marketing

1

LACTURE

2-01

Financial Aspects of Marketing

Management

2

1. Define accounting and financial concepts useful in marketing management.

2. Describe how pro forma income statements are prepared.

YOU SHOULD BE ABLE TO:

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VARIABLE ANDFIXED COSTS

FINANCIAL ASPECTS OF MARKETING MANAGEMENT

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TYPES OF COSTS

VariableCosts

VariableCosts

FixedCostsFixedCosts

Variable/FixedCosts

Variable/FixedCosts

OtherVariable

Costs

OtherVariable

Costs

Cost of Goods Sold

Cost of Goods Sold

MaterialsMaterials

LaborLabor

OverheadOverhead

SalesCommissions

SalesCommissions

DiscountsDiscounts

Programmed Costs

Programmed Costs

CommittedCosts

CommittedCosts

AdvertisingAdvertising

SalesPromotion

SalesPromotion

OthersOthersOthersOthers

OthersOthers

RentRent

Administrative/Clerical

Administrative/Clerical

OthersOthers

SellingExpenses

SellingExpenses

SalarySalary

Commission/Bonus

Commission/Bonus

5

Are expenses that are uniform per unit of output within a relevant time period (i.e. budget year).

Fluctuate in direct proportion to the number of units produced.

TYPES OF COSTS

Variable CostsVariable Costs

6

Variable expenses not tied to production but do vary with volume. Includes sales commissions, discounts, etc.

Materials, labor, and overhead tied directly to production.

Are divided into two categories:

Variable CostsVariable Costs

OtherVariable

Costs

OtherVariable

Costs

Cost of Goods Sold

Cost of Goods Sold

TYPES OF COSTS

7

Are expenses that do not fluctuate with output volume within a budget year.

On a per-unit basis, decrease as the number of units over which they are allocated increase.

Remain unchanged regardless of the number of units produced.

TYPES OF COSTS

Fixed CostsFixed Costs

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TYPES OF COSTS

Fixed CostsFixed Costs

Those that maintain the organization. Includes rent, administrative/clerical salaries, etc.

Those that generate sales. Includes marketing costs such as advertising, sales promotion, salesforce salaries, etc.

Are divided into two categories:

Programmed Costs

Programmed Costs

CommittedCosts

CommittedCosts

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Some costs have both a variable and fixed component. Example:

• Fixed component: salary

• Variable component: commission or bonus

TYPES OF COSTS

Variable/Fixed CostsVariable/Fixed Costs

SellingExpenses

SellingExpenses

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RELEVANT ANDSUNK COSTS


11

Differ among marketing alternatives being considered.

RELEVANT COSTS

Are expected to occur in the future as a result of some marketing action.

Relevant costs are expenditures that:

Include opportunity costs, the forgone benefits from an alternative not chosen.

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Are the opposite of relevant costs.

SUNK COSTS

Sunk costs are past expenditures for a given activity and are typically irrelevant in whole or in part to future decisions.

Include past R&D, test marketing, and advertising expenses.

Sunk cost fallacy: Recoup spent dollars by spending still more dollars in the future.

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MARGINS


14

Is expressed on a total volume or individual basis, dollar terms, or percentages.

MARGIN

Margin refers to the difference between the selling price and the “cost” of a product or service.

Consists of three types:

Profit MarginProfit MarginGross MarginGross Margin Trade MarginTrade Margin

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The difference between total sales revenue and total cost of goods sold or

GROSS MARGIN

Gross margin (or gross profit) is:

On a per-unit basis, the difference between unit selling price and unit cost of goods sold.

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GROSS MARGIN

Gross margin is expressed in dollars or percent:

Dollar AmountDollar Amount PercentagePercentageTotal Gross MarginTotal Gross Margin

Unit Gross MarginUnit Gross Margin

Unit sales price $1.00 100%

Unit cost of goods sold -$0.40 -40%

Unit gross profit margin $0.60 60%

Net sales $100 100%

Cost of goods sold -$40 -40%

Gross profit margin $60 60%

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The difference between unit sales price and unit cost at each level of a marketing channel (manufacturerwholesalerretailer).

TRADE MARGIN

Trade margin is:

Frequently referred to as a markup or mark-onby channel members, expressed as a percentage.

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Example: Selling Price = $20; Cost = $10; Margin = $10

Retailer Margin as aPercent of Cost

Retailer Margin as aPercent of Cost

TRADE MARGIN

Retailer Margin as aPercent of Selling Price

Retailer Margin as aPercent of Selling Price

Margin: $10

Cost: $10100 = 100%

Differences in margin percentages show the importance of knowing the base (cost or selling price).

Margin: $10

Selling Price: $20100 = 50%

Trade margin percents are usually based on selling price.

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TRADE MARGIN

Example:

Managers must work backward from the consumerretail selling price through the marketing channel to arrive at the manufacturer’s product’s selling price.

Unit Selling Price

Unit Selling Price

Gross Marginas a Percentageof Selling Price

Gross Marginas a Percentageof Selling Price

Unit Cost ofGoods SoldUnit Cost ofGoods Sold

MarketingChannel

MarketingChannel

Manufacturer $2.00 $2.88 30.6%

Wholesaler $2.88 $3.60 20.0%

Retailer $3.60 $6.00 40.0%

Consumer $6.00

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NET PROFIT MARGIN (BEFORE TAXES)

Dollar AmountDollar Amount PercentagePercentage

Example: Net profit margin in an income statement

Net profit margin is the remainder after cost of goods sold, other variable costs, and fixed costs have been subtracted from sales revenue.

Net sales $100,000 100%

Cost of goods sold -$30,000 -30%

Gross profit margin $70,000 70%

Selling expenses -$20,000 -20%

Fixed expenses -$40,000 -40%

Net profit margin $10,000 10%

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CONTRIBUTION ANALYSIS


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Contribution is:

Contribution analysis is used to assess the relationship between costs, prices, volume, and profit.

CONTRIBUTION ANALYSIS

• The difference between total sales revenue and total variable costs or

• On a per-unit basis, the difference betweenunit selling price and unit variable cost

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TotalVariable Costs

TotalVariable Costs

Breakeven analysis identifies the unit or dollar sales volume at which an organization neither makes a profit nor incurs a loss.

Break-even is shown by this equation:

TotalFixed Costs

TotalFixed Costs

TotalRevenue

TotalRevenue

BREAK-EVEN ANALYSIS

= +

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BREAK-EVEN ANALYSIS

An estimate of unit variable costs.

Break-even requires the following:

The selling price for each product or service unit.

An estimate of the relevant total dollar fixed costs to produce and market the product or service unit.

