Pricing Strategies

- Fixed price for a given program (etc. nowtv)

- CPM (Cost per thousand impression) (etc. Amazon, taobao)
- If ad is seen advertising has to pay
- Exposure = pay
- CPC (Cost per click) (etc. Google search, Baidu search)
- Pay by completion / Cost per view

Terms to know
- Additions of utilities rule
- LCV, acquisition cost
- Loyalty programs (your loyalty program is betraying you)
- SOW

Tested in quiz
- Calculate acquisition cost per customer
- Economics of loyalty
- SOW
Marketing Quiz 1 Revision (Feb 23)

“Marketing Overview”

Identifying Competitors
- Who are their customers?
- Do their products satisfy same / similar needs / wants

Pricing Strategies
- Fixed price for a given program (etc. nowtv)
- CPM (Cost per thousand impressions) (etc. Amazon, taobao)
- If ad is seen advertising has to pay
- Exposure = pay
- CPC (Cost per click) (etc. Google search, Baidu search)
- Pay by completion / Cost per view

3C’s (Consumer, Company, Competitor)

Customer

Understanding Customers
- Their needs and wants
- Their decision making process
- How to influence their decisions
- Lifetime values of customers
- Acquisition costs of a customer
- Customer retention
- Economics of loyalty
- Loyalty programs

Maslow’s Hierarchy of Needs (MHN)

Limitations of MHN
- Conflict between needs
- Can products designed for “lower level” needs satisfy “higher level” needs
- Cultural differences - Importance of different needs
- Multiple selves - Different personalities or needs within the same or different people
- Some consumers don’t know their needs

Consumer Decision Making

- Rationality
- Attribute importance
- Performance
- Use Intuitions
- Representativeness: Judging a thing based on stereotypes such as where it
comes from and how it looks. (Physical appearance and its psychological effect)
- Availability: Judge a thing based on how easy it comes to your mind

Addition of Utilities Rule

Economics of Loyalty
- Acquisition cost per customer
- Formula:
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑐𝑜𝑛𝑡𝑎𝑐𝑡𝑖𝑛𝑔 𝑎𝑙𝑙 𝑝𝑟𝑜𝑠𝑝𝑒𝑐𝑡𝑠
𝐴𝑐𝑞𝑢𝑖𝑠𝑖𝑡𝑖𝑜𝑛 𝐶𝑜𝑠𝑡 𝑝𝑒𝑟 𝐶𝑢𝑠𝑡𝑜𝑚𝑒𝑟 = 𝑁𝑜. 𝑜𝑓 𝑐𝑢𝑠𝑡𝑜𝑚𝑒𝑟𝑠 𝑜𝑏𝑡𝑎𝑖𝑛𝑒𝑑

Loyal Customers Profitability

- Acquisition cost: Money spent acquiring assets, clients, or overtaking a company
- Base Profit: Net cash flow of individual properties
- Revenue Growth
- Cost Savings
- Referrals: Advertising to ask customers to recommend their services and products
- Price Premium
Loyalty Programs
- Highly competitive
- The need to complete → The closer the goal is the faster they run toward it
- SOW (Share of Wallet) → For specific company
- Formula:
𝑆𝑝𝑒𝑛𝑑𝑖𝑛𝑔 𝑎𝑡 𝑡ℎ𝑒 𝑓𝑖𝑟𝑚
𝑆𝑂𝑊 = 𝑆𝑝𝑒𝑛𝑑𝑖𝑛𝑔 𝑎𝑡 𝑐𝑎𝑡𝑒𝑔𝑜𝑟𝑦
- Can help determine potential of customer
- Low spending at your firm but overall high (High potential)
- The value of customer to the specific firm
- Low value is usually dropped by firm
- Retain good existing customers
- Decide whether or not the customer is worth acquiring
- Loyal Customers
- If these customers always pay back in time they are a burden to the firm
- Disloyal Customers
- Can be used to drive them to competitors to make it their burden

