity

A brand’s position is often co-created, with its owner, its customers, and other cultural influences
working together to generate meaning that differentiates the brand from its competitors.

Positioning Differently

● Reverse Positioning → Sometimes brands succeed by stripping away the expected points of
parity in their product category and offering consumers something less, and, at the same time,
something more in their positioning statements. This is known as reverse positioning.
● Breakaway positioning → When brands find themselves stuck in low-opportunity product
categories, breakaway positioning provides a way to escape by leaping into a new category.
● Stealth positioning → Sometimes product or service categories become tainted. Consumers
become wary to purchase products in categories where they have previously been
disappointed by unsatisfactory performance or intimidated by the technical expertise
required. To overcome such difficulties, stealth positioning allows brands to conceal the true
nature of their products by associating them with a different category

Positioning practical hints:

Positioning essentials → 4 required essentials to establishing rock-solid brand positioning

● Your audience → Who is your demographic? What are their pain points?
● Your market → What is your market category? And, how does your brand better relate to
your audience, in comparison to your competition?
● Your brand promise → Think back to your audience’s pain points and then ask yourself, how
does your brand solve those problems? In the eyes of your audience, what are the greatest
benefits your brand offers?
● Your evidence → What irrefutable evidence can you offer to demonstrate that your brand
delivers on its promise?

Brand positioning formula: For [your audience], [your brand] is the [your market] that best delivers
on [your brand promise] because [your brand], and only [your brand], is [your evidence].
Best practices:

Craft your value proposition first: focuses on the benefits your customers receive by using your
products or services and touches on the emotional impact of your brand. Positioning statement →
company’s “why” & what differentiates your brand from your competitors. Use value proposition →
convey why your brand is the leader.

Your positioning statement should be in tune with your brand personality: If your brand is fun-loving,
lighthearted, and not-too-serious, your positioning statement should also reflect these qualities.

You can have more than one positioning statement: for each market segment or brand persona, as
each segment or persona may experience a different primary benefit from working with your brand .
Serve as a guiding force behind all marketing messaging targeting those personas. Brands multiple
products → positioning statements for each product, as well as an positioning statement that fits the
brand archetype for the company

Your positioning statement should serve as a guideline that business decisions can be measured
against: By evaluating messaging, strategies, and other activities and decisions in the context of the
brand positioning statements, you can ensure that all decisions and actions are in line with your brand.

How to Evaluate your Brand Positioning Statement: →. Before you sign off on what you’ve written,
ask yourself the following questions:

● Will it help inform your marketing ● Does it motivate your audience?

decisions? ● Is it easily understood?
● Does it effectively differentiate your ● Will it stand up to your competitors?
brand? ● Is it unique? (Is it different from your
● Is it believable? competitors’ brand positioning?)
● Is it flexible enough to allow for growth ● Is it memorable?
over time? (In other words, does it ● Can you OWN it?
position your brand for long-term
success?)
● Does it paint a clear mental image?
● Does it speak directly to your core
audience?
● Is it consistent, across all aspects of your
brand?

Again, if you can’t answer “yes” to all of these questions, then circle back and refine your statement
until you can.

Examples: → Walt Disney World: does branding so well, it hardly needs to brand itself anymore. Every,
single piece of collateral goes back to their brand promise: magically making your dreams come true.
From the moment you drive in, you know: You’ve arrived at the most magical place on Earth. Here,
your dreams are about to come true.

Brand repositioning

Changing the position of a brand in the minds of consumers vis-à-vis its competitors—can be achieved,
although it requires convincing consumers to rewire the web of associations they already have with
the brand

The four components of the positioning statement point the way how to do it:

● For whom, for when, for where: Changing the target market, expanding the usage situation,
or finding new places where consumers can purchase or consume the product can often be a
way to increase sales.
● What value: Most repositioning efforts involve adding new value claims to resonate with
changing consumer needs. Managers need to be careful that new claims do not conflict with
or undermine the brand’s existing meaning, but rather build on it.
● Why and how: New-product development efforts often yield improved products and services.
A brand repositioning can leave the fundamental value claim in place, but offer more
persuasive evidence through the inclusion of a new ingredient or upgraded feature.
● Relative to whom: Sometimes brand repositioning involves comparing the product or service
to a new set of competitors. Here, the brand’s managers redefine the playing field.

Successful brand positioning→ find ways to seamlessly fit into consumers’ lives

● Paying attention, perceiving, and persuading.

● More about its consumers and the jobs they need to have done.
● More about how the various aspects of the product or service enhance the daily lives of
consumers.

Example: Evolutionary Brand Repositioning → Gillette wanted to reposition itself as a men’s grooming
product company so it used an evolutionary approach. Starting from its strong razor base, Gillette
used brand extensions to first launch shaving creams to get a toehold into the skin care category.

Repositioning Identity Brands

● Identity brands allow consumers to create and recreate themselves by communicating

important things about their masculinity, femininity, social class and status, level of
intelligence, personal wealth, cultural capital, and other aspirational attributes. Existing
customers may feel that their personal identity is threatened, particularly when they view new
value claims or new target markets as undesirable.
● Gender-bending, a strategy for repositioning a brand that has historically targeted one gender
to attract the other Ex: Porsche
Dangers of Repositioning Identity Brands

● Existing consumers will leave the brand because it is no longer communicating the identity
they wish to present
● Existing consumers will fight against the brand’s repositioning by co creating their own
meaning for it, thereby changing its position in the minds of other consumers
● Existing customers will stay with the brand, but devalue it due to its loss of identity signaling
power → Existing customers will struggle with the new identity meanings associated with the
brand and how it reflects on them. This may cause them to lower the price premium they are
willing to pay for the brand and may make them question their loyalty to it.
● New customers will not be attracted to the repositioned brand because the memory trace of
the old brand positioning is too strong and unappealing .

Mitigating Risk Associated with Repositioning

● Strategic use of brand architecture → Managers can mitigate some of the risks associated
with repositioning existing brands through this strategy.
● Launching a sub-brand → To reach out to new target markets, others use their existing brand
as an endorser brand. Example: Marc Jacobs
● Launching a new brand → To position an existing brand’s products to a new audience.
Example: Coca- cola → Diet Cola for men: Coke Zero

Value Proposition Explained

The value propositions building block describes the bundle of products and services that create value
for a specific customer segment

Values may be quantitative or qualitative:

- Newness - Price
- Performance - Cost reduction
- Customization - Risk reduction
- “Getting the job done” - Accessibility
- Design - Convenience/usability
- Brand/status
 T9: UNDERSTANDING VALUE AND POSITIONING - PART 2

Customer value

Four Types of Customer Value

Understand the needs of its customers and create products and services that will satisfy those
customers or even delight them. This process can be:

● Market-driven → whereby a firm uncovers the needs of its customers through market
research.
● Market driving → whereby the company creates new products based on its own vision of the
future.

Managers need to understand what customers value that will encourage them to pay for an
organization’s products or services.

Value → difference between what a customer pays for a product or service and the bundle of benefits
she receives. Ways to obtain value:

● Economic value → when a product provides tangible monetary savings either at the time of
purchase or over its long-term use.
● Functional value → when comparing many products consumers consider not only the price
but also different features.
● Experiential value → intangible psychological and emotional value that can be derived from
brands or great service.
● Social value → The value of Facebook comes from sharing information, pictures, and videos
with friends. Many restaurants and cafés provide customers with good food and drink as well
as a place to meet friends.

Determining the true economic benefit of a product → look at the costs and savings involved.

The basic idea of economic value, then, is to consider the total cost of ownership or life cycle cost. This
is the cost of owning a product over its entire useful life.

Economic Value to the Customer

Example: Laptops - Funcional Value → We have the 4 brands and for each their model name, retail
price, processor name, weight
Example (cont.): Multi-Attribute Model

IMPORTANCE OF ATTRIBUTE

40% 30% 10% 20%

Hard Disk RAM Weight Pice Preference

HP 10 8 4 8 8.4

Lenovo 10 10 4 6 8.6
BRAND

Dell 4 6 8 5 5.2

Sony 4 6 10 3 5.0

Preference for brand 𝑗 = ∑𝑛 (𝑖𝑚𝑝𝑜𝑟𝑡𝑎𝑛𝑐𝑒 𝑎𝑡𝑡𝑟𝑖𝑏𝑢𝑡𝑒 𝑖) · (𝑟𝑎𝑡𝑖𝑛𝑔 𝑏𝑟𝑎𝑛𝑑 𝑗 𝑜𝑛 𝑎𝑡𝑡𝑟𝑖𝑏𝑢𝑡𝑒 𝑖)

Marketing implications → Lenovo is Anton’s preferred brand and Sony the least preferred one. What
can an organization do to improve its value offering to consumers? → In this case Sony:

● Assess why its laptop rates so low - Hard Disk storage and RAM → The issue is a technical
problem that likely requires redesign of the product to improve it.
● launch a campaign that includes comparative advertising to bring down rates of competitors.
● Try to change consumers’ minds about the importance of various attributes like weight.
● Find and target a different segment of consumers who view the weight as more important
(i.e. travelers)
● Bring to customers’ attention an entirely new attribute that currently has no importance (i.e.
great customer service)

Limitations

● This model is compensatory → high rating on an attribute can compensate for a low rating on
another. → consumers use a non-compensatory approach, where they would not consider a
brand unless it meets a minimum threshold.
● Other models exist to account for the behavior of consumers → conjunctive model → if
consumer does not choose prod unless it meets min. threshold level on all attributes.
● Easy for researchers to conduct the studies, but hard for consumers to answer.
● New methods developed → conjoint analysis → provides description of 2 laptops and asks
consumers to choose one. The process is repeated + statistical analysis.

It is critical to recognize the difference between features and benefits.

● Features → what a product offers / Benefits → what customer gets from features.

When companies focus too much on features and not benefits, they create a features war.
Experimental Value → Create experimental value through:

● Branding → quality, status, and image that represent physiological value for customers.
Brands allow firms to charge premium prices.
● Design → of products & stores.
● Customer experience & customer services → source of significant competitive advantage.

The Service Profit Chain

How can organizations hope to close that gap between their perception of good service and
customers’ actual experience of satisfaction? The answer may lie with employee satisfaction. An
influential Harvard study introduced the concept of the service-profit chain, which demonstrated the
link among employee satisfaction, customer satisfaction, customer loyalty, and customer profitability
(above).

Employee satisfaction is a necessary condition for delivering superior customer service. Employee
satisfaction results from high quality support services and policies that enable employees to deliver
value to customers. Organizations that wish to improve customer service and experience should
consider attending to the needs of their front-line employees, along with their product offering and
how they manage customers.

Front-line employees (least compensation and the least amount of training) are responsible for
delivering superior customer experience. The lack of training and incentives → annual turnover rate
of over 100% among these employees in many industries (retailing and hospitality).

The problem → the way these employees are hired. While most companies hire frontline employees
based on their skills and aptitude, some business scholars argue that frontline employees should be
hired for attitude instead of aptitude. Their people skills are far more critical than their technical
knowledge of the product.

Ex Herb Kelleher, co-founder and former CEO of Southwest Airlines, believed that finding employees
who have the right attitude is so important that Southwest’s hiring process takes on a “patina of
spirituality”, he also believed that “anyone who looks at things solely in terms of factors that can
easily be quantified is missing the heart of business, which is people.” The key to retention in the front
line also lies in the level of respect, training, and benefits employees are given.

EX: Starbucks employees → special title—baristas—and its part-time employees are offered health
insurance and stock options.

Increased competition → firms respond by adding features to their products and introducing a large
number of items to fill their product line.

Example, banks offer complex products. Therefore, the quality and treatment of front-line employees
can play a large role in how well customers receive and understand an organization’s product offering.
Commerce Bank (now part of TD Bank), have chosen to offer fewer product lines in order to focus
front-line training on delivering excellent customer service, low wage → not credible that they are
well trained for big things

The experiential value that a customer perceives in a product or service is tied to the way the
organization manages its customers. Technology allows organizations to reduce costs by offloading
more tasks to customers

Example: banks encourage customers to do online banking instead of coming to a branch, airlines ask
travelers to print their boarding passes at home, and retailers have self-checkout lines at stores.

These tasks have to be simple to ensure a positive customer experience.

Emotional Benefits

Important experiential value aspect → emotional benefit that customers perceive in the products and
services they use. The role of marketing and advertising is not only to convey information about a
product or service’s features but also to build an emotional bond with customers to create long-term
loyalty.

Value created through emotions is difficult for competitors to imitate and provides a competitive
advantage to firms in the long-run.

Example, in 2012, Procter & Gamble (P&G) created an advertising campaign called “Thank You, Mom”
to honor the mothers of Olympic athletes of the London Summer Olympics. This campaign recognized
moms (P&G’s target audience) who had toiled for years to encourage and support their children in
pursuit of their athletic achievements.

