buyer behavior professor s.j. grant spring 2011 buyer behavior, marketing 3250

Buyer Behavior

Professor S.J. GrantSpring 2011

BUYER BEHAVIOR, MARKETING 3250

Outline

Introduction Goals of the course Requirements Grading Honor code My obligations About me

Introduction

This course is an overview of concepts of consumer behavior

Drawing from psychology, our study of behavior will emphasize an understanding of consumer learning, memory, preference, choice and attitudes

Goals of the Course

Introduce you to key concepts and theories relating to consumer behavior

Demonstrate how an understanding of consumer behavior drives marketing strategy

Requirements

Readings REQUIRED TEXT:

• Wayne D. Hoyer & Deborah J. MacInnis, Consumer Behavior, 3rd ed., Houghton Mifflin, 2004.

• Arbinger Institute, Leadership and Self-Deception; Getting Out of the Box, Berrett-Koehler, 2002.

OPTIONAL TEXTS: • Frank R. Kardes,Consumer Behavior and

Managerial Decision Making, 2nd ed., Prentice Hall, 2001.

• Dawn Iacobucci, ed., Kellogg on Marketing, John Wiley & Sons, 2001.

Requirements

Class attendance is mandatoryStudents with perfect attendance

receive 5% extra-credit awardMissing more than 3 classes results in

drop in student’s overall grade by one letter grade (B+ to C+)

Sign attendance sheet

Requirements

Group workGroups will be assignedPeer evaluation is component of

overall grade (5%)Collaborative work has pedagogical

purpose

Grading

Grading will be based on evaluations of individual effort and team work

Positioning analysis# 10 %Case analysis# 10 %Quantitative analysis* 10 %Exam I* 20 %Exam II* 20 %Team project# 20 %Team dynamics# 5 %Class participation^ 5 %

# Team work * Individual effort^Preparation for class discussion may be done in teams

Grading

Assignments Positioning

analysis Case analysis Quantitative

analysis Team project

Readings Cold calling Class discussion

Exams Midterm I Midterm II Final

Honor Code

Team work Duty to the team Conflict in the team Peer evaluation

Infractions and suspected violations are taken seriously Applies to attendance, course requirements,

preparation of assignments, exams

My Obligations

I will return assignments within one week of submission

I am available during office hours TTh 2-3 pm and by appointment

I will return all student phone calls and emails within 24 hoursPhone: 303 492 5616Email:

susan.jung.grant@colorado.edu

About Me

Education University of Pennsylvania, BA Kellogg School of Management,

Northwestern University, MBA, PhD Experience

Northwestern University, lecturer Price Waterhouse Coopers LLP, consultant Philadelphia Inquirer, editor Boston Globe, reporter, editor

Review of Marketing Concepts

Professor S.J. Grant Spring 2005

Outline

What is marketing? What is consumer behavior? Why focus on understanding

behavior? Review of marketing management

Analyzing the marketing environment & marketing opportunities

Aspects of strategy

What is Marketing?

Marketing is a social and managerial process by which individuals and groups obtain what they need and want through creating, offering and exchanging products of value with others (Philip Kotler, 1991)

What is Consumer Behavior?

Consumer behavior reflects the totality of consumers’ decisions with respect to the acquisition, consumption, and disposition of goods, services, time, and ideas by decision-makers over time

Paradigm Shift

“Selling focuses on the needs of the seller; marketing on the needs of the buyer. Selling is preoccupied with the seller’s need to convert his product into cash; marketing with the idea of satisfying the needs of the customer by means of the product and the whole cluster of things associated with creating, delivering and finally consuming it.” (Theodore Levitt)

Historic Overview

Selling concept has been historically dominantWhatever was produced (crops,

livestock, goods) had to be sold at market

Industrial Revolution shifted production from home to factory, prompting focus to be on the marketing concept

Selling versus Marketing

Selling Concept

Selling & PromotingProducts

Profits through sales

volume

Customer needs

Profits through customer

satisfaction

Marketing Concept Integrated Marketing

Selling versus Marketing

Selling conceptFocuses on selling what you can make

Marketing conceptFocuses on making what you can sell

Marketing Concept

Analyze Marketing Opportunities- Environmental Analysis- Competitive Analysis- Consumer Analysis

Implementation & Control

MarketingResearch

Select Target Markets- Segmentation - Targeting - Positioning

Formulate the Marketing Mix- Product - Promotion- Pricing - Distribution/Place

Marketing Management

Management of change, a necessary focus in a dynamic marketplaceSensitivity to external changes is key

in identifying opportunity• Competitors• Consumers

Sensitivity to internal changes is key in formulating a strategy

How is marketing management distinct from plain old management? Customer focus

Customer focus “Customer is always right” Customer focus implies scrutinizing how

strategic motivations are relevant to the customer

Involves keeping a disciplined vision of how to create the kind of value the customer is willing to pay for

In essence, marketing management is about value creation and value delivery

Choose the value

Provide the value

Communicate the value

Value Creation & Delivery

Choose the value

Provide the value

Communicate the value

Marketing Strategy

Strategic planning is important management activity

What is strategy?A fundamental pattern of present and

planned objectives, resource deployment, and interactions of an organization with markets, competitors and other environmental factors

Marketing Strategy

5 components within well-developed strategy Scope

• Where should firm compete? Goals and objectives

• Specify levels of accomplishments – profit, revenues, ROI

Resource deployments• How resources are obtained, allocated

Synergy• Is total performance enhanced by sum of parts?

Identify sustainable competitive advantage• Strategic fit

Firm must decide where to compete Product line decisions

• Honda Motor Co. made small, cheap cars• Started to make motorcycles and lawn mowers• Honda became a small motor manufacturer

• Clorox was seller of bleach• Expanded cleaning supplies business• Acquired Hidden Valley, Glad and Brita

Competitive field• Southwest chose not to go head-to-head against

United, American

Goals & Objectives

Firm must decide what the goals areProfitability through market share

• High volume strategyProfitability through margins

• High margins can be achieved through• Low costs• High prices

Resource Deployments

Firm must decide how to allocate resourcesAllocation among businesses in

portfolio• Cash cow? Rising star?

Allocation across marketing functions• Coupons or trade promotions?• Advertising or service?