Company

SWOT Analysis
- Strength
- Weakness
- Opportunities
- Threats

Competitors

Value Chain: Business chain that receives raw materials as input, add value to the raw
materials through various processes, and sell final products to customers.
STP (Segmentation, Targeting, Positioning)

Segmentation: Divides market into smaller subsets

- Geographic segments
- Demographic segments
- Age, family, sex, income… etc
- Psychographic segments
- Social class, lifestyle, personality… etc
- Behavioral segments
- Occasions, benefits, responses

Targeting: Deciding which group to market to

- Strategies
- Single target approach
- Selecting one specific segment
- Multiple target approach
- Two or more segments and offering different marketing mixes to each
- Characteristics of a good segment
- Needs / wants are similar
- Responses to marketing actions are similar
- Large enough segment
- Distinctive → Can be separated from other segments
- Identifiable → Easily identify customers of the segment
- Stable

Positioning: Creating an image or identity in the target market for the product
- States who the product is for
- The functionality of the product
- Products benefits / unique selling point in comparison to its competitors
- Positioning is usually identified by (strategies
- Price / Quality
- Use / Occasion
- Benefit / Attribute
- Product user
STP in Starbucks Case Study

The Problem
- “despite its high Customer Snapshot scores, Starbucks was not meeting expectations in
terms of customer satisfaction”
- Christine Day believed that Starbucks had began to lose sight of their customers →
losing connection between growth of business and consumer satisfaction

The Decision
- Should the company carry out the She $40 million labor plan

Mission Statement: It has always been, and will always be, about quality.
- When our customers feel this sense of belonging, our stores become a haven, a break
from the worries outside, a place where you can meet with friends. It’s about enjoyment
at the speed of life – sometimes slow and savored, sometimes faster. Always full of
humanity.

Starbucks Case Study Questions

1. Factors of success
a. Premium Quality Products
b. Experiential Brand Strategy: Creating experience around drinking coffee, a “third
place” for customers outside of home and work
c. Store Ambiance: Cozy and inviting environment
d. Customer Focus: Customer satisfaction
i. Tightly integrated positioning that perfectly fitting the needs of customers
2. How does the Starbucks of 2002 differ from the Starbucks of 1992?
a. Store Count and Expansion
b. Market Dominance
c. Customer Base: While the early Starbucks stores primarily catered to affluent,
well-educated, white-collar patrons between the ages of 25 and 44, the customer
base had expanded by 2002.
d. Global Presence: Expanded from US only to worldwide
e. Financial Performance
f. New image

i.
ii. Slow vs Fast coffee
iii. Increased convenience yet maintaining most of the quality
iv.
3. Why did Christine Day believe consumer satisfaction declined? Why did Starbucks start
to lose the connection between satisfying customers and growing business?
a. Market research findings revealed they were not able to meet customer
satisfaction and expectations
i. The more stores that opened up the harder it was to keep up the standard
with all the stores
4. Describe the ideal Starbucks customer from a profitability standpoint. How valuable is a
highly satisfied customer to Starbucks?
a. Loyal: Regular and Frequent Visits
b. High transaction values
c. Positive word of mouth: Recommending the product / service
d. Reduced costs: Less customer service since they are already familiar with
surroundings → Low operational cost
5. Should Starbucks make the $40 million investment in labor in the stores and why?
a. Goal of investment?
i. Improving overall customer experience and service
ii. More labor means higher efficiency
b. How is this plan going to change customer satisfaction?
i. Reduced wait times
ii. Higher level of customer engagement
c. Risk?
i. Will the increased satisfaction justify the $40 million investment? Evaluate
ROI in order to determine if the benefits outweigh the costs
ii. Implementation: More workers means more training and adapting
managing more people and shifting schedules
iii. May not entirely address the customer’s concerns and may possibly
backfire → quality and store ambience may be effected
Curse of Success
- Dramatic expansion of customer base leads to people who are not apart of the target
market become their customers
- This leads to Starbucks being unable to meet satisfaction of new customers
- Growing to conflicting segments
- Company will then have to decide what is more profitable and beneficial (New Vs Old)
- New
- More profitable
- Drags on their brand image
- Old
- Keeping their brand image
- Drags on profitability

