Marketing 20100 Fall Semester Final Study Guide 2016 (Chapters 9-11)

How does the Quick Service Restaurant industry (Taco Bell) use Pricing as a competitive weapon?

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Ritchie Brothers is based on a "auction" style? How do they get the best price in their offerings?

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What can be learned by studying the pricing of Airline tickets?

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What does an examination the prices of "Sprecher Gourmet Soda" say about pricing strategy?

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What problems has JC Penney had in implementing their price strategies?

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Describe Home Depot's Supply Chain and why is it a competitive advantage?

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How are channels used in the wine industry (Creston) and how do they help a small company??

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How are the first four activities in the "Service Profit Chain" the most important to deliver high quality services?

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How did Staples want to use their stores in order to offer complimentary copying services? Why was this smart use of resources and a way to grow business?

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How was Starbucks Service Orientation essential in taking business from their competitors?

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How can Service "differentiate" your product from your competitors?

P. 265 >In Chapter 6, we mentioned that service leadership and personnel leadership are two important sources of differentiation for a company. Recall that differentiation means communicating and delivering value in different ways to different customer groups. Presumably these groups are segments that show the most promise for return on marketing investment. As a marketing manager, a significant challenge with using differentiation as a core market strategy is that competitors are constantly coming to market with new differentiators that trump the efficacy of the current ones. > In his book On Great Service, Leonard Berry, a leading expert in the field of services marketing, advocates that a focus on service and on enabling employees to effectively deliver service can be one differentiator that is hard for the competition to replicate. Many firms are reluctant to invest in great service, largely because it takes time and patience before a return on the investment may be noticeable. But Berry's point is that although the payback might take time, once a firm is able to deliver great service as a core differentiator, it is much more likely to provide a sustainable competitive advantage than are most other sources of differentiation.

What percentage of the economy has shifted to services? Why?

P. 265 >There's no debate that today we operate in an economy that is increasingly focused on intangible offerings - services - instead of just physical goods. A service is a product in the sense that it represents a bundle of benefits that can satisfy customer wants and needs, yet it does so without physical form. As such, the value a customer realizes from purchasing a service is not based on its physical attributes, but rather on some other effect the service has on him or her fulfilling needs and wants. And differences in the quality of a service can be profound; just think for a moment about the best and worst experiences you've had with a server in a restaurant. Even if the food itself is good, it is the service aspect of a meal out that everyone remembers most. All the data suggest that we not live in a predominantly service economy. More than 80% of jobs in the United States are service-related. Compare that to 55% of jobs in 1970. The Bureau of Labor Statistics expects service jobs to account for all new domestic job growth for the foreseeable future, partly because the number of jobs outside the service sector is actually declining. Jobs represented in the service sector of the economy include such important categories as intellectual property, consulting, hospitality, travel, law, health care, education, technology, telecommunications, and entertainment - all high-growth job categories. In terms of U.S. GDP, services account for more than 75% and that number is growing. The long-term shift from goods-producing to service-producing employment is expected to continue. Service-providing industries are expected to account for about 16.8 million new wage and salary jobs generated from 2008 to 2018, while goods-producing industries will see overall job loss. In today's workplace everyone is involved in service in some way; everyone has customers either outside or inside the firm, or both. >Changing U.S. demographics represent a major driver for why the service sector is thriving. For example, as baby boomers begin to retire and spend their discretionary income on travel and entertainment, firms in those industries will prosper. As the baby boomers continue to age, health services will begin to predominate their spending. In the meantime, the fixation of Generation Y and millennials towards all things technological will continue to drive impressive growth in gaming, music, computing, cellular phone, and other technological industries.

What is a "Service-centered" view for a company and why is it important?

P. 265-266 >That service is central to marketing management today is embodied in an important article that appeared in one of the field's leading journals, the Journal of Marketing, titled "Evolving to a New Dominant Logic for Marketing." The new dominant logic for marketing implies a shift in worldview from the traditional goods versus services dichotomy to recognition of the following: Customers do not buy goods or services: They buy offering which render services which create value... The traditional division between goods and services is long outdated. The shift in focus to services is a shift from the means and the producer perspective to the utilization and the customer perspective. > In a service-centered view, tangible goods serve as "appliances" for service provision rather than ends in themselves such that in some ways the product becomes secondary or incidental to the service it propagated. This perspective has profound implications for how marketing managers approach their business in a world of increasingly commoditized physical goods. The most fundamental question is "Just what is it that we are marketing?" Or, put another way: What is the product and where does its value come from? A service-centered perspective is very consistent with a customer-centric approach in which people, processes, systems, and other resources are to be aligned to best serve customers. It disposes of the limitations of thinking about marketing in terms of goods taken to the marketplace and instead leads to opportunities for expanding the market by assistive the customer in the process of specialization and value creation. > An overall service-centered view is fundamental to successful marketing management today. The remainder of this chapter is devoted to providing insights for effectively capitalizing on the service opportunities associated with an offering. First, unique characteristics of services are described that set services apart from physical goods for marketing managers. Second, the concept of the service-profit chain is introduced. Third, service attributes are discussed along with a continuum of products from pure goods to pure services. Fourth, the concept of service quart is introduced along with its measurement and uses by management. Finally, service blueprinting is introduced as a way for a marketing manager to map out the overall service delivery system for a business.

The four characteristics of Services are intangibility, inseparability, variability and perishability. Describe them and how do they affect the quality of service

P. 266-269 > Intangibility: A service cannot be experienced through the physical senses. It cannot be seen, heard, tasted, felt, or smelled by a customer. This property represents the intangibility of services versus goods; goods can easily be experienced through the senses. A State Farm Insurance agent issues a policy for an automobile. Yes, the customer will receive a written policy document. But the policy itself is not the product in the sense of a physical good such as a box of cereal or a bottle of shampoo. Instead, the product is the sense of financial security that insurance policy provides to the customer. It is the confidence that if something dire happens to the car, State Farm will fix it or replace it. > So how do customers draw conclusions about a brand such as State Farm if they can't actually try the product before purchase? This is one of the challenges of intangibles. Strong branding can be an important way to make a service seem more tangible. Service firms such as State Farm use strong imagery to send out signals about their products, increase trust, and ease customer uncertainty about what is being purchased. Ever see the ads saying, "Like a good neighbor, State Farm is there"? This phrase and the accompanying visual images provide cues about the dependability of the service, replacing to an extent the ability customers have to try physical products in advance of purchase. When it comes to making purchase decisions about services, customers draw conclusions from what tangibles they can experience - things like the company's people, website, marketing communications, office ambience, and pricing. In a service setting, the importance and impact of marketing are heightened considerably because in many cases there's little else tangible for the customer to experience before purchase. > Inseparability: Even with the best efforts at enhancing a service's tangibility, a customer still can't really experience it until it is actually consumed. This characteristic represents the inseparability of a service - it is produced and consumed at the same time and cannot be separated from its provider. With physical goods, the familiar process is production, storage, sale, and then consumption. But with services, first the service is sold and then it is produced and consumer at the same time. Perhaps it is more accurate to think of a service as being performed rather than produced. In a theatrical play or an orchestral concert, many individuals have a part in the performance. Similarly, the quality of a service encounter is determined in part by the interaction of the platers. Most elegant restaurants structure their customer encounters as elaborate processions involving servers, the wine steward, the chef, and , of course, the table of diners. > The inseparability of performance and consumption of services heightens the role of the human service providers in the customer's experience. It also leads to opportunities for considerable customization in delivering the service. Finicky customers in the hair stylist's char can coax just the right cut. Want two scoops of cinnamon ice cream instead of one on that apple tort? Just as the server. > Variability: An offshoot of the inseparability issue, variability of a service means that because it can't be separated from the provides, a service's quality can only be as good as that of the provider himself. Focusing on employees as a source of differentiation in marketing is usually a smart move, mainly because so many firms just can't seem to pull it off very well. The point is to remove much of the variability of customers' experiences with your service and instead provide a more dependable level of quality. Go into any Nordstrom and work with any of the Nordstrom's sales associates and you will very likely experience the same high level of satisfaction with the service. > Goods, in general, tend to be much more standardized than services because, once a girl has invested in continuous process improvement and quality control in its manufacturing operations, products flow off the line with very little variation. With services, continual investment in training, retraining, and good management of people is required if variability is to be consistently low. It is in this are where the disciplines of marketing, operations, leadership, and human resource management probably have their closes intersection. For service firms, great marketing cannot take place without a strong overarching future that values employees. > Perishability: If you schedule an appointment for a routine physical with your physician and then simply don't show up, the doctor loses the revenue from that time slot. That's perishability - the fact that a service can't be stored or saved up for future use. Perishability is a major potential problem for service providers, and explains why, under the circumstances above, many physicians have a policy of charging the patient for the missed appointment. Ever wonder why an airline won't issue a refund or let you change your super-low-fare ticker after the door closes and the plane leaves without you? It's because the value of that empty seat - its ability to generate incremental revenue for the airline - dropped to zero when the door closed and the plane backed away from the gate. > Fluctuating demand is related to perishability of services > Because demand for most goods rends to be more stable and because they can generally be stored for use after purchase, this critical issue of synchronizing supply and demand is easier to deal with for goods than for services.