Recognizing that many athletes have parents that do not have the financial resources to see their sons
and daughters compete in the Olympics, P&G funded their travel and related expenses. It also created
special pavilions with beauty lounges stocked with free P&G products, a Pampers village for younger
siblings, and a family room for entertainment. This campaign was supported with social media and
created an enormous amount of exposure for P&G, resulting in billions of media impressions,
significant pride among employees, and a large increase in P&G’s favorability scores. The company
also reported substantial incremental sales due to this effort. The goal of this endeavor was not to
promote the economic or functional benefits of P&G’s products but to build an emotional bond by
showing that P&G cares for its customers

Few business scholars would argue against the idea that superior customer service is critical for
customer satisfaction and customer retention; several studies have shown the link between customer
retention and both customer profitability and firm value. That link is perhaps even more critical today,
given the increasing power of social media and word of mouth in consumer decision making.
Therefore, organizations want to improve the experiential value of their offerings by ensuring that
customers are highly satisfied and become advocates of their brands

Social Value

Network effects -rapid scale, sharable features:

We live in a networked society, many of the benefits we derive are based on our social interactions
with family and friends. How can organizations enhance the value of their products and services to
customers in a socially connected world?

The value of a social network such as Facebook, a video phone feature such as FaceTime on an iPhone,
or a text messaging app such as WhatsApp is limited if you are the only one who has that service or
app. The more people use these services, the greater the value to you, the customer. In other words,
many products and services have strong network effects, where the value of a product or service for
a customer increases significantly as more and more customers adopt it.

Example: websites such as YouTube become destination sites as more and more people visit them,
encouraging other consumers to upload their videos, which in turn provides even more positive
feedback to viewers who visit YouTube.

This virtuous cycle provides an increasing return to scale to these companies, so that they effectively
become dominant players. In such cases, rapid scale (e.g., offering free product) and shareable
features (e.g., sharing files in Dropbox) to encourage virality are critical for success.

Preference formation:

We assume that consumers have strong preferences for attributes that allow them to evaluate
products to match their needs. Research shows, however, that in many cases consumers’ preferences
are constructed and heavily influenced by their peers

Example: One study illustrates how social influence affects a user’s preference for music. In this study,
more than 14,000 participants were presented with 48 songs by unknown bands. Participants could
listen to as many songs as they wanted and were allowed to download the ones they liked. They were
randomly assigned to one of two experimental conditions: independent, where they saw only the
names of the bands and songs, and social, where they also saw how many times a particular song was
downloaded by previous participants. The number of previous downloads was experimentally
manipulated so that different songs were shown to be more popular in different tests. The study found
that “popular” songs (as manipulated by the researchers) became even more popular, regardless of
which song was artificially made popular.
Another Example: Another study further documented this type of herding behavior on a social news
aggregation website, where users contribute news articles and other users vote on these contributions
using a thumbs-up or thumbs-down icon. The collective voting behavior of users determines the
relative ranking of articles on the site. In this study, the researchers randomly assigned more than
100,000 submitted comments to three conditions: up, down, or the control group. The up-treatment
comments were artificially given an up-vote (a +1 rating), the down-treatment comments were
artificially given a down-vote (a −1 rating), and the control comments were left as they were. The study
found that prior ratings created a significant bias in users’ ratings behavior. Specifically, negative social
influence inspired users to “correct” manipulated ratings; however, positive social influence increased
final ratings by 25% on average. Recognizing that consumers often have weak preferences when it
comes to some products, companies such as Netflix and Amazon have designed recommendation
systems to help consumers choose movies and books.

Social capital:

First, when users benefit from the content of a site (e.g., by reading a restaurant review on Yelp), they
want to reciprocate over time by making a similar contribution. Second, by offering suggestions for
improvement or new ideas, users feel empowered and important to a company’s operations. Third,
many consumers build social capital through these activities.

Example: Yelp and TripAdvisor offer badges to their elite reviewers. Yelp even hosts special parties
for its Elite Squad. And Facebook and Twitter users, of course, are often judged by others by how many
friends or followers they have—a social pressure that ultimately benefits these companies by bringing
even more traffic to the site

Social relationships: Consumers use social networks such as Facebook and other platforms to build
and strengthen relationships. In turn, firms can offer products and services to enhance the social
relationships of their users.

Example: In 2010, eBay introduced the Group Gifts feature, where people can pool funds to buy gifts
for friends. American Express developed OPEN Forum to host conferences for small-business owners.
The OPEN Forum site was such a hit that the company launched a members-only social network called
Connectodex, where small-business owners can list services they offer or need and get advice from
each other. In two years, more than 15,000 small businesses joined the network
The Elements of Value Pyramid

Example: Value Proposition Canvas - XAVI

Bringing it all together - Value and the STP Model

The STP Model

SEGMENTATION TARGETING POSITIONING MARKET POSITIONING

Set objectives Evaluate segment Identify sources of Design marketing mx

attractiveness and differential advantage
Group market using select target segments Deploy resources
relevant variables Create desired
Develop personas positioning strategy
Profile segments

The Role of Segmentation in M. Strategy

Benefits of Segmentation
Segmentation Bases and Variable by Market

Segmentation Brief Description Consumer Markets Business Markets

Base

Demo/ Grouping market units by Age Industry vertical

firmographic categorical, descriptive Gender Size
characteristics: answers “who” Incom Performance
questions Occupation Structure
Marital Status Ownership
Family life cycle Years in business
Education Customer type
Socio-economic status Technology

Geographic Grouping units in the market Region Region

using variables tied to location: Country Country
answers “where” questions Geospatial data Density
Market Size Infrastructure
Population density Regulations
Climate Language
Environmental
context
Language

Psychographic Grouping market units using Motives Buyer motives

psychological, sociological & Personality traits → Organizational
anthropological variables: openness, need for personality
answers “why” questions variety Values
Valies Attitudes
Attitudes Interests
Interests

Behavioral Grouping market units based Role Purchase approach /

on past or predicted behaviour; Purchase occasions decision procedures
answers “how“ questions Customer value Occasion
Usage rate User status
Readiness stage Usage rate
Shopping patterns Readiness stage

Payment patterns Payment patterns

Media consumption Industry engagement

Benefits Grouping market unit based on Needs Needs

sought the underlying utility or need Utility Utility
driving decisions: answers Jobs-to-be-done Jobs-to-be-done
“what” questions
Empowered Customer Segmentation Framework

Segment Profile Characteristics

Progressive Pioneers Heavy online shoppers, heavy reliance on technology, willing to try
new technologies, expect seamless digital experiences,
comprehensive information consumption skills, opportunity-seeking
mindset, high spending power, cord-cutters streaming entertainment
online.

Savvy Seekers Information junkies, receptive to brand-driven and peer-generated

online content, active social media users, comfortable with digital
payment methods, high levels of digital media consumption.

Convenience Conformers Willing to experiment, high need for technology, high expectations for
seamless digital experiences but lack information savviness and self-
efficacy Prefer mainstream, simple digital services that enhance
convenience but are not innovators or early adopters.

Settled Survivors Average reliance on technology, unlikely to adopt emerging

technologies, most use traditional retail stories and payment
methods.

Reserved Resisters Highly risk-averse, lowest interaction with digital information

resources, rarely shop online, unlikely to use digital services
experience innovation, tend to be older with lowest income.

The segmentation Procedure

There are six main stages in the segmentation procedure, as shown in the slide.

Step 1: identify the objectives guiding the segmentation analysis, segmentation objectives may be:

- Strategic segmentation can inform an organization's mission and strategic focus by identifying
fundamental needs in the market.
- Managerial segmentation guides resource allocation and marketing planning.
- Operational segmentation focuses on the execution of the marketing mix.

Step 2: Identify segmentation variables relevant for project scope

The basis and their variables to tie back to the internal and external influences on buyer behavior.
Thinking about which of these bases and variables are influential in the customer journey is
instrumental in choosing the right variables for segmentation. Segmentation can be based on
potentially hundreds of variables or in a single behavioral indicator. Any variable could be used as a
basis to segment the market, but the result will only add value if the variables are relevant to the
marketing objectives.

EXAMPLE: Identify new product concepts, segmentation on needs and benefits sought will be
relevant; For pricing decision - price sensitivity, deal seeking, and value perception; for the advertising
decisions - media usage data, lifestyle, and benefits sought; for distribution decisions - online shopping
behaviors and store preferences. The variables chosen should differentiate among segments based on
their response to marketing variables (e.g., buyers versus non buyers, deal seekers versus brand
loyalist, etc.). Variables that describe key characteristics like demographics can be useful for profiling
segments. Benefits sought and psychographics are valuable → variables hard to observe.
Demographic/firmographic variables are easy to observe but have little meaning.

Step 3: Identify data sources and collected data

Three types of data exist:

1. First-party data is captured over the course of a direct relationship with the customer as part
of a company's customer relationship management system.
2. Second-party data is obtained through a direct relationship with the not competitive brand
partners, such as Google or Facebook. This is essentially another company's first party data
shared in an aggregated anonymized format.
3. Third-party data, sometimes called compiled data, is off the shelf data that can be purchased
from data aggregators such as credit agencies.

Besides these traditional data types, deterministic data identifies a single user across a range of
situations, devices (e.g., tablet, mobile phone, laptop) and environments (web browser, mobile app,
social media website). Primary data may also be collected using surveys specifically for use in its
segmentation analysis. Hybrid segmentation utilizes multiple data sources drawn from a combination
of different types of consumer data to build a picture of the market.

Step 4: Analyze data

Data is analyzed to produce segments that are homogeneous within each segment and heterogeneous
between segments with respect to the chosen segmentation variables. The specific analytic
techniques used will vary depending upon the segmentation objectives, variables, and data formats.
Typical analytical techniques for segmentation include cluster analysis, factor analysis, and enjoys
modeling.

Step 5: identify and profile segments

The segments produced by the data analysis will be identified and profiled to provide information on
the size of the segment, expected growth and profit potential, and other information that will be
useful as the company evaluates the segments as possible target markets. The profiles provide the
information necessary for selecting the segments to targets.

Step 6: Column assess segmentation effectiveness and re-analyze if needed

The final step is to assess the effectiveness of the segmentation analysis. Even if the objectives were
successfully met, there may be value in segmentation re-analysis to extract additional insights to guide
marketing decisions
Observability and Segmentation Bases

Targeting Approaches

Undifferentiated / Differentiated / multi- Differentiated / Differentiated / micro-

mass marketing segment concentrated / niche segment /
individualized

← BROAD NARROW →

● Identifiable / Substantial / Accessible / Durable / Differentiable / Actionable

Buyer Persona

Buyer persona → snapshot of a prototypical customer in the target segment. It tells the buyers story
using the information you used for segmentation. Provides a composite sketch of the desired target
market.

Creating journey maps for each persona highlights aspects of the customer experience that can be
designed to perform better at the moments of truth.
Digital analytics facilitates targeting micro-segments and even segments of one by applying predictive
modeling to target profile data, ranking prospects by value and responsiveness, and selecting optimal
targets.

Targeting choices and understanding the characteristics and preferences of the target segment is key
to every subsequent decision that marketers make about the marketing mix.

Positioning Bases

The final step in the STP model is positioning. Positioning is the process of designing a brand’s offer
and meaning to occupy a specific place relative to the competition in the mind of the target market.
Just as the segmentation analysis informed selecting and profiling of the target segments, knowledge
of the needs, preferences and, and characteristics informs the positioning strategies. A positioning
strategy should differentiate the brand from the competition and create and reinforce desirable brand
associations. It answers the question: “ “What do we want the target segment to perceive about the
brand, relative to the competing brands ? “

Specifying the positioning strategy requires identifying a competitive frame of reference and the
brand’s points of differentiation (PODs) relative to the desires of the target segment. The competitive
frame of reference is the set of brands offering substitutable products and competing for the target
markets business. Brands typically have points of parity as well. Points of parity (POPs) are attributes
that are similar across competitors and considered necessary to compete in the product category.

Differentiation involves creating differences in the brands offer that sets it apart from the
competition. These differences make up the points of differentiation, the brand associations that are
perceived as unique relative to the competition. They provide a differential advantage. When a POD
is a tangible characteristic, it is called a unique selling proposition. For instance, Estee Lauder anti-
aging products feature Moringa extract as an exclusive key ingredient. You can think of the place
where the brand's point of differentiation meets the target market's desires as the positioning sweet
spot. We see this in the four Ds used to select the brand attributes to feature as points of
differentiation in a positioning strategy:

● desirable to the target market

● deliverable by the brand
● different from competitors, and
● durable (sustainable) over time

Positioning statements communicate the strategy to internal audiences who make marketing
decisions and includes 4 elements:

● target market / product category or competitive frame of reference / key benefit / reasons to
believe the benefits claim

Positioning strategy → related to the value proposition, an assertion of the reasons for the target
market should choose the brands offer. It articulates the brand's most enduring and valuable benefit.