$40 Million Plan

- Goal: Improve speed-of-service and overall customer satisfaction
- Do both segments really care about efficiency
- Evaluate
- When will the plan break even? How?
- From satisfied to highly satisfied in order to break even

Results (Starbucks)
- 40m plan
- Becoming the labor program
- Improving satisfaction scores and overall sales
- Transaction times
- Reduced due to additional labor, verismo machines, and customer adoption of
SVC cards
- Loyalty Program
- Launched in 2003
- Partnering with Visa USA and Bank One
- Customers redeem coffee credits
- Expansion
- Opening another 1,300 stores worldwide in 2004 including 950 new stores in the
US

Take away from case study

- Importance of market positioning that fits the targeted segment
- Need to constantly reassess STP to lessen the chances of “curse of success”
- No single definition of great service
- Different customers define service differently often conflicting with one another
- Companies often are forced into difficult balancing act
4P’s
- Price
- Optimal pricing
- Pricing strategies
- Seasonal pricing (e.g. for airlines)
- Price compared to competitors
- Price of buy backs outside
- Promotion
- Communication of information about product with goal of generating positive
customer response
- Adverts
- Sales
- Promotions
- Word of mouth
- Public relations
- Place
- Also known as distribution
- Getting products to customers
- Decision making process
- Market coverage
- Location
- Distribution channels
- Partnerships
- Presence (Nationally and internationally)
Marketing Quiz 2 Revision (Mar 15)

Marketing Research

Process:

Data Types
- Primary Data
- Data collected specifically for a project
- Secondary Data
- Data collected for other purposes
- Internal
- E.g. Sales data…
- External
- E.g. Government sources, books, newspapers…

Value of Marketing Research

- Reduces uncertainties
- Provides warnings to what data may be wrong
𝑉𝑎𝑙𝑢𝑒 = 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑝𝑎𝑦𝑜𝑓𝑓 𝑓𝑟𝑜𝑚 𝑏𝑒𝑠𝑡 𝑎𝑐𝑡𝑖𝑜𝑛 𝑎𝑓𝑡𝑒𝑟 𝑖𝑛𝑓𝑜 𝑖𝑠 𝑐𝑜𝑙𝑙𝑒𝑐𝑡𝑒𝑑 − 𝑏𝑒𝑓𝑜𝑟𝑒
- Example: Direct Marketing

Expected Profit
𝐸𝑃 = [𝑃𝑟𝑜𝑏𝑎𝑏𝑖𝑙𝑖𝑡𝑦 × (𝑅𝑒𝑣𝑒𝑛𝑢𝑒 − 𝐶𝑜𝑠𝑡)] + (𝑃𝑟𝑜𝑏𝑎𝑏𝑖𝑙𝑖𝑡𝑦 × 𝑃𝑎𝑦𝑜𝑓𝑓)
𝑃𝑎𝑦𝑜𝑓𝑓 = 𝑅 − 𝐶
 - Example: Munch-a-bunch Cereal

Major Types of Marketing Research

- Exploratory Research
- Purpose: Seeks insight into certain unstructured/qualitative problems
- E.g. Improvement of quality of marketing
- Method
- Observations → Emerging methods
- Consumer tracking

- Eye-tracking
- Focus groups
- Social media
- Interviews
- Descriptive Research
- Purpose: Provides accurate “snapshot” of market environment
- E.g. What customers are buying and for what price. Age distribution of
customers
- Method
- Surveys
- Secondary data
- Internalized sales data
- Casual Research
- Purpose: Testing out a casual relationship
- E.g. Try cutting prices by $10, does sales increase? New packaging?
- Method
- Experiments (e.g. A/B testing: Testing method A against method B)
- Test market
IKEA Case Study