Competitive Advantage

Firm must decide what is its sustainable competitive advantageAchieving competitive advantage

means outperforming the industry2 sources of advantage

• Differentiation• Cost

Competitive Advantage

How can a firm sustain competitive advantage?Isolating mechanisms (Rumelt, 1984)

• Distinctive capabilities• Legal restrictions on imitation, patents• Superior access to inputs or customers• Economies of scale• Early-mover advantages

Barriersto entry

Company: Core Competencies How does a firm know what its core

competency is? Misidentifying core competencies

results in missing attractive opportunities and chasing unprofitable ones

Core Competencies

3 dimensions of core competenciesOperational excellenceProduct leadershipCustomer intimacy

DisciplinesOperational Excellence

Sharpen distribution systemand provide no-hassleservice

Has strong, central authorityand a finite level ofempowerment

Maintain standard operatingprocedures

Acts predictably and believes“one size fits all”

Product Leadership

Nurture ideas, translatethem into products, andmarket them skillfully

Acts in an ad hoc, organic,loosely knit, andever-changing way

Reward individuals’innovative capacity andnew product success

Experiments and thinks “out-of-the-box”

Customer Intimacy

Provides solutionsand help customersrun their businesses

Pushes empowerment closeto customer contact

Measure the cost ofservice, maintainingcustomer loyalty

Is flexible and thinks“have it your way”

Core businessprocesses that...

Structure that...

Managementsystems that...

Culture that...

Source: M. Treacy and F. Wiersema The Discipline of Market Leaders Addison-Wesley: Reading MA, 1995

Which Discipline to Choose?

Operational Excellence

When practicing the operational excellence discipline, it is necessary to balance the need to respond to consumer and competitor changes in the marketplace A company must tradeoff consumer

heterogeneity, slowing demand and product proliferation if the core discipline is to be maintained

• Economies of scale, efficiency are crucial• Mass market is competitive space

Product Leadership

When practicing the product leadership discipline, the firm must be willing to cannibalize existing products, but the focus should be on providing consumers with a reason to “trade up” to the product innovation rather than “trade down” Product innovation must be constant Continual investment is necessary Requires partners’ cooperation

Customer Intimacy

When practicing the customer intimacy discipline, the firm aims to serve a small segment who pay a high premium Customer intimacy cannot be achieved on a

large scale The smaller the segment, the higher the

price charged, the higher the quality of the product or service

Choosing a Discipline

Operational Excellence

Product Leadership

Customer Intimacy

BIC Gillette British Airways

Wal-Mart Hewlett-Packard American Express

Toyota Intel Lexus

Overview: Marketing and Consumers

Outline

What is strategy? Strategy starts with analysis

3 C’s SWOT

What is consumer behavior? How does consumer behavior impact

marketing? STP 4P’s

Marketing Strategy

What is the goal of strategy?To develop and maintain strategic fit

between the company’s abilities and changing market opportunities

• Strategy positions the firm to optimize • Strategy must consider alignments of

internal, external factors• Internal: company • External: competitors, consumers

MarketOpportunity

Consumers

Competition

Company

SWOT Analysis

Basic approach starts with evaluatingInternally

• Strengths• Weaknesses

Externally• Opportunities• Threats

What is Consumer Behavior?

Consumer’s Culture

Consumer Behavior Outcomes

Process of Making Decisions

Psychological Core

What Affects Consumer Behavior?

Psychological Core

Having motivation, ability, and opportunity

Exposure, attention, and perception

Categorizing and comprehending information

Forming and changing attitudes

Forming and retrieving memories

Psychological Core

Problem recognition and search for information

Making judgments and decisions

Making post-decision evaluations

Psychological Core External processes:

Regional and ethnic influences

Age, gender, and household influences

Reference groups

Consumer Behavior Outcomes

Psychological Core Consumer behaviors

can symbolize who we are

Consumer behaviors can diffuse within a market

Developing a customer-oriented strategy starts with a segmentation schemeWhat is known about the market?How is the market segmented?

• Different types of consumers• Different needs

• Perception of value• Willingness to pay

Implications: Segmentation

Choose a targetHow profitable is each segment?What are the characteristics of

consumers in each segment?Are customers satisfied with existing

offerings?

Implications: Targeting

PositioningHow are competitive offerings positioned?How should our offerings be positioned?Should our offerings be repositioned?

Implications: Positioning

Developing products or servicesWhat are consumers’ ideas for new

products?What attributes can be added to or

changed in an existing offering?What about guarantees? Post-purchase

service? Repeat-buying opportunitiesAny consumer trends that can inspire

development?

Implications: Product

Making promotion decisions Sales promotion objectives and tactics (push)

• When should sales promotions happen?• Have our sales promotions been effective?• How many salespeople are needed to serve

customers?• How can salespeople best serve customers?

Advertising (pull)• What should our advertising look like? • Where should advertising be placed?• When should we advertise?• Has our advertising been effective?

Implications: Promotion

Making pricing decisionsWhat price should be charged?How sensitive are consumers to price and

price changes?• What is price elasticity?

When should certain price tactics be used?How do price changes affect the firm?

Implications: Price

Making distribution decisionsWhere are target consumers

likely to shop?How should stores be designed?

Implications: Place

Perception, Memory & Learning

Perception Memory

What are the types of memory? How memory is enhanced

Organization of long-term memory What is retrieval?

What are the types of retrieval? How retrieval is enhanced

Learning

Outline

Hemispheric lateralization

Perception

When do we perceive stimuli?Absolute and differential thresholds

• Just noticeable difference• Weber’s law

Selective – cocktail party Subliminal perception

• Does subliminal perception affect consumer behavior?

Perception

Does subliminal messaging make people buy? 1956 N.J. movie theater flashed subliminal

messages, “Hungry? Eat popcorn. Drink Coca-Cola.”

• Increased popcorn sales 58% and Coca-Cola sales 18%, but results were not replicated

Erotic stimuli and sexual symbols in ads purported to increase receptivity to suggestions in the ad

A Model of Memory

Perceived information is encodedExplicitImplicit

Then stored in memoryShort-term storeLong-term store

Retrieval involves calling up stored bits from memory

A Model of Memory

Stimulus Short-TermMemory

Long-TermMemory

RetrievalConsolidation

Recall

A Model of Memory

Sensory Short-term Long-term

SensoryEchoicIconicCharacteristics of sensory memory

A Model of Memory

Short-term memory (STM)Imagery processingDiscursive processingCharacteristics of short-term memory

• Short-term memory is limited (7±2)• Short-term memory is short-lived

A Model of Memory

Long-term memory (LTM)Autobiographical (episodic) memorySemantic memoryCharacteristics of long-term memory

• Stable memory of events of more distant past• Unlimited capacity• Organized by nodes

A Model of Memory

Converting short-term memories to long-term store is physically located in the hippocampus

Elaboration, or rehearsal, of information increases consolidation

Recall from long-term storage is a function of recency and availability Availability is aided if memory is organized into

a well-defined associative network of nodes• Categories• Hierarchies

A Model of Memory

Beverages

Carbonated Non-carbonated

MixersColas Juices Water

Pepsi Coke Evian PolandSpring

A Semantic (or Associative) Network

Chunking Rehearsal Recirculation Elaboration

Y=mx+bY=mx+bY=mx+bY=mx+b

How Memory Is Enhanced

Semantic network Trace strength

• Accessibility Spreading of activation

• Priming Retrieval failures

• Decay• Interference• Primacy and recency effects

Retrieval errors

What Is Retrieval?