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BREAK-EVEN ANALYSIS

Break-even formula:

UnitVariable Costs

UnitVariable Costs

TotalFixed Costs

TotalFixed Costs

UnitSelling Price

UnitSelling Price

=

–

UnitBreak-Even

Volume

UnitBreak-Even

Volume

Denominator = contribution per unit

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BREAK-EVEN ANALYSIS

Unit Break-Even Volume Example: Unit Selling Price = $5; Unit Variable Costs = $2; Total Fixed Costs = $30,000

=Unit

Break-EvenVolume

UnitBreak-Even

Volume

10,000 units

$30,000

$5 – $2

=Unit

Break-EvenVolume

UnitBreak-Even

Volume

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BREAK-EVEN ANALYSIS

Dollar Break-Even Volume Example: Unit Selling Price = $5; Unit Variable Costs = $2; Total Fixed Costs = $30,000

=Unit

Break-EvenVolume

UnitBreak-Even

Volume

UnitSelling Price

UnitSelling Price ×

DollarBreak-Even

Volume

DollarBreak-Even

Volume

$50,000=Dollar

Break-EvenVolume

DollarBreak-Even

Volume

= ×Dollar

Break-EvenVolume

DollarBreak-Even

Volume10,000 units$5

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CONTRIBUTION MARGIN

Contribution margin formula:

UnitVariable Costs

UnitVariable Costs

UnitSelling Price

UnitSelling Price

=

–

ContributionMargin

ContributionMargin

UnitSelling Price

UnitSelling Price

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Contribution Margin Example: Unit Selling Price = $5;Unit Variable Costs = $2

= 60%$5

=

CONTRIBUTION MARGIN

ContributionMargin

ContributionMargin

ContributionMargin

ContributionMargin

$5 – $2

DollarBreak-Even

Volume

DollarBreak-Even

Volume=

$30,000

0.60=

ContributionMargin

ContributionMargin

TotalFixed Costs

TotalFixed Costs

= $50,000

;

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BREAK-EVEN ANALYSIS CHART

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SENSITIVITY ANALYSIS

Break-even points can change if there are changesin selling price, variable costs, and/or fixed costs.

ContributionPer Unit

CU = (P - UVC)


CU = (P - UVC)

UnitBreak-Even

Volume(FC / CU)

UnitBreak-Even

Volume(FC / CU)

DollarBreak-Even

Volume(FC / CM*)

DollarBreak-Even

Volume(FC / CM*)

TotalFixed Costs

(FC)

TotalFixed Costs

(FC)

Scenario #1Scenario #1



UnitVariable

Costs(UVC)

UnitVariable

Costs(UVC)

UnitSelling Price

(P)

UnitSelling Price

(P)

* Contribution margin (CM) = [(P – UVC) ÷ P]

$5.00

$4.00

$5.00

$2.00

$2.00

$1.50

$3.00

$2.00

$3.50

$40,000

$30,000

$30,000

$66,667

$60,000

$42,857

13,333 units

15,000 units

8,571 units

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A modified break-even analysis is used to incorporate a profit goal since profits are necessary for the continued operation of an organization.



TotalFixed Costs

TotalFixed Costs

CONTRIBUTION ANALYSIS AND PROFIT IMPACT

To incorporate a profit goal in the break-even formula, treat it as an additional fixed cost.

=

+ Dollar Profit Goal

Dollar Profit Goal

Unit Volumeto AchieveProfit Goal


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Profit Goal Example: Unit Selling Price = $25;Unit Variable Costs = $10; Total Fixed Costs = $200,000; Profit Goal = $20,000

=Unit

Break-EvenVolume withProfit Goal

UnitBreak-EvenVolume withProfit Goal

$200,000 + $20,000

$25 – $10

14,667 units=Unit



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A profit goal can also be specified as a percentage of sales rather than as a dollar amount: Profit goal = 20% on sales.


To incorporate a profit goal in the break-even formula, subtract the profit goal from the contribution per unit.



TotalFixed Costs

TotalFixed Costs

=

– DollarProfit Goal

DollarProfit Goal



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Profit Goal Example: Unit Selling Price (P) = $25;Unit Variable Costs (UVC) = $10; Total Fixed Costs (FC) = $200,000; Profit Goal = 20% of Unit Selling Price (P);Contribution per Unit (CU) = P- UVC

=Unit



$200,000

[($25 – $10) – $5*]

20,000 units=Unit



* Dollar Profit Goal = (P × Profit Goal Percent on Sales) = $25 × 20%; $25 × .20 = $5

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CONTRIBUTION ANALYSIS AND MARKET SIZE

A manager can assess the feasibility of a venture by comparing the break-even volume with market size and market-capture percentage.

Example: Market potential is 100,000 units andunit volume break-even point is 50,000 units. Therefore, a firm’s product or service needs a50 percent market share to break even.

Marketing implication: Can such a percentage can be achieved?

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CONTRIBUTION ANALYSIS AND PERFORMANCE MEASUREMENT

Product Y(20,000 units)

Product Y(20,000 units)

Total(30,000 units)

Total(30,000 units)

Product X(10,000 units)

Product X(10,000 units)

Which product is more profitable?

Which product is more profitable on a unit-contribution basis?

Should Product X or Product Y be dropped? Why or why not?

Unit price $10.00 $3.00

Sales revenue $100,000 $60,000 $160,000

Unit variable cost $4.00 $1.50

Total variable cost $40,000 $30,000 $70,000

Unit contribution $6.00 $1.50

Total contribution $60,000 $30,000 $90,000

Fixed costs $45,000 $10,000 $55,000

Net profit $15,000 $20,000 $35,000

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ASSESSMENT OF CANNIBALIZATION

Cannibalization occurs when a firm obtains revenue by diverting sales from one product or service to another.

Brand Y:New Gel

Toothpaste

Brand Y:New Gel

Toothpaste

Brand X:Existing OpaqueWhite Toothpaste

Brand X:Existing OpaqueWhite Toothpaste

Unit price $1.00 $1.10

Unit variable cost -$0.20 -$0.40

Unit contribution $0.80 $0.70

Which product has the higher unit contribution?

Why is this important?

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Example: Estimate of Brand X sold = 1,000,000 units;Estimate of Brand Y sold = 1,000,000;Cannibalization effect =

How will the introduction of Brand Y affect the total contribution dollars of Brand X?

• Brand X total contribution lost? ($0.10 per unit lost × 500,000 cannibalized units from Brand X to Brand Y = –$50,000)

• Brand Y total contribution gained? ($0.70 unit contribution × 500,000 units of Brand Y = +$350,000)

• Financial effect of introducing Brand Y? (Net contribution dollars = +$350,000 – $50,000 = $300,000)

• Loss of 500,000 units of Brand X sales diverted to Brand Y

• Loss of $0.10 per unit of Brand X for each unit of Brand Y sold

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ProductProduct UnitVolume

UnitVolume

Unit Contribution

Unit Contribution

ContributionDollars

ContributionDollars

+ +

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A firm’s ability to meet short-term financial obligations within a budget year.

LIQUIDITY AND WORKING CAPITAL

Consists of cash, accounts receivable,prepaid expenses, inventory, etc.

Consists of short-term accounts payable,income taxes, etc.

Managers must be aware of the impact of marketing actions on working capital.