Basic Terms
- Product Item: Specific product noted by a unique brand, size, or price
- Stock Keeping Unit (SKU): Tracking inventory, what is available to be sold
- E.g. Barcode of products
- Product Line: Group of products that satisfy similar / class of needs, used together, or
sold to the same group of customers

Brand: Term, name, design, symbols, or features that identifies the specific seller’s goods or
service that distincts from other sellers (uniqueness of product)
- Strategies
- Differentiation Strategy: Differentiate from competitors in one or more attributes
- Low Cost / Price Strategy: Lower costs and prices relative to competitors
- Rules
- Build a long term profitable brand
- Profitable low end brand is better than non-profitable luxury brand

Product Life Cycle (PLC)

- Key Points
- Consists of 4 stages
- Different lengths and shapes depending on industry and technology
- Closely linked to advertising objectives and pricing decisions
- BCS matrix is a tool for PLC strategies (
BCG Matrix

- Limitations of BCG Matrix

- Doesn’t mention profitability
- Makes the assumption that profits are directly related to market share
which is not always the case
- Limits companies and products managers want to work with (question mark and
dog)
- Framework assumes that each business unit is independent of other
- In some cases, business units under “dog” could be helping other
business units gain competitive advantage, meaning the market needs all
four elements at times to function

New Product Development

- Ansoff Matrix

Line Extension
- Low risk and cost method to address different consumer segments
- Opportunity to offer broader range of price points
- Excess capacity after maturing stage
Test Markets

Test Markets
- Movies (Releasing in different times and areas)
- Music/Book
- Teaching
- Medicine

Simulated Test Marketing (STM)

- Emerging tool for casual research
- Stimulates an actual test market to evaluate
- Initial purchase rates
- Competition
- Packaging
- Pricing
- Retail Shelf Placement
- Advantages (Relative to real test markets)
- Fast and cheap
- Flexible
- Impressive accuracy rates
- Limitations
- Sample may not be representative
- Becoming trend in marketing research

IKEA Case Study

Question 1:
Imagine you are a furniture buyer, what are the purchase obstacles (both practical and
psychological) associated with replacing old furniture or buying new? According to the case,
how do furniture retailers respond to these purchase obstacles?
Question 2
- What factors account for the success of IKEA
- Despite its success, there are many downsides to shopping at IKEA. What are some of
these downsides?
- Should the company fix these downsides and how?

IKEA Success Factor

- Unique value positioning → “Low price with meaning”
- Price drives everything: Set price → Select manufacturer and materials → design
- Cost-efficient labor: Buy from suppliers in cheap labor market
- Competitive bidding: Designers to come up with the most cost efficient designs
- Selective use of materials: Reserving higher quality wood for high stress areas,
high-visibility surfaces, and lower-grade wood for rest areas
- Flat packaging: Lower shipping costs, reduce labor costs, avoid transport
damages, reduce consumer service
- Self-service retail philosophy: Minimize number of in-store salespeople
- “Low price with meaning”
- Supply-side cost-cutting gives IKEA economic flexibility to finance perquisites
that end up delighting consumers on the demand-side
- E.g. Aesthetically pleasing stores, company-operated childcare centers,
affordable restaurants…

IKEA Downsides
- Long lines: Less in-store salesperson
- Big shops: Easy to get lost in
- Overloaded demand
Question 3
- Describe the product offerings of existing furniture retailers when IKEA invades America
in 2002. What about the product offerings of IKEA?
- What is IKEA’s branding strategy (Differentiation? Low cost? Something else?)