What is the financial reward for a company to offer "customer delights" in their services?

P. 278 > Earlier we mentioned the importance of managing customer expectations - the notion that underpromising and overdelivering is powerful because it contributes to a high level of customer satisfaction. Exceeding customer expectations is often referred to as customer delight, which has been shown to correlate highly with loyalty and high return on customer investment. Firms practicing great service often build in delightful surprises for their customers as part of their service experience - the warm chocolate chip cookie you get at Doubletree on every stay was originally conceived as a delightful surprise; a fairly inexpensive way to make a memorable impact on sweaty travelers. Although Doubletree patrons have now come to expect their cookie, this little extra has become a part of the firm's branding and image, and customer surveys regularly indicate it is one of the most-loved aspects of the Doubletree experience.

Why is it vital to do a Gap Analysis in trying to improve a companies' service? Give examples of some Gaps and why they occur?

P. 278-282 Review the Gap Model of Service Quality, presented in Exhibit 9.6. The basis of the gap model is the identification and measurement of differences in five key areas of the service delivery process. Notice how the model is divided by a horizontal line, with the area below the line representing the provider side of the service encounter and the area above the line representing the customer side. For marketing managers, ongoing use of the gap model to identify emerging problems in service delivery is an important way to ensure service quality. > Gap 1: Management's Perceptions of Customer Service Expectations versus Actual Customer Expectations of Service: In Chapter 3 you learned about the importance of ongoing, well-executed market research to provide input for marketing management decision making. Gap 1 is where a lack of the right customer data can wreak havoc on service delivery. Unfortunately, firms all too often make unfounded assumptions about customers' wants and needs and translate them into product offerings. Then management is surprised when new products fail or customers begin to switch to other providers. > Outback Steakhouse was an early leader in providing convenient phone-ahead curbside service for customer pickup. Although it varies by location, some stores do as much as 15 to 20% of their revenue in customer takeout. This is especially profitable because it requires little extra server labor to fill these pickup orders. How did Outback know to add this new service? Not surprisingly, it was through market research that showed customers were increasingly disappointed with traditional fast-food drive-throughs and were willing to pay more for a quality, convenient meal they could enjoy at home. Convenience and time utility are two major drivers of busy young professional families today, which just happens to be Outback's primary target market. > Gap 2: Management's Perceptions of Customer Service Expectations versus the Actual Service Quality Specifications Developed: In Gap 2, management may or may not accurately perceive actual customer expectations of service, but regardless builds an aspect of the service delivery system that does not meet customer wants and needs. A perfect example of this would be if Outback had designed its curbside carryout system differently. Customers grabbing takeout after work do not want to park, het out of the car, and go into the restaurant to pick up the food. Almost all of Outback's competitors originally designed takeout that way. By designing the system as a curbside pickup in front of the store, Outback not only accurately my customer expectations of service but also designed service delivery specifications to match. > Gap 3: Actual Service Quality Specifications versus Actual Service Delivery: Interestingly, unlike the previous two gaps, this one has no element of perception - this gap strictly asks whether the service is provided in the manner intended. As such, when there is a negative hap at Gap 3, it nearly always points to management and employees simply not getting the job done. This could be due to vague performance standards, poor training, or ineffective monitoring by management. > Like many firms, Outback uses teamwork to enhance its service delivery system. Ever notice that more than one person makes contact with you at your table, asks how you are doing, brings food or drink, and so forth? To make the curbside pickup system work like clockwork, employees from the phone order-taker to the cooks to the car0runner must be in sync. If cars back up, employees are trained to go down the line to make contact, provide estimated remaining wait times, and even handle payment so that when the food does come out the customer can immediately depart. You may wait a while to get your table at an Outback restaurant on a peak evening (if it's a nice night, you can sit outside and sip on a beverage), but once you're seated the restaurant has aggressive standards for wit times for getting your meal at the table. When these wait times are significantly exceeded, the employees are trained to apologize, not offer lame excuses, and then offer something extra like a free dessert or a coupon for a free Bloomin' Onion next time. > This process is called service recovery and is actually a very strategic aspect of marketing management. Much research in services marketing has shown that service failure, when properly handled through service recovery, does not necessarily impact customer satisfaction, locally, or retention unless service failures become habitual. All firms employing service as a marketing strategy must plan ahead for the eventuality of service failures and rain employees to properly execute service recovery. > Sometimes a service failure can be quite severe. A classic example occurred in February 2007 when JetBlue Airways found itself the victim of a major winter storm at New York's JFK International Airport. Word quickly spread via media stories, blogs, and word of mouth that many hundreds of JetBlue passengers were left stranded on airplanes that had pulled away from their gates but were not allowed to take off or return to the gate for up to 12 hours. By the next day, then CEO David Neeleman had declared publicly that the airline had suffered an operational meltdown and that a series of bad decisions compounded with an already bad situation to make it even worse. > Is service recovery even possible given the magnitude of the service failure that JetBlue's customers experienced at JFK? Neeleman certainly can't be faulted for lack of trying. Immediately after the incident, he sent out an apology letter electronically to every customer in the company's database, backed up by a video message posted on the company website. This was followed by a new JetBlue Airways Customer Bill of Rights, which received press for being industry-leading. Neeleman's letter is presented in Exhibit 9.7, and the current version of JetBlue's Customer Bill of Rights can be reviewed on the company's website. Apparently JetBlue's customers believe this service recovery was appropriate and effective. JetBlue's customer ratings of quality have continued to be among the highest in the industry, ranking in the top three every year for the past five years. > Gap 4: Actual Service Delivery versus What the Firm Communicates it Delivers: This gap fundamentally represents customer expectations management through marketing communications. Part five of this book will familiarize you with different ways to communicate the value offering to customers. The messages the marketing manager puts out through various communication vehicles are in large measure what sets the expectations for the customer. Thus, deceptive advertising, overly zealous sales pitches, and coupon promotions backed by too little stock to handle demand all create a negative gap at Gap 4. In the case of Outback's curbside pickup, although it has done some advertising over the years, most of Outback's media ads focus more on special occasions and the fun theme of the restaurant. Because much of Outback's product is the experience provided the dinner inside the restaurant, it has allowed the pickup business to grow more through word of mouth and in-store signage. Outback has not set any unrealistic expectations about its curbside takeout via its marketing communications. > Gap 5: Perceived Service by Customers versus Actual Customer Expectations of Service: Finally, Gap 5 represents the core issue of expectations versus perceptions and is the only gap that occurs exclusively in the customer's space. This is the gap between the service a customer expects to receive and the customer's perceptions of the level of service actually received. The score for this gap, which can be positive or negative, is the manifestation of a firm's customer expectations management strategy and the efficacy of its service delivery system. For Outback Steakhouse, as well as most other firms, these scores are a direct flow-through into customer satisfaction measurement. Occasionally after eating at Outback, you might get a special receipt that has a toll-free number to call at Outback to answer a brief telephone questionnaire about your service encounter. Outback might offer some free food for completing the survey by providing you with an activation number. Almost always such survey research efforts are aimed at measuring importance scores (how important various aspects of a service are to the customer) versus actual performance scores (how well did we do on delivering against these service aspects during your last service encounter with us). > To provide an example of Gap 5 in practice, Exhibit 9.8 lists 14 hypothetical attributes that a restaurant like Outback might consider for analysis in terms of customer perceptions of their importance. The, Exhibit 9.9 portrays a matrix based on a hypothetical analysis of importance perceptions versus performance perceptions for those 14 attributes, showing areas where the restaurant can invest in service improvement, areas where it needs to simply keep up the current service, areas of low priority for attention, and areas where too much emphasis is being placed on service aspects. One other analysis could be easily added - comparative matrices for several of Outback's closest competitors so the chain can easily see how well the competition is doing in delivering against the same attributes. Such analytical approaches are invaluable in allowing marketing managers to know how to best invest in service quality.