LiquidityLiquidity

WorkingCapital

WorkingCapital

CurrentAssetsCurrentAssets= Current

LiabilitiesCurrent

Liabilities–

CurrentAssetsCurrentAssets

CurrentLiabilitiesCurrent

Liabilities

42

Operating leverage refers to the extent to which fixed costs and variable costs are used in the production and marketing of products and services.

OPERATING LEVERAGE

The higher the operating leverage, the faster total profits will rise or fall once sales volume rises or falls below break-even volume.

High total fixed costs relative to total variable costs. Example: Airlines

Low total fixed costs relative to total variable costs. Example: Wholesalers

LowOperatingLeverage

LowOperatingLeverage

HighOperatingLeverage

HighOperatingLeverage

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EFFECT OF OPERATING LEVERAGE ON PROFIT

High VariableCost Firm


High FixedCost Firm

High FixedCost Firm

Base CaseBase Case 10% Increasein Sales

10% Increasein Sales

10% Decreasein Sales

10% Decreasein Sales



High FixedCost Firm

High FixedCost Firm



High FixedCost Firm

High FixedCost Firm

VariableCosts

VariableCosts

FixedCostsFixedCosts

SalesSales

ProfitsProfits

$100,000

$20,000

$80,000

$0

$100,000

$80,000

$20,000

$0

$110,000

$22,000

$80,000

$8,000

$110,000

$88,000

$20,000

$2,000

$90,000

$18,000

$80,000

($8,000)

$90,000

$72,000

$20,000

($2,000)

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DISCOUNTED CASH FLOW

Discounted cash flows are future cash flows expressed in terms of their present value.

Incorporates the theory of the time value of money or present-value analysis.

Premise: A dollar received next year is worth less than a dollar received today because its future value is affected by risk, inflation, and opportunity cost.

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DISCOUNTED CASH FLOW

The cost of earnings opportunities forgone by investing in a business with its attendant risk as opposed to investing in risk-free securities such as U.S. Treasury bills.

The interest or discount rate is defined by the cost of capital.

DiscountedCash Flow

Factors

DiscountedCash Flow

Factors

Cost ofCapitalCost ofCapital

Net Cash Flow

Net Cash Flow

CashOutflows

CashOutflows

= –Cash

InflowsCash

Inflows

• r = Interest rate• n = Number of the year

1

(1 + r)n = ∑

1 to n

46

APPLICATION OF DISCOUNTED CASH FLOW ANALYSIS WITH A 15 PERCENT DISCOUNT FACTOR

Which business has the larger cumulative cash flow? Why is this important?

Which business has the faster payback? Why is this important?

Which business has the greater discounted cash flow? Why is this important?

DiscountedCash Flow

DiscountedCash Flow

DiscountedCash Flow

DiscountedCash Flow

DiscountFactor

DiscountFactor

CashFlowCashFlow

CashFlowCashFlow

Business ABusiness A Business BBusiness B

CumulativeCash Flow

CumulativeCash Flow

CumulativeCash Flow

CumulativeCash Flow

TotalsTotals

YearYear

00

44

33

22

11

55

($105,000)

$43,500

$41,580

$39,480

$37,180

$34,790

$91,530

($105,000)

($55,000)

$0

$60,000

$125,000

$195,000

($105,000)

$50,000

$55,000

$60,000

$65,000

$70,000

($105,000)

$21,750

$26,460

$32,900

$40,040

$44,730

$60,880

($105,000)

($80,000)

($45,000)

$5,000

$75,000

$165,000

($105,000)

$25,000

$35,000

$50,000

$70,000

$90,000

1.000

0.870

0.756

0.658

0.572

0.497

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CUSTOMER LIFETIME VALUE


48


The present value of future cash flows from a customer relationship.

The CLV calculation requires this information:

CustomerLifetime

Value(CLV)

CustomerLifetime

Value(CLV)

= +–$M$M VariableCosts

VariableCosts

Other CustomerAcquisition CostOther CustomerAcquisition Cost

SalesRevenue

SalesRevenue ( )

(r)RetentionRate

RetentionRate =

(i)InterestRate

InterestRate =

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The customer lifetime value (CLV) formula is:

Example: $M = $2,000; i = 10%; and r = 80%. CLV is:

CLVCLV =1

1.0 + 0.1 – 0.8 $2,000 ×

CLVCLV = $6,666.67

CustomerLifetime

Value(CLV)

CustomerLifetime

Value(CLV)

=1

1 + i – r ×$M$M

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Example: $M = $2,000; i = 10%; r = 80%;g (constant growth rate) = 6%. CLV is:

CLVCLV =1

1.00 + 0.10 – 0.80 – 0.06$2,000 ×

CLVCLV = $8,333.33

Marketing affects the customer margin ($M),the retention rate (r), and the growth rate (g)but not the interest rate (i).

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PREPARING A PRO FORMA INCOME STATEMENT


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PRO FORMA INCOME STATEMENT

A pro forma income statement displays projected revenues, budgeted expenses, and estimated net profit for an organization, product, or service during a specific planning period, usually a year.

A pro forma income statement includes a sales forecast and a listing of variable and fixed costs that can be programmed or committed.

A pro forma income statement reflects a marketer’s expectations (sales) given certain inputs (costs).

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PRO FORMA INCOME STATEMENT DEFINITIONS

Sales. The forecasted unit volume times unit selling price.

Cost of goods sold. The costs incurred in buying or producing offerings, which:

• Are constant per unit within certain volume ranges

• Vary with total unit volume

Gross margin or gross profit. The remainder after cost of goods sold has been subtracted from sales.

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PRO FORMA INCOME STATEMENT DEFINITIONS

Marketing expenses. The programmed expenses budgeted to produce sales.

General and administrative expenses (overhead). The committed fixed costs for the planning period, which cannot be avoided if the organization is to operate.

Net income before (income) taxes or net profit before taxes. The remainder after all costs have been subtracted from sales.

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PRO FORMA INCOME STATEMENT FOR THE 12-MONTH PERIOD ENDED DECEMBER 31, 2008

Sales $1,000,000Cost of goods sold $500,000Gross margin $500,000Marketing expenses

Sales expenses $170,000Advertising expenses $90,000Freight or delivery expenses $40,000 $300,000

General and administrative expensesAdministrative salaries $120,000Depreciation on buildings/equipment $20,000Interest expense $5,000Property taxes and insurance $5,000Other administrative expenses $5,000 $155,000

Net profit before (income) taxes $45,000

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The Value of a Name

Prof. Dr. MAK Chishty

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Aaker: “A brand is a distinguishing name and/or symbol (such as a logo, trademark, or package design) intended to identify the goods or services of either one seller or a group of sellers, and to differentiate those goods or services from those of competitors”

58

Ogilvy: A brand is the consumer’s idea of a product”

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King: “A product is something that is made in a factory; a brand is something that is bought by a consumer. A product can be copied by a competitor; a brand is unique; a product can be quickly outdated; a successful brand is timeless.”