IKEA Product Offerings

Is IKEA a Low-end Brand

- IKEA provides self creativity customers, provides engagement for customers to conduct
their own designing and assembling
- “Partnership with customers” → Makes customers less upset when full service is not
provided
- IKEA “retailtainment” environment creates psychological distance from other low-priced
stores
- Design of store as an entirety

What is IKEA’s Branding Strategy

 - IKEA challenges in US market
- Maintain low price and cost
- Differentiate on augmented benefits

IKEA’s Positioning
- Traditional Furniture Retailer Positioning
- Specialty furniture retailers: Highly augmented product
- Discount retailers: Compete on price with little augmentation
- IKEA’s Reverse Positioning
- Reverse Positioning: Position of a firm which runs counter to the direction in
which the rest of the market is moving
- High-end reverse positioning
- Elimination of product attributes that are expected in high end
retailers in order to compete with them in quality with the objective
to maintain lower costs
- Low-end reverse positioning
- Provides unique benefits (food, entertainment, childcare) unique
benefits that are not seen in low-end retailers

- To take away expected benefits and augmenting in unexpected directions

Reverse Positioning Strategy - Three Elements
- IKEA
- Do-it-yourself philosophy makes high end retailers feel over excessive with their
services
- Augmented services make low end retailers even more low end as they lack of
those benefits
- jetBlue
- Meals and certain attributes made to be wasteful
- Google
- Elegant interface making other homepages appear clustered and over excessive

When is Reverse Positioning Used

- When market is fully occupied by powerful high end and low end competitors
- When resources are limited to compete against either high end or low end competitors
- When brand image is totally new to the customers
- When you are able to educate target customers so that they are not upset about missing
out on expected benefits

Consequences of Successful Reverse Positioning Strategy

- Changes definition of quality within the category
- Ends up existing outside of conventional brand hierarchy
- Disrupts segmentation in category as it steals shares from both low and high end
- Becomes one of the strongest brand identities in category and some of the most loyal
customers
Question 4
- The hope of 50 stores in operation in the US by 2013 is an indication of how optimistic
the company is about the viability of its value proposition in the country
- Is IKEA being overly optimistic in its growth plans?
- In order to achieve these goals, what are your suggestions for IKEA

IKEA’s Biggest Challenge: Changing consumer’s mindsets

- Furniture being life long durable
- From hard and durable to soft and replaceable
- IKEA’s “unböring” ad campaign

Reality
- Rural areas were reluctant to constantly replace furniture
- By 2013 only 38 stores in US

“Small Spaces, Small Ideas”

- Focuses on high purchase frequency
Marketing Quiz 3 Revision (Apr 24)

Place
Types of Distribution Systems
1. Producer → Consumer
2. Producer → Retailer → Consumer
3. Producer → Wholesaler → Retailer → Consumer

“Middlemen”
- Increases efficiency
- Distribution systems decreases number of contacts between customer and
manufacturers

Promotion Strategy
1. Pull Strategy: Directing promotions to ultimate consumers to gain their cooperation
a. Fits products with low substitutability
2. Push Strategy: Directing promotions to channel members to gain their cooperation
a. Fits “guided purchase” (buying what retailers offer)

Sales Promotions
- Consumer Promotions: Aimed at end customs (Pull Strategy)
- Price discounts
- Free samples
- Coupons
- Trade Promotions
- Price discounts for middlemen (allowing retailers to also provide lower prices for
customers)
- Display (Physical interaction with product before purchase)
Potential Problems with Sales Promotions
- Consumers may simply speed up future purchases and stock up without increasing
consumption (stockpiling)
- Middlemen may also stock up when there is a trade promotion (forward buying)
- Middlemen may sell products they bought with discounts and resell them in places that
do not have discounts at a higher price for larger profit margins (diverting)
- Sales promotions could erode brand loyalty and encourage consumers to buy on deals

Place Decisions for Retail Industry

- Size of network
- Density of retail store
- Locations
- Quality signal
- Cost efficiency
- Cannibalization: the reduction of the sales of a company's own products as a
consequence of its introduction of another similar product.
- Competition
- Target segments

Competition - Hotelling Theory

- Consumers are uniformly distributed along the beach from A to C
- Ice creams from the two stores are essentially the same
- Distance is what matters → buying from the closer store

Revenue Model: Income generating framework

- Common models
- Buy low, sell high
- Markup
- Take cost of goods that you just bought and marking it up by n%
- Commission
- Subscription
- Franchising
- Donation