Positioning strategy & value proposition → expressed to the target market in the form of a tagline or
slogan, a short and memorable phrase that captures the essence of the brand promise. “Aveeno’s
tagline is “naturally beautiful”.

Example of a Positioning Map / Perceptual map

Identifying open positions in the competitive frame & clarifying possible POD. The position map →
competing brands based on their respective positions on 2 dimensions.

It requires 3 steps:

1. Define the market (competitive frame reference) & relevant needs of the target market
2. Choose the 2 dimensions,
3. Plot the positions of each competing brand
 T10: SETTING PRODUCT STRATEGY

Empathy Mapping

Empathy Map

Collaborative visualization used to articulate what we know about a particular type of user. It
externalizes knowledge about users in order to:

● Create a shared understanding of user needs

● Aid in decision making

Provides a glance into a user as a whole and are not chronological

or sequential.

Says → contains what the user says out loud in an interview or

some other usability study. Ideally, it contains verbatim and
direct quotes from research.

Thinks → captures what the user is thinking throughout the

experience. Ask yourself (from the qualitative research
gathered): what occupies the user’s thoughts? What matters to
the user? It is possible to have the same content in both Says and
Thinks.

Does → enclose the actions the user takes. From the research, what does the user physically do? How
does the user go about doing it?

Feels → the user’s emotional state, often represented as an adjective plus a short sentence for
context. Ask yourself: what worries the user? What does the user get excited about? How does the
user feel about the experience?

It is natural (and extremely beneficial) to see juxtaposition between quadrants. You will also
encounter inconsistencies — for example, seemingly positive actions but negative quotes or emotions
coming from the same user. This is when empathy maps become treasure maps that can uncover
nuggets of understanding about users. It is job of professionals to investigate the cause of the conflict
and resolve it

Level of Application: Empathy maps can capture one particular user or can reflect an aggregation of
multiple users:

One particular user: One-user (individual) empathy maps are usually based on a user interview or a
user’s log from a diary study.

Aggregated empathy maps represent a user segment, rather than one particular user. They are usually
created by combining multiple individual empathy maps from users who exhibit similar behaviors and
can be grouped into one segment. The aggregated empathy map synthesizes themes seen throughout
that user group and can be a first step in the creation of personas. However, empathy maps are not a
replacement for personas. But they can be one way to visualize what we know about a persona in an
organized, empathetic way

Aggregation of multiple users: Aggregated empathy maps can also become ways to summarize other
qualitative data like surveys and field studies. For example, an empathy map can be used to
communicate a persona, instead of the traditional ‘business card’ approach. As more research is
gathered about that persona, you can circle back to the empathy map and add new insights or remove
those that have changed or been invalidated.

Why Use Empathy Maps

● Establish ground among team members & to understand & prioritize user needs
○ User-centered design → empathy maps used beginning of the design process
● Capute who a user / persona is → helps distill & categorize your knowledge of the user
○ Categorize & make sense of qualitative research (survey)
○ Discover gaps in current knowledge and identify the research needed
○ Create personas by aligning and grouping empathy maps covering individ users.
● Communicate a user or persona to others → source of truth throughout a project & project
it from bias or unfounded assumptions
● Help us build empathy with our end users
● Remove bias from our design & align the team on a single, shared understanding of user
● Discover weaknesses in our research
● Uncover needs that user themselves may not even be aware of
● Understand what drivers users’ behaviors
● Guide us towards meaningful innovation

Example: Empathy Map for Buying a TV

How to Build an Empathy Map

1. Define scope and goals

a. What user or persona will you map? Persona or individual user? Always start with 1:1
mapping (1 user/persona per empathy map).
b. Define your primary purpose for empathy mapping. Could be to align the team on
your user, analyze an interview transcript...
2. Gather materials → your purpose should dictate the medium you use to create an empathy
map. In group - whiteboard, sticky notes, markers. Alone - system that works for you.
3. Collect research → gather the research you will be using to fuel your empathy map. As this
mapping is a qualitative method, you will need qualitative inputs: user interviews, field
studies, dairy studies, listening sessions, or qualitative surveys.
4. Individually generate sticky notes for each quadrant → mapping as a team. Each member
can fill out sticky notes that align the 4 quadrants.
5. Converge to cluster and synthesize → team moves through stickies on the board
collaboratively and clusters similar notes that belong to the same quadrant. Name clusters
with themes that represent each group. Clustering facilitates discussion and alignment, goal -
arrive at a shared understanding of your user by all team members.
6. Polish and plan → adapt the map including additional quadrants or increasing specificity to
existing ones if you need more detail or have unique needs. Include user, outstanding
question, dte and version number. Plan to circle back to the empathy map as more research
is gathered or guide UX decisions.

Design Thinking

The Designer Paradox

How the How the How the How the What the beta How the
customer project leader analyst programmer testers business
explained it understood it designed it wrote it received consultant
described it
Design Thinking

"Design thinking is a human-centered approach to innovation that draws from the designer's toolkit
to integrate the needs of people, the possibilities of technology, and the requirements for business
success."

What is Design Thinking?

- Design thinking takes a human-centered approach to problem solving

- Helps us to get a deep understanding of customers’ unmet needs and wants
- It encourages creative consideration of a wide array of innovative solutions
- It is as much a mindset as a process

Three Lenses of Human-Centered Design

1. Desirability → What do people desire?

2. Feasibility → What is technically and organizationally feasible?
3. Viability → What can be financially viable?

Combining Creative and Analytical Thinking

Design Thinking → As a style of thinking, design thinking is generally considered the ability to combine
empathy for the context of a problem, creativity in the generation of insights and solutions, and
rationality to analyze and fit solutions to the context.

Left Brain Right Brain

Analytical Creative
Rational Holistic
Objective Subjective
Present & Past Present & Future
Facts Feelings
Order/pattern Spatial
Planned Spontaneous

What Design Thinking is NOT?

● Only for the “creative” people or product designers

● A narrow equation to aesthetics and craft
● Just a brainstorming session
● A “one-day” process where problems can be solved in 24h
● A process to replace analytical problem-solving
● A silver bullet for all types of problems

Benefits of Design Thinking

● Complements other problem-solving techniques

● Helps organizations to become more innovative
 ● To solve human problems
● To increase customer satisfaction
● To gain competitive advantages

What is Unique About Design Thinking?

Design thinking → Human-centered - Interactive - Highly creative - Hands - on

Industrial Applications of Design Thinking

Launched the mobile payments app Retail stores designed around

(alternative to the SB card). activities, not products.

Stores lines move 10-20% faster Most profitable retail store per
square foot.

Launched Tide PODS so Changed product-based model to a

customers don’t have to cloud-based subscription model.
measure.
Creative Cloud software revenue
Estimated earning of $131 million increased by 44% since 2013
in 2012

Framework of Design Thinking

Learn Brainst
about orm Build a
the and
Create representa
audienc come Share
a point tion of one
e for up with your
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Understanding the Framework of DT

Design action plan → series of action phases that execute the design thinking process

Mindset → set of thinking traits or behaviors that runs the design thinking process consistently and
effectively.

Action Plan and Mindsets → required to run together!

Desired Traits of a Design Thinker

● Able to step into the shoes of your customers

● Have empathy on users and stakeholders
● Like to challenge the status quo rebelliously
● Able to ask the right questions - even to your boss
● Draw and sketch instead of typing an email
● Like to collaborate in multidisciplinary meetings instead of working in silo
● Able to look at the big picture and think holistically
● Generate many new ideas and not afraid to share
● Find and reiterate alternatives to approach your desired goals
● Willing to fail early and often

Summary of 5 Thinking mindsets

Ideation method

Divergent and Convergent Thinking

Summary of the Design Action Phases

Phase Activities Tools to use Deliverables

Empathize User interview Interview checklist Persons

Informal charts Observation checklist Empathy map
Observation Writing tools List of user feedback
Shadowing Flipcharts and paper Problems identified
Mystery shopping Camera
Picture-taking
Immersion

Define Workshops Drawing and writing tools Design Brief

Shareholder meetings Post its Stakeholder map
Whiteboard Context map
User feedback Customer journeys
(empathize) Opportunity map

Ideate Ideation activities Drawing & writing tools Ideas / concepts

Brainstorming Post-its Sketches
Workshops Flipchart / Whiteboard Prioritization map
Mind Maps Personas Affinity map
Sketching Design brief Idea evaluation
Brainstorming tools
Empathy Map Example

Desired Traits of a Design Thinker → “Insanity is doing same thing over and over gain and expecting
different results”

Example: Sports Activity Vehicle (SAV)

Structured creative problem-solving process, but enables

innovation and positive impact.

Human-centered design process - truly understand and

empathize with user.

Process Model

● Challenge assumptions and the status quo

● Be curious and question everything
● Divergent thinking: Quantity over quality
● Never criticize ideas or evaluate them a while generating!
● Defer judgement and instead build on ideas of others
● Wild ideas are encouraged
● Look for analogies or inspiration from nature
● Be visual - draw / sketch to communicate
● EMPATHY - how would our customers use / feel / interact with / experience our prod?

Example persona - Francine

● Travels to client venues / sites regularly

● Typically has to drive or take an Uber / Lyft
● Unable to continue working during travel (sometimes 60+ mins) due to lack of workspace
● Shared Autonomous Vehicles proposes an opportunity to continue working
● Public transportation and Uber / Lyft does not allow the privacy required
● Very likely to use SAV regularly
User Journey Mapping

Problem Space

How might We

Produce “How Might We….” statements to address the pain points to address the pain points and
areas of opportunity that you’ve identified.

● Cluster the HMWs into themes

Individual Ideation: Rapid Fire

On a piece of cardstock, sketch 8 different ideas to address your

HMW statement (1min per idea)

If you get stuck, try applying some constraints

Individual Ideation: Brain Writing

● Each person has 3 min to jot down ideas about sources for vehicle heading that currently
exist
● After 3 min is up, pass your paper to your right person
● That person has 3 min to add their own ideas and flesh out ones already on the page
● Repeat this process until everyone gets their original paper back

Group Ideation: Speed Mapping

● Write your opportunity in the middle of the page

● Use 3 levels of brainstorming to produce new ideas
○ 1: Preliminary ideas (1 min) 2: Expan ideas (3min) 3: Add some details (3min)
● To refine ideas,ask yourself “how” or “what would this look like”
● It is ok if you don’t do all 3 levels for each branch
● Timer 8 min → group have 1 mon to generate 8 solutions to the how might we settle upon
earlier
● Not finished → idea after the minute is done move to the next box however if they finish a
box early tell them to jump ahead

Group Ideation: Reverse Thinking

● List the WORST possible ways that you

ensure heading integrity.
● Examine how you could reverse these bad
ideas to create the best possible solutions

Set a timer for 8 min, group members have 1 min intervals to generate 8 different solutions to the
HOW MIGHT WE settled upon earlier. Let them know when each minute is up. If they are not finished
with their idea after the minute is done, move on to the next box. However, if they finish a box early
tell them to jump ahead.

Group Ideation: Industry Swap

● What it’s good for:

○ Brainstorming new ideas as a group
● How it works
○ Create template
○ Choose company known for high customer
satisfaction
■ Apple, IKEA, Starbucks, Amazon…
● Brainstorm ways that another company would
tackle your problem
 ● Think of how similar solutions could be applied for GM

Group Ideation: Group Brainstorming

How can the AV experience be customized?

- Gather around a whiteboard with stickies and sharpies

- Present some ideas that have been proposed
- As a team build on the ideas in the form of “Yes and…”
- Do not use “No and But”

Products

Learning Objectives

● What are the characteristics of products, and how do marketers classify product?
● How can companies differentiate products?
● Why is product design important, and what are the different approaches taken?
● How can marketers best manage luxury brands
● What environmental issues must marketers consider in their product strategies?
● How can a company build and manage its product mix and product lines?
● How can companies combine products to create strong co-brands or ingredient brands?
● How can companies use packaging, labeling, warranties, and guarantees as marketing tools?

Product Characteristics and Classifications

Product - anything that can be offered to a market to satisfy a want or need, including physical goods,
services, experiences, events, persons, places, properties, organizations, information, and ideas. Many
people think a product is tangible, but this definition suggests otherwise.

Components of the Market Offering

Marketing planning begins with formulating an offering to meet target customers’ needs or wants.
The customer will judge the offering on three basic elements: product features and quality, service
mix and quality, and price.
Product Levels: The Customer-Value hIerarchy

In planning its market offering, the marketer needs to address five

product levels. Each level adds more customer value, and together
the five constitute a customer-value hierarchy.

