Marketing 480

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Marketing 480
2011-12-15 13:54:59
Final Exam

Chapters 7 and 8 Cases: Cutco, Swisher, A.1., EMI
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  1. WHat is the effect of marketing channels on the organizations segmentation and marketing mix?
    • 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
  2. Channel selection decision reguarding intermediaries
    • 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
  3. Distribution Density
    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
  4. Direct vs. Indirect Distribution
    • 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
  5. Marketers employ direct distribution when:
    • 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
  6. What are the three factors that affect the selection of the type and location of retail outlets?
    • 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?
  7. Effective distribution
    • 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
  8. Dual distribution
    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
  9. Disintermediation
    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
  10. Channel Conflict
    • 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
  11. Channel Power
    • 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
  12. Wal-Marts Ongoing Fashion Struggle
    • 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
  13. Hasbro's Channel Strategy
    • 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
  14. Pricing Factors
    • 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
  15. Price as an Indicator of Value
    • 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
  16. Price Elasticity of Demand (E)
    • 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
  17. Price Elasticity of Demand (E) Factors
    • 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
  18. Product-Line Pricing
    • 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
  19. Full-CostPrice Strategies
    • 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
  20. Variable-Cost Price Strategies
    • 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
  21. Stimulate Demand
    • 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
  22. Shift Demand
    • 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
  23. New Offerings Pricing Strategies
    • 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
  24. Skimming Pricing Strategy
    • 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
  25. Penetration Pricing Strategy
    • 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
  26. A.1. Defense
    • 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
  27. Lawry’s 10% share capture dollar impact
    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)
  28. Lawry’s 10% share capture volume impact
    • 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
  29. Defense Framework
  30. Sales and Profit Impact of Two/$5 Holiday Promotional Price
  31. Sales and Profit Impact of Two/$4 Holiday Promotional Price
  32. Elasticity of demand for recorded music sales
    • 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.
  33. Change in quantity demanded is UMG's plan is launched
    • •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
  34. Likelihood of price war in music industry
    • •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
  35. How much UMG sales increase is required to recoup price reduction
    •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%
  36. Cutco's Potential Growth Drivers
    • 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)
  37. Proposal Analysis
    • 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
  38. Revenue and Cost Estimates
  39. Economics of Private Brand