How can good Service Recovery after a service failure actually help a business relationship between a service provider and their customers?

P. 280 > Gap 3: Actual Service Quality Specifications versus Actual Service Delivery: Interestingly, unlike the previous two gaps, this one has no element of perception - this gap strictly asks whether the service is provided in the manner intended. As such, when there is a negative hap at Gap 3, it nearly always points to management and employees simply not getting the job done. This could be due to vague performance standards, poor training, or ineffective monitoring by management. > Like many firms, Outback uses teamwork to enhance its service delivery system. Ever notice that more than one person makes contact with you at your table, asks how you are doing, brings food or drink, and so forth? To make the curbside pickup system work like clockwork, employees from the phone order-taker to the cooks to the car0runner must be in sync. If cars back up, employees are trained to go down the line to make contact, provide estimated remaining wait times, and even handle payment so that when the food does come out the customer can immediately depart. You may wait a while to get your table at an Outback restaurant on a peak evening (if it's a nice night, you can sit outside and sip on a beverage), but once you're seated the restaurant has aggressive standards for wit times for getting your meal at the table. When these wait times are significantly exceeded, the employees are trained to apologize, not offer lame excuses, and then offer something extra like a free dessert or a coupon for a free Bloomin' Onion next time. > This process is called service recovery and is actually a very strategic aspect of marketing management. Much research in services marketing has shown that service failure, when properly handled through service recovery, does not necessarily impact customer satisfaction, locally, or retention unless service failures become habitual. All firms employing service as a marketing strategy must plan ahead for the eventuality of service failures and rain employees to properly execute service recovery.

What can a "Service Blueprint" reveal about a companies' business process?

P. 287 > Earlier in the chapter, you read that from its inception Outback Steakhouse conceived of its service delivery system as an important source of differentiation in its positioning against other mid-prices family restaurants. How does a marketing manager conceive of such a system, lay it out, and then implement it to that everyone in the firm can follow it and play their part? The answer is through service blueprints, which borrows concepts from manufacturing and operations management to actually map out (likely though the use of computer software) a complete pictorial design and flow chart of all the activities from the first customer contact to the actual delivery of the service. > A simple example of a service blueprint for a floral delivery service is mapped out in Exhibit 9.12. > Note in tracking through the floral delivery service of a blueprint that activities are divided between those above the line of visibility (or those activities directly involving the customer that the customer sees) and those below the line of visibility to the customer (in this case, backstage operations and processing activities). The "moments of truth" we discussed earlier occur above the line of visibility. > A service blueprint is invaluable as tool for marketing managers, especially for service encounters that are more complex than floral delivery, restaurants, and the like. First, the mere creation of the document serves to uncover potential bottlenecks in the service delivery system before it goes operational. Second, it represents a tremendous training device for employees involved in service delivery. Especially in a teamwork environment such as Outback Steakhouse where servers, cooks, and bartenders are so dependent on each other's performance to maximize customer's positive experience overall, familiarizing each person involved in service delivery with exactly how his role fits into the entire system helps everyone take on a customer mind-set - even employees who ordinarily don't directly interface with the external customers such as the cooks. Finally, using a service blueprint provides managers with an important way to integrate service topics into the performance evaluation process for all employees.

Why is "cost leadership" extremely important as a strategy when competing in business?

P. 295 > You have learned that value is a ratio of the bundle of benefits a customer receives from an offering compared to the costs incurred by the customer in acquiring that bundle of benefits. From the customer's perspective, many but not all of those costs are reflected within the price paid for the offering. There are other types of costs, such as time invested in the purchase process or the opportunity costs of choosing one offering over another. But for most purchasers, regardless of whether the setting is B2C or B2B, the vast majority of costs are associated with the purchase price. As such, price - or, more specifically , the customers perception of the offering's pricing - is a key determinant of perceived value. When customers exhibit strongly held beliefs that a firm's offerings provide high value, they are much more likely to remain loyal to the firm and its brands as well as actively tell others about their favorable experiences. Thus, marketing managers must take driving decisions very seriously. > From a marketing planning and strategy perspective, Michael Porter has consistently advocated that firms that are able to compete based on some extraordinary efficient in one or more internal processes bring to the market a competitive advantage based on cost leadership. And although firms competing on cost leadership will likely also engage in one of Perter's other competitive strategies (differentiation or focus/niche), their core cost advantages translate directly to an edge over their competitors based on much more flexibility in their driving strategies as well as their ability to translate some of the cost savings to the bottom line.

The first step in pricing decisions is to establish your objectives. How do pricing decisions effect the perception of the overall value of an offering?

P. 297 > As illustrated in the Southwest Airlines example, pricing objectives are but one component leading to an overall value proposition. However, a product's price tends to be so visible and definitive that customers often have trouble moving past price to consider other critical benefits the product adores. This characteristic puts pressure on marketing managers to establish driving objectives that best reflect and enhance the value proposition, while at the same time achieving the firm's financial objectives. Striking a balance between these two forces sometimes makes pricing an especially challenging part of marketing. > Pricing objectives are the desired or expected result associated with a pricing strategy. Pricing objectives must be consistent with other marketing-related objectives (positioning, branding, etc.) as well as with the firm's overall objectives, along with their related strategies. > The decision of which pricing objective or objectives to establish is driven by many interrelated factors. As you learn about each of the approaches, keep in mind that most firms attempt to balance a range of issues through their pricing objectives, including internal organization0level goals, internal capabilities, and a host of external market and competitive factors.

If one practices "Penetration Pricing" what strategies will a company execute?

P. 298 > Market share is the percentage of total category sales accounted for by a firm. When a firm's objective is to gain as much market share as possible, a likely pricing strategy is penetration pricing, sometimes also referred to as a pricing for maximum marketing share. In markets where customers are sensitive to price and where internal efficiencies lead to cost advantages allowing for acceptable margins even with aggressive pricing, a penetration objective can create a powerful barrier to market entry for other firms, thus protecting market share. > Sometimes penetration pricing is used as part of a new-product introduction. In both B2B and B2C markets, it is common for prices to be set low initially to wart off competition and then for prices to creep up over time. Such pricing is built into the product's budget over the life cycle of the item. Recall from Chapter 7 that as a product progresses through the product life cycle, margins tend to be at their highest during the maturity stage. This is partly because weaker competitors tend to drop out due to penetration pricing earlier in the cycle (introduction and growth stages), which created the potential for remaining firms to decrease spending and raise prices sting the maturity stages. > Be careful with a penetration pricing strategy. Because price is a cue for developing customer perceptions of product quality, the value proposition may be reduced if a low price belies the product's actual quality attributes. An axiom in marketing is that customers always find it more palatable when a firm reduces a price than when it raises a price, and a corollary to the axiom is that one a price has changed (one way or the other), changing it back created confusion about positioning and brand image.

What is the good news and bad about product skimming?