Core benefit → the service or benefit the customer is really buying.

A hotel guest is buying rest and sleep.

Basic product → a hotel room includes a bed, bathroom, towels,

desk, dresser, and closet.

Expected product → set of attributes and conditions buyers

normally expect when they purchase this product. Hotel guests minimally expect a clean bed, fresh
towels, working lamps, and a relative degree of quiet.

Augmented product → the marketer prepares an augmented product that exceeds customer
expectations. In developed countries, brand positioning and competition take place at this level.

Potential product → encompasses all the possible augmentations and transformations the product or
offering might undergo in the future. Here companies search for new ways to satisfy customers and
distinguish their offering.

Product Classifications

● Durability
● Tangibility
● Use

Durability and Tangibility

● Nondurable goods → tangible, consumed 1 or few uses (shampoo / beer)

○ Purchased frequently, make them available many locations, change only a small
markup, advertise heavy to introduce trial and build preferences
● Durable goods → tangible, many uses (refrigerators, machine tools, clothing)
○ Require more personal selling & services, command a higher margin, & require more
seller guarantees
● Services → intangible, inseparable, variable, require more quality control, supplier credibility
and adaptability (haircuts, legal advice, appliance repairs)

Consumer-Goods Classification

● Convenience → frequently, immediately and minimal effort, without any planning

○ Soft drinks, soaps, newspaper
● Shopping → we compare on such bases as suitability, quality, price & style
○ Furniture, clothing, major appliances
○ Homogeneous → similar in quality but different in price to justify comparison
 ○ Heterogeneous → differ in product feature, may be more important than price
● Specialty → unique characteristics / brand identification for which enough buyers are willing
to make a special purchase effort
○ Cars, audio.video components, men’s suit
● Unsought → consumer does not know about or normally think of buying
○ Smoke detectors, life insurance, cementary plots, gravetones

Industrial-Goods Classification

We classify industrial goods in terms of their relative cost and the way they enter the production
process:

● Materials and parts → goods that enter the manufacturer’s product completely
○ Raw materials
■ Farm products (wheat, cotton, livestock, fruits, and vegetables).
■ Natural products (fish, lumber, crude petroleum, iron ore).
○ Manufactured materials and parts
■ Component materials (iron, yarn, cement, wires)
■ Component parts (small motors, tires, castings)
● Capital items → long-lasting goods that facilitate developing or managing finished prod
○ Installations
■ Building (factories, offiees)
■ Heavy equipment (generators, drill presses, mainframe computers, elevators)
○ Equipment
■ Portable factory equipment and tools (hand tools, lift trucks)
■ Office equipment (desktop computers, desks) → not part of finished good
● Supplies and business services → short-term goods and services that facilitate developing or
managing the finished product.
○ Business services:
■ Maintenance and repair items (paint, nals, brooms)
■ Business advisory services (legal, management consulting, advertising)
○ Supplies:
■ Operating supplies (lubricants, coal, writing paper, pencils)

Maintenance and repair items + operating supplies → MRO goods

Product Differentiation

● Form → size, shape, physical structure.

● Features → that supplement basic function.
● Performance quality → level at which product’s primary characteristics operate: low, average,
high, or superior.
● Conformance quality → degree to which all produced units are identical and meet promised
specifications.
● Durability → product’s expected operating life under natural or stressful conditions.
● Reliability → probability that a prod will not malfunction or fail within a specified time.
 ● Repairability → ease of fixing a product when it malfunctions or fails.
● Style → product’s look and feel to the buyer. Creates distinctiveness hard to copy.
● Customization → allow firms to be highly relevant and differentiating by finding out exactly
what a person wants.

Service Differentiation

● Ordering ease: Ordering ease describes how easy it is for the customer to place an order with
the company.
● Delivery: Delivery refers to how well the product or service is brought to the customer,
including speed, accuracy, and care throughout the process.
● Installation: : Installation refers to the work done to make a product operational in its planned
location.
● Customer training: Customer training helps the customer’s employees use the vendor’s
equipment properly and efficiently
● Customer consulting: Customer consulting includes data, information systems, and advice
services the seller offers to buyers
● Maintenance and repair: Maintenance and repair programs help customers keep purchased
products in good working order. These services are critical in business-to-business settings
● Returns: A nuisance to customers, manufacturers, retailers, and distributors alike, product
returns are also an unavoidable reality of doing business, especially in online purchases. Free
shipping, growing more popular, makes it easier for customers to try out an item, but it also
increases the likelihood of returns. Controllable returns result from problems or errors made
by the seller or customer and can mostly be eliminated with improved handling or storage,
better packaging, and improved transportation and forward logistics by the seller, or its supply
chain partners. Uncontrollable returns result from the need for customers to actually see, try,
or experience products in person to determine suitability and can’t be eliminated by the
company in the short run

Design : Design the totality of features that affect the way a product looks, feels and functions to a
consumer.

● Is emotionally powerful
● Transmits brand meaning/ positioning
● Is important with durable goods
● Make brand experiences rewarding
● Can transform an entire enterprise
● Facilitates manufacturing/ distribution
● Can take on various approaches

As competition intensifies, design offers a potent way to differentiate and position a company’s
products and services. Design offers functional and aesthetic benefits and appeals to both our rational
and emotional sides.

Luxury Brands
Design is often an important aspect of luxury products, though these products also face some unique
issues. They are perhaps one of the purest examples of the role of branding because the brand and its
image are often key competitive advantages that create enormous value and wealth. A luxury shopper
must feel he or she is getting something truly special.

Thus, the common denominators of luxury brands are :

● Quality ● Heritage
● Uniqueness ● Authenticity
● Craftsmanship ● History

Guidelines for Marketing Luxury Brands

1. Maintaining a premium image ; controlling that image is thus a priority.

2. Luxury branding typically includes the creation of many intangible brand associations and an
aspirational image.
3. All aspects of the marketing program for luxury brands must be aligned to ensure high-quality
products and services and pleasurable purchase and consumption experiences.
4. Brand elements—logos, symbols, packaging, signage—important drivers of brand equity for
luxury products.
5. Secondary associations from linked personalities, events, countries, and other entities can
boost luxury-brand equity as well.
6. Luxury brands must carefully control distribution via a selective channel strategy.
7. Luxury brands must employ a premium pricing strategy, with strong quality cues and few
discounts and markdowns.
8. Brand architecture for luxury brands must be managed carefully.
9. Competition for luxury brands must be defined broadly because it often comes from other
categories.
10. Luxury brands must legally protect all trademarks and aggressively combat counterfeits.

Environmental Issues

Environmental issues are also playing an increasingly important role in product design and
manufacturing. Many firms are considering ways to reduce the negative environmental consequences
of conducting business, and some are changing the manufacture of their products or the ingredients
that go into them.

The Product Hierarchy

It stretches from basic needs to particular items that satisfy those needs. We can identify six levels of
the product hierarchy, using life insurance as an example:

● Need family → The core need that underlies the existence of a product family. Example:
security.
● Product family → All the product classes that can satisfy a core need with reasonable
effectiveness. Example: savings and income.
 ● Product class → A group of products within the product family recognized as having a certain
functional coherence, also known as a product category. Example: financial instruments.
● Product line → A group of products within a product class that are closely related because
they perform a similar function, are sold to the same customer groups, are marketed through
the same outlets or channels, or fall within given price ranges. A product line may consist of
different brands, a single-family brand, or an individual brand that has been line extended.
Example: life insurance.
● Product type → A group of items within a product line that share one of several possible forms
of the product. Example: term life insurance.
● Item → A distinct unit within a brand or product line distinguishable by size, price, appearance,
or some other attribute. Example: Prudential renewable term life insurance.
● Product system → groups of diverse but related items that function in a compatible manner.
● Product mix / assortment → set of all products and items a particular seller offers for sales →
Consist of various product lines
○ Width → how many different product lines the company carries
○ Length → total number of items in the mix
○ Depth → how many variants are offered of each product in the line
○ Consistency → how closely related the various product lines are in end use,
production requirements, distribution channels, or some other way

Product Line Analysis

Sales and profits - Product - Item Contributions Market profile and image - Product Map for a
to a Product’s total Sales and Profits Paper-Product Line

● Monitor and protect carefully the 2 first → 80% total sales and 60% profits
● Consider dropping product 5 → 5% sales and profits unless it has growth potential
● Product line manager → review how the line is positioned against competitors lines
● Another benefit of product mapping is that it identifies market segments
● Figure shows type of paper, by weight, quality, prefered by the general printing industry, the
point-of-purchase display industry and the office supply industry
Product Line Length

● Line stretching
○ Down-market stretch
○ Up-market stretch
○ Two-way stretch
● Line filling
● Line modernization
● Line featuring
● Line pruning

Product Mix Pricing

The firm searches for a set of prices that maximize profits on the total mix. Product mix pricing:

● Product line pricing → companies develop product lines rather than single products, so they
introduce price steps.
● Optional-feature pricing → optional products, features, and services with main prod.
● Product-building pricing → sellers often bundle products and features. Pure building occurs
when a firm offers its prods only as a bundle. In mixed building, seller offers goods both
individually and in bundles, normally changing less for the bundle than if the items were
purchased separately.
● Captive-product pricing → some prods require use of ancillary or captive products.
● By-product pricing → production of certain goods (meat, petroleum…) often yields by-
products that should be priced on their value.
● Two-part pricing → service firms engage in two-part pricing, consisting of a fixed fee plus a
variable usage fee.

Co-Branding

Two or more well-known brands are combined into a joint product or marketed together in some
fashion.

● Same-company → same-company co-branding, as when General Mills advertises Trix cereal

and Yoplait yogurt
● Joint-venture → such as General Electric and Hitachi lightbulbs in Japan or the Citi Platinum
Select AAdvantage Visa Signature credit card in which three different parties are involved.
● Multiple-sponsor → such as Taligent, a one-time technological alliance of Apple, IBM, and
Motorola
● Retail → in which two retail establishments use the same location to optimize space and
profits, such as jointly owned Pizza Hut, KFC, and Taco Bell restaurants.

Ingredient branding - co-branding that creates brand equity for parts that are necessarily contained
within other branded products.

Example: Westin Hotels advertises its own “Heavenly Bed”—a critically important ingredient to a
guest’s good night’s sleep. The brand has been so successful that Westin now sells the bed, pillows,
sheets, and blankets via an online catalog, along with other “Heavenly” gifts, bath products, and even
pet items. Ingredient brands try to create enough awareness and preference for their product so
consumers will not buy a host product that doesn’t contain it.

Packaging : important as it is the buyer’s first encounter with the product. A good package draws the
consumer in and encourages product choice. In effect, it can act as a “five-second commercial” for the
product.

Used as a marketing tool:

● Self-service: In an average supermarket, which may stock 15,000 items, the typical shopper
passes some 300 products per minute. Given that 50 percent to 70 percent of all purchases
are made in the store, the effective package must perform many sales tasks: attract attention,
describe the product’s features, create consumer confidence, and make a favorable overall
impression
● Consumer affluence: . Rising affluence means consumers are willing to pay a little more for
the convenience, appearance, dependability, and prestige of better packages.
● Company and brand image: Packages contribute to instant recognition of the company or
brand. In the store, they can create a billboard effect, as Garnier Fructis does with its bright
green packaging in the hair care aisle.
● Innovation opportunity: Unique or innovative packaging can bring big benefits to consumers
and profits to producers. Companies are always looking for a way to make their products more
convenient and easier to use—often charging a premium when they do so

Packaging objectives:

● Identify the brand

● Convey descriptive and persuasive information
● Facilitate product transportation and protection
● Assist at-home storage
● Aid product consumption

Formally, packaging must achieve a number of objectives that are listed on this slide. To achieve these
objectives and satisfy consumers’ desires, marketers must choose the functional and aesthetic
components of packaging correctly.

The Color Wheel of Packaging

● Red → excitement, energy, passion, courage, and being bold.

● Orange → friendliness and fun. It combines: energy of red and the warmth of yellow.
● Yellow → color of the sun: warmth, joy, and happiness.
● Green → as the color of nature, connotes health, growth, freshness, and renewal.
● Blue → color of the sky and sea: associated with dependability, trust, competence, and
integrity.
● Purple → nobility, wealth, and wisdom. It combines: stability of blue and energy of red.
● Pink → soft, peaceful, comforting qualities.
● Brown → color of the earth, honesty and dependability.
 ● Black → classic, strong, and balanced.
● White → purity, innocence, and cleanliness

Labeling, Warranties and Guarantees

Labeling

● Identifies the product/brand, grades the product, describes the product: who made it, when,
where, how to use it, what is has inside, and promotes the product

Warranties

● Formal statements of expected product performance by the manufacturer. Products under

warranty can be returned to the manufacturer or designated repair center for repair,
replacement, or refund. Warranties are legally enforceable

Guarantees

● Promise of general or complete satisfaction. Guarantees reduce the buyer’s perceived risk.
They suggest that the product is of high quality and the company and its service performance
are dependable. They can be especially helpful when the company or product is not well
known or when the product’s quality is superior to that of competitors.

