Marketing 480

• Segmentation- determines whether its chosen target markets are reached
• Communications- dictates its advertising, sales promotion, direct marketing, etc. activities
• Pricing- influences its markup and discount policies
• Offering- branding policies, willingness to stock and customize offerings, and ability to augment offferings

• Type
• Location
• Density- intensive, exclusive, selective
• Functions
• The number of levels in a marketing channel is determined by the number of intermediaries between the producer and ultimate buyers or users
• As the number of intermediaries between the producer and the ultimate buyer increases, the channel increases in length

Intensive Distribution- The firm’s offerings are sold through as many retail outlets as possible

• ExclusiveDistribution- One retail outlet in a geographic area or one retail chain sells the firm’s offerings
• •Is the defined trade area of the retailer
• •Some retailers sign exclusive distribution agreements with manufacturers
• Franchising- A marketer gives a retailer exclusive rights to sell its offerings in a defined area in return for performing specific marketing functions
• Selective Distribution- The marketer selects a few retail outlets in a specific area to carry its offerings

• Marketers must decide whether to use:
• 1. Intermediaries to reach target markets
• 2. Contact buyers directly via thier own sales force and distribution outlets or their own marketing website

• Buyers of target markets are easily identifiable
• Personal selling is a major component of the organization’s communication program
• The organization has a wide variety of offeringsfor the target market
• Resources are available to satisfy target market requirements normally handled by intermediaries
• Intermediaries are not available for reaching target markets
• Intermediaries do not possess the capacity to service the requirements of target markets
• Offerings possess certain characteristics: Technically Sophisticated, Nonstandardized, High Unit Value
• The organization’s marketing strategy dictates:
• •An aura of exclusivity
• •An emphasis on “buying direct”
• The organization seeks to differentiate its offeringfrom others distributed through intermediaries

• Target Market Coverage- Which retailers will provide the best coverage of the target market?
• Buyer Requirement Satisfaction- Which retailers will best satisfy the target market’s buying requirements?
• Profitability- Which retailers will be the most profitable?

• Effective distribution means that a limited number of outlets at the retail levelaccount for a significant fraction of the market potential
• Example: A marketer distributes the product through 40% of available retail outlets, but these outlets account for 80% of the market

Dual distribution occurs whenan organization distributes its offering through two or more different marketing channelsthat may or may not competefor similar buyers.

• A firm uses dual distribution because it:
• Produces its own brand (for resellers) as well asa private store brand (for a specific retailer)
• May distribute directly to a large-volume retailerand use wholesalers for small-volume retailers
• Considers geography:
• •Uses it own sale force in concentrated markets
• •Uses intermediaries elsewhere
• Employs a multibrand strategy

Disintermediation is the practice whereby a traditional intermediary member is dropped from a marketing channel and replaced by an electronic storefront.

• Is considered more serious than cannibalization by intermediaries—it affects reseller survival
• May cause firms to avoid multi-channel marketing due to complaints and threatsby intermediaries, particularly retailers,to discontinue carrying their productsand delivering their services

• Marketing managers recognize that conflicts often occur in trade relations
• Channel conflict arises when one channel member (such as a manufacturer or an intermediary) believes another channel member is engaged in behavior that is preventing it from achieving its goals

• Occurs when:
• A channel member bypasses another member and sells or buys direct
• There is a dispute over how profit margins are distributed among channel members
• Manufacturers believe wholesalers or retailers are not giving their offerings adequate attention
• A manufacturer engages in dual distribution—particularly when different retailers or dealers carry the same brands

• A channel captain is a member of a marketing channel who seeks to coordinate, direct, support, and influence the behavior of other channel members to reduce the likelihood of conflict.
• Can take these forms:
• Economic- The ability of a firm to reward or coerce other members due to its strong financial position or consumer franchise
• Expertise- A distinctive competence that provides avalue-added service to channel members
• Channel Member Identification- Resellers compete with others to carry a firm’s highly valued brand offerings
• Legitimate Right- The ability of one channel member to legally dictate how another behaves

• Pros
• -Wide distribution of product
• -expands target market
• -quality brand perception of Wal-Mart may go down

• Cons
• -conflicts with Wal-Marts cost strategy
• -may alienate main consumers
• -brand perception of clothes may go down