Types of Pricing
1. Cost based pricing (financial target oriented)
2. Value based pricing (customer oriented)
3. Competitive pricing (competition oriented)
4. STP strategic pricing (strategy oriented)
Cost Based Pricing
1. Pros & Cons
+ Simple
+ Accounting friendly
+ Easily linked to cost management and low cost strategy
- Ignores customers, demand, competition… etc
- Hard to determine which costs to consider
2. Takeaways
a. Decompose cost into VC and FC to get better idea of cost infrastructure
b. Break-even analysis involves strong assumptions which could hinder with
accuracy of conclusion

Value Based Pricing

1. Differentiation Strategy: Focuses on creating and communicating the consumer
perceived value
2. Low Cost Strategy: Aims to increase consumer premium at the cost of a lower or even
negative price premium

Competitive Pricing
1. Price Match: Matching the exact price of competitors
a. Avoids price wars
2. Taking turns in offering low prices
a. Smart and invisible price collusion
i. Difficult to be detected

STP Strategic Pricing (Price Discrimination)

1. Pricing determined by customers not product

Types of Promotion
1. Advertising: Paid form of nonpersonal communication (e.g. social media, posters, print
ads)
2. Personal Selling: Two-way flow of communication between buyer and seller designed to
influence the buyers’ purchase intentions (f2f, phone)
3. Public Relations: Nonpersonal. Indirectly paid presentation of goods and services (news
articles, editorials, keynotes… etc)
4. Sales Promotion: Short-term inducement of value offered to arouse interests (e.g.
coupons, rebates… etc)
5. Direct Marketing: Any form of direct communication with consumer inducing responses
in the form of order, enquiries or visits (e.g. emails, catalogs… etc)
Integrated Marketing Communications (IMC)
1. Traditional Promotions Management
a. Separate functions handled by experts in separate departments
b. Separate functions each have their own goals and promotional plans
2. IMC: Coordinating all promotional activities to provide a consistent message across all
media
a. Separate functions of promotion strategically integrated

3. Major Objectives
a. Build Awareness
b. Create Positive Attitude
c. Develop Motivation to Buy
4. Target
a. Talk to
i. End customers
ii. Channel partners
iii. Influencers
5. Message
a. Develop position and personality
b. Advertising Appeals: Approach used to attract attention and/or influence feelings
toward products
i. Utilize emotions, humor… etc
c. Cognitive Appeal
i. Spokespeople (E.g. Celebrities)
ii. Credibility
iii. Issues
1. Cost and control
d. Rational Appeal (Comparative Advertising: Directly or indirectly referred to)
Comparative Advertising
+ Clear communication of benefits
+ Attention getting
- Poor attitude towards the ad (consumers may dislike tone of comparison)
- Counter-argumentation
- Ad for competitor
- Consumers become indifferent between brands if they claim they deliver similar benefits

Continued
6. Media Strategy
a. Main Issues
i. Where: Selection of medium
1. Efficiency (exposure, costs… etc)
ii. When and how often: Scheduling
b. Costs
i. Cost per click
ii. Cost per impression
iii. Click through rate
iv. Transaction conversation rate
v. Take rate: Purchase probability
vi. Bounce rate: Percentage of customers who leave your website after
spending less than five seconds
7. Budget
a. How much do we need to spend
i. Expected sales
ii. Follow industry norm
8. Evaluation
a. Communication effects
i. Ad communicating well?
ii. Recall measures
1. Do you remembers having seen this ad
2. Can you recall brand name
3. Can you recall ad content
4. Attitude towards brand caused by ads?
b. Sales effects
i. Ad increasing sales?

Competitive Keyword Ad Strategy

- Bidding on keywords that matter to you and your competitive
- Bid to lose but deplete your competitive budget

Click Fraud
- Practice of deceptively clicking on search ads with the intention of increasing revenue or
exhausting advertiser’s budget