Product policy

Product Policy Decisions

There are three key policy decisions that companies make to arrive at such a product mix.

Product mix breadth → refers to the variety and number of product lines offered. To arrive at the
product mix breadth, managers must ask themselves: How many columns are there going to be (how
many product lines will be offered?)? What is the relationship, if any, between the lines?

Product line depth → is the number of items in a given product line. To arrive at the product line
depth, managers will ask themselves: Within a given column, how many rows (items) will there be in
the line? How is the line to serve customer segments of varying tastes or willingness to pay?
Product item design → refers to the product’s design specifications. To determine the product item
design, managers will ask themselves: What will the design or specifications be for each cell in the
matrix (meaning each item within a product line)? Note that for a multi item line, decisions about an
item’s design should be made in light of the design of other items to create an optimal overall offering
to the market. An item can further be disaggregated into stock-keeping units (SKUs) as it is offered,
for example, in a variety of package sizes.

Expanding the number of product Lines

Firms differ greatly in the product mix, or variety, of products offered. Why and when do companies
decide to expand the number of product lines offered? Often the decision results from a specific
favorable economic opportunity to draw on the company’s existing skills, even if there is little linkage
to the company’s current business. Greater benefit, however, is usually derived from developing a
new product that connects in some way with the company’s existing products. Consider the following
three ways that such connections might arise:

● Undertaking a business whose profit stream will probably correlate negatively with the profit
stream of existing businesses, thereby reducing the overall risk of the enterprise
● Leveraging a key asset of the company that underlies the current product offerings
● Tapping into complementary-in-use products and thus enabling the firm to be a “total solution
supplier”

In all these cases, managers must carefully analyze the interrelationship between product lines to
ensure that positive links are taken advantage of and to guard against potential negative links

Product Line Depth Consideration

Product line depth decisions are driven by how many different segments within the target market the
firm chooses to serve, they must be carefully analyzed and planned—and should be guided by a vision
for what the product line is to become over time.. Unless the product line is well managed,
management’s desire to serve customers (or retail partners) with precisely the right product for them
can lead to excessively long product lines.

9 key considerations in the product line depth decision-making process:

1. Customer Heterogeneity and Requirements Specification

The heterogeneity or segmentation of the customer base and the “tightness” of the product
specification required to meet customer needs.

Example: Caterpillar makes heavy equipment such as bulldozers and tractors, which are used by
sophisticated buyers with a particular job or set of jobs to do. Therefore, a product that almost meets
the specification won’t be good enough. This creates an incentive to extend the line. As a result, the
Caterpillar product equipment line has more than 300 machines, including 19 bulldozers. With these
19 offerings, Caterpillar noted: “From large to small, mining to finish work, you are certain to find a
Cat Dozer to match your needs.”
If consumer requirements are relatively homogeneous across the market and those requirements can
be met by products of varied specifications, the line can be shorter.

Example → a basic individual-cup coffeemaker suits most consumers’ needs, even though one
customer values additional features more than another.

2. Ability to Configure the Offering to the Segment

Even though a firm may identify a customer segment it wishes to target with a particular product, its
strategy for product line depth depends on its ability to configure and position the product so that the
intended customers see the product as being made for them.

What is the mapping of products to segments or applications? In some cases this is clear:

Example: diet soda and reduced-fat foods → calorie-conscious consumers.

An inability to communicate this mapping can result in customer confusion. A “good-better-best”

vertical differentiation strategy, such as the one Sears uses for its car batteries, exemplifies a
straightforward mapping of a product to a customer’s willingness to pay.

Example: GM’s job of positioning its three Buick sedans. There was a clear price-point difference of
about $5,000 between models:

➢ Buick Verano: $23,700

➢ Buick Regal: $29,690
➢ Buick LaCrosse: $33,535

The problem, however, was that the benefits of the added consumer expense in trading up to the
higher-priced item was unclear

3. Competitive Impact

A company may try to achieve competitive advantage with its product line. For example, it may:

1. preempt a competitor - by expanding its product line and serving a greater range of customer
segments. Preemption occurs when a product serves a market segment in such a way that
there is no room for a second company to profitably serve that segment.

Example: Japanese companies were able to dominate the motorcycle market in the United
States because of a missed preemption opportunity by competitors. When US company
Harley-Davidson neglected the lower end of the market, Honda and Suzuki thus were able to
enter the US market and establish a reputation for quality products and built a distribution
system. This enabled them to later trade up to high-performance bikes (and, later,
automobiles)

2. achieve a point of sustainable differentiation with a product line expansion - the ability to
serve a segment better than competitors can, using company skills to offer a differentiated
product delivering superior value to a segment of the market.
 Example: Apple’s iPhones are perceived by some as being simply better than competitors’
offerings. Furthermore, broad product lines can make it difficult for smaller firms to compete
by filling niches in the market, thereby achieving a point of sustained differentiation.

Example: Sensodyne & Tom’s of Maine were able to carve out niches in the toothpaste market
by specializing, but the broad lines of Crest and Colgate limited incursion.

4. Legitimization

Extension of a product line by a leading firm into a product type or niche at a particular price point can
legitimize that spot in the market, possibly to the benefit of a competitor or potential entrant.
Legitimization can also occur if a firm extends its line downward to a new price point.

5. Category Size Impact

A key question in expanding the product line is whether a new item will increase demand for the
product category overall. Quelch and Kenny suggest that while many line expansions seem to be
justified on this basis, the facts rarely support the expansion idea. they provide data showing that
although the coffee and shampoo categories showed a 44% increase in the number of items offered
overall during a four-year period, both categories declined in overall dollar sales in real terms. If a new
item gains sales by means of category expansion, it is less likely to trigger a competitive reaction than
if it has a “share takeaway from competitors” effect. Category expansion can stem from an increase
in either the number of category users or the average consumption rate.

Example: Apple’s hope for the 5c—a lower-cost addition to the iPhone line at the time of the release
of the 5s—was not only to provide a competitor to Samsung and others but also to increase the sales
of smartphones overall by means of the lower price.

6. Net impact on own margins

Conceptually, a unit sale for a new item can come from one of the following three places:

1. an expansion of the category,

2. taking away a sale that would otherwise have been made by a competitor
3. taking away a sale that otherwise would have gone to an existing item in a company’s line,
that is, cannibalization of sales of a company’s own items.

Cannibalization is typically an issue in the case of a trade-down product line extension (an extension
to a less expensive version of an existing product), since such products typically offer a lower margin
than the existing elements of the line. Thus, any cannibalized units represent a decline in the sales
margin that is generated.

7. Brand Equity

Two questions are critical here.

 1. in considering an expansion using an existing brand name, one has to judge the brand’s ability
to support that extension, this question is of more significance for trade-up extensions than
trade-down or horizontal ones.

Example: Apple brands extension of the iPhone 5 → the 5s and 5c.

Toyota upscaled in its automobile line → Lexus brand.

2. one must address the effect of a brand extension on the equity of the overall brand itself—in
other words, will it enhance, or build, brand equity (as was the case with American Express
and its Gold and Platinum cards, given the quality of their delivery on those services), or will
it dilute brand equity?

Brand equity derives from the favorable brand associations that a consumer holds. Thus, even
an extension of the brand to a trade-up situation can conceivably dilute brand equity.

Example: Bang and Olufsen speakers as a high quality brand that, while expensive, represents
good value—and is worth the price. Extension of the line to a new, higher-priced offering could
upset these perceptions about value and worth—even if the consumer had never sampled the
new speakers’ sound.

8. Cost of Variety versus Scale Opportunity

One must assess the overall effect of line extension on costs. If an extension increases unit sales of the
line and the items in the line are derived from the same platform, the added sales can drive down
costs across the line. On the other side, several potential problems can arise.

1. incremental research and development costs can be significant, especially if the new item
presents technological challenges.
2. there may be hidden costs in production, since more items means shorter production runs
and more changeovers. Inventory carrying costs may increase and the supply chain may
become more difficult to run efficiently.

Quelch and Kenny report that the “cost of variety”— the added cost of producing the full line versus
just the most popular item—is 25–45% in some consumer packaged-goods situations.

9. Collaborator Reaction

Companies must assess how partners and collaborators, such as distributors and retailers, will react
to how new items are marketed. These partners may see a new item positively, and as an investment
in the brand to keep it growing. On the other hand, the addition of a new item, can lead to a decrease
in sales velocity per SKU—a metric that collaborators may use in evaluating the brand and making
stocking decisions.

The nine considerations argue for careful planning of product line evolution and length, rather than
myopically adding a line on the basis of a belief that expanding consumers’ options is always a good
thing. By using the checklist we have just outlined, and regularly asking whether an item should be
deleted from the line, marketers can feel more confident in their overall product architecture.

A line extension should be both desirable for some segment of customers, by virtue of its
distinctiveness and the value it offers, and deliverable by the company—communicable so that the
segment adopts it. This combination can help make it profitable for the company when all existing
product interactions are considered.

Marketing Strategy Formation Process

Once all decisions have been made to determine the depth of a company’s product line, management
moves to the actual specifications for the items it will develop and sell within each product line (or
each cell within the overall product line matrix).

3 interrelated elements in the marketing strategy formation process:

Decisions:

● Aspiration → what the firm hopes to achieve in the market (setting positioning to be achieved)
● Action plan → product has a key role in creating customer value, but it must fit in two other
value-creating elements: promotion and place.

Product → special role “problem is solved”. Promotion → supportive role, make customers
aware of good and its features. Place → product conveniently available.

Product Structure

Theodore Levitt → 4 different levels of products to be considered:

● Generic product → combination of elements required to participate in the market, or the

“table stakes” of the game. Some refer to this as features needed to deliver the core benefit
of the product.
 ● Expected product → generic product plus minimum the customer expects from a product in
the category. (Ex. 24/7 support in online banking)
● Augmented product → expected product to include unexpected value-enhancing elements.
Useful to think about customer’s entire purchase-and-use experience.
● Potential product → extension of augmented product, includes “everything that might be
done to attract and hold customers”.

Characteristics of Unique and Superior Products

● Superior in terms of meeting users’ needs

● Solve a problem the customer has with a competitive product
● Feature good value for the money and excellent price and performance characteristics
● Provide excellent product quality, according to customers’ way of defining quality
● Offer features easily perceived as useful by the customer
● Offer benefits that are highly visible to the customer

Roger's Five Key Innovation Attributes

● Relative advantage: What is the degree of improvement in the innovation relative to existing
products?
● Compatibility: How easy is it to integrate with current investments and ways of doing things?
● Complexity: How difficult is the innovation to understand? How difficult is it to use properly?
● Trialability: How easy is it to try the product on a limited basis to assess its relative
performance?
● Observability: To what extent would use by an adopter be visible to others and hence create
awareness of and knowledge about the innovation?

Another key aspect of a successful new product or service is how quickly and easily customers adopt
it. Everett Rogers identified five attributes (see above) that explain the rate of adoption of an
innovation by target consumers

New Product Spectrum

● Incremental improvements of existing product → Examples: Kitchen Aid Food processor

withDicing Attachment, Samsung Refrigerator with Automatic Sparkling water dispenser,
Bosch dishwasher with Speed perfect model (cutting run by 30 min)
● Expansion of existing product line → Examples: Diet Coca-Cola/ coke zero etc, Tanqueray 10
gin, Marc by marc jacobs
● New product to firm, but no to world → Examples: Zantac (after tagamet for ulcers), Cialis(
after viagra for erectile dysfunction)
● New-to-product / radical innovation → Examples: Tagamet, Viagra, GE CT Scan, Segway
Human Transporter, Corning Optical Fibre

How does a company develop a superior, highly valued product in the first place?