• Refresh products and try to keep customers interested
• Mass merchant channel- lots of inventory sales
• Alternate channels of distribution (intensive):
• -Reach more customers
• -Want to have product differentiation
• -Bundling differentiation- same product packaged differently and not directly competiting on price
• Different channels for different markets
• One cohesive message

• Demand for an offering sets the price ceiling
• Costs, particularly variable costs, determine the price floor
• Consumer value perceptions and price sensitivity determines the maximum price charged
• The price must at least cover unit variable costs; otherwise, a loss will result for each offering sold
• Government regulations, such as predatory pricing
• Life-cycle stage of the offering—greater price discretion exists earlier than laterin the life cycle
• Profit margins of marketing channel members
• The price differentials of a firm’s offeringsto maintain perceived value differences among buyers

• Consumers pair price with the perceived benefits derived from an offering to determine value
• Value is the ratio of perceived benefits to price: Value = Perceived Benefits/Price
• This shows that for a given price, value increases as perceived benefits increase and vice versa
• For some offerings, price influences consumers’ perception of quality—and ultimately value
• Price affects consumer perceptions of prestige: As the price for an item increases, the demand for it rises
• Consumers determine value by judging the worth and desirability of an offering relative to substitutes that satisfy the same need
• -Comparing the costs and benefits of substitute items gives rise to a “reference value”
• -Pricing store brands more than 20 to 25 percent below manufacturers’ brands causes consumersto view the lower price as indicating lower quality

• Measures how responsive consumer demandis to changes in an offering’s price
• Is the ratio of the percentage change in quantity demanded relative to a percentage change in price

• PriceElasticityof Demand = E =
• Percentage Change in Quantity Demanded/
• Percentage Change in Price

• Elastic Demand- The percentage change in quantity demanded is greater than the percentage change in price ( E > 1)
• A small price reduction will result in a large increase in the quantity purchased
• As a result, total revenue will rise significantly

• Inelastic Demand- The percentage change in quantity demanded is less than the percentage change in price ( E < 1)
• A small price reduction will result in a small increase in the quantity purchased
• As a result, total revenue will rise very little

• The more substitutes an offering has, the greater its price elasticity
• The more uses an offering has, the greater its price elasticity
• The higher the ratio of the price of the offering to the income of the buyer, the greater the price elasticity

• Cross-elasticity of demand relates the price elasticity simultaneously to more than one offering:
• Measures the responsiveness of the quantity demanded of Offering A to a price change in Offering B
• Offerings are considered complements (substitutes) if lowering (raising) the price of Offering A leads to an increase in the unit sales of Offering B

• In most organizations, offerings are not priced in isolation:
• -They may be sold at a loss to entice buyers
• -They ensure that the organization can offer potential buyers complete product lines
• -Thus, the price may bear little relationshipto the actual cost of an offering

• Involves determining the:
• Lowest-Priced Product Price- Is the traffic builder designed to capture the attention of the hesitant or first-time buyer
• Highest-PricedProduct & Price- Is typically positioned as the premium item in quality and features
• Price Differentialsfor All OtherProducts in the Line
• •Should reflect differences in their perceived value of the products offered
• •Should get larger from less to more expensive items as one moves up the product line

• Those that consider both variable and fixed costs(also called direct and indirect costs)
• Mark-upPricing- Is determined simply by adding a fixed amount to the cost of the offering
• Break-EvenPricing- Equals the per-unit fixed costs plus the per unit variable costs of an offering
• Rate-of-ReturnPricing- Obtain a pre-specified rate of return on investment (ROI) for the organization
• -Used by large firms and public utilities whose return rates are watched or regulated by government
• -Assumes a standard (linear) demand function and insensitivity of buyers to price

• Those that take into account only the direct variable costs associated with an offering
• Also known as contribution pricing
• Used when a firm operates under capacity and fixed costs are a great proportion of total costs
• Assumptions:
• •Short-term, the relevant costs are variable, not total
• •Variable unit cost represents the minimum selling price
• •Any price above this minimum contributes to fixed costs and profit

• A form of demand-oriented pricing that either:
• Stimulates Demand- Since variable cost prices are lowerthan full-cost prices, the assumptionis that they will increase demand
• Shifts Demand- Shifts demand from one time period to another

• Leads to:
• •Increased revenues
• •Lower unit costs
• •Economies of scale
• •Greater profits

• Makes sense because:
• •Fixed costs incurred whether or not an offering is sold
• •The incremental variable costs of serving one more customer are minimal