P. 298-299 > A strategy of price skimming addresses the objective of entering a market at a relatively high price point. In proposing price skimming, the marketing manager usually is convinced that a strong price-qualirt relationship exists for the product. This might be done to lend prestige to a brand, or skimming is sometimes used in a new-product introduction by a firm with a fort-mover advantage to skim early sales while the product has a high level of panache and exclusivity in the marketplace. > Major developers of gaming consoles, including Nintendo, Microsoft, and Sony, always introduce a new platform with the objective of price skimming. Plasma televisions all started with very high price points and have gradually inched pricing downward as more and more customers began to purchase. Pharmaceutical companies justify very high introductory prices for new medications based on a necessity to recoup exorbitant R&D costs associated with their industry. Those same drugs steadily decline in price as more advanced competitive drugs come along, and, when patent protection runs out, the price drops precipitously as generic versions of the drug flood the market. > Regardless of the motivation for a price skimming strategy, as with penetration pricing, when multiple-year burgers are developed, marketing managers must consider the likelihood of competitive entry and adjust pricing projections accordingly. An initial pricing objective of skimming will require modification over time based in part on the rate of adoption and diffusion by consumers. > In general, skimming can be an appropriate pricing objective within the context of a focus (niche) strategy. By definition, such an approach possessions a product for appeal to a limited (narrow) customer group or submarket of a larger market. Caves niche market players typically attract fewer and less-aggressive competitors than those employing differentiation strategies within the larger market, a focus strategy can usually support higher prices and the potential for skimming can be extended. The ability to use price skimming declines precipitously, however, if the product migrates from a niche position to that of a differentiated product within the larger market.

Financial executives often favor "profit maximization" and "Target ROI"? Why is it dangerous for a company to let the financial team pick the pricing strategy and not the marketing execs?

P. 299-300 > Pricing objectives very frequently are designed for profit maximization, which necessitates a target return on investment (ROI) pricing strategy. Here, a bottom-line profit is established first and then pricing is set to achieve the target. Although this approach sounds straightforward, it actually brings up an important reason pricing is best cast within the purview of marketing instead of under the sole control of accountants or financial mangers in a firm. When pricing decisions on a product are made strictly to bolster gross margins, bottom-line profits, or ROI without regard to the short- and long-term impacts of the pricing strategy on other important market- and customer-related elements of success, the product becomes strategically vulnerable. Marketing managers are in the best position to take into account the competitor, customer, and brand image impact of pricing approaches. > Still, in preparing product budgets and forecasts, marketing managers are expected to pay close attention to their organization's financial objectives. During the research that leads to a decision to introduce a new product or modify an existing one, one key variable of interest is whether the market will bear a price point that enhances the firm's overall financial performance. Often, price elasticity of demand - the measure of customers' price sensitivity estimated by dividing relative changes in quantity sold by relative changes in price - becomes central to whether a product can even be viably introduced within the context of a firm's financial objectives. > Unfortunately, price sensitivity is notoriously one of the most difficult issues to determine through market research. Sometimes, historical records or secondary data can provide evidence of pricing's impact on sales volume. When primary research methods are used to ask customers about pricing - whether through survey, focus group, experiments, or other methodology - they most often place the respondents into a hypothetical "what if" mode of thinking in which they are asked to predict how one price or the other might impact their decision to buy. This is a very difficult assertion for a person to make and can lead to bad data and ultimately poor pricing decisions. Importantly, in many instances, much of a customer's reaction to pricing is more psychological or emotional in nature than rational and logical. > Finally, the idea of pricing based on purely economic models and solely for profit maximization raises important ethical concerns, especially in cases where essential products are in short supply. The latest wonder drugs, building materials, after a major disaster, and new technologies needed for emerging markets are but three examples in which pricing for pure profit motive can damage both a firm's image and ultimately its relationships with customers. And as oil prices have soared over recent years, more and more consumer groups have been actively calling for investigation of the pricing practices of the big oil companies, and Congress has periodically called in the CEOs to testify about their profits. At the same time, independent distributors, gasoline retailers, and end-user consumers of gasoline have all struggled because of high prices.

What is competitor based pricing and why is it often used to determine a price?

P. 300-301 > Gaining a thorough understanding of competitors' marketing practices is key element of successful marketing planning and execution. A competitor's price is one of the most visible elements of its marketing strategy, and you can often infer the pricing objectively carefully analyzing historical and current pricing patterns. Based on such analysis, a firm may develop competitor-based pricing strategies. This approach might lead the marketing manager to decide to price at some market average price, or perhaps above or below it in the context of penetration or skimming objectives. > The logic of competitor=based pricing is quite rational unless (a) it is the only approach considered when making the ultimate pricing decisions or (b) it leads to exaggerated extremes in pricing such that on the high end a firm's products do not project customer value or on the low end price wars ensue. A price war occurs when a company purposefully makes pricing decisions to undercut one or more competitors and gain sales and net market share. Such was the case in the early 1990s when Sears embarked on a short-lived "low-price" strategy to compete with Walmart on certain high-profile foods, sparking a major price war. Sears Management, concerned at the time about losing the Gen X market to Walmart and other discounters, fired the first salvo by publicly announcing a list of items on which it would not be undersold. One of these items, branded disposable diapers such as Pampers and Luvs, let the way in Sears' ads nationwide at prices well below cost. > Unfortunately for Sears, management grossly underestimated the power of Walmart to thwart such competitive threats. First, Walmart's chairman went public in the press by reiterating that Walmart was the true low-price king in retailing (the company tagline at the time was "Low Prices... Always") and assuring customers Walmart would match any advertised Sears price. Then, within days and in the market, Walmart took to the newspapers with full-page ads discounting diapers to ridiculous levels need before seen, thus negating Sears' approach. This price war was short-lived and forced Sears to immediately rethink its pricing strategy.

How are the strategies of value pricing implemented? Are they more valid? Accurate? Fairer?

P. 301-303 > Firms that have an objective of utilizing pricing to communicate positioning use a value pricing strategy. Value pricing overtly attempts to consider the role of price as it reflects the bundle of benefits sought by the customer. Because value is in the eyes of the beholder, affected by his perceptions of the offering coupled with the operative needs and wants, pricing decisions are strongly driven by the sources of differential advantage a product can realistically deliver. Effectively communicating a product's differential advantages is at the heart of positioning strategy, and exposure to these elements spurs the customer to develop perceptions of value and a subsequent understanding of the value proposition. > Value pricing is complex and overarches the other pricing objectives discussed so far. Through value pricing, a marketing manager seeks to ensure that the offering meets or exceeds the customer's expectations - that is, when he or she does the mental arithmetic that calculates whether the investment in the offering is likely to provide sufficient benefits to justify the cost. Put another way, value pricing considers the whole deliverable and its possible sources of differential advantage - image, service, product quality, personnel, innovation, and many others - the whole gamut of elements that create customer benefit. For instance, Toyotas and Hondas cost more to purchase initially than other comparable vehicles, but they last longer, require fewer repairs, are more fuel-efficient, and hold their resale value much better; overall, they have a lower lifetime cost of ownership. > From this assessment, the marketing manager makes a pricing decision that best reflects that product's capacity to be perceived as a good customer value. This high=impact decision helps frame customers' reactions and their relationship with the product and the company. Not surprisingly, Toyota and Honda drivers tend to be very brand loyal, with a very high repeat purchase rate, and many multiple-car families of one or the other. > Would a firm ever benefit from pricing without regard to value? This is an intriguing question that can best be illustrated through the example of a positioning map like the one in Chapter 6. Exhibit 10.3 provides a positioning map with price on one axis and quality on the other. In this instance, we're using the term quality rather generically to simply connote a range of differential advantages that might comprise the perceived bundle of benefits for the offering. > Notice in Exhibit 10.2 that a diagonal range of feasible positioning options exists based on matching price to the benefits achieved. For most products, as long as the customer perceives the ratio of price and benefit to be at least at equilibrium, perceptions of value will likely be favorable. Thus, a poorer-quality product offset by a super-low price can be perceives as a good value just as a higher-quality product at a high price can be. > The key lesson marketing managers should draw about value pricing goes back to a key point about managing customer expectations in Chapter 9: Over-promising and underdelivering is one of the quickest ways to create poor value perceptions and thus alienate customers. Marketers will do well not to overpraise benefits, but rather should communicate and deliver a realistic level of benefits for a price. > But what happens when one strays off the favorable diagonal price/benefit harmony? In the lower-right quadrant - high quality/low price - a penetration strategy might be in play. Or perhaps a firm is taking advantage of its cost leadership by offering a somewhat reduced price. However, over the long run, reducing price too much based on either of these pricing strategies can unnecessarily damage both margins and brand image. Penetration is usually intended to be a temporary strategy, giving the product a chance to gain a strong foothold in the market share while warding off competition for a time. Michael Porter has long advocated that cost leadership based on value chain efficiencies should not be wholesale translated to low prices - the reason the approach is called cost leadership, not price leadership. Successful cost leaders tend to offer a somewhat lower price in the marketplace, but they also translate a substantial portion of their efficiencies to margin, thus enhancing the long-term growth and performance of the firm. Bottom line, it may be all right to play in the bottom-right quadrant temporarily in the case of penetration or to creep slightly into that quadrant over the long haul with a properly executed cost leadership approach. > Clearly, operating in the upper-left (high price/low benefits) quadrant can be problematic. Some firms utilize price skimming strategies, especially on product introductions, even when all the bugs have yet to be worked out of the product. New technology products are notorious for having surprises in quart, functionality, and reliability crop up soon after introduction. When this happens, it can be extremely damaging to the value proposition and to the brand. In such cases, from an ethical perspective, one could question the firm's intent. Did the company much a product to market to beat an impending entry by competition, pricing ti high due to first-mover advantage, all the while knowing that serious quality problems existed? Firms and brands that continually attempt to operate in the high-price/ low-benefit's quadrant do not survive over the long run as customer trust is damaged. Unfortunately, some highly unscrupulous companies perpetuate their operations in this quadrant by constantly changing company name, location, and brand names, Stories of customer rip-offs are particularly prolific in the service sector (from construction to financial services to health care) because in this sector the offering is inextricably linked to the provider and it's difficult to asses quart until after the service in rendered.