The first part of answering this question is to recognize that there is no one answer; that is, the process
of new-product development must be customized to each situation. It would be foolish, for example,
for GE to apply the same process to designing its latest microwave oven as it would to a low-cost CT
scanner for emerging economies

At the top of the spectrum are incremental improvements of existing products. Even when small (for
example, a new flavor or package size), the change must be appropriately managed. While not offering
the excitement of the breakthroughs at the bottom of the spectrum, these improvements, aggregated
over the years, can be critical to a firm’s competitive position and cost levels. Product development
efforts here are typically guided by the firm’s knowledge of the market from having been a participant
in it. This intimacy with the market indicates valuable directions of research, and technological
uncertainty is low

The bottom of the spectrum, radical innovations are generally characterized by high degrees of
uncertainty. A company may not even know the market that will ultimately prove most receptive to a
new product; therefore, it might not even know whom to survey as potential customers, if such a
survey was needed for the development process

US “Colgate Max Fresh” Concept Statement

Useful research procedure → participants are given a description of the product and asked their
reaction

● Colgate introduced a concept test on its Max Fresh with 213 US respondents
● In the test marketers collected from participants the following key measures
○ Purchase intent, ranging from “definitely would buy” to “definitely wouldn't”
○ Perceived likeability, value and uniqueness

Assessor model → pre-test market model that forecasts sales or market share for a new brand,
provides a structure for evaluating alternative marketing strategies and generates diagnostics that aid
in improving the product

Bases test → concept test that assesses a sample of consumers’ reactions to a concept: a key measure
is their expressed purchase intention. With this measure and other like perceived uniqueness of the
product, Bases makes a market share forecast

Hierarchy-of-Effects Model MARIA

STAGE 0 → STAGE 1 → STAGE 2 → STAGE 3

Unaware (advertising Aware * Trial (Product Repeat
samples) quality)

*Product concept - Advertising weight / persuasion - level of distribution - price

● Model posits that consumers move through successive stages by the various market elements
shown
● Breaks down larger problem of forecasting sales to 3 smaller problems; predicting---
○ % customers will become aware of the product, % who are aware and who will try, %
who try the product and will become repeat customers
 ● Repeated use of such models, and the opportunity to compare actual and predicted share
levels, has established an impressive record for this approach
● Bases & Assessor → use a simple hierarchy-of-effects model, to forecast the sales volume for
a product before market introduction.

The Stage-Gate Model

Idea generation → Scoping → Building Business Case → Development → Test → Launch

● Developed by Cooper → to provide a conceptual & operational road map that a new-product
project from idea to launch
● Product idea → goes through the sequential stages
● Cooper warns against the process becoming “too rigid and linear”.
● He suggest the following guideline to this spiral approach
○ Build something - Get in front of customer & obtain their reactions (likes, dislikes &
purchase intent) - get feedback on what needs to be changed - revise (update & setup
the next iteration of “build-test-feedback-and revise”
● This approach overcomes the fact that “customers don’t really what they are looking for until
they see it or experience it”

Typical Sales and Profit Path

Example: The wine of Château Margaux dates back to

the sixteenth century. In 1855 it was designated one of
the four “premier crus” in Bordeaux, signifying top
quality. A bottle of Grand Vin du Château Margaux from
a good year could sell for thousands of dollars. In 1906
the château allocated some grapes to the making of a
second, lower-quality level, “Pavillon Rouge.” In 2013,
to preserve the quality of the top wine, the châteaux
designated even a smaller percentage of its grapes to it,
instead introducing a third-quality wine from the
châteaux’s vineyards.

Introduction: Marketing expenditures are high as awareness and knowledge of product features must
be established in the target market. Trial may be hard to induce if customers are satisfied with current
options. Distribution must be built up.

Growth: With awareness and trial achieved, the product’s performance is the dominant driver of sales.
Success may induce the entry of new competitors and require promotional spending to defend against
those competitors. Pricing is case specific. As happened with Zantac, price may be increased as the
perceived value increases. In other cases, price declines (helped by cost declines) are enacted to reach
a broader market.

Maturity: All feasible market segments have been reached and distribution channels built up. For
nondurables, sales come from replenishment only, as household penetration has leveled off. For
durables, population and income growth can be key drivers.
Decline: The rate of decline may still be a function of marketing efforts. A focus on hardcore loyals,
who will make an effort to buy even at high prices and limited distribution, may be a profit
opportunity. The discipline to phase out weak products is critical, however, lest the company and
distribution channels become overwhelmed.

T11: DESIGNING AND MANAGING SERVICES

Designing and Managing Services

Learning Objectives

As companies find it harder to differentiate their physical products, they turn to service differentiation,
whether that means on-time delivery, better and faster response to inquiries, or quicker resolution of
complaints. Top service providers know these advantages well and also how to create memorable
customer experiences. It is critical to understand the special nature of services and what that means
to marketers, in this topic we systematically analyze services and how to market them most
effectively.

The Nature of Service

Service → any act or performance one party can offer to another that is essentially intangible and
does not result in the ownership of anything.

● Its production may or may not be tied to a physical product

Category of Service Mix

The service component can be a minor or a major part of the total offering. We distinguish five
categories of offerings:

● A pure tangible good

● A tangible good with accompanying services
● A hybrid
● A major service with accompanying minor goods/services
● A pure service

Service Distinctions

● Equipment→ automated car washed, vending machines

● People based → vary by whether unskilled, skilled or professional workers provide them
○ Examples: window washing, accounting services
● Different processes of delivery → restaurants offer cafeteria - ,style fast-food, buffet …
● Some need client’s presence → if the client is present, the service provider must be
considerate of his or her needs
○ Brain surgery, beauty salon → invest in decor, play background music..
● Meet personal or business need → service providers typically develop different marketing
programs for these markets
 ● Differs in objectives (profit / nonprofit) and ownership (private / public)→ these 2
characteristics, when crossed, produce 4 different types of organizations
○ Marketing programs of private hospitals are different than a charity hospital

Evaluation Continuum for Product Types

Customers typically cannot judge the technical quality of some services even after they have received
them.

Left → goods high in search qualities—that is,

characteristics the buyer can evaluate before
purchase

Middle → goods and services high in experience

qualities—characteristics the buyer can evaluate
after purchase.

Right → goods and services high in credence

qualities—characteristics the buyer normally finds
hard to evaluate even after consumption.

Characteristics of Services that affect the design of marketing programs

Intangibility Inseparability Variability Perishability

Intangibility

● Services cannot be seen, tasted, felt, heard or smell

● Demonstrate service quality → Physical evidence and presentation tools
○ Place → the layout of the checkout area & the traffic low should be planned carefully,
waiting lines should not get overly long
○ People → check out staff should be busy, but there should be sufficient number to
manage the workload
○ Equipment → UPC scanners, credit card readers & electronic registers should all be
state of the art
○ Communication material → signage and britches & text and photos should suggest
efficiency and speed
○ Symbols → the supermarkets name & symbol could suggest fast service, for instance
“Speedy Shop”
○ Price → supermarket could advertise a $10 if customers have to wait in line more than
5 minutes

Dimensions of Brand Experience

Sensory Affective
This brand makes a strong impression on my This brand includes feelings and sentiments.
 visual sense or other senses. I do not have strong emotions for this brand.
I find this brand interesting in a sensory way. This brand is an emotional brand.
This brand does not appeal to my senses.

Intellectual Behavioral
I engage in a lot of thinking when I encounter this I engage in physical actions and behaviors when
brand. I use this brand.
This brand does not make me think. This brand results in bad experiences.
This brand stimulates my curiosity and problem This brand is non action-oriented.
solving

Inseparability

Services are typically produced and consumed simultaneously. Several strategies exist for getting
around the limitations of inseparability. The service provider can work with larger groups. The service
organization can train more service providers and build up client confidence.

Variability

The quality of services depends on who provides them, when and where and to whom. As such,
services are highly variable and in their performance puts them at risk.

3 steps service to increase quality control

1. Invest in good hiring and training procedures

2. Standardize the service-performance process throughout the organization
3. Monitor customer satisfaction

Perishability

Services cannot be stored, so their perishability can be a problem when demand fluctuates. The right
services must be available to the right customers at the right time, place and price to maximize
profitability. Several strategies can match demand & supply.

On demand side On supply side

● Differential pricing → shift some ● Part-time employees → serve peak

demand from peak to off-peak periods. demand. (Stores hire + on holiday)
(Discount) ● Peak-time efficiency routines → allow
● Nonpeak demand → can be cultivated. employees to perform only essential
(Hotels: mini-vacation services) tasks during peak periods. (Paramedics
● Complementary services → provide assist physicians during busy periods)
alternatives to waiting customers. ● Increased customer participation →
(Automated teller machines in bank) frees service providers’ time.
● Reservation systems → manage (Customers bag their own groceries)
demand level. (Hotels) ● Shared services → can improve
offerings. (Hospitals can share medical-
equipment purchases)
● Facilities for future expansion → can be
 a good investment. (Buy surrounding
land for later develop.)

Blueprint for Overnight Hotel Stay

A service blueprint can map out the service process, the points of customer contact, and the evidence
of service from the customer’s point of view. The slide shows a service blueprint for an overnight guest
at a hotel. Behind the scenes, the hotel must skillfully help the guest move from one step to the next.
Service blueprints can be helpful in identifying potential “pain points” for customers, developing new
services, supporting a zero-defects culture, and devising service recovery strategies.

New Services Realities

A shifting customer relationship, the importance of the:

- Customer empowerment & co production

- Satisfying employees as well as customers

The Internet has empowered customers by letting them send their comments around the world with
a mouse click.

Good customer experience → will talk about it // bad experience → will talk to more people.

Unhappy customers may download a damaging video to share their customer service miseries with
others. When a customer complains, most companies now respond quickly.

Customers do not merely purchase and use a service; they play an active role in its delivery. Their
words and actions affect the quality of their service experiences and those of others as well as the
productivity of frontline employees. Customers often feel they derive more value, and feel a stronger
connection to the service provider, if they are actively engaged in the service process.

Excellent service companies know that positive employee attitudes will strengthen customer loyalty.
Instilling a strong customer orientation in employees can also increase their job satisfaction and
commitment, especially if they have high customer contact
Three Types of Marketing in Service Industries

External marketing → describes the normal

work of preparing, pricing, distributing, and
promoting the service to customers.

Internal marketing → describes training and

motivating employees to serve customers well.

Interactive marketing → describes the

employees’ skill in serving the client. Clients
judge service not only by its technical quality,
but also by its functional quality

Achieving Excellence in Service Marketing

Technology is changing the rules of the game for services in a very fundamental way. But as companies
collect, store, and use more information about customers, they have also raised concerns about
security and privacy. Companies must incorporate the proper safeguards and reassure customers
about their efforts.

● The Internet allows for true interactivity, customer-specific and situational personalization,
and real-time adjustments of the firm’s offerings

Best Practices of Top Services Companies

Strategic Concept: Top service companies are “customer obsessed.” They have a clear sense of their
target customers and their needs and have developed a distinctive strategy for satisfying them.

Top-Management Commitment: Companies such as Marriott, Disney, and Ace Hardware have a
thorough commitment to service quality. Their managers look monthly not only at financial
performance, but also at service performance.

High Standards: The best service providers set high quality standards.

Profit Tiers: Firms have decided to coddle big spenders to retain their patronage as long as possible.

- Customers in high-profit tiers get special discounts, promotional offers, and lots of special
service
- Customers in lower profit tiers who barely pay their way may get more fees, stripped-down
service, and voice messages to process their inquiries.

Monitoring Systems: Top firms audit service performance, both their own and competitors’, on a
regular basis. They collect voice of the customer (VOC) measurements to probe customer satisfiers
and dissatisfiers and use comparison shopping, mystery or ghost shopping, customer surveys,
suggestion and complaint forms, service audit teams, and customers’ letters.
Satisfying Customer Complaints: On average, 40 percent of customers who suffer through a bad
service experience stop doing business with the company, if those customers are willing to complain
first, they actually offer the company a gift if the complaint is handled well. Companies that encourage
disappointed customers to complain have been shown to achieve higher revenues and greater profits
than companies without a systematic approach for addressing service failures.

Importance-Performance Analysis

We can judge services on customer importance and company performance. Importance performance
analysis rates the various elements of the service bundle and identifies required actions. Table and
diagram show how customers rated 14 service elements or attributes of an automobile dealer’s
service department on importance and performance.

Quadrant A: in the figure shows important service elements that are not being performed at the
desired levels; they include elements 1, 2, and 9. The dealer should concentrate on improving the
service department’s performance on these elements.

Quadrant B: shows important service elements that are being performed well; the company needs
to maintain this high performance.

Quadrant C: shows minor service elements that are being delivered in a mediocre way but do not
need any attention.

Quadrant D: shows that a minor service element, “Send out maintenance notices,” is being performed
in an excellent manner.

Ratings obtained from a four-point scale of “extremely important” (4), “important” (3), “slightly
important” (2), and “not important” (1).

Ratings obtained from a four-point scale of “excellent” (4), “good” (3), “fair” (2), and “poor” (1). A “no
basis for judgment” category was also provided.
Differentiating Services

Customers who view a service as fairly homogenous care less about the provider than price. Firms
require marketers to differentiate so they aren’t seen as a commodity → through people and
processes that add value. Ways to differentiate service:

● Primary and secondary service options

○ Primary service package → what the customer expects.
○ Secondary service features to the package (i.e. hotel → free breakfast)
● Innovation with services → to satisfy unmet needs and wants.