Explicit memoryRecognitionRecallJudgments

Implicit memoryJudgments

What Are the Types of Retrieval?

Retrieval

Perceptual• “His name started with a ‘J’ . . .”

Conceptual• “A brand of personal computers that

competes with IBM . . .”

Characteristics of the stimulusSaliencePrototypicalityRedundant cuesThe medium in which the stimulus is

processed

How Retrieval Is Enhanced

What the stimulus is linked toRetrieval cuesWhere do retrieval cues come from?The brand name as a retrieval cueOther retrieval cuesConsumer implications

• Consideration set

How a stimulus is processed in short-term memoryDual coding

Consumer characteristics affecting retrievalNetwork of associationsExpertise Mood

Exposure

Attention

Interpretation

Memory

Information Processing Selective

ExposureRandom Deliberate

AttentionLow- High-

involvement involvement

InterpretationLow- High-

involvement involvement

Short-term Memory Long-term

Active problem Stored experiences, solving values, decisions,

rules, feelings

Purchase and consumption decisions

A Model of Learning

Information Processing& Implications

A model of information processingRole of attention, or cognitive

resources The structure of knowledge

How the structure of knowledge leads to understanding and persuasion

Implications for positioning

Outline

Awareness

Knowledge

Preference

Loyalty

Relevance

Differentiation

Attention

OldParadigm

NewParadigm

A Model of Information Processing

Attention

Relevance

Differentiation

Memory

Information Processing Selective

Relevance

Determining relevance is based on existing knowledge structuresInterpretation is subject to prior

learning• Schemas and associations• Categorization• Images• Scripts

Taxonomic Category Structure

Categories and their structurePrototypicalityCorrelated associationsHierarchical structure

• Superordinate level• Basic level• Subordinate level

Knowledge Structure

Consumer inferencesBrand names and brand symbolsInferences based on misleading

names and labelsInferences based on inappropriate or

similar namesProduct features and packagingInferences based on product attributesInferences based on country of origin

Using Knowledge to Understand

Target AudienceMust be broad enough to support a meaningful business, but sufficiently discriminating to guide communication and strategy. This is where segmentation strategies are relevant.

Reason to Believe

The category of competing offerings – substitutes – against which the customer should evaluate the relative merits of the brand

The brand’s competitive, differentiated reason for being – ideally an emotional benefit that uniquely identifies the brand. This is where the elevated value proposition is expressed/how elevated value is delivered.

The key product attributes or benefits that justifies the customer’s belief that the claimed benefit is true and meaningful to them

Differentiated Benefit

Frame of Reference

Implications for Positioning

Positioning

New brands or products must establish in consumers’ mindsTargetFrame of reference (or category

membership)Point of differenceReason to believe

Positioning

For busy, health-conscious adults

Prepared, ready-to-eat packaged foods

Lower fat content, reduced calories

For dieters who want to lose weight

Dietetic food (Weight Watchers, Slimfast)

Tasty, more satisfying variety of foods

Target

Frame of reference

Point of difference

Position 1 Position 2

Positioning

For leisure travelers seeking pampering

Resorts, spas, vacation getaways

Luxurious furnishings, upscale experience

For business travelers who need to be productive

Hotels catering to business travelers (Hyatt, Hilton)

Excellent service, attention to detail

Target

Frame of reference

Point of difference

Position 1 Position 2

Positioning

For upscale convertible lovers

Other luxury convertibles (BMW, Mercedes, Lexus)

Volvo’s reputation for safety first, rollover protection

For drivers who value Volvo’s safety heritage

Safety-oriented vehicles (station wagons)

A turbocharged convertible with 10-speaker sound

Target

Frame of reference

Point of difference

Position 2Position 1

Positioning

For customers who buy frozen pizza

Other frozen pizzas

Better quality

Rising crust

For customers who prefer delivery pizza

Delivery pizza

Better value

Lower price than delivery

Target

Frame of reference

Point of difference

Reason tobelieve

Position 2Position 1

Attitude Theory & Persuasion

What are attitudes? The cognitive, affective, behavioral aspects of

attitudes• Attitudes and motivation

Forming and changing attitudes Models of attitudes and measurement

Instruments to measure attitude

Outline

What are Attitudes?

Attitude defined Evaluative judgment

• Valence• Extremity

Based on beliefs – not necessarily data Characteristics of attitudes

• Favorability• Accessibility• Confidence or strength• Persistence or duration• Resistance

Attitudes

AffectiveAffective

CognitiveCognitiveBehavioralBehavioral

Characteristics of attentionAttention is selectiveAttention can be dividedAttention is limitedAttention (or cognitive resources) is

affected by motivation (or involvement) Attention facilitates memory, learning,

and ultimately persuasion

Attention

Methods of Enhancing Attention

Personal relevance • Relevant problem• Demographic

Pleasant• Using attractive

spokespersons or models

• Using music• Using humor• Aesthetics

Surprising• Using novelty• Using

unexpectedness Easy to process

• Prominent stimuli• Concrete stimuli• Contrasting stimuli• Amount of

competing information

Attitudes and Motivation

Low involvement with Low involvement with product, message, or product, message, or decisiondecision

Limited attention Limited attention focused on peripheral focused on peripheral feelings and featuresfeelings and features

Low or incidental Low or incidental processing of most processing of most salient aspectssalient aspects

Persuasion occurs Persuasion occurs through heuristic through heuristic processingprocessing

High involvement with High involvement with product, message, or product, message, or decisiondecision

Attention focused on Attention focused on central, product-central, product-related featuresrelated features

Conscious thoughts Conscious thoughts about attributes and about attributes and benefitsbenefits

Persuasion occurs Persuasion occurs through systematic through systematic processingprocessing

HIGH EFFORT HIGH EFFORT ATTITUDESATTITUDES

LOW EFFORT LOW EFFORT ATTITUDESATTITUDES

Perceived Risk

Inconsistency with Attitudes

Values, Goals, Needs

Personal Relevance

What Affects Motivation?