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A product is a physical object, but a brand is a concept in the minds of consumers

Key aspect of a brand is not what it does but what it means

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Aaker: “A set of brand assets and liabilities linked to a brand, its name and symbol, that add to or subtract from the value provided by a product or service to a firm and/or to that firm’s customers.”

Honda Auto’s: “The added value that a brand gives to `generic products/services’ beyond their functional purpose.”

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Adds or subtracts value for consumers Helps them interpret, process, & store

information Can enhance customer satisfaction

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Helps attract new customers and recapture old ones KFC……………..(Entertainment ) Agha Khan Hospital …..( Health Care ) K & N Foods………………( Healthy food)

Can enhance brand loyalty, provide reasons to buy, enhance satisfaction

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Improves margins by permitting premium pricing makes promotions less necessary

Provides growth platform through brand extensions

Forms barriers to entry for competitors

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Brand loyalty Brand awareness Perceived quality Brand associations

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United Bakers -- Warmth, act of baking, caring, fun

Season Conola -- Valley, fresh vegetables, “green,” healthy

Marlboro Man -- Outdoor, adventure, full flavor

Iqra University-- Strength, stability, security

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A recent survey found that half added nothing weren’t recognized or weren’t associated with

the right product Abstract and futuristic logos were

generally confusing and ineffective half made consumers less likely to trust

company and want to buy product

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A product is a physical thing; a brand is an idea in the consumer’s mind

Brand equity is the value of brand meanings and associations provides value for consumers and the firm

Brand equity consists of awareness, loyalty, perceived quality, and associations

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Lecture By Prof. Dr. MAK Chishty

Marketing Decision

Making and Case Analysis

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1. Describe each step in the decision-making process using the “DECIDE” method.

2. Prepare and present an analysis of a written case.

YOU SHOULD BE ABLE TO:

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DECISION MAKING

“Decision making is a rational and systematic process and that its organization is a definite sequence of steps, each of them in turn rational and systematic.”

— Peter Drucker

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DECISION-MAKING PROCESS

MARKETING DECISION MAKING AND CASE ANALYSIS

73

DECISION-MAKING PROCESS: DECIDE

Enumerate the decision factorsEnumerate the decision factors

Consider the relevantinformationConsider the relevantinformation

Define the problemDefine the problem

Identify the best alternativeIdentify the best alternative

Develop a plan for implementingthe chosen alternativeDevelop a plan for implementingthe chosen alternative

Evaluate the decision and the decision processEvaluate the decision and the decision process

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STEP 1: DEFINE THE PROBLEM

“A problem well defined is half solved.”

— John Dewey

Problem definition framework includes:

ConstraintsConstraintsSuccess

MeasuresSuccess

MeasuresObjectivesObjectives

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STEP 2: ENUMERATE THE DECISION FACTORS

Two decision factors to be enumerated and related to each other:

AlternativeCourses of Action

AlternativeCourses of Action

UncertaintiesUncertainties

Controllable by the decision maker such as the marketing mix.

Uncontrollable factors that the manager cannot influence.

76

STEP 3: CONSIDER RELEVANT INFORMATION

Relevant information consists of information that relates to the alternatives identified by the manager as being likely to affect future events. Includes characteristics of the following:

ConsumersConsumers

CompetitorsCompetitors

IndustryIndustry

Organization (competitive

strengths and position)

Organization (competitive

strengths and position)

AlternativesAlternatives

77

STEP 3: CONSIDER RELEVANT INFORMATION

Identifying relevant information is difficult:

• There is often an overabundance of information and viewpoints

• Determining what does and does not matter is a skill learned through experience

• Resist the temptation to consider everything as factual information

• Sometimes relevant information must be created

A manager has performed a situation analysis when steps 1 through 3 are completed.

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STEP 4: IDENTIFY THE BEST ALTERNATIVE

The framework for identifying the best alternative is decision analysis, which:

Use a decision tree and a payoff table to show the relationship among alternatives, uncertainties, and potential outcomes.

• Matches each alternative with the uncertainties in the environment

• Assigns a quantitative value to the outcome associated with each match

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Example: El Nacho Foods

AlternativeCourses of Actionfor Frozen Dinners

AlternativeCourses of Actionfor Frozen Dinners

Uncertaintiesabout Competitors

Uncertaintiesabout Competitors

• Reduce price

• Maintain price

• Maintain lower price

• Reduce price further

80

EXHIBIT 3.1: DECISION TREE FOREL NACHO FOODS

$175,000

$90,000

CompanyAction

CompetitiveResponse

FinancialOutcome

$150,000

$110,000

Maintain priceMaintain price

Maintainprice

Reduceprice further

Maintainprice

Reduceprice further

Reduce priceReduce price

81


Displays the alternatives, uncertainties, and outcomes facing a firm.

A payoff table:

Includes management’s determination of the probability of an uncertainty’s occurrence.

82

EXHIBIT 3.2: PAYOFF TABLE FOREL NACHO FOODS

$110,000$110,000

$90,000$90,000

$150,000$150,000

$175,000$175,000

CompetitorsCompetitorsMaintain PriceMaintain Price

(Probability = 0.9)(Probability = 0.9)

Reduce priceReduce price

Maintain priceMaintain price

UncertaintiesUncertainties


CompetitorsCompetitorsReduce PriceReduce Price


83


A payoff table computes the “expected monetary value” (EMV) for each alternative.

The EMV is calculated as follows:

EMVEMV Outcome of Uncertainty1

Outcome of Uncertainty1

= +

Outcome ofUncertainty2

Outcome ofUncertainty2

× Probability (p)of Uncertainty1

Probability (p)of Uncertainty1

Probability (p)of Uncertainty2

Probability (p)of Uncertainty2 +×

((

(())

))

EMVPI = EMV of Perfect Information

…

84

EXHIBIT 3.3: DECISION ANALYSIS AND THE VALUE OF INFORMATION

$110,000$110,000

$90,000$90,000

$150,000$150,000

$175,000$175,000

CompetitorsCompetitorsMaintain PriceMaintain Price


AA11: Reduce price: Reduce price

AA22: Maintain price: Maintain price

Payoff Table UncertaintiesPayoff Table Uncertainties


CompetitorsCompetitorsReduce PriceReduce Price


EMVEMVCalculationCalculation

$166,500$166,500

$146,000$146,000

EMVA1 = (0.9 × $150,000) + (0.1 × $110,000) = $146,000

EMVA2 = (0.9 × $175,000) + (0.1 × $90,000) = $166,500

EMVCertainty = (0.9 × $175,000) + (0.1 × $110,000) = $168,500

EMVPI = EMVCertainty – EMVBest alternative

EMVPI = $168,500 – $166,500) = $2,000

85


Is a fundamental tool for considering “what if” situations.

Decision analysis is important because it:

Forces the manager to quantify outcomes associated with specific actions.

Is useful in a variety of settings.

Can be used in determining the value of“perfect” information.

