Unit 3: Creating value - Subjective Questions

Product: A product is anything offered to a market for attention, acquisition, use, or consumption that can satisfy a need or want. It may be a physical good, service, person, place, organization, or idea.

The three levels of a product are:

• Core benefit: The fundamental benefit or problem-solving service sought by the customer. For example, a hotel guest purchases rest and accommodation.
• Actual product: The tangible product or service created around the core benefit. It includes quality, features, design, brand name, and packaging. For example, a hotel room with a bed, furniture, Wi-Fi, and a recognizable brand.
• Augmented product: Additional services and benefits offered with the actual product, such as warranties, installation, delivery, customer support, and after-sales service.

Marketers create superior customer value by managing all three levels together.

Consumer products are purchased by final consumers for personal consumption, whereas industrial products are purchased for further processing or for use in conducting business.

Categories of consumer products:

• Convenience products: Bought frequently, immediately, and with little comparison, such as soap or newspapers.
• Shopping products: Compared on quality, price, suitability, and style, such as furniture or clothing.
• Specialty products: Possess unique characteristics for which buyers make a special purchasing effort, such as luxury cars.
• Unsought products: Products that consumers do not normally consider buying, such as life insurance.

Categories of industrial products:

• Materials and parts: Raw materials and manufactured components used in production.
• Capital items: Installations and equipment that support production.
• Supplies and business services: Operating supplies, maintenance services, and professional services.

The classification depends primarily on the buyer's purpose rather than the physical nature of the product.

Marketers make several connected decisions for individual products and services:

• Product attributes: Decisions about quality, features, style, and design determine the benefits delivered to customers.
• Branding: A name, sign, symbol, or design gives the offering a distinct identity and helps customers recognize it.
• Packaging: Packaging protects the product and also performs promotional, informational, and convenience functions.
• Labeling: Labels identify and describe the product, provide legally required information, and may promote the brand.
• Product support services: Delivery, installation, warranties, repair, training, and customer assistance increase total customer value.

These decisions must be coordinated with the target market and the brand's positioning. A strong offering combines functional performance with a consistent and satisfying customer experience.

A good is predominantly tangible and can usually be owned, stored, and inspected before purchase. A service is an activity or benefit offered for sale that is essentially intangible and does not normally result in ownership.

Services have four important characteristics:

• Intangibility: Services cannot be seen, tasted, felt, heard, or smelled before purchase. Marketers therefore use physical evidence, reputation, and guarantees to reduce uncertainty.
• Inseparability: Services are often produced and consumed simultaneously, making the provider and customer part of the service experience.
• Variability: Service quality may vary depending on who provides it and when, where, and how it is delivered. Training and standardized processes help maintain consistency.
• Perishability: Services cannot be stored for later sale. Differential pricing, reservations, and flexible staffing can help balance demand and capacity.

Effective service marketing requires attention to employees, delivery processes, and physical evidence in addition to the traditional marketing mix.

The new product development process generally includes the following stages:

1. Idea generation: New product ideas are collected from internal research, employees, customers, competitors, suppliers, and other sources.
2. Idea screening: Weak or unsuitable ideas are eliminated to avoid unnecessary development costs.
3. Concept development and testing: Promising ideas are converted into detailed product concepts and tested with target consumers.
4. Marketing strategy development: The target market, value proposition, sales goals, pricing, distribution, and promotion plans are formulated.
5. Business analysis: Management estimates sales, costs, profits, risks, and financial feasibility.
6. Product development: The concept is transformed into a physical or functional product and tested for performance and safety.
7. Test marketing: The product and marketing program are tested under realistic market conditions.
8. Commercialization: The firm launches the product and decides when, where, and how to introduce it.

Customer feedback should be used throughout the process to reduce uncertainty and improve market fit.

Idea screening is the process of evaluating new product ideas and eliminating those that do not match customer needs, organizational objectives, resources, or profit expectations. Its purpose is to identify promising ideas before substantial money and time are invested.

The R-W-W framework asks three groups of questions:

• Is it real? The firm examines whether a genuine customer need exists, whether the market is large enough, and whether the proposed product can actually satisfy that need.
• Can we win? The firm evaluates the product's competitive advantage, the strength of competitors, and whether it has the capabilities needed to succeed.
• Is it worth doing? Management considers strategic fit, expected profitability, acceptable risk, and the required financial and human resources.