Personally relevant

Affects self concept

Personal Relevance

Values Goals Needs Types of

Personal Relevance

Maslow’s Hierarchy of Needs

Types of perceived riskPerformanceFinancialPhysical (or

safety)SocialPsychologicalTime

Perceived Risk

Personal Relevance

When inconsistency with attitudes occurs, we try to remove or at least understand the inconsistency

Perceived Risk

Inconsistency with Attitudes

Personal Relevance

Approaches to Attitude Change

The foundation of attitudes The role of effort in attitude formation and change

Central-route processing• Systematic

Peripheral-route processing• Heuristic

Forming and Changing Attitudes

Influences on Attitudes

Source Trustworthiness Expertise Attractiveness Likeability Celebrity vs. anonymous

Message characteristics Argument quality 1-sided vs. 2-sided Comparisons Category-consistent information Late id (a.k.a. mystery ads) Music, humor Dramas, story grammars Sex Relative complexity Fear and threat

Measurement of Attitudes

Scales can elicit responses about overall attitudes, attribute weights, importance Likert scales (agree-disagree) Semantic differential scales (pretty-ugly) Forced choice

Response latency can measure attitude accessibility

Conjoint analysis Perceptual mapping

Psychological Foundations for Marketing Applications

Psychological explanations Judgment

• Context effects: assimilation and contrast Consumer choice

• Compromise effect Advertising

• Negation effect• Message fit

Pricing strategies• Self-perception theory

Perceptual fluency• Knock-off brands

Outline

Context Effects

Contrast effectsExposure to a prime shifts judgment of

a target away from a reference point because of comparison

• Buy a $90 tie after spending $1000 on a suit

• Honda Accord feels like a luxury car when compared with a Civic

• Charlie’s Angels condition (Kenrick and Gutierres, 1980)

Context Effects

Assimilation effectsExposure to a prime shifts judgment of a

target toward a reference point because prime serves as interpretive frame

• Clothing in upscale retail store may seem more fashionable

• Country of origin (Germany vs. Mexico) helps to interpret product attributes, overall evaluation (Hong and Wyer, 1990)

Compromise Effect

Introduction of a 3rd option (decoy) may lead to selection of “compromise” when choice between 2 products is difficult

Quality

Restaurant A

Restaurant B

Restaurant A is higher on convenience but lower on quality; restaurant B ishigher on quality but loweron convenience

Which would you choose?

Compromise Effect

Williams-Sonoma increased sales of its bread machine by adding to its inventory a super premium machine

Quality

Compromise Effect

•58-minute cycle with automatic keep-warm feature •Easy-to-use control panel with 13-hour delay-bake timer •3 crust color settings: light, medium and dark •Makes 2-pound horizontal loaf •Baking cycles include: white, wheat, 58-minute ExpressBake, French, sweet, dough, pasta, quick breads, jelly/jam and cake •Instructions and over 100 recipes included •For household use only •14-1/2"L x 10"W x 13-1/2"H •Model No. 5833

$44.96

Was: $49.96

Sunbeam ExpressBake 2-Pound Bread Maker

Compromise Effect

Owning this machine is like having a custom bakery at your disposal. Its 110 programmable settings allow you to bake breads and cakes, mix pasta and pizza doughs and even cook jams. It makes traditional-shaped loaves in 1, 1 1/2 and 2-lb. sizes. The dispenser automatically adds fruits, nuts and other extras at just the right time in the cycle, and a window lets you monitor the baking progress. You can even set the timer up to 24 hours in advance for baked goods that are ready when you want them. The exterior is brushed stainless steel. Instruction booklet with recipes included. 15" x 13" x 9" high. A Williams-Sonoma exclusive.

Regular: $199.00Special: $149.00

Brushed Stainless-Steel Automatic Bread Baker

Compromise Effect

Williams-Sonoma increased sales of its bread machine by adding to its inventory a super premium machine

Quality

Super premium brand

Negation Effects

Messages that contain negations require extra computational step to process affirmation + negator

When cognitive resources are low, the negator may not be retrieved “McDonald’s burgers do not contain

worms” “This is not your father’s Oldsmobile” “It’s not delivery – it’s DiGiorno”

Message Fit

Messages that promise benefits more compelling to people with approach (or promotion) orientation Merrill Lynch promises to

maximize financial returns

Milk ads talk about benefits of stronger bones, health

Messages about safety or security more compelling to people with avoidance (or prevention) orientation Vanguard reassures

investors that portfolio will be safe

Milk ads talk about problems associated with calcium deficiency

Self-Perception Theory

Suggests that people infer their own attitudes from their actionsBuying product on sale leads to inference

that purchase was motivated by low price, not true preference (Dotson, Tybout and Sternthal, 1980)

• May operate on automatic, subconscious level, e.g. nodding head produces more positive evaluations than shaking head (Bargh, 1985)

Perceptual Fluency

New Entry in Cola Wars Muslims in France who wanted to boycott American brands created Mecca-Cola to protest policies in the Middle East.New York Times, Dec. 30, 2002

Brands and Consumers

Outline

What is a brand? Brands add value

Case study: Brand equity How are brands built?

Laddering and goal-based positioning Leveraging a brand

Brand extensions Co-branding Global branding

What is a Brand?

A name, term, sign, symbol or design (or combination of these) intended to identify the goods or services of one seller or group of sellers and to differentiate them from those of competitorsWell-established brands activate a

network of associations in consumers’ minds

Brands Add Value

RANK BRAND 2004 1 COCA-COLA 2 MICROSOFT 3 IBM 4 GE 5 INTEL6 DISNEY 7 McDONALD’s 8 NOKIA 9 TOYOTA 10 MARLBORO

BRAND VALUE ($billions) 67.461.453.844.133.527.125.024.022.722.1

Top 10 most valuable brands, as determined by Interbrand Group, 2004, J.P. Morgan.

Laddering

Goal-based positioning deepens consumers’ understanding of a brand by showing brand helps to achieve goals Concrete features imply functional benefits Functional benefits imply emotional benefits Emotional benefits imply brand essence Brand essence implies goal attainment

Features Emotions Essence Benefits Goal

The Consumer Connection BridgeProduct Feature - why I believe this

ProductFeature

FunctionalBenefit

Emotional

Benefit

Consumer Brand

Functional Benefit - what it does for meEmotional Benefit - how this makes me feelConsumer Goals - how this allows me to achieve an important, universal goal

Laddering

Physically attractivePhysically attractive

Virtuous, leanVirtuous, lean

Low inLow incaloriescalories Fat freeFat free NutritiousNutritious

breakfastbreakfastFunctionalBenefits

EmotionalBenefits

Brand Essence

Laddering

Adds lifeAdds life

RefreshingRefreshing

BubblyBubbly Goes withGoes withfoodfood TraditionalTraditionalFeatures

FunctionalBenefit

EmotionalBenefits

Laddering

Healthy livingHealthy living

Great tasteGreat taste

Select Select orangesoranges

Squeezed Squeezed within within

24 hours24 hoursNot fromNot from

concentrateconcentrateFeatures

FunctionalBenefit

EmotionalBenefits

Laddering

A family placeA family place

FriendlyFriendly

CleanClean facilitiesfacilities

HappyHappyMealsMeals

ReliableReliablefarefare

FunctionalBenefits

EmotionalBenefits

Brand Essence

Laddering

Good parentGood parent

CaringCaring

ChoosyChoosyMakingMakingtoughtough

choiceschoices

WantingWantingbestbest

for kidsfor kids

EmotionalBenefits

Brand Essence

Laddering

Elite establishmentElite establishment

AcceptanceAcceptance

PreppyPreppystylingstyling

American American casualcasual

QualityQualitymaterialmaterial

FunctionalBenefits

EmotionalBenefits

Brand Essence

Leveraging the Brand

Product line extensionsDiet Coke Bayer Select

Country Time Cider A1 Poultry Sauce Crystal Pepsi

Cool Mint ListerineHershey’s Hugs

Brand extensionsMarlboro Clothing BIC PerfumeJello Pudding PopsAunt Jemima Pancake