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STEP 5: DEVELOP A PLAN FOR IMPLEMENTING THE CHOSEN ALTERNATIVE

Allocation of marketing, financial, and manufacturing resources.

Developing an implementation plan involves:

Strategy formulation.

Strategy implementation.

Timing needed to develop a marketing plan.

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STEP 6: EVALUATE THE DECISION AND THE DECISION PROCESS

Was a decision made?

With respect to the decision itself, ask two questions:

Was the decision appropriate given the situation?

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STEP 6: EVALUATE THE DECISION AND THE DECISION PROCESS

Was the problem defined adequately?

With respect to the performance of the decision-making process, ask five questions:

Were all the pertinent alternatives and uncertainties identified? Were the assumptions realistic?

Was all the relevant information considered?

Was an appropriate course of action recommended?Was the logic consistent? Was any important piece of information overlooked?

How can the recommendation be implemented?

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PREPARING AND PRESENTING

A CASE ANALYSIS

MARKETING DECISION MAKING AND CASE ANALYSIS

90

APPROACHING THE CASE

First reading. Become familiar with the situation of the organization:

Second reading. ay attention to key facts and assumptions:

• Identify insights into the problem

• Obtain background information on the environment and organization

• Determine relevance and reliability of data

• Take extensive notes

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APPROACHING THE CASE

Do not rush to a conclusion.

Avoid these pitfalls:

Do not confuse supposition with fact.

Do not “work the numbers” until their meaning and derivation are understood.

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Nature of the Industry, Market, and Buying Behavior:

Assess the structure, conduct, and performance of the industry and competitors.

FORMULATING THE CASE ANALYSIS

Identify the buyers and why, where, when, how, what, and how much they buy.

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The Organization:

Understand an organization’s resources—financial, human, and material.


Identify an organization’s strengths and weaknesses and the reasons for success or failure.

Assess the “fit” between an organization and its environment via a SWOT analysis.

94

A Plan of Action:

Identify possible courses of action based on the situation analysis.


Calculate realistic estimates of the revenues and costs of each course of action.

95

Potential Outcomes:

Evaluate the potential outcomes of all courses of action.


Recommend the best course of action to be pursued.

96

If Using Teams:

Create a balanced team whose member’s skill sets complement one another (writing, oral presentation, financial, etc.).


Be committed to the task and dependable.

Avoid “groupthink.”

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MARKETING CASE ANALYSIS WORKSHEET

Nature of the industry, market,

and buyer behavior

Nature of the industry, market,

and buyer behavior

1. What is the nature of the industry structure, conduct, and performance?

2. Who are the competitors, and what are their strengths and weaknesses?

3. How do consumers buy in this industry or market?

4. Can the market be segmented? How? Can the segments be quantified?

5. What are the requirements for success in this industry?

TheOrganization

TheOrganization

1. What are the organization’s mission, objectives, and distinctive competency?

2. What is its offering to the market? How can its past and present performance be characterized? What is its potential?

3. What is the situation in which the manager or organization finds itself?

4. What factors have contributed to the present situation?

A Planof ActionA Plan

of Action

1. What actions are available to the organization?

2. What are the costs and benefits of action in both qualitative and quantitative terms?

3. Is there a disparity between what the organization wants to do, should do, can do, and must do?

PotentialOutcomesPotential

Outcomes

1. What will be the buyer, trade, and competitive response to each course of action?

2. How will each course of action satisfy buyer, trade, and organization requirements?

3. What is the potential profitability of each course of action?

4. Will the action enhance or reduce the organization’s ability to compete in the future?

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Nature of the industry,

market, and buyer

behavior

Nature of the industry,

market, and buyer

behavior

1. What is the nature of the industry structure, conduct, and performance?

2. Who are the competitors, and what are their strengths and weaknesses?

3. How do consumers buy in this industry or market?

4. Can the market be segmented? How? Can the segments be quantified?

5. What are the requirements for success in this industry?

99


TheOrganization

TheOrganization

1. What are the organization’s mission, objectives, and distinctive competency?

2. What is its offering to the market? How can its past and present performance be characterized? What is its potential?

3. What is the situation in which the manager or organization finds itself?

4. What factors have contributed to the present situation?

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A Planof Action

A Planof Action

1. What actions are available to the organization?

2. What are the costs and benefits of action in both qualitative and quantitative terms?

3. Is there a disparity between what the organization wants to do, should do, can do, and must do?

101


PotentialOutcomesPotential

Outcomes

1. What will be the buyer, trade, and competitive response to each course of action?

2. How will each course of action satisfy buyer, trade, and organization requirements?

3. What is the potential profitability of each course of action?

4. Will the action enhance or reduce the organization’s ability to compete in the future?

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COMMUNICATING THE CASE ANALYSIS

Class DiscussionClass Discussion

Case preparation requires 4–5 hours.

Bring notes to class.

Carefully listen to the viewpoints of other students during the discussion of the case.

Prepare a short summary of the case after discussing it in class.

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Oral PresentationOral Presentation

Rehearse the presentation.

Visual aids do not replace the oral presentation.

• Do not read slides to the audience

• Do not use too many graphics, colors, and transitions

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Oral PresentationOral Presentation

Slides should cover the following:

• Opening slide: Presentation title and presenters’ names

• Outline of the presentation

• Key problems and strategic issues that management needs to address

• Analysis of the organization’s situation or problem

• Recommendations and supporting reasoning for each

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Written ReportWritten Report

Be carefully organized and grammatically correct.

Has three major sections:

• Strategic problem and issue identification

• Analysis and evaluation

• Recommendations

106

LECTURE BY: Prof. Dr. MAK Chishty

Product and Service Strategy and Brand Management

107

1. Explain the offering concept and offering mix portfolio.

3. Identify and describe the stages in the new-offering development process.

AFTER LECTURE YOU SHOULD BE ABLE TO:

2. Describe how the marketing manager modifies the offering mix.

4. Identify and describe the stages in the product life cycle.

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5. Explain the types of positioning strategies.

AFTER LECTUREYOU SHOULD BE ABLE TO:

6. Define the concepts of brand and brand equity.

7. Describe how brand equity is created as well as its value to organizations.

8. Explain the types of branding and brand growth strategies.

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OFFERING STRATEGY FRAMEWORK

PositioningOfferings

PositioningOfferings

Branding OfferingsBranding Offerings

Modifying theOffering MixModifying theOffering Mix

The profitability of an organization depends on its product or service offering(s) and the strength of its brand(s).

Marketers face three offering-related strategy decisions:

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THE OFFERING PORTFOLIO

PRODUCT AND SERVICE STRATEGY AND BRAND MANAGEMENT

111

An offering consists of the benefits or satisfaction provided to target markets by an organization.

It consists of the following elements:

PackagingPackagingWarranties/GuaranteesWarranties/Guarantees

Brand name(s)Brand name(s)

Tangibleproduct/service(a physical entity)

Tangibleproduct/service(a physical entity)

Related services(delivery, setup, etc.)