What is "Product Line" Pricing and how is it used?

P. 303-305 > As you have learned, firms rarely market single products. Most products are part of an overall product line of related offerings; and this is true whether the product is in the B2C or B2B marketplace, or in the realm of goods or service. Product line pricing (or price lining) affords the marketing manager an opportunity to develop a rational pricing strategy across a complete line of related items. As a customer is evaluating the choices available within a firm's product line, the price points established for the various items in the line need to make sense and reflect the differences in benefits offered as the customer moves up and down the product line. > Consider the different types of rooms offered by a resort gore on Maui. At top porpoise such as the Fairmont Kea Lani in Wailea, even a room on a lower floor with a limited view might easily run well over $500 per night during peak season. Exhibit 10.5 shows the array of room types and prices across the product line - the different grades of guest room. > In price lining, the escalation of product prices up the product line has to consider factors such as real cost differences among the carious features offered, cuter assessments of the value added by the increasing level of benefits, and prices competitors are charging for similar products. Price lining can greatly simplify a customer purchase decision making by clearly defining a smorgasbord of offerings based on different bundles of benefits at different prices. Regardless of the product category, customers often approach a purchase with some preconceived range of price acceptability in mind, and product line pricing hales hide them toward the best purchase match to their needs while facilitating easy comparison among offerings. > Price lining can occur at a level much broader in scope than individual products. For example, Marriott has branded its entire family and accommodations based on different value propositions, supported by clearly delineated pricing strategies. Its offerings include Ritz-Carlton and JW Marriott for the most discriminating patron, Marriott and Renaissance at the next level of full service, and an array of differentially positioned brands such as Courtyard, Residence Inn, SpringHill Suites, Fairfield Inn, and TownPlace Suites. Marriott clearly communicates the differences and value in each of these brands, partly by how each is prices in relation to the others. By now you should have a strong sense of how strategically important prices is within he marketing mix as a cue for the customer's perceptions of value.

Describe how Captive pricing and two part pricing are tactics designed to keep customers?

P. 305 > Captive pricing, sometimes called complementary pricing, entails gaining a commitment from a customer to a basic product or system that requires continual purchase of peripherals to operate. What is the most profitable part of Hewlett-Oacjart's office products business: printers or ink cartridges? It's the cartridges. And although other sources for replacement cartridges exist for HP machines, the company foes a great hob of convincing users that only genuine HP cartridges can be depended on for high-quality performance. > Captive pricing is just as common in the service sector, where it is sometimes called two-part pricing. Any firm that charges a monthly access fee, membership, retainer fee, or service charge and then bills by the specific service provided is using this pricing approach.

Price bundling and unbundling are tactics used by many sales team. Why and what are the advantages?

P. 305-306 > When customers are given the opportunity to purchase a package deal at a reduced price compared to what the individual components of the package would cost separately, the firm is using a price bundling strategy. Cable television providers want you to buy the full gamut of entertainment products from them, and the more you add to your bundle - digital television, premium channels, downloadable movies, local and long-sidtance phone service, cellular service, gaming, high-speed Internet - the better the deal becomes compared to the total of the individual prices of each piece of the bundle. > A potential dark side to price bundling is that, in some industries, it can become unclear just what the regular, or unbundled, price is for a given component of a package. The cable/telecommunications industry is regulated to the point that this is less an issue, but in unregulated industries, unscrupulous firms sometimes set artificially high prices for the sake of pushing customers into buying a package. > Beyond legalities, ethical issues sometimes arise with regard to price bundling. For example, car shoppers often find every car on the lot within given model has many of the same features automatically bundled as add-ons. How many of those features would you but if you had a choice? The extra features being bundled typically carry much larger margins than the margin on the core vehicle itself. IF you special order a car without the bundle, chances are you will be waiting months for it to be delivered to the lot = id the dealer will even order it for you.

What is "Reference pricing" and "Price Anchoring" and how are they used by the Pricing Team.

P. 306 > Reference Pricing: As in price bundling, it can be useful for customers to have some type of comparative price when considering a product purchase. Such a comparison is referred to as reference pricing and, in the case of price bundling, the reference price is the total price of the components of the bundle if purchased separately versus the bundled price. The savings would be expected to stimulate purchase of the bundle so long as the perceived value realized is sufficient. > Reference pricing is implemented in a number of ways. Sometimes a product catalog might show a manufacturer;s suggested list price next to the actual price the product is offered for in the catalog. In retail stores, in any given product category a private-label product (say, the Walgreens brand for instance) is often purposely displayed on a shelf right next to its national brand equivalent. The retailer hopes the savings realized by the direct price comparison of a bottle of Walgreens' mint mouthwash versus the bottle of Scope next to it will be enough to stimulate purchase. Reference pricing is very heavily used in B2B price lists, often reflecting price level differences depending on how many items are purchased or reflecting the amount saved by a firm's special "contract rate" with a vendor versus what a noncontract rate would be. > Clearly, reference pricing can create a powerful psychological impact on a customer by virtue of the savings (real or imagined) demonstrated by the comparison. Ever have a salesperson tell you that a price increase is imminent and if you don't purchase today you'll pay more tomorrow? Customer hedging behaviors against pricing uncertainty are driven by referencing projected prices in the future. And, of course, a sale or promotional price provides a strong reference point and, if the comparative difference is great enough, shoppers flock to the store as if going into battle to take advantage of temporary price reductions while they are in effect.

Many brands use "Prestige" pricing tactics? What psychology is used and how does it work?

P. 306-307 > As mentioned earlier, one rationale for establishing a price skimming objective is prestige pricing - lending prestige to a product or brand by virtue of a price relatively higher than the competition. With prestige pricing, some of the traditional price/demand curves cannot properly predict sales or market response because it violates the common assumption that increasing price decreases volume. From the perspective of financial returns, prestige pricing is a phenomenal approach because, everything else being equal, commanding a premium price reflects directly on margins and bottom line. > Prestige pricing plays on the psychological principles that attach quality attributions to higher-priced goods - a typical response to some higher-priced products is that they must be better than their competitors; otherwise the price would be lower. When the Norwegian glacier water Voss entered the U.S. market in 2002, it entered with a prestige pricing strategy that helped create a whole new category of ultra-premium bottled waters. Order Voss in a chic restaurant and you can expect to pat a double-digit price per bottle. What's the value proposition that would support such a high price? The exclusivity of distribution, unique cylinder shape of the bottle, and exotic facial imagery all combine so that a premium price actually enhances the customer's feelings of experiencing something really special (yes, water can be an experiential purchase). Promotion of Voss water gas included numerous product placements showing celebrities and others among the rich and famous partaking of the brand. Has Voss entered the market without such a prestige pricing strategy, it is highly unlikely it would have achieved the buzz and early curt status it did.