• Encourage customers to switch behavior from peak demand times to even it outover a longer time period
• May use different price schedules to shift behavior

• Skimming- The price for a new offering isset very high initially and istypically reduced over time
• Penetration- An offering is introduced at alow price
• Intermediate- The price is set between the two extremes and is used in the vast majority of initial pricing decisions

• Is appropriate for a new offering if:
• 1.Demand is likely to be price inelastic
• 2.There are different price-market segments, of which one will pay a higher price for it
• 3.It can be protected by patent or copyright
• 4.Production or marketing costs are unknown
• 5.Production capacity is constrained
• 6.The firm wants to quickly recoup its investment or fund other projects
• 7.There is a realistic perceived value in it

• Is appropriate for a new offering if:
• 1.Demand is likely to be price elastic in the target market segments at which the product or service is aimed
• 2.It is neither unique nor protected by patent or copyright
• 3.Competitors are expected to quickly enter the market
• 4.There are no distinct and separate price-market segments
• 5.There is a possibility of large savings in production and marketing costs if a large sales volume can be generated
• 6.The firm’s major objective is to obtain a large market share

• Reasons to defend
• •Send a signal
• •Minimize volume loss
• •Ensure Lawry’s is not successful
• •Deal with a potential long-term problem

• Reasons not to defend
• •Lawry’s not likely be successful
• •Defense might be costly
• •Defense might hurt A.1. business
• •Lawry’s price positioning

A.1. revenue is $150 million, which represents 54% dollar market share

• Total category sales should be:
• $150 M = .54 category dollar sales
• $277,777,778 = category dollar sales
• If Lawry’s capture 10% of this, its sales will be $27.8M
• If Lawry’s draws dollar sales proportionately, A.1. will lose $15M revenue or $12.45M gross profit (83% of revenue)

• A.1. has a 46% volume market share
• A.1. sales price is $3.493 per 10 oz. bottle ($4.99 less 30% retailer margin)
• A.1. pound (16 oz) price is $5.60 ($3.493/10x16)
• A.1. volume is $150 M / $5.60 = 26,785,714 lbs. or 42,857,142 bottles (26,785,714/10x16)

• Total steak sauce category volume is:
• 26,785,714 = .46 category pound volume 58,229,813 = total category pound volume
• If Lawry’s capture 10% of this, its pound volume will be 5,822,981

• Elasticity of demand for recorded music sales=
• -8 % Quantity change = -2.0
• +4 % Price change

Reducing price should increase the quantity demanded, all else held equal.

• •Current average price
• .50 x 18.98 (superstar) + .35 x 17.98 (other) + .15 x 16.98 (other) = $18.33

•New price =12.98

• •Average reduction
• 18.33 – 12.98/18.33 = 29.19%
• •- 2.0 = % change in quantity demanded/-29.19% (% change in price) = 58.38%

• •Who sells at MSRP prices?
• Music Stores

• •Current industry conditions:
• –Decreasing growth rate
• –High price visibility to competitors
• –High buyer price sensitivity
• –Low industry capacity utilization

• •High product differentiation
• •The industry has high operating leverage
• •How various competitors interpret UMG’s goals and objectives
• •Expected competitor gains and losses from matching new low price

•Total CD unit sales, market share of UMG, contribution $ per unit before and after price reduction

• •Estimated contribution dollars:
• –729M (units) x .294 (UMG market share)= 214,326,000
• x $6.683 = $1,432,340,658
• –New unit volume at $5.90 contribution
• $1,432,340,658 / $5.90 = 242,769,603 units
• •Change
• 242,769,603 - 214,326,000/214,326,000 = 13.27%

• Investment in acquisitions (growth-feasible but not best choice)
• Investment in recruiting (increase direct sales- feasibile) BEST CHOICE
• Investment in brand recognition (feasible)
• Expansion into international markets (small % sales- not feasible)
• Investment in supplemental channels (cannibalization- not feasible)
• Investment in retail (indirect) channel (cannibalization- not feasible)
• Status quo (feasible- not recommended)

• Pros
• –Sales
• ---From current 4,200 units to 12,400 units (8,200 ordered)
• –Production capacity
• –Market expansion
• –Marketing costs
• –Duration of the contract
• –Sales of additional parts

• Cons
• –Captivity
• –Product liability
• –Existing relationships and cannibalization
• –Gross profit margin
• –Inventory
• –Incremental costs