Related services(delivery, setup, etc.)

Other FeaturesOther Features

THE OFFERING CONCEPT

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THE OFFERING MIX

ProductLinesProductLines

Product ItemsProduct Items

Offering Mix/PortfolioOffering Mix/Portfolio

The totality of an organization’s offerings is known as its product or service.

Groups of offerings similar in terms of usage, buyers marketed to, or technical characteristics.

A specific product or service noted by a brand, size, or price.

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THE OFFERING MIX

DepthDepth

ConsistencyConsistency

Width(breadth)Width(breadth)

The number of items in each line.

The number of offering lines.

The extent to which offeringssatisfy similar needs, appeal to similar buyer groups, or usesimilar technologies.

Offering mix decisions concern the:

114

THE OFFERING MIX

Offering mix decisions depend on the:

CompetitiveSituationCompetitiveSituation

OrganizationalResources

OrganizationalResources

MarketingStrategyMarketingStrategy

High-Profit orHigh-Volume Offerings

High-Profit orHigh-Volume Offerings

CompleteLinesCompleteLines

OneOfferingOneOffering

115

Bundling involves the marketing of two or more product or service items in a single “package” that creates a new offering:

THE OFFERING MIX

Value Meals Vacation Packages

116

Means that consumers value the package more than the individual items.

Provides a lower total cost to buyers and lower marketing costs to sellers.

THE OFFERING MIX

Bundling:

Is due to benefits received from not having to make separate purchases and the satisfaction from one item given the presence of another.

117

MODIFYING THE OFFERING MIX


118

OFFERING MIX MODIFICATON STRATEGY DECISIONS

Eliminatingthe OfferingEliminatingthe Offering

Modifyingthe Offering


Harvestingthe Offering

Harvestingthe Offering

Adding to theOffering MixAdding to theOffering Mix

New OfferingDevelopmentNew OfferingDevelopment

SingleOfferingSingleOffering

EntireLineEntireLine

Trading UpTrading Up

Trading DownTrading Down

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ADDITIONS TO THE OFFERING MIX

Additions take the form of:

How consistent is the new offering with existing offerings?

Questions to ask when considering new offerings:

SingleOfferingSingleOffering

EntireLineEntireLine

Does the organization have the resources to introduce and sustain the offering?

Is there a viable market for the offering?

ResourcesResources


MarketMarket

120



Consider demand interrelationships (offering substitutes or complements) —the cannibalization effect.

Consider the degree to which the new offering fits the organization’s existing selling and distribution strategies.

121


ResourcesResources

Consider the organization’s financial strength—R & D and marketing programs.

Consider the speed and magnitude of the competitive response.

Consider the market growth rate.

122


Consider whether a market exists.

Consider whether the new offering has a relative advantage over competitive offerings at a price consumers are willing and able to pay.

Consider if there is a distinct buyer group or segment for which no present offering is satisfactory.

MarketMarket

123

STAGES IN THE NEW-OFFERING DEVELOPMENT PROCESS

IdeaScreeningIdeaScreening

Business AnalysisBusiness Analysis

IdeaGenerationIdeaGeneration

MarketTestingMarketTesting

Commercial-izationCommercial-ization

124


Sources of new offering ideas include:

EmployeesEmployees BuyersBuyers CompetitorsCompetitors

Idea GenerationIdea Generation

Ideas are obtained through marketing research (formal) and informal means.

125


Idea ScreeningIdea Screening

Ideas are screened based on:

OrganizationalDefinition

OrganizationalDefinition

OrganizationalCapability

OrganizationalCapability

ProspectiveBuyersProspectiveBuyers

Ideas deemed incompatible with organizational definition and capabilityare quickly eliminated.

126


Assess the match between prospective buyers andoffering characteristics by asking:• Does the offering have a relative advantage over existing offerings?

• Is the offering compatible with buyers’ use or consumption behavior?

• Is the offering simple enough for buyers to understand and use?

• Can the offering be tested on a limited basis prior to actual purchase?

• Are there immediate benefits from the offering once it is consumed?

If the answers are “yes” and the offering satisfies a felt need,then go to the business analysis stage.

Idea ScreeningIdea Screening

127



Assess financial viability based on estimated:

SalesSales CostsCosts ProfitsProfits

Forecasting sales is difficult for new offerings.

Profitability analyses relate to:

InvestmentInvestment Break-evenBreak-even Payback PeriodPayback Period

128



The number of years required foran organization to recapture its initial offering investment.

=PaybackPeriodPaybackPeriod

Total Fixed CostsTotal Fixed Costs

=

Cash FlowsCash Flows

PaybackPeriodPaybackPeriod

129



The ratio of average annualnet earnings (return) divided byaverage annual investment,discounted to the present time.

=Return onInvestment(ROI)

Return onInvestment(ROI)

Annual Net EarningsAnnual Net Earnings

=

AnnualInvestmentAnnualInvestment

× DiscountFactorDiscountFactor



130


Market TestingMarket Testing

May include product concept or buyer preference tests in a laboratory situation or field test market.

Ideas that pass through this stage are commercially introduced into the marketplace.

A test market is a scaled-down implementation of one or more alternative marketing strategies for introducing the new offering.

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Market TestingMarket Testing

Generate benchmark data for assessing sales volume when the product is introduced over a wider area.

Examine the relative impacts of alternative marketing strategies and programs under actual market conditions.

Assess the incidence of trial, repeat-purchase, and quantities purchased by potential buyers of the offering.

Inform competitors of the organization’s activities,which may increase the speed and effectiveness of competitive response.

132


CommercializationCommercialization

3,000 raw ideas are needed to produce a single commercially successful new offering.

New offering success depends on a fit with:

• Market needs

• Organizational strengths and resources

133

LIFE-CYCLE CONCEPT

A life cycle plots sales of an offering(a brand of coffee) or a product class(all ground coffee brands) over a periodof time.

Life cycles are divided into four stages:

Maturity-SaturationMaturity-SaturationGrowthGrowthIntroductio

nIntroduction DeclineDecline

134

EXHIBIT 5.1: GENERAL FORM OF A PRODUCT LIFE CYCLESales

Time

Maturity-SaturationMaturity-SaturationGrowthGrowthIntroductionIntroduction DeclineDecline

135

LIFE-CYCLE CONCEPT

The sales curve can be viewed as the result of offering trial and repeat purchasing behavior.

Sales volume

=(Number of triers × average purchase amount × price) + (number of repeaters × average purchase amount × price)

Time

Sales

TrierVolume

RepeaterVolume

136

Focus on stimulating trial of the offering by:

The vast majority of sales volume is due to trial purchases.

• Advertising

• Giving out free samples

• Obtaining adequate distribution

Introduction StageIntroduction Stage

LIFE-CYCLE CONCEPT

137

An increasing share of volume is due to repeat purchases.