Managing Service Quality

Customer switching behaviour factors

● Pricing, Inconvenience, Core service failure, Service encounter failures, Response to service
failure, Competition, Ethical problems, Involuntary switching
● Service quality → tested at each service encounter
● Flawless service delivery → ideal output for any service organization

Service-Quality Model

Highlights the main requirements for delivering high service quality.

1. Gap between consumer expectation and management perception—Management does not always
correctly perceive what customers want.

2. Gap between management perception and service-

quality specification—Management might correctly
perceive customers’ wants but not set a performance
standard.

3. Gap between service-quality specifications and

service delivery—Employees might be poorly trained
or incapable of or unwilling to meet the standard;
they may be held to conflicting standards, such as
taking time to listen to customers and serving them
fast.

4. Gap between service delivery and external

communications—Consumer expectations are
affected by statements made by company
representatives and ads.

5. Gap between perceived and expected service—The

consumer may misperceive the service quality.
Improving Service Quality

- Listening - Surprising customers

- Reliability - Fair play
- Basic service - Teamwork
- Service design - Employee research
- Recovery - Servant leadership

Servqual Attributes

Reliability: Empathy
•Providing service as promised • Giving customers individual attention
• Dependability in handling customers’ service • Employees who deal with customers in a
problems fashion
• Performing services at the promised time • Having the customer’s best interests at heart
• Maintaining error-free records • Employees who understand the needs of their
• Employees who have the knowledge to answer customers
customer questions • Convenient business hours

Responsiveness Tangibles
• Keeping customer informed as to when service • Modern equipment
will be performed • Visually appealing facilities
• Prompt service to customers • Employees who have a neat, professional
• Willingness to help customers appearance
• Readiness to respond to customers’ requests • Visually appealing materials associated with
the service

Assurance
• Employees who instill confidence in customers
• Making customers feel safe in their transactions
• Employees who are consistently courteous

Researchers identified five determinants of service quality, in descending order of importance:

- Reliability—The ability to perform the promised service dependably and accurately.

- Responsiveness—The willingness to help customers and provide prompt service.
- Assurance—The knowledge and courtesy of employees and their ability to convey trust and
confidence.
- Empathy—The provision of caring, individualized attention to customers.
- Tangibles—The appearance of physical facilities, equipment, staff, and communication
materials.

Based on these five factors, the researchers developed the 21-item SERVQUAL scale (see the Table).
They also note there is a zone of tolerance, or a range in which a service dimension would be deemed
satisfactory, anchored by the minimum level consumers are willing to accept and the level they believe
can and should be delivered.
Extending the Service-Quality Model

Dynamic process model of improved service quality perceptions → Increasing / decreasing customer
expectations of what the firm will deliver

● Subsequent research has extended the service-quality model

● One of these processes was based on the premise that customer perceptions and expectations
of service quality change over time, but at any one point they are a function of prior
expectations about what will and what should happen during the service encounter, as well
as the actual service delivered during the last contact.

Incorporating Self-Service Technologies (SSTs) can

● Make transactions more accurate, convenient, faster and reduce costs

● Consumers value convenience in service and person-to-person service interactions are being
replaced by SST intend to provide convenience
● Ex: self-checkouts, self-pumping at gas stations, ticket purchasing, customize products

Managing Product-Support Services

Three types of customer worries about Product Service

1. They worry about reliability and failure frequency. A farmer may tolerate a combine that will
break down once a year, but not one that goes down two or three times a year.
2. They worry about downtime. The longer the downtime, the higher the cost. The customer
counts on the seller’s service dependability—the ability to fix the machine quickly or at least
provide a loaner.
3. They worry about out-of-pocket costs. How much does the customer have to spend on
regular maintenance and repair costs?

Buyer with all these factors tries to estimate the life-cycle cost = the product’s purchase cost plus +
discounted cost of maintenance and repair - the discounted salvage value.

Postale Service Strategy

Quality of customer service departments varies. At one extreme → those that transfer customer calls
to appropriate person. At the other extreme → departments eager to receive customer requests,
suggestions, and complaints and handle them.

● Customer-service evolution → managers usually start by running their own parts-and-service

departments. They want to stay close to the equipment and know its problems. Over time,
they switch more maintenance and repair service to authorized distributors and dealers.
● The customer-service imperative → customer-service choices are increasing rapidly and
equipment manufacturers increasingly must figure out how to make money on their
equipment, independent of service contracts.
Consumer Adoption of New Market Offering

New product development process

Phase 1→ Ideation: Technological innovations, Unmet buyer

needs, CO-creation concepts

Phase 2 → Viability: Technical feasibility, Potent search, Market

research to assess market attractiveness, Boll park costing

Phase 3 → Development: Competitive feardowns, CAD

prototype, 3D prototype, Process mapping

Phase 4 → Brand development: Branding ( visual identify, logo,

name), Package design and prototype, Business case, strategy
brief

Phase 5 → Protect and produce: Potent trademark, registered

design applications, secure production, test marketing

Phase 6 → Commercialization: Go-to-market

Sources of Insights for DTV

● Competitive insights → competitive teardowns, comparative performance, packaging analysis

● Supplier insights → clean sheet analysis, costing by attitude
● Customer insights → benefits sought, willingness to pay, journey insights (points of friction,
pain points)

The consumer adoption process

Adoption - an individual’s decision to become a regular user of a product (passes from first hearing
about an innovation to final adoption) → 5 stages

1. Awareness → aware of the innovation but lacks information about it

2. Interest → consumer is stimulated to seek information about the innovation
3. Evaluation → consideration whether to try the innovation
4. Trial → tries the innovation to improve his or her estimate of its value
5. Adoption → consumer decides to make full and regular use of the innovation
Factors influencing the adoption process

Readiness to try new products and personal influence:

Innovators → technology enthusiasts; they are venturesome and enjoy tinkering with new products
and mastering their intricacies. In return for low prices, they are happy to conduct alpha and beta
testing and report on early weaknesses.

Early adopters → opinion leaders who carefully search for new technologies that might give them a
dramatic competitive advantage. They are less price sensitive and are willing to adopt the product if
given personalized solutions and good service support.

Early majority → deliberate pragmatists who adopt the new technology when its benefits have been
proven and a lot of adoption has already taken place. They make up the mainstream market.

Late majority → skeptical conservatives who are risk averse, technology shy, and price sensitive.

Laggards→ tradition-bound and resist the innovation until the status quo is no longer defensible.

Personal influence: the effect one person has on another’s attitude or purchase probability, has
greater significance in some situations and for some individuals than others, and it is more important
in evaluation than in the other stages. It has more power over late than early adopters and in risky
situations

Characteristics of the innovation:

1. Relative advantage → degree to which innovation appears superior to existing prods.

2. Compatibility → degree to which innovation matches consumers’ values and experiences.
3. Complexity → degree to which innovation is difficult to understand or use.
4. Divisibility → degree to which innovation can be tried on a limited basis.
5. Communicability → degree to which benefits of use are observable or describable to others.

Example DVR

● Relative advantage: the greater the perceived relative advantage of using a DVR, say, for
easily recording favorite shows, pausing live TV, or skipping commercials, the more quickly it
was adopted.
 ● Compatibility: DVRs are highly compatible with the preferences of avid television watchers.
● Complexity: DVRs are complex and took a slightly longer time to penetrate into home use.
● Divisibility: provided a sizable challenge for DVRs - sampling could occur only in a retail store
or perhaps a friend’s house.
● Communicability: fact that DVRs have some clear advantages helped create interest and
curiosity.

Factors influencing the adoption process (4)

Organization’s readiness to adopt innovations

● Adoption → associated with variables in the organizations environment (community

progressiveness, community income), the organization itself (size, products, pressure to
change) and the administrators (education level, age, sophistication)
● Other forces come into play → government funds in public schools
● Controversial or innovative product can be squelched by negative public opinion

T12 - DEVELOPING PRICING STRATEGIES AND PROGRAMS

Pricing

Price

● Amount of money charged for a product or service

● Determines a form’s market share and profitability
● Produces revenue → only element of the marketing mix, the other represent costs

Consideration in Setting Price → 3 major pricing strategies

1. Customer value-based pricing

2. Cost-based pricing
3. Competition based pricing
● If customers perceive that a
product’s price is greater than its
value, they won’t buy the product.
● If the company prices the product
below its costs, profits will suffer.
● Between the two extremes, the right pricing strategy is the one that delivers both value to
the customer and profits to the company.

Primary determinants influencing pricing

Customer orientation: Price to value → Price Considerations

● Cost orientation: Price to cost

● Competition orientation: Price to competitor
Pricing objectives

● Maximize profit → mind revenue & costs to maximize profits, may involve setting high price
in situations of weak competition and lowering costs
● Maximize revenue → set price to optimize earnings
● Maximize sales growth/ grain market share → set low price to capture market share
● Maximize profit margin → increase the profit margin for each unit and don’t focus on the total
number of units sold
● Demonstrate product-quality leadership → set premium price to demonstrate price-quality
relationship
● Recoup product innovation costs → follow market.skimming approach by setting high initial
price while product is in introduction stage of the product life cycle
● Encourage product trial → offer low or free initial price during trial period
● Demonstrate low-cost leadership → set price beneath competitors
● Ensure survival → drop price to gain market share, and/or only cover costs
● Maintain status quo → maintain stable price to avoid competitive retaliation

Customer Value- based pricing

Based on buyers’ perceptions of value rather than on the seller’s cost. The price is considered before
the marketing program is set along with all other marketing mix variables. Type of value-based pricing:

● Good-value pricing → offers just the right combination of quality and good service at a fair
price. It involves introducing less expensive versions of established, brand name products or
new lower-price lines. It also involves redesigning existing brands to offer more quality for a
given price or the same quality for less.
● Value-added pricing → involves attaching value-added features and services to differentiate
a company’s offers and then charging higher prices. “Fair price”

Value-Based Pricing vs Cost Based pricing

Cost-based pricing

Design a good product Determine product Set price based on cost Convince buyers of
costs product’s value

Value-based pricing

Assess customer needs Set target price to Determine costs that Design to deliver
and value perceptors match customer- can be incurred desired value at target
perceived value price

● Value-based pricing reverses the process → based on the value perceptions

● Companies are more profitable if they apply the value-based pricing
Cost-based pricing

Cost-based pricing continues to dominate the marketplace. This approach typically takes the form of
cost-plus pricing, an approach in which an organization applies a predetermined markup to its cost to
make or obtain the product. This simplicity might be costly

Example → A manufacturer, for instance, might tally all the variable costs associated with the
production of a good and simply add a markup of 25%. Why is cost-plus pricing so popular?

1. The costs of production are relatively easy to estimate or measure. Indeed, in one survey,
more than 80% of managers reported being well informed when it came to their
organization’s variable costs.
2. Cost-plus pricing is easy to justify to various stakeholders, with customers generally willing to
pay a reasonable markup and investors accepting of a healthy margin.
3. For many organizations, it simplifies an otherwise complex pricing process.

However, these benefits of cost-plus pricing limit organizations’ ability to capture the full price
customers might be willing to pay, which can be devastating to the company’s bottom line.

Types of Cost-based pricing

Cost-plus pricing (markup pricing) → simplest pricing method. Adding a standard markup to the cost
of the product. It remains popular because:

● Sellers are more certain about costs than about demand.

● When all firms in the industry use this pricing method, prices tend to be similar and price
competition is minimized.

Break-even pricing (target return pricing) → Setting price to break even on the costs of making and
marketing a product, or setting price to make a target return. It uses the concept of a break-even
chart, which shows the total cost and total revenue expected at different sales volume levels.

Competition-based pricing

Setting prices based on competitors’ strategies, costs, prices, and market offerings. In assessing
competitors’ pricing strategies, the company should ask several questions:

● How does the company’s market offering compare in terms of customer value?
● How strong are current competitors?
● What are their current pricing strategies?

Value-Based Pricing Strategy

Value-Based Pricing

Value pricing hinges on two key elements:

 1. Value orientation → a focus on the economic value created by an organization’s product for
a given customer
2. Set of processes → to capture a portion of that value for the firm

While the design and implementation of a true value-based pricing approach requires a commitment
to systematic, rigorous work, the returns on that effort can be substantial.

Value-Pricing Thermometer falta

completar XAVI

● TEV = cost of the best alternative +

value of the performance
differential
● Perceived value → benefits
● Set the price between the PV and
Product price
● Difference of Product price and Cost
o f goods is the incentive for the
company

Example: Toy Factory Value-Based Pricing

To calculate TEV we need benchmark → compare it with others

Example: Toy Factory Value-Based Pricing (2) INES

𝑃𝑉 = $75,000 + ((20% · $100,000) − (5% · $100,000)) − ((2,500ℎ𝑟𝑠 · $15/ℎ𝑟) − (2,500 ℎ𝑟𝑠

· $10/ℎ𝑟)) =

= $75,000 + $15,000 − $12,000 = $77,500

Example:

Glaxo introducing Zantac to the ulcer-treatment category dominated by the market pioneer,
SmithKline’s Tagamet.
 ● While TEV presents

Example: Toy Factory Value-Based Pricing (3) XAVI

Example: Toy Factory Value-Based Pricing (4)

It is critical to recognize that the value of this air-filtration system likely varies across customers.