SyrupJack Daniels Charcoal

Woolite Tough Stain Rug Cleaner

DuPont StainmasterMarquis by Waterford

Product Line Extensions

Opportunities Way to serve a segmented market Adapt to consumer variety seeking and update or expand

the core brand’s image Increase shelf-space and attract more consumer attention Offer a broader range of price points and thereby serve a

wider audience of consumers Utilize excess capacity Increase sales quickly Create a barrier to entry by increasing control of shelf-

Product Line Extensions

Threats Blurring the rationale for each product in the line Encouraging variety seeking Diluting the core brand image Increasing costs without increasing total sales,

cannibalization Reducing credibility with trade if extension sales are

lower than promised Offering competitors more opportunities to match

products

Brand Extensions

Brands may launch extensions as a way to leverage strong brand equityStarbucks coffee – Starbucks ice

creamHewlett Packard calculators – Hewlett

Packard PCs and printers

Brand Extensions

The “extendibility” of a brand is a function of its associations Brands that have “laddered-up” and thus connect

with broad values and goals often can be extended successfully to other categories that serve the same goal (e.g. Polo)

Brands that remain closely tied to their product category may only succeed with extensions to related categories (e.g., Aunt Jemima Pancake Mix and Aunt Jemima Syrup)

Co-Branding

Ingredient brands Intel InsideNutrasweetDuPont Stainmaster

Composite brandsMaster Card and issuing bankHealthy Choice from Kellogg’s

Global Branding

Global target Teens, business travelers, affluents/aspirers Global needs: simplicity, elegance, status

Global category needs Yes: high tech, high signal (style, fashion) No: local tastes, rituals, personal hygiene

Global equity Country-of-origin imagery relevant (Coke, Levi’s, Harley-

Davidson, Chanel, Evian, Nissan) Weak, fragmented local competitors

Can leverage economies of scale

Segmentation and Targeting: DemographicsProfessor S.J. GrantSpring 2005

Outline

What is market segmentation? Why segment? How to segment?

DemographicsGeographicPsychographicsEthnicitySocial class

Overview of the STP Process

1. Identify dimensions for segmentation 2. Develop profiles of the resulting segments1. Evaluate attractiveness of each segment2. Select the target segment(s)1. Identify positioning concepts for segment2. Select, develop and communicate the chosen positioning

Segmentation

Targeting

Positioning

Segmentation is the dividing of a market into subsets, on the basis of similar needs, characteristics or behavior, by which any subset can be selected as a marketing target to be reached with a distinct positioning and marketing mix

Segmentation

Market Segmentation

One size fits all? Physician

• General practitioner versus pediatric neurosurgeon

Business consultant• Specialist versus generalist

Demographic Females vs. males Teenagers vs. senior citizens

Geographic East Coast vs. West Coast Urban vs. rural

Psychographic Lifestyle, individual differences

Ethnic Class

Working class vs. middle class Nouveau Riche vs. Old Money

Commonly Used Variables

Demographics

289.9 million people in the US 85 million households

Minorities make up more than 29% of the US population Hispanic Americans 12.5% African Americans 12.3% Asian Americans 3.6% Native Americans 1%

Almost half the work force is womenhttp://www.americandemographics.com/

Demographics

Generational segmentsBaby Boom Generation

• 78 million (born 1946-1964)Generation X

• 45 million (born 1965-1976)Generation Y, or Echo Boomers

• 72 million (born 1977-1994)

Demographics

Declining birth rateCouples having fewer childrenSegment of couples at child-bearing

years is smaller (Generation X)Causing a shift in age distribution

Demographics

Generation Y 60% of children under 6 have mothers who

work outside the home (compare to 18% in 1960)

60% of households with children under 7 have PCs in home

Teenage population expected to peak in 2006 with 30 million

• Highest since 1975• $100 billion in annual purchasing power

Demographics

25%23-61995-20121977-1994

17%34-241984-19941966-1976

21%45-351973-19831955-1965

14%54-461963-19721946-1954

17%72-551946-19631928-1945

5%78-731940-19451922-1927

3%88-791930-19391912-1921

Share of Population

Age in 2000Coming of Age

BornCohort

Depression

World War II

Post-War

Boomers I

Boomers II

Generation X

Generation Y

Demographics

Depression/WWII Orange juice FDR Flattops No more

butter Sunday drives Mom, Dad,

Grandma, Grandpa

Dr. Spock

Baby Boomers The Juice runs Nixon HAIR No more war

Drive-thrus Mom and Dad

Dr. Strangelove

Generations X & Y The Juice walks Reagan Skinheads No more ozone

layer Drive-bys Mom or Dad

Dr. Kevorkian

Geographics

Shifts in population Pre-1950s: people from rural, agricultural

areas moved to urban areas After World War II, urban dwellers began to

move to the suburbs In the 1980s, populations moved from the

Northeast (New England, New York) and Midwest (Illinois, Ohio) to the South (Georgia), West (California, Washington) and Southwest (Arizona)

Geographics

Regions in the US have distinct character – though somewhat diminished because of migratory culture, but still preserved

Psychographics

Psychographics is a quantitative investigation of consumers’ personalities, values and lifestyles

Assessing dominant values of individuals can help lead to better predictions of consumer behavior

http://courses.bus.ualberta.ca/consumer-behavior/Lectures/98-99LectureNotes/VALSPERS.html#The VALS Psychographic Inventories

Ethnicity

100150200250300350400

2010 2020 2030 2040

WhiteHispanicAfrican Amer.Asian Amer.

Ethnicity: Hispanic

Largest minority group by 2010(ish) Significant within group diversity Acculturation levels vary

AcculturatedBiculturalTraditional

Ethnicity: Hispanic

Family orientation/extended family Strong ethnic pride/work ethic Importance of religion Younger than national average Brand loyal Preference for literal messages

Ethnicity: African Americans

Currently the largest minority group Politically and morally charged role

and place in US history

Ethnicity: African Americans

Representation in highest and lowest income groups is increasing

Urban – 15 largest cities Higher within-group identification Religious groups/Church membership important Preservation of cultural identity Pay more attention to ads/prestigious brands Less trust in unadvertised brands Sales force interaction important

Ethnicity: Asian Americans

Highly significant within group diversity On average, greater discretionary income High value on education, upward mobility Emphasis on family, tradition, cooperation Strong work ethic Buy for quality Loyal to “high quality” (i.e.,expensive)

brands

Middle Class

“Do the right thing” (i.e., the “done” thing)

Influenced by popularity and current trends

Organization and neatness important Joiners Mainstay of branded products

Working Class

Oftentimes struggling to survive More locally oriented – socially,

intellectually, and geographically Because of preoccupation with

money, use price as cue to quality

Nouveau Riche vs. Old Money Nouveau Riche

Intellectual (real or perceived)

Self-expression Entrepreneurial Status from

achievement

Old Money Liberal and

socially conscious Understated, but

known status symbols

Careful search for information vs. price/brand as cue

Social Class

Trickle Down:Upscale can do downscale

Status Float:Downscale aspire to upscale

Segmentation and Targeting: Usage

Outline

What is segmentation? Why segment? How to segment?