Marketers focus on retaining existing buyers of the offering through offering:

• Modifications

• Enhanced brand image

• Competitive pricing

Growth StageGrowth Stage

LIFE-CYCLE CONCEPT

138

Proportion of buyers who are repeat purchasers(i.e. few new buyers or triers exist).

There is an increase in the:

Standardization of production operations and product-service offerings.

Incidence of aggressive pricing activities by competitors.

LIFE-CYCLE CONCEPT

Maturity-Saturation StageMaturity-Saturation Stage

139

Finding new buyers for the offering.

Significantly improving the offering.

Increasing the frequency of usage among current buyers.

Marketers focus on:

Marketers decide to harvest or eliminate the offering.

LIFE-CYCLE CONCEPT

Maturity-Saturation StageMaturity-Saturation Stage

Decline StageDecline Stage

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MODIFYING OFFERINGS



TradingUpTradingUp

Trading DownTrading Down

Involves adding new features and higher-quality materials or augmenting the offering with attendant services and then raising the price.

Is the process of reducing the number of features or quality of an offering and lowering the price.

141

HARVESTING OFFERINGS

Harvesting is the strategic decision to reduce the investment in a business entity in the hope of cutting costs and/or improving cash flow.

The decision is not to abandon the offering outright but to minimize the human and financial resources allocated to it.

142

HARVESTING OFFERINGS

Harvesting should be considered when:

The market for the offering is stable.

The offering is not producing good profits.

Market share becomes increasingly costly to defend from competitive inroads.

The offering enhances the firm’s image or provides a full product line despite a poor future.

143

ELIMINATING OFFERINGS

• What is the future sales potential of the offering?

• How much is the offering contributing to offering mix profitability?

Elimination means that the offering is dropped from the firm’s offering mix.

An offering may be eliminated if the answers to these questions are “very little” or “none.”

• How much is the offering contributing to the sale of other offerings in the mix?

• How much could be gained by modifying the offering?

• What would be the effect on channel members and buyers?

144

POSITIONING OFFERINGS


145

POSITIONING

Positioning is the act of designing an organization’s offering and image so that it occupies a distinct and valued place in the target customer’s mind relative to competitive offerings.

146

POSITIONING STRATEGIES

Strategies include positioning by:

Product or Brand UserProduct or Brand User

Use orApplicationUse orApplication

Attribute or BenefitAttribute or Benefit

Product orService ClassProduct orService Class

Price andQualityPrice andQuality

CompetitorsCompetitors

Marketers often combine two or more of these strategies when positioning a product, service, or brand.

147

POSITIONING BY ATTRIBUTE OR BENEFIT

Requires determining:

• Which attributes are important to target markets

• Which attributes are being emphasized by competitors

Is the strategy most frequently used.

• How the offering can be fitted into this offering-target market environment

Accomplished by designing an offering that contains appropriate attributes or stressing the appropriate attributes if they already exist.

148

ATTRIBUTE OR BENEFIT POSITIONING MATRIX

Benefits of the positioning matrix:

• Can judge the competitive response to a new offering more effectively

• Can spot potential opportunities for new offerings and determine if a market niche exists

• Permits subjective estimation of the extent to which a new offering might cannibalize existing offerings

Develop a matrix relating attributes of the offering to market segments (see Exhibit 5.2).

149

ATTRIBUTES AND MARKETING SEGMENT POSITIONING

AdultsAdults

ToothpasteAttributesToothpasteAttributes ChildrenChildren Teens;

Young AdultsTeens;Young Adults FamilyFamily

Market SegmentsMarket Segments

Principal Brandsfor Each SegmentPrincipal Brandsfor Each Segment

Topol;RembrandtTopol;RembrandtAim; StripeAim; Stripe Ultra Brite;

McCleansUltra Brite; McCleans Colgate; CrestColgate; Crest

NOTE: A check () indicates principal benefits sought by each market segment.

FlavorFlavor

ColorColor

Whiteness of TeethWhiteness of Teeth

Decay PreventionDecay Prevention

Fresh BreathFresh Breath

PricePrice

Plaque PreventionPlaque Prevention

Stain PreventionStain Prevention

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CRAFTING A POSITIONING STATEMENT

Once the desired positioning has been determined, marketers prepare a succinct, written positioning statement.

A positioning statement identifies:

• The offering’s unique attributes or benefits

• The target market and needs satisfied

• The product (service) class or category in which the organization’s offering competes

151

CRAFTING A POSITIONING STATEMENT

A positioning statement takes this form:

For (target market and need), the (product, service,brand name) is a (product/service class or category)that (statement of unique attributes or benefits provided).

Example:

“For upscale American families who desire a carefree driving experience, Volvo is a premium-priced automobile that offers the utmost in safety and dependability.”

152

REPOSITIONING

Repositioning is necessary when:

• Better positioning opportunities arise

• The initial positioning of a product, service, brand, or organization is no longer competitively sustainable or profitable

It takes time and is costly to establish a new position, so do this after careful study.

153

MAKING THE POSITIONING STRATEGY DECISION

Who are the likely competitors, what positions have they staked out in the marketplace, and how strong are they?

What position, if any, does the organization already have in the target consumers’ mind?

What are the preferences of the target consumers and how do they perceive competitors’ offerings?

The choice of which positioning strategy to use can be made by answering the following:

154


What position do we want to own?

Do we have the marketing resources to occupy and hold the position?

What competitors must be outperformed if we are to establish the position?

Positioning strategy implementation decisions can be made by answering the following:

155


Frequent positioning changes should be avoided since the development of a position is a lengthy and expensive process.

The position must be clearly communicated to and valued by targeted customers.

The success of a positioning strategy depends on the following factors:

The position taken in the marketplace should be sustainable and profitable.

156

BRAND EQUITY AND BRAND MANAGEMENT


157

BRAND AND BRAND EQUITY

BrandBrand Brand EquityBrand Equity

A brand name is any word, “device” (design, sound, shape, or color), or combination of these that are used to identify an offering and set it apart from competing offerings.

Brand equity is the added value a brand name bestows on a product or service beyond the functional benefits provided.

158

BRAND EQUITY

Provides a competitive advantage, such as signifying quality.

Brand equity has two marketing advantages:

Can charge a higher price for an offering since consumers are often willing to pay for the equity premium present in the brand.

159

CREATING BRAND EQUITY

1. Develop positive brand awareness in consumers’ minds and associate it with a product class or need to give the brand an identity.

2. Establish a brand’s meaning in the minds of consumers, consisting of:

• Brand functional performance

• Brand imagery

Brand equity arises from a four-step process:

160

CREATING BRAND EQUITY

3. Elicit the proper consumer responses to a brand’s identity and meaning—how they think and feel.

4. Create a consumer-brand resonance evident in an intense, active loyalty relationship (psychological bond) between consumers and the brand.