The owner of an off-shore oil rig needs a similar system. While this owner faces the same two
alternatives - the new product at a price yet to be determined or the next-best alternative at $75,000
- the relative impact of his choice may be quite different from that faced by the toymaker. In particular,
different operating conditions may affect the probability of a system crash, the cost of a system failure,
and the system’s operating costs per hour, as reflected in Exhibit 5.

Operating system costs per hour → negative for us

Example: Toy Factory Value-Based Pricing (5) falta completar INES

1. Where would we put the price in the toymaker? In the middle to have both the same benefit
and based on the competition too
2. Oil Rig Owner has higher perceived value

Synchronizing Pricing and Marketing Activities

Feasible → follow a low-price (relative to TEV) and low

marketing-expenditure strategy. The product’s value in
this case must speak for itself, and such a soft voice may
not push PV near TEV. But because of the low price, the
hurdle for a consumer to purchase may not be high.

Feasible → high/high strategy. In particular, a firm can

invest in marketing to boost PV, price high to capture the
perceived value thereby created, and attain the margins
necessary to fund the high marketing effort.
No unit sales (High price/low marketing) → fails because the organization doesn’t use enough
resources to convince potential consumers of the product’s value.

No unit contribution (Low price/high marketing) → is not feasible because, while the high number of
consumer purchases may help create unit sales, the low unit margins resulting from the low price
amount to minimal contribution to the organization.

Price Customization

Where price varies across customers, is the primary way that many organizations improve price
realization - with dramatic results.

Service companies in particular have increased profitability significantly through dynamic pricing
implemented through yield-management systems. Some factors driving variations:

● Tastes → For example, one person may regard Lindt as the maker of the best tasting
chocolates in the world, while another may prefer a Nestlé bar.
● Nature of use → The manager who uses an Excel spreadsheet to track sales force
compensation may value the software more highly than someone who uses Excel to track his
league’s soccer scores.
● Intensity of use → The picture quality of the latest Samsung television may be more highly
valued by someone who watches hours of televised sports than by the person who glances at
the news for a half hour each morning while getting ready for work.
● Competition → The value of a nonstop Lufthansa flight will be greater on routes where few
(or no) other airlines fly nonstop than on routes where many do.

It is important to recognize that some buyers view price customization as unfair. While it should be
obvious that no pricing method should cross legal barriers, it is also critical to note that price
customization itself is both fair and legal.

Controlling the Availability of Prices

Customer Price Sensitivity

Price Sensitivity: Managerial Judgment falta completar XAVI

● Price sensitivity is high if

PRODUCT PRICE BUYER

- Low differentiation of - Sophisticated, deliberative

alternatives - Bearing costs
- Easy comparability - Able to switch easily
- Will perform as expected
- Not mission-critical
Price Sensitivity: Market Research

A. Customer surveys

Surveys are done with a representative sample. Some questions that may be asked:

- What is the likelihood that you would buy this product at a price of $25.00?
- At what price would you definitely buy this product?
- How much would you be willing to pay for this product?
- How much of this product would you buy at a price of $0.99?
- At which price difference would you switch from product A to product B?

Direct response surveys do have potential problems. Such surveys can induce an unrealistically high
level of price consciousness for a consumer.

Consumers are only asked about their willingness to buy or to pay and they are not actually required
to spend their money, so the survey results often paint an overly optimistic picture of a product’s
potential.

These surveys are often a good first step in assessing perceived value. In addition, sophisticated survey
approaches, such as conjoint analysis, can mix price and product comparisons to address these
problems

B. Price experimentation (e.g., A/B testing)

Price experimentation observes how customers actually do behave relative to price. This observation
can take place in a simulated environment, such as a test store where products are presented at
various prices, or in the actual marketplace, where prices are manipulated across time or geographic
locations.

Method A/B testing, exposes one group (group A) to one price and a second group (group B) to
another, with any differential purchasing behavior across the two groups being attributed to price.
This process involves setting a price for the express purpose of learning price sensitivity, even to the
point of setting prices far from levels believed to be profit maximizing.

C. Analysis of historic pricing and sales data

It provides a third way to assess price sensitivity quantitatively. Firms often have years of historic
pricing data at their disposal. For instance, as a firm pursues its (often changing) marketing goals,
prices for a product tend to vary over time and across geographic regions, creating something akin to
a natural experiment. And with advances in scanner-based tracking technology, information firms
such as Nielsen and IRI increasingly track prices, sales, and market share at a region, store, or even
household level, providing the data needed to determine the effect of price on overall consumer
demand using sophisticated mathematical models.

Demand Curve → shows the relationship between price and demand, it plots the cumulative
aggregate demand for a firm’s product across all consumers at a wide range of price points.
 ● It is only a prediction of what will happen at various price points and is most often informed
by how demand has varied relative to price in the past.

Elasticity Summarized INES

E = infinitive →

inelastic demand → brand loyal

Economic Impact of Pricing

Profit → differences between the total revenue and the total costs in making and selling

● Total revenue → amount of money from the sale of the product, it is based on the total
number of units or quantity, sold to
customers and the price at which each
unit is sold
● Firms sell directly to customers →
price of total revenue is the retail price
of purchase
● Firms that sell through channel
intermediary (retailer) → price used in
the calculation is the wholesale price at which the firms sell their products to that channel
partner

Costs

Tends to decrease for the quantity used and it is normally curved

Margin Across the Distribution Channel

Sometimes, we extend this analysis to the entire channel of distribution. For example, the slide shows
the channel structure used to bring this clock to market.

In this example, the manufacturer, wholesaler, and retailer each perform a set of channel functions,
and each partner in the channel system is compensated for those functions by the margin it receives.
Here, the manufacturer receives a 37.5% margin; the wholesaler, a 33.3% margin; and the retailer, a
20% margin. Such an analysis is useful to understand the relative motivation of each channel partner
to sell a product.

Alternatively, if we analyze the margins of channel partners across competing products, we might
better understand why a particular channel partner is promoting one firm’s products more than those
of another firm.

Break-even chart → for determining target return price and break-even volume

This figure shows a break-even chart for a flash drive manufacturer.

Fixed costs → $6 million

regardless of sales volume, and
variable costs are $5 per unit.

Variable costs → added to fixed

costs to form total costs, which
rise with volume.

The slope of the total revenue

curve reflects the price. Here, the
price is $15.

Example → the company’s

revenue is $12 million on 800,000 units, or $15 per unit. At the break-even point, 600,000 units, total
revenue equals total cost. To make a target return of $2 million, the company must sell 800,000 units.
But will customers buy that many units at the $15 price? Although break-even analysis and target
return pricing can help the company to determine the minimum prices needed to cover expected costs
and profits, they do not take the price-demand relationship into account.
New Product Pricing Strategies

Market-skimming pricing (price skimming) Market-penetration pricing

Setting a high price to skim maximum revenues Setting a low price to attract a large number of
from the segments willing to pay the high price. buyers and a large market share.

The company makes fewer but more profitable The high sales volume results in falling costs
sales.
Several conditions must be met:
This strategy works only under certain - the market must be highly price sensitive so
conditions: that a low price produces more market growth.
- the product’s quality and image must support - production and distribution costs must
its higher price. decrease as sales volume increases.
- the costs of producing a smaller volume cannot - the low price must help keep out the
be so high that they cancel the advantage of competition, and the penetration “pricer” must
charging more. maintain its low-price position.
- competitors should not be able to enter the
market easily and undercut the high price.

Product Mix Pricing Strategies

● Product line pricing → setting prices across an entire product line

○ Eg. Software version each one is different and with different price
● Optional-product → pricing optional or accessory products along with the main product
● Captive-product pricing → pricing products that must be used along with the main product.
Eg. blades for a razor and games for a video game console
○ Can account for a substantial portion of a brand’s sales and profits (Gillette)
○ Sell razor handles at low prices and make money on higher price, margin replacement
blade cartridges → you become the hostage my razor only works with my blades
● By-product pricing → price low-value by products to get rid of or make money on them by
being more competitive
● Product bundle pricing → combining several products and offering the bundle at a reduced
price → telecommunications, tv, telephony …

Price Adjustment Strategies

● Discount & allowance → reducing prices to reward customers responses such as volume
purchase, paying early, or promoting the product
● Segmented → adjusting prices to allow for differences in customers, products or location
● Psychological → adjusting prices for psychological effect
● Promotional → temporarily reducing prices to spur short-run sales
● Geographical → adjusting prices to account for the geographic location of customers
● Dynamic → adjusting prices continually to meet the characteristics and needs of individual
customers and situations
● International → adjusting prices for international markets

Discount and Allowance Pricing

Most companies adjust their basic price to reward customers for certain responses, such as paying
bills early, volume purchases, and off-season buying.

● Discount → a straight reduction in price on purchases during a stated period of time or of

larger quantities. Forms:
○ Cash → a price reduction to buyers who pay their bills promptly
○ Quantity → a price reduction to buyers who buy large volumes.
○ Functional → also called a trade discount, to trade-channel members who perform
certain functions, such as selling, storing, and record keeping.
○ Seasonal discounts → a price reduction to buyers who buy merchandise or services
out of season.
● Allowance → promotional money paid to retailers for an agreement to feature the
manufacturer’s products in some way.
○ Trade in → price reductions given for turning in an old item when buying a new one
→ Apple discounts money for a new phone if you return your old phone
○ Promotional → payments or price reductions that reward dealers for participating in
advertising and sales-support programs.

Segmented Pricing

Selling a product or service at two or more prices, where the difference in prices is not based on
differences in costs. It takes several forms:

● Customer-segment pricing → different customers pay different prices for the same product
or service.
○ Example → Museums and movie theaters may charge a lower admission for students
and senior citizens.
● Product form pricing → different versions of the product are priced differently, but not
according to differences in their costs.
○ Example → different prices for seats in a theater based on their location.
● Location-based pricing → involves a company charging different prices for different locations,
even though the cost of offering each location is the same.
● Time-based pricing → occurs when a firm varies its price by the season, the month, the day,
and even the hour.
○ Example → movie theaters charge matinee pricing during the daytime

For segment pricing to be an effective strategy, certain conditions must exist:

The market must be able to be segmented Segments must show different degrees of
demand

The costs of segmenting and reaching the Segmented pricing should also be legal
market cannot exceed the extra revenue
obtained from the price difference

Psychological Pricing
Refers to pricing that considers the psychology of prices and not simply the economics

● The price is used to say something about the product

● Reference prices → prices that buyers carry in their minds & refer to when looking at a given
product
● Formed→ noting current prices, remembering past prices, assessing buying situation
● Sellers can influence or use these consumers references prices when setting price

Promotional Pricing

Temporarily pricing products below the list price to increase short-run sales. It takes different forms:

● Discounts and special-event pricing → Black friday

● Limited-time offers and cash rebates → rebate is when you buy a product and you have to
mail back to the manufacturer
● Low-interest financing and longer warranties
● Free maintenance

It can have adverse effects:

● Used too frequently, price promotions can create “deal-prone” customers who wait until
brands go on sale before buying them.
● Constantly reduced prices can erode a brand’s value in the eyes of customers.
● Marketers sometimes become addicted to promotional pricing, especially in tight economic
times. They use price promotions as a quick fix instead of sweating through the difficult
process of developing effective longer-term strategies for building their brands.

Digital Solutions for Optima Pricing Strategies

Algorithmic pricing

● 2% is the product fulfilled by Amazon? / 3% average rating / 6% feedback

● 10% is Amazon the seller? / 10% positive feedback
● 33& Price ratio to the lowest / 36% Price difference to the lowest

Pricing Optimization Models

● Line → quantifies the effect of pricing discounts on sales

● Price threshold → identifies price bands beyond which sales will decline significantly
● Price elasticity → Measures likely impact of price changes on demand
● Price gap → determines optimal price difference to differentiate from competitor price

Modules of Dynamic Pricing

1. Long-tail module → helps set the introductory price

through intelligent product matching → Introductory
phase based on comparable articles
2. Elasticity module → calculates how a product’s price affects demand
a. More demand plus lower elasticity triggers price increase
3. KVI module → estimates how much each product affects consumer price perception
a. Classification as KVI lower price under that of competitors
4. Competitive-response module → recommends price adjustments based on competitor prices
updated in real time → Price remains lower than that of competitors
5. Omnichannel modules → coordinates prices among the retailers offline & online channels →
Automatic coordination with in-store prices