TraditionalUsage based

• Non-users, current users, competitor’s users

• Benefits

Goal of Segmentation

Why segment? Segments seek different benefits and will,

therefore, respond to different positionings Segmenting allows a firm to identify which

consumers can be most effectively reached instead of employing a broad reach

Appealing to a diverse set of users with a common product is difficult, prone to failure

Market Segmentation

Market segmentation allows firms to: Take into account consumers’ diverse needs and differing

behaviors (heterogeneity) Design marketing mix to be more closely matched with

consumer needs and deliver value by precisely meeting consumer needs (i.e., consumer propositions not diluted by intra-target variance)

Improve the efficiency and effectiveness of resource allocation, boosting profitability

How to Segment

Segmentation divides diverse set of consumers into homogeneous groups that can be addressedWith common positioningWith common benefitsWith common media vehicle

How to Segment

Criteria for selecting segments as your target? Measurable (have to be able to find them) Addressable (once you find them, must

identify media to reach them) Substantial enough to support a business

Traditional segmentation Define segments on key descriptors (sex, age) Measure response differences across segments

Usage-based segmentation Identify segments that differ on key usage

dimensions Profile resulting segments on key demographic and

psychographic descriptors

Traditional vs. Usage Segmentation

Why Segment by Usage?

Communicating with consumers about a category is facilitated when a pre-existing knowledge structure in placeAllows storage of information that is

consistent with prior notionsPersuasion is difficult when you are

contradicting beliefs

Why Segment by Descriptors? No other information is available Most useful way of addressing

specific segments

Benefit Segmentation

Segmentation acknowledges consumer heterogeneity

Heterogeneity is represented by different ideal points

Market segments are formed by clustering individual ideal points together

Gentle

Ideal Point Segment 1

Ideal Point Segment 2

Excedrin

Tylenol

Bufferin Private Label

Anacin

Road Warriors: Generally higher-Income, middle -aged men who drive 25,000 to 50,000 miles a year . . . buy premium with a credit card . . . purchase sandwiches and drinks from the convenience store . . . will sometimes wash their cars at the carwash.

18% of buyers

True Blues: Usually men and women with moderate to high incomes who are loyal to a brand and sometimes to a particular station . . . frequently buy premium gasoline and pay cash. 16% of buyers

Generation F3 (for fuel, food and fast): Upwardly mobile men and women-half under 25 years of age-who are constantly on the go . . . drive a lot and snack heavily from the convenience store.

27% of buyers

Homebodies: Usually housewives who shuttle their children around during the day and use whatever gasoline station is based in town or along their route of travel.

21% of buyers

Price Shoppers: Generally aren't loyal to either a brand or a particular station, and rarely buy the premium line . . . frequently on tight budgets . . . efforts to woo them have been the basis of marketing strategies for years.

20% of buyers

® Mobil Oil Company

Market Segmentation Example

Segmentation Schemes

Once the benefits underlying segments are understood, organizing segments according to usage is necessary for targeting Current users

• Heavy users• Moderate users• Light users

Competitors’ users Non-users

Current Users

Current users are the most important segment to targetCurrent users have already favorable

associations to the productCustomer retention pays off, much more

cost effective than pursuing new users• Due to high cost of customer acquisition,

relationship may be profitable only after 1 year

Current Users

Current users are most likely to sustain, increase consumption

• Heavy users account for disproportionate share of brand’s volume

• 80/20 rule applies to beer drinkers• Men, age 18-34, eat several meals a week at

McDonald’s• Heavy users of Campbell’s Soup purchase

300 cans per year• A brand’s first obligation is to address

current users

Competitors’ Users

Success of a strategy that targets a competitors’ users depends on the brand’s ability to convince consumers of its superiority Difficult to change beliefsMaking a challenging claim often

encourages consumers to rehearse their own thoughts

Non-Users

Targeting non-users may be warranted if targeting other segments do not enhance opportunities for growthPoint-of-entry strategy

• Consumers who may be considering using the category, e.g. new parents, diamond ring

Category build strategy• Consumers who buy category for uses other

than conventional ones, e.g. baking soda

Segmentation: Example 1

What is the most useful way to segment diaper market?Traditional variables

• Baby’s sex• Baby’s age• Baby’s weight

Usage variables• Benefits?

Segmentation: Diapers

Pampers aims at parents who are expecting their first child

• Premium diaper• Outstanding softness• Rash-care• Sesame Street

• First-time parents have unique mindset• Nothing but the best• Cautious• Baby is precious

Segmentation: Diapers

Luvs targets parents of 2nd or 3rd child• “No leaks” point of difference• Cheaper diaper• “Live, learn and then get Luvs”• Barney Rewards loyalty program

Makers of shower gels have complex segmentation schemes Category Crazies – buy all the latest products Thrifty Concerned – want gels, but price sensitive Shower Freaks – men seeking ‘squeaky clean’ Sensible Selectors – older women seeking pH

balance, buying for families Promiscuous Practicals – brand switchers Unsophisticated Bathers – prefer baths to showers Cynical Pragmatists – soap is soap

Consumers as Decision Makers

Overview

Stages in consumer decision making Problem recognitionInformation searchEvaluation of alternativesProduct choice

Problemrecognition

Informationsearch

Evaluationof alternatives

Productchoice

Stages in Consumer Decision Making

Problemrecognition

Informationsearch

Productchoice

“I’m hungry”“Subway orMcDonald’s”

“Fat? Cost?Taste?” Choose

McDonald’s

Stages in Consumer Decision Making

Problemrecognition

Informationsearch

Productchoice

Attribute search • Effort• Expertise • Confirmation biasBrand search• Stimulus based • Memory basedAvailability bias

Non-compensatory• Conjunctive• Disjunctive• Elimination by aspects• LexicographicCompensatory• Multi-attribute• Additive difference

Compromise effectAttraction effectContrast effectAssimilation effectHeuristics• Brand loyalty• Price

Ideal stateActual state

Problem Recognition

Ideal state versus actual state How do consumers have a sense of an ideal

state?• Past experience

• Clean house• Vacation

• Future aspirations• Status• Power

• Reference groups, peers• Major life changes

• Getting married• Starting a new job

Search for attribute information Effort Expertise Confirmation bias

Search for brands Consideration set

• Stimulus based • Memory based

• Availability bias

Information Search

Search for attribute information Unique, differentiating, goal-relevant attributes

are more memorable Effort and expertise affect how much search

consumer is willing to undertake• Search costs• Search benefits

Confirmation bias Recall of experiences: Are extremely negative or

extremely positive experiences more memorable?