What is the difference between EDLP and high/low pricing?

P. 308 > (EDLP) The rise of Walmart as one of the world's largest corporations has brought the concept of everyday low pricing (EDLP) to the forefront of global consumer consciousness. EDLP is not an option just for retailers; it's an important strategic choice for nearly any firm. The fundamental philosophy behind EDLP is to reduce investment in promotion and transfer part of the savings to lower price. Thus, firms practicing an EDLP strategy typically report substantially reduced promotional expenditures on their financial statements. They instead rely much more on generating buzz in the market about the EDLP to create and maintain customer traffic and sales volume. EDLP, when successfully implemented, has a strong advantage of reducing ups and downs in customer traffic, thus making forecasting more accurate. > (high/low pricing) The antithesis to EDLP is a high/low pricing strategy, in which firms rely on periodic heavy promotional pricing, primarily communicated through advertising and sales promotion, to build traffic and sales volume. The promotional investment is offset by somewhat higher everyday prices. Why would a firm elect high/low pricing instead of EDLP? Usually, the firm has little choice because of what competitors are doing. It takes a long time for any product or service provider to convince the market that it has EDLP. Most often, firms use various elements of promotion to build sales of new products, shore up sales of declining products, or combat competitors' promotional activity in the same marketplace. Some industries truly are over the top in employing high/low pricing strategies - airlines, auto dealerships, and personal computers are a few that run so many price promotions that customers are conditioned to wait and rarely purchase a product at full price. When high/low pricing reaches this fevered pitch in an industry, it almost always hurts the bottom line of all firms.

Will Auction Pricing ever work in the new economy?

P. 309 > Auctions have been around for centuries. In an auction, in which individuals competitively bid against each other and the purchase goes to the high bidder, the market truly sets the price (although some minimum bid amount is often established by the seller). As a strategy, auction pricing has gained in prominence as Internet commerce has come of age. The most famous example of auction pricing is eBay. Whereas int he past prices at auction were wholly dependent on the level of demand represented by a fairly small number of people either physically gathered at the auction location or connected through traditional telecommunication, today the Internet provides a vast electronic playing field for customers to participate in the auction on a real-time basis. > This phenomenon has resulted in a marketplace in which auction prices can be considerably more reflective of the real value of an offering versus other static price purchase environments. Besides standard auction approaches (buyers if for a seller's offering), online reverse auctions are now very common in which sellers bid prices to capture a buyer's business. Priceline.com is a prominent example of a reverse action firm that serves as a clearinghouse for extra capacity from airlines, hotels, and cruise lines.

What is the difference between discounts and allowances?

P. 311 > Discounts are direct, immediate predictions in price provided to purchasers. Allowances remit monies to purchasers after the fact. In general, in B2B transactions, marketing managers must be cognizant of several types of discount and allowance approaches that essentially amount to price adjustments for channel buyers. While the pricing discounts and purchasing allowances mentioned in this section primarily pertain to B2B, in some instances, end-user consumers may be offered some of the same price adjustments. > Sellers offer discounts and allowances for a variety of reasons. Paying a bill early, purchasing a certain quantity, purchasing seasonal products during the off-season, and experiencing an overstock on certain products are common rationales for offering various discounts and allowances. At its essence, the approach hopes to impact purchaser behavior in directions that benefit the selling firm by sweetening the buy-ing organization's terms of sale.

What ways are discounts passed on to a customer?

P. 311-312 <<<Cash Discounts, Trade Discounts, Quantity Discounts, Seasonal Discounts, Promotional Allowances, Geographic Aspects of Pricing>>> > Discounts are direct, immediate predictions in price provided to purchasers. Allowances remit monies to purchasers after the fact. In general, in B2B transactions, marketing managers must be cognizant of several types of discount and allowance approaches that essentially amount to price adjustments for channel buyers. While the pricing discounts and purchasing allowances mentioned in this section primarily pertain to B2B, in some instances, end-user consumers may be offered some of the same price adjustments. > Sellers offer discounts and allowances for a variety of reasons. Paying a bill early, purchasing a certain quantity, purchasing seasonal products during the off-season, and experiencing an overstock on certain products are common rationales for offering various discounts and allowances. At its essence, the approach hopes to impact purchaser behavior in directions that benefit the selling firm by sweetening the buy-ing organization's terms of sale.

Why are price changes tough to execute? What is a "price war"

P. 313-314 > Over time, price changes are inevitable. A marketing manager may want to raise or lower a price for competitive or other reasons, or competitors may make price changes that require a considered pricing response from your own firm. Among the marketing mix variables, price is the easiest and quickest to alter, so sometimes firms over-rely on price changes to stimulate additional sales or gain market share. You've already seen that establishing pricing objectives and strategies and implementing pricing tactics are complex and entail important managerial decisions. It is important to also recall that in the overall scope of marketing planning and strategy, pricing does not take place in a vacuum. That is, a change in an offering's price - either up or down - can dramatically impact the effectiveness of the overall marketing mix variables in reflecting your offering's positioning in the eyes of customers. > It is important for marketing managers to conduct appropriate market research in advance of major price changes to try to determine the likely impact of a price change on customer perceptions of the offering and likelihood to purchase. Both qualitative research approaches, such as focus groups, and quantitative approaches, such as surveys and experiments, can be designed to determine the degree to which an anticipated price change might influence customer response. Ideally, price changes upward will reflect the just noticeable difference (JND) in a price, which is the amount of price increase that can be taken without affecting customer demand. > If a potential upward price change is being driven by pressure on margins, creative marketers often look for ways to save margin without increasing price. Over the years, candy manufacturers have been severely affected by swings in the price of sugar. As the sugar price has gone up, a a good portion of the profit margin of a candy bar has been preserved by simply reducing the size of the bar. Today's chocolate lovers would be amazed at seeing how much larger a snickers bar was in 197 versus today. At the same time, the basic bar size has shrunk multiple times during that period, including a 10% reduction(and concurrent 30-calorie education) in early 2013. While the price of a bar has risen dramatically during the same period (an average of four times the 1970 price), the price increase would have been even more dramatic without the reduction in ounces. > In addition to reducing the offering in terms of size or quantity, other non-price approaches to mitigating the pressure to maintain margins include altering or reducing discounts and allowances, unbundling some services or features from the original offering, increasing minimum order quantities, or simply reducing product quality. However, marketing managers should deb cautious when they begin to consider altering the product itself to retain margins; customer response to such tinkering might be negative. > A worst-case scenario occurs when a firm takes a price decrease on an offering to stimulate volume and grow share, only to have one or more competitors immediately and aggressively jump in the meet or beat the price decrease, resulting in a a price war. Price wars are the quickest way to destroy margins and bottom-line profit. The old marketing adage "We'll price our product lower but make it up on volume" doesn't work when competitive price pressure forces prices below cost! > Assume that you, as a marketing manager, just found out that a competitor has taken a price increase or decrease. You must evaluate the change and select the appropriate response for your product line. The basic principles and cautions about competing on price are the same, regardless of whether your firm or a competitor fires the first shot. If your firm is the market leader, you may find that competitors tend to create similar but somewhat inferior offerings at attractive prices in an attempt to knock you off as leader. > When formulating a response to a competitor's price reduction, remember to consider your offering from the perspective of its overall value proposition to customers and not be too quick to react in kind with a price decrease. In the case of a competitor's price increase, perhaps based on escalating costs or margin pressure, analysis may reveal the increase is an opportunity to both gain a price advantage and can maintain desired margins at your current price. Or you may simply wish to take a concurrent price increase and enjoy the related margin enhancement. remember, a cost leadership strategy does not necessarily imply price leadership; rather, the best cost leader firms take a portion of their cost leadership to margin and perhaps a portion to price advantage.

Name four or five legal considerations in pricing?

P. 314-315 <<< Price-Fixing, Price Discrimination, Deceptive Pricing, Predatory Pricing, Fair Trade and Minimum Markup Laws >>>

Why is a network or virtual organization and important business strategy? What makes it successful and what could backfire?