• Thinking: Focuses on a brand’s perceived quality, credibility, and superiority relative to other brands

• Feeling: Relates to the consumer’s emotional reaction to a brand

Brand equity arises from a four-step process:

161

CUSTOMER-BASED BRAND EQUITY PYRAMID

1. Identity =Who are you?

1. Identity =Who are you?

Consumerbrandresonance

4. Relationships = What about you and me?

4. Relationships = What about you and me?

Intense,activeloyalty

Intense,activeloyalty

2. Meaning =What are you?

2. Meaning =What are you?

3. Response =What about you?

3. Response =What about you?

Positive, accessible reactions

Positive, accessible reactions

ConsumerjudgmentsConsumerjudgments

ConsumerfeelingsConsumerfeelings

Strong, favorable,and unique brandassociations

Strong, favorable,and unique brandassociations

BrandperformanceBrandperformance

BrandimageryBrandimagery

Deep, broadbrand awarenessDeep, broadbrand awarenessBrand salienceBrand salience

162

VALUING BRAND EQUITY

Successful brand names provide organizations with financial benefits because they:

Have economic value as intangible assets.

Enjoy a competitive advantage.

Create earnings and cash flow in excess of the return on its tangible (plant and equipment) assets.

Can be bought and sold, generating earnings.

Can appreciate in value, not depreciate as tangible assets do with time and use.

Achieve a high rate of return relative to competitors.

163

BRANDING STRATEGY

Three common branding strategies are:

MultiproductBrandingMultiproductBranding

PrivateBrandingPrivateBranding

MultibrandingMultibranding

A company uses one name for all its products in a product class.

A company gives each product or product line a distinct name.

A company supplies a reseller with a product bearing a brand name chosen by the reseller.

164

BRANDING STRATEGY

Multiproduct BrandingMultiproduct Branding

Is also called family branding or corporate branding.

Establishes dominance in a product or service class.

Allows consumers to transfer the good brand equity of one product to other company offerings with the same name.

Lowers advertising and promotion costs and raises overall brand awareness since the same name is used on all products.

165

BRANDING STRATEGY


Builds a global brand, which:

• Is a brand marketed under the same name in multiple countries with similar and centrally coordinated marketing programs

• Requires a large financial investment to create a unified global message

Dilutes the meaning of a brand for consumers if there are too many uses for one brand name.

166

BRANDING STRATEGY


Firms can also can employ sub-branding, which:

Combines a corporate/family brand with a new one.

Builds on favorable associations consumers have toward the corporate/family brand while differentiating the new offering.

Differentiates offerings along a price-quality continuum by adding high-end, midlevel, and low-end offerings.

167

BRANDING STRATEGY

Is a useful strategy when each brand is intended for a different market segment or uniquely positioned in the marketplace.

Often arises from company acquisitions.

Increases promotional costs because the firm must generate acceptance among consumers and distributors for each new brand.


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BRANDING STRATEGY

Since each brand is unique toeach market segment, there is reduced risk that an individual brand’s failure will transfer to the firm itself or to its other brands.

The complexity and expense of implementing this strategy canoutweigh the benefit.


AdvantageAdvantage

DisadvantageDisadvantage

169

BRANDING STRATEGY

If a reseller carries its own private brands:

Private BrandingPrivate Branding

Price competition with other resellers is avoided.

Brand equity for an offering accrues to the reseller.

170

BRANDING STRATEGY

If a manufacturer offers its own private brands:


• Profits contribute to overhead if production capacity is underutilized

Brand name companies also produce private label branded offerings.

• Thwarts competitors who may want to obtain the rights to produce competing private label brands

171

BRANDING STRATEGY

Dangers in producing private brands:


Becoming too reliant on private-brand revenue, only to have it curtailed when a reseller switches suppliers or produces its own.

May adversely affect the trade relationship between a producer and reseller.

172

BRAND GROWTH STRATEGIES

LineExtensionLineExtension

NewBrandNewBrand

BrandExtensionBrandExtension

Occurs when an organization introduces additional offerings with the same brand in a product class that it currently serves.

Fighting/Flanker BrandFighting/Flanker Brand

Is the practice of using a current brand name to enter a completely different product class.

Involves the development of a new brand and often a new offering for a product class that has not been previously served by the organization.

• Creates new brands for an existing product class that attracts specific consumer segments not served by an organization’s existing products/brands

• Represents a defensive move to counteract competitors

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NewBrandStrategy

NewBrandStrategy

LineExtension Strategy

LineExtension Strategy

BrandExtensionStrategy

BrandExtensionStrategy

Fighting/FlankingBrand Strategy

Fighting/FlankingBrand Strategy

Existing Product ClassExisting Product ClassNew Product ClassNew Product Class

New BrandNew Brand

Product/Service ClassProduct/Service ClassServed by the OrganizationServed by the Organization

Brand NameBrand Name

Existing BrandExisting Brand

174


Line Extension StrategyLine Extension Strategy

Responds to customers’ desire for variety. Eliminates gaps in a product line.

Lowers advertising and promotion costs because the same brand is used on all items.

Risks product cannibalism as buyers substitute one item for another in the extended product line.

Can create production and distribution problems and added costs without incremental sales.

Examples: New or different flavors, forms, colors, ingredients, features, and package sizes. This strategy:

175


Dilutes the meaning of a brand for consumers if the brand name has too many uses.

Brand Extension StrategyBrand Extension Strategy

Provides consumers with the familiarity of an established brand when introducing an offering in a new market.

Requires that the perceptual fit and core product benefit of the brand exists with and transfers to the new product class.

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Allows for co-branding, which:

Brand Extension StrategyBrand Extension Strategy

• Pairs the two brand names of two manufacturers on a single product (General Mills and Hershey’s)

• Permits firms to enter a new product class (Hershey’s—cereal) and capitalize on an already established brand name (Hershey’s—Reese’s)

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This strategy is akin to diversification.

Used when existing brand names are not extendable to a new product class for whichit is targeted.

May be the most challenging to successfully implement and the most costly: $50 to $100 million to introduce a new brand.

New Brand StrategyNew Brand Strategy

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Adding new brands on the high orlow end of a product line based on a price-quality continuum.

Adding a new brand whose sole purpose is to confront competitive brands in a product class being served by an organization.

Fighting/Flanker Brand Strategy Fighting/Flanker Brand Strategy

Fighting BrandFighting Brand

Flanker BrandFlanker Brand

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Introduced when:

An organization has a high relative share of the sales in a product class.

Its dominant brand is susceptible to having its high market share reduced by competitors through aggressive pricing or promotion.

The organization wishes to preserve its profit margins on its existing brand.

Fighting BrandFighting Brand

180


Fighting and flanker brand strategies risk cannibalizing other, particularly lower-priced, brands in a product line.

Marketers should engage in preemptive cannibalism—the conscious practice of stealing sales from an organization’s existing products or brands to keep customers from switching to competitors’ offerings—than lose sales volume.

Fighting/Flanker Brand Strategy Fighting/Flanker Brand Strategy

marketing

Documents

margin margin

marketing costs

gross margin gross margin

price gross margin

relevant costs relevant

sunk costs

types of costsvariable

unit gross profit margin