Search for brands Consideration set construction

Stimulus-based search Memory-based search

Prototypicality Brand familiarity Brand preference Strong, easily imagined

visual cues Availability bias

Availability has special status

Information Search

Availability biasWhat is the most popular motor

vehicle in the United States?What is the capital city of New York?What is the most common cause of

death in the United States?What is the capital city of Florida?Who was the second president of the

United States?

Compensatory decisions Multi-attribute model:

• Formula based on strength of belief• Assign an importance weight to each attribute• For each brand:

Score = (Importance weight on attribute 1 * Belief strength on attribute 1) + (Importance weight on attribute 2 * Belief strength on attribute 2) + . . . + (Importance weight on attribute n * Belief strength on attribute n)

Additive difference model:• Comparisons made on attributes two brands at a time

Evaluation of Alternatives

Conjunctive Does a choice satisfy minimum cutoffs on all the

attributes? Sets up minimally acceptable standards for attributes

– rule out brands that fail to meet them Emphasis on negative information to make a decision

Disjunctive Cutoffs established for the most important attributes Sets up standards for each important attribute – look

for brands that exceed them Emphasis on positive information to make a decision

Non-Compensatory Decisions

Conjunctive Consider buying a car

• Must meet all cutoffs; discard any options that don’t • Price over $20,000• Gas mileage less than 20 mpg• Less than 5-year bumper-to-bumper warranty

Disjunctive Consider choosing a class

• Accept any option that has most important attributes• Marketing area• Meets Tuesday, Thursday at 2 p.m.• No final exam

Lexicographic model: Judge options by most important attribute In case of a “tie,” compare all remaining

brands on the second-most important attribute

Elimination-by-aspects model: Prioritize attributes Establish desired standards for each

attribute Retain the brands that meet the cutoff

Examples

Lexicographic model Consider buying a car

• Honda Civic, Toyota Celica, VW Passat, Hyundai Sonata

• Price

Elimination-by-aspects model Consider choosing a class

• Advertising, Sales Force, Corporate Finance• Marketing• Time, day• Teacher evaluations

Conjunctive: Select all (or any or first) brands that surpass a minimum level on each relevant evaluative criterion.

Disjunctive: Select all (or any or first) brands that surpass a satisfactory level on any relevant evaluative criterion.

Elimination- Rank the evaluative criteria in terms of importance and establish by-aspects satisfactory levels for each. Start with the most important attribute and

eliminate all brands that do not meet the satisfactory level. Continue through the attributes in order of importance until only one brand is left.

Lexicographic: Rank the evaluative criteria in terms of importance. Start with the most important criterion and select the brand that scores highest on that dimension. If two or more brands tie, continue through the attributes in order of importance until one of the remaining brands outperforms the others.

Compensatory: Select the brand that provides the highest total score when the performance ratings for all the relevant attributes are added (with or without importance weights) together for each brand.

Decision Rules Used by Consumers

Heuristics and Biases

Outline

Biases in judgmentsLoss aversionFraming effectsAnchoring and adjustmentBase-rate neglectCounterfactual thinking

Kinds of heuristics

Decision Making

Biases Elicit judgments that might be

considered “irrational” or inconsistent with utility maximizing assumptions

Heuristics Simplifying strategies that aid

decision making Rules of thumb

Thought Experiment 1

Imagine that a new experimental cure for Sudden Acute Respiratory Syndrome (SARS), a fatal flu-like epidemic, has been discoveredKills 3 out of 10 patients who are

given the experimental treatmentSaves 7 out of 10 patients who are

given the experimental treatment

How would you rate hamburger that is 80% lean?

How would you rate hamburger that is 20% fat?

Effects of Framing

We are subject to framing effects Expected value = probability * value of

outcome Classical economics predicts if expected

values are equal, we should be indifferent, but we’re not

Pricing implications: Rebates Sales price

You need a book for a class you are taking. It is on sale at a store that is 45 minutes away for $40. Normally, it costs $100. Would you drive to the store to buy the book?

You need a new computer for school. It is on sale at a store that is 45 minutes away for $1140. Normally, it costs $1200. Would you drive to the store to buy the

computer?

Thought Experiment 4a

Imagine that 600 U.S. troops are expected to die in the fighting in Iraq. Two alternative programs are being considered by the Pentagon: Program A – 200 troops will be saved Program B – there is a 1/3 probability

of saving 600 troops and a 2/3 probability that no one is saved

Thought Experiment 4b

Imagine that 600 U.S. troops are expected to die in the fighting in Iraq. Two alternative programs are being considered by the Pentagon: Program A – 400 troops will die Program B – there is a 1/3 probability

that no one will die and a 2/3 probability that 600 troops will die

Loss Aversion

We also make judgments differently about losses vs. gains Gains – risk averse

• Preference for certain outcome Losses – risk seeking

• Preference for uncertain outcome “Losses loom larger than gains”

There are 70 engineers and 30 lawyers attending a conference in Seattle. At this conference, you meet David, who is married and has two children. He is outgoing and articulate. What is the probability he is a lawyer?

Base-Rate Neglect

Base-rate information reflects the actual rate of occurrence in the population

People tend to rely on individuating information that is vivid or accessible when making probability estimates more than on base rates

Imagine you have 100 shares of stock and you decide to sell half. The next day the stock price goes up. How would you feel?

Imagine you have 100 shares of stock and you decide to sell half. The next day the stock price goes down. How would you feel?

Counterfactual Thinking

Counterfactual thoughts are reflections on an alternative state of reality due to a change in a specific action or outcomeThinking “if only . . .”Olympic medalistsThe kind of counterfactual invoked has

implications for consumer satisfaction or regret

Heuristics

Simplifying strategies are most often used by low-involvement processors Low motivation or interest Knowledge base is small Purchase is trivial or unimportant

Kahneman and Tversky describe 3 heuristics Anchoring and adjustment Availability Representativeness

Anchoring and Adjustment

Anchor and adjustment process: Starting with an initial reference point and

adjusting it with additional information Possible anchors?

Brand name Country-of-origin Pricing (e.g. a $99 value, yours for

$49.99)

Availability

People exaggerate or overestimate the relative frequency of events that are available in memory

Representativeness

An event is judged to be probable to the extent that it represents the essential features of the parent population or of its generating process

Sometimes the manner in which the object or event is represented makes one insensitive to the prior probabilities involved

Sometimes the manner in which the object or event is represented leads one to ignore the basic rules of the probability calculus, e.g., that the likelihood of a conjunction is always less than the likelihood of each conjunct taken singly

Sometimes the manner in which the object or event is represented makes one insensitive to the fact that small samples are less representative than large samples are

Heuristics

Buy based on priceCheapest productMost expensive productMid-level product

Buy the highest status brand Buy the most familiar brand

Consumer Insights

Outline

Need for consumer insightsRole in product developmentMessage clarity

Case: Pepsi One Case: MasterCard Case: Altoids Case: DiGiorno Pizza

Need for Consumer Insights

Concept of value must be defined in context of what targeted consumers are willing to pay forIt is not always clear what features

provide valueWhat is level of optimal

tradeoff?