P. 324-326 > Based on the concept of value networks, a whole new breed of organization is arising called a network organization, or virtual organization, because it eliminates many in-house business functions and activities in favor of focusing only on those aspects for which it is best equipped to add value. Such approaches are often pursued to provide quicker market response and to free resources to focus on the firm's core deliverables. Network firms usually formalize contracts with suppliers, distributors, and other important partners to contribute the aspects of the value chain those entities do best, then draw on their own internal capabilities to focus on core internal sources of value. Some network organizations operate much like a shell in which most or all of the actual manufacturing, distribution, operations, and maybe even R&D and marketing execution are outsourced to efficient experts. > In the future, more firms, and especially start-ups, entrepreneur organizations, and those whose core products are in the critical introduction and growth phases, will opt for a network organization approach to take advantage of the value network concept. This prediction is based on a competitive need for firms to be nimble in all aspects of their operation - that is, to be in a position to be maximally flexible, adaptable, and speedy in response to the many key change drivers affecting business today such as rapidly shifting technology, discontinuous innovation, fickle consumer markets, and relentless maker globalization. Taking a value network approach frees up internal resources so a firm can be more nimble in addressing external uncontrollable opportunities and threats, thus yielding a potential competitive advantage over firms that have high costs associated with performing many of the value chain functions themselves. A network organization facilitates concentration on one's own distinctive competencies while efficiently gathering value from outside firms that are concentrating their efforts in their own areas of expertise within your value network. > Many organizations are beginning to consider their customers - both end users and within a channel - as important members of a value network. As you learned in Chapter 9, firms cultivate customer involvement in carious aspects of product and market development to enable customer advocacy, which is a willingness and ability on the part of a customer to participate in communicating the brand message to others within his or her sphere of influence. There are several potential value-adding ways to involve customers, in both B2B and B2C settings, including participation in ongoing research and customer advisory panels and provision of recognition, rewards, and delightful surprises for customers that participate in the relationship at a high level. > Overall, managing marketing channels and the supply chain is a fruitful area of concentration for marketing managers because of its potential to enhance the value of the firms goods and services in a variety of ways. As you read further about the various specific components of the "place {: in the marketing mix, keep in mind that in today's business environments, the boundaries of just how these value-adding activities are delivered and by whom within the value network is a very open opportunity. As we have learned, these decisions are made with the knowledge that intelligent investment in the primary and support activities within the value chain should positively enhance profit margin through more efficient and effective firm performance.

What role can a channel partner play is helping with the physical distribution of a product?

P. 328-329 <<< Breaking Bulk, Accumulating Bulk and Storing, Creating Assortments, Reducing Transactions, Transportation and Storage>>> > One function of channel intermediaries is physical distribution, or logistics, which is the integrated process of moving input materials to the producer, in-process inventory through the firm, and finished goods out of the firm through the channel of distribution.

What facilitating functions can be performed by middlemen in the areas of finance, market research and risk taking?

P. 330 > Financing: Without readily available credit at various stages in the distribution process, many channels could not operate. In any given channel, when credit is required by one channel member, it may be facilitates by another channel member such a s a producer, wholesaler, or retailer, depending on the situation. Alternatively, credit may be facilitated by outside sources such as banks and credit card providers. > Market Research: Because intermediaries are closer to end-user consumers and business users than manufacturers, they are in an ideal position to gather information about the market and consumer trends. Collecting and sharing market and competitive information helps members of the channel continue to offer the right product mix at the right prices. > Risk-Taking: A big part of how an intermediary can add value is by reducing the risk of others in the channel. Any of the major physical distribution functions described above that are assumed by a channel member come with potential risk and liabilities. For example, accumulating bulk perishable goods comes with a risk of spoilage if customer demand estimates are inaccurately high. Also, when product liability lawsuits are filed, the defendants named are nearly always anyone within the distribution channel that played a part in getting the product to market.

Disintermediation offer occurs when adding new e-channels. When do they help a business grow and improve market share?

P. 331-332 > Driven largely by the advent of electronic commerce and online marketing, disintermediation, or the shortening or collapsing of marketing channels due to the elimination of one or more intermediaries, is common in the electronic channel. In the early days of e-commerce, many entrepreneurs rushed to market with a website to sell their favorite products. This dot-com boom quickly turned to a bust, however, in part because so many of these new-age marketers didn't understand the basics of distribution channels. Simply opening a website that features a product is one thing, but it's another thing entirely to invest in the infrastructure and capabilities needed to consistently fulfill orders in a timely and accurate manner. Most postmortems on the cause of the dot-com bust point to poor channel and supply chain practices as the No. 1 reason so many of those initial e-marketers failed. That is, customer expectations were peaked by the novelty and convenience of buying online only to be established by delays and errors in product fulfillment after the sale. > Today, electronic commerce has settled into a more rational position as one of several approaches within marketing management for distributing and promoting goods and services. E-marketers are much more savvy about how they set up and manage their channels and realize that disintermediation may not improve aggregate channel performance. The trend toward more stability in online shopping was facilitated in large measure by the entry of firms such as UPS and FedEx into the market of providing a broad range of integrated supply chain solutions. > Recently, many e-commerce (and other) firms are finding that handing over one or more of their core internal functions, such as most or all of their supply chain activities, to other (third-party) companies that are experts in those areas allows the firm to better focus on its core business. This approach, which is referred to as outsourcing or third-party logistics (3PL), is attractive for many firms whose own core competencies do not include these elements. The trend has opened up opportunities for firms such as UPS and FedEd, as well as a host of other smaller firms, to change their business focus from mere shippers into a broad-based logistics consultancies that handle all aspects of clients' supply chain functions.

How are "power" relationships with channels often played out? (struggles and controversies)

P. 333-334 > The very nature of channels, especially traditional channels composed of independent entities, fosters differences in channel power among members. Channel power is the degree to which any member of a marketing channel can exercise influence over the other members of the channel. As we saw with the administered VMS, power can directly influence the relationships within the channel. Ultimately, channel conflict can occur in which channel members experience disagreements and their relationship can become strained or fall apart. Unresolved channel conflict not only can result in an uncooperative and inefficient channel, but it also can ultimately impact end-used consumers through inferior products, spotty inventory, and higher prices. > French and Raven have identified 5 important sources of power that are relevant in a channel setting. Those power sources are illustrated in Exhibit 11.6 and explained below. (1) Coercive Power: Coercive power involves an explicit or implicit threat that a channel captain will invoke negative consequences on a channel member if it does not comply with the leader's request or expectations. Walmart has exceedingly tight standards for how shippers must schedule delivery appointments at a Walmart distribution center. If the truck missed the appointment by even a few minutes, the error results in punitive financial consequences for the vendor. If the problem becomes repetitive, a vendor will be placed on probation as an approved source. (2) Reward Power: Despite Walmart's ability to coerce, few vendors will turn up their nose at potential business from the retailing giant just because they can be difficult to work with. Naturally, the motivating force is Walmart's huge reward power in the form of writing big orders. (3) Expert Power: Often, channel members adopt an approach of utilizing their unique competencies to influence others in the channel. Expert power might take the form of sharing important product knowledge, such as a representative from Clinique setting up a demonstration for cosmetic consultants in a Nordstrom store to stimulate sales expertise. Or it might involve sharing of information such as Kroger Supermarkets providing consumer preference data to Frito-Lay to get it to produce a special flavor of chips for a specific geographic area that Kroger serves.(4) Referent Power: When a channel member is respected, admired, or revered based on one or more attributes, that member enjoys referent power within the channel. Only the best of the brands can rely on this power source. In frozen foods, Stouffer's (a unit of Nestle) commands a level of respect well above the competition because of its outstanding quality standards, successful marketing and branding strategies, and cooperativeness with retailers. When frozen-food sections of supermarkets are reset to accommodate new-product entries and remove discontinued items, Stouffer reps are often trusted to help store clerks reset the shelves and in many instances Stouffer's is given prime display space in the freezer case. (5) Legitimate Power: Legitimate power results from contracts such as franchise agreements or other formal agreements. When McDonald's requires franchisees that want to participate in the latest iteration of their famous Monopoly scratch-off game to sign an agreement as to how the game will be promoted and administered in the store, it is exercising legitimate power to control misuse of the promotional activity.