Apple introduced the versatile Newton in 1993 But for all its technological advancements, the

handwriting recognition software was flawed, and the product flopped

Motorola Envoy, launched in 1994, also failed to make inroads with consumers

Palm Pilot, an incremental improvement over its predecessors, became a huge success when it was introduced in 1996

Product quality is not just the strength of its attributesCoca-Cola introduced an improved

formula after losing Pepsi Challenge taste tests, but consumers rejected New Coke

Consumer Insights: Pepsi One Pepsi introduced Pepsi One, a one-calorie

cola, in 1998 Addition to line of products: Pepsi, Diet Pepsi,

Mountain Dew, Diet Dew, Slice, Mug

Pepsi One fits you like a glove. You are viewed by friends as an intellectual and a trendsetter. You go out of your way to learn about new music, fashion, and trends. There's a brainy side of you too. You often pull interesting facts out of your hat and stun people with your worldliness. The same goes for your impeccable taste in music. You also have a spark that lights up the room when you make your entrance. Your smile is magnetic.

Case Study: MasterCard

There are some things money can’t buy. For everything else there’s MasterCard.

VISA: Everywhere you want to be

American Express: Membership has its privileges

Associated with acceptance at 24 million locations

Affiliated with 15,000 financial institutions

Market share is in mid 20s, about half that of Visa

Consumer insight: Values were changing in a fundamental way in the late ‘90s

More emphasis was being placed on family and human relationsMaterial consumption was

almost taken for granted

Market Shares (% Purchase Volume)

1997 1998 2000 2001

MasterCard 25.40 25.50 25.60 27.61

Visa 51.70 52.25 51.75 50.38

American Express 15.90 16.30 17.25 16.14

More recent versions of the ad have off-beat humor, irreverence

Represent departure from nostalgic, sentimental executions

A change in strategy?

Males, 20-28, working Smokers Drink coffee, beer Frequent restaurants or carry out Go to movies and clubs frequently Looking for empowerment

Case Study: Altoids

Drawing on a retro image, Altoids brand is built on the benefit of having “curiously strong” breath-freshening capabilities

Case Study: Altoids

Percentage

1996 2000 2001

Market Share

Tic TacsAltoids

Case Study: DiGiorno

Consumers who enjoy delivery pizza complained of inconsistent carry out/delivery quality Long waits High price Cold when delivered

Idea of high-quality frozen pizza met with cynicism

Case Study: DiGiorno

Pizza, which is sold in supermarket freezer, was positioned against delivery pizza as the frame of referenceHigher quality ingredientsSelf-rising crust

Point of difference: “It's like getting a $12 pizza for $5”

Product

Outline

New product successTapping into a needTapping into an emotionTapping into an aspirationTapping into a trend

Creating a Need

Do marketers create needs?Women’s razorsSalad in a bagDesigner water

Livestrong and Nike

17,516,398 requests since Tuesday 04 November, 2003

Post 9/11 Post 9/11 patriotismpatriotism

Generations

Civic(Millennials,

(Generation Y)

Adaptive(Silent)

• Correct ills of Reactive• Era of prosperity and strength• Pervasive optimism• Uplifting patriotic sentiment

• Follow trends from Civic• More complacent• Head down hard work

and life enjoymentIdealist

(Boomers)• Change agents as tired of / rebel

against status quo of Adaptive• Era of volatility (economic,

political, social, etc.)

Reactive(Generation X)

• Left reacting to changes initiatedby Idealists

• Often era of economic downturn• Feelings of negativity and disenfranchisement

ubiquitous

Target

GenerationIdealists (Baby boomers)Reactives (Generation X)Civics (Generation Y)Adaptives (Parents of boomers)

Intergenerational Trend

Pricing I

Outline

Economic approaches used to understand and determine pricingCost basis (seller focused)

• Breakeven analysis• Margin calculations

Demand basis (customer focused)• Elasticity

Cost Basis Pricing

A seller-focused approach takes into account the cost of productionMaterial costsLabor costsDistribution costsOpportunity costs

Break-Even Analysis

Calculating the break-even point is helpful for understanding what price is needed to cover costs

Total Cost = Fixed Cost + Variable Cost

Revenues = Total Cost

Revenues = Fixed Cost + Variable CostBreak-even

Margin

Margin refers to profit in terms of selling priceManufacturer’s marginRetailer’s margin

Manufacturer Retailer Consumer

Cost: $1Profit: $.50Margin: 33%

$1.50 $1.80

Cost: $1.50Profit: $.30Margin: 16.7%

Markup

Markup refers to profit in terms of costManufacturer’s markupRetailer’s markup

Manufacturer Retailer Consumer

Cost: $1Profit: $.50Markup: 50%

$1.50 $1.80

Cost: $1.50Profit: $.30Markup: 20%

Margin

Contribution margin calculations allow managers to understand the added benefit of increasing production

Selling Price – Variable Cost = Contribution Margin

Return on investment is a measure of efficiencyConsider 2 projects you might invest

in – how would you decide?ROI calculation is a way to take

opportunity costs into considerationROI = Profit / InvestmentROI = Profit / Total Costs

Market Share

Share of market is calculated based on total market sales Half of $300 million market is worth

$150 million$20,000 represents 20% share of

$100,000 market Company with 75% market share has

revenues of $3 billion in $4 billion industry

Demand Basis Pricing

Pricing may be determined according to what the market will bearReal estateAuctionsUsed cars

Calculation of price sensitivity can be helpful to understand consumer demand

Demand Elasticity

Elasticity is a measure of responsivenessElasticity of demand tells us how

much the quantity demanded changes when the price changes

• Demand is elastic• Demand is inelastic

http://hadm.sph.sc.edu/COURSES/ECON/Elast/Elast.html

Elastic Demand

At low prices, greater quantities are sold More consumers may buy Consumers may buy more (stockpiling)

At high prices, smaller quantities are sold Fewer consumers may buy Consumers may buy fewer Consumers may find substitutes

Inelastic Demand

Same quantities are sold, regardless of priceLower prices do not encourage

consumptionHigher prices do not discourage

consumption• Few substitutes available• E.g. medical care

Calculating Elasticity

Elasticity can be defined as:ΔQ/QΔP/P

or(Q2-Q1)/Q1

(P2-P1)/P1

http://www.digitaleconomist.com/elasticity_tutorial.html

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