What are the advantages to the logistics system of a company to use a channel?

P. 336-337 > Physical distribution, or logistics, is the integrated process of moving input materials to the producer, in-process inventory through the firm, and finished goods out of the firm through the channel of distribution. Traditionally, logistics was thought of as an internal flow going one direction - outbound logistics. That is, it was thought that logistics started with production and ended with receipt of the finished good by the end-user consumer or business user. From a supply chain perspective, logistics professionals today tend to take a more holistic view of physical distribution. Thus, along with outbound logistics, it is important to consider inbound logistics - sourcing materials and knowledge inputs from external suppliers to the point at which production begins. > Today, the concept of reverse logistics must also be taken into account. Reverse logistics deals with how to get goods back to a manufacturer or intermediary after purchase. Product returns result for many reasons including spoilage and breakage, excess inventory, customer dissatisfaction, and overstocks. In particular, online sellers in both the B2C and B2B space recognize that an inherent aspect of electronic commerce is the increased likelihood of product return. Returns are higher in this channel in large part because of the inability to physically examine the merchandise before purchase. Smart online sellers build return allowances - either free, with shipping charges, or with a restocking fee - into their pricing model. To do this, the seller must work out an efficient and customer-friendly procedure for how merchandise is to be returned . In many cases, the selling firm partners with one logistics company to handle the reverse logistics. For example, Zappos partners with UPS and the USPS and provides its customers the convenience of printing a free return label online at the Zappos website. > Several logistics aspects of supply chain management require close attention by marketing managers. These are order processing, warehousing and materials handling, inventory management, and transportation.

Name three Legal issues that could occur with a Channel partner?

P. 339-340 <<< Exclusive Dealing,Exclusive Territories, Tying Contracts >>>

What value do "Retailers" play as a Channel Partner? Name four.

P. 340-342 <<< Offer a variety for consumers, Separate large product volume into consumer purchase quantities, Maintain inventory levels, Make additional services available to consumers >>> > You have learned that retailers are one form of channel intermediary. In this section we will focus a bit more on them as they tend to be the type of intermediary that most people encounter most frequently. Retailing is any business activity that creates value in the delivery of goods and services to consumers for their personal, nonbusiness consumption and is an essential component of the supply chain. As we discussed earlier in the chapter, an efficient, effective supply chain moves materials from manufacturer to consumer. Retailing, in whatever form, is the point of contact in the supply chain with the consumer of the product. Put another way, retailing in its various forms represents a very important point of customer interface. > The retail sector plays a fundamental role in terms of employment and economic activity for any economy. In the United States, for example, retailing accounts for nearly 15% of all employment and generates over 6% of the GDP. More importantly, it provides a vital connection between companies and customers. Retailing, however, plays a critical role in economies around the world and is growing in a number of emerging countries (See Exhibit 11.8). > In an increasingly interconnected world where consumers communicate directly with manufacturers, some question the long-term viability of retailing. Some suggest that retailing, at least traditional store-based retailing, will give way to Internet-based shopping experiences like Amazon. However, despite predictions about the demise of traditional retailing in the late 1990s, the retail sector continues to grow. Thile the Internet has definitely altered the retail landscape, retailers still perform four critical functions that add value for companies and consumers.

Name several examples of Non-Store Retailing and describe their effectiveness?

P. 346-347 > Marketing managers understand that customers can and will connect with a company in a variety of situations, and wile in-store retailing is a very successful and powerful customer interface, and effective retail strategy must consider a wide range of other retail environments. Non-store retailers use alternative methods to reach the customer that do not require a physical location. This allows consumers to purchase from their homes or some other convenient location and includes catalogs, direct selling, television home shopping, vending machines, and electronic retailing. (1) Catalog Retailers: While consumers visit a store to view merchandise, catalog retailers offer their merchandise in the comfort of a consumer's home using a printed or online catalog. One of the oldest forms of retailing, catalog retailing has become extremely popular as two-income households often lack the time for an in-store experience and appreciate the convenience of shopping when they choose from home. These households often have sufficient income to purchase a variety of products and services. Catalog retailers face three challenges: 1. Getting the catalog in the hands of the right target audience is costly. 2. Breaking though the clutter to reach the consumer is difficult. 3. Building and maintaining the order fulfillment and CRM systems used by catalog retailers. (2) Direct Selling: Direct selling involves independent businesspeople contacting consumers directly to demonstrate and sell products or services in a convenient location, often the consumer's home or workplace. The order is placed and fulfilled by the salesperson, who usually delivers the product directly to the consumer. (3) Television home shopping: Often overlooked as a major retail concept, television home shopping generates over $10 billion in sales each year. The primary advantage of this retail format is the ability to show and demonstrate the product. Unlike catalogs, however, shoppers must wait for the product to show up on the screen, which limits sales. To deal with this limitation, the networks have gone to scheduling products for certain times so consumers know when to plan their viewing. (4) Vending machines: Perhaps you haven't thought of vending machines as a retail concept, but sales from vending machines in the United States exceed $7 billion annually, with soft drinks accounting for 40% of the revenue. Vending machine retailing sells merchandise or services that are stored in a machine then dispensed to the consumer when the payment has been made. Although popular with consumers, vending machines are not necessarily the most popular form of non-store retailing. Rising costs in labor, gasoline, and maintenance, coupled with a very competitive environment that limits price increases, keeps margins low.

What are the advantages and disadvantages of electronic retailing?

P. 349-350 >>> Advantages of Electronic Retailing: (1) Extensive Selection: No other channel offers the breadth and depth of selection. (2) Considerable Information Available for Product Research and Education: The Internet dramatically expands consumers' knowledge, offering an almost unlimited number of websites that research, evaluate, and recommend products and services. From retailers to independent testing organizations, consumers can find information about anything. (3) Build product communities: The Internet brings together groups of individuals with a shared interest to create virtual communities. These communities share information, ideas, and product information. (4) Individualized customer experience: The Internet allows a great deal of personalization for not the consumer and the company. >>> Disadvantages of Electronic Retailing: (1) Easier for customers to walk away: The customer is in total control of the web experience and has the opportunity to walk away at any time. (2) Reduce ability to sell features and benefits: Websites now incorporate sophisticated tools to display and highlight critical features and benefits. However, unless the customer initiates additional contact via web live chat, phone, or e-mail, it is not possible to engage the customer to answer questions or deal with objections. (3) Security of personal data: While companies work hard to make their websites secure and keep personal data such as credit card numbers private, many consumers still have concerns about the security of their data. These concerns lead some consumers to limit their electronic purchases.

Why has B2B E-commerce grown faster than B2C? What is a "market-maker".

P. 350-351 > Although the Internet has reshaped the way businesses and consumers interact, it has had a much more significant role in the B2B customer interface. B2B electronic commerce now accounts for over $300 billion in sales - 50% more than the revenue for retail. Exhibit 11.11 highlights the growing importance of digital versus traditional advertising, particularly in the B2B sector, where spending on traditional advertising is dropping the most. > Many companies now require their vendors to do business online. Disney suppliers become part of Disney's EDI (electronic data interchange) network and process orders via the Internet. This requires an initial investment of thousands of dollars to get the infrastructure (hardware and software) to connect with Disney. As mentioned earlier in the chapter, Walmart, a pioneer in the application of technology into business processes, directly connects its large suppliers such as P&G with its IT network so that stock replenishment is fast and seamlessly accurate. > The Internet has also increased the efficiency of B2B relationships through dedicated B2B sites that facilitate the exchange of products and services. This has made many markets, such as the wholesale distribution of electricity, more efficient as buyers and sellers get together quickly. Known as market makers, these sites (such as lendingtree.com for mortgage and other loans) bring buyers and sellers together. > Customer communities are, as the name suggests, sites where customers come and share stories about their vendor experiences. These sites enable customers to evaluate vendors and then make better product decisions. Nortel Networks sponsors a customer community program to encourage customer dialogue and deliver the most current information and education on its portfolio of products, solutions, and enabling technologies. The company's goal is to offer customers insight into Nortel while providing a forum for feedback and commentary.