An idea should normally progress only when the market is real, the firm can establish a defensible position, and the likely return justifies the investment.

• Product idea: A general proposal for a possible product that the company might offer to the market.
• Product concept: A detailed version of the idea expressed in meaningful consumer terms, including the target user, usage situation, and principal benefits.
• Product image: The way consumers actually perceive a real or potential product.

Importance of concept testing:

• It presents alternative product concepts to target consumers before full development.
• It measures clarity, credibility, relevance, perceived value, uniqueness, and purchase intention.
• It identifies the concept and positioning most attractive to the target market.
• It reveals misunderstandings or undesirable product features at an early stage.
• It reduces the financial risk of developing a product that customers may not accept.

Concept testing is more reliable when the concept is presented clearly and the respondents closely represent the intended target market.

Common reasons for failure include:

• Overestimating market size or customer demand.
• Offering weak customer value or little differentiation.
• Incorrect positioning, pricing, or timing.
• Poor product design or inconsistent quality.
• Inadequate market research and concept testing.
• Insufficient distribution or promotional support.
• High development costs and strong competitive reactions.
• Lack of coordination among marketing, research, production, and finance.

Measures for improving success include:

• Begin with a clearly identified customer problem.
• Involve customers throughout idea generation, testing, and development.
• Use systematic screening and realistic business analysis.
• Develop a compelling value proposition and clear positioning.
• Apply cross-functional teamwork and senior management support.
• Use prototypes, test marketing, and iterative improvement.
• Plan commercialization carefully and monitor post-launch performance.

New product success depends on both a valuable product concept and disciplined execution.

A brand is a name, term, sign, symbol, design, or combination of these elements that identifies the goods or services of a seller and differentiates them from competitors.

Value for consumers:

• Makes products easier to identify and compare.
• Reduces perceived risk and search effort.
• signals consistent quality and expected performance.
• Creates emotional, social, and self-expressive benefits.
• Simplifies repeated purchase decisions.

Value for firms:

• Differentiates the offering and supports positioning.
• Encourages customer loyalty and repeat purchases.
• Provides legal protection through trademarks.
• Strengthens bargaining power with distributors.
• Supports premium pricing and brand extensions.
• Creates brand equity as a valuable intangible asset.

Thus, branding turns a basic offering into a recognizable promise of value and experience.

Brand equity is the differential effect that knowledge of a brand has on a customer's response to its products and marketing. Positive brand equity exists when customers respond more favorably to a branded offering than to an equivalent unbranded offering.

Major dimensions include:

• Brand awareness: The customer's ability to recognize or recall the brand.
• Brand associations: Ideas, feelings, images, and experiences connected with the brand.
• Perceived quality: The customer's judgment about the offering's overall excellence or superiority.
• Brand loyalty: The customer's commitment to repurchase and resist competing offers.
• Brand relevance and differentiation: The extent to which the brand is meaningful and distinct in its category.

Strong brand equity can improve customer retention, support premium prices, increase the effectiveness of marketing communication, and provide opportunities for growth.

Brand development decisions can be understood by considering whether the brand name and product category are existing or new:

• Line extension: An existing brand name is used for new forms, flavors, sizes, or features within an existing product category. It is relatively economical but may cause brand dilution or cannibalization.
• Brand extension: An existing brand name is introduced in a new product category. It provides instant recognition but may fail when the extension does not fit the brand's established meaning.
• Multibrands: A firm introduces additional brands in an existing category. This can target different segments and secure more shelf space, but each brand may obtain only a small market share.
• New brands: A new brand name is created for a new category or when existing names are unsuitable. It enables distinct positioning but requires substantial investment to build awareness.

The appropriate strategy depends on brand strength, category fit, competitive conditions, resources, and the risk of weakening existing brands.

• Manufacturer brand: The brand is created and owned by the producer, such as a national electronics brand. The manufacturer controls brand strategy but bears development and promotion costs.
• Private brand: The brand is owned by a retailer or wholesaler. It can offer higher margins and differentiation to the seller, while manufacturers may gain volume but receive less public recognition.
• Licensed brand: A firm pays a fee to use another organization's name, symbol, character, or intellectual property. Licensing offers rapid recognition but involves fees and less control over the licensed asset.
• Co-branding: Two established brand names are used on the same product. It can combine complementary strengths and reach new customers, but poor performance or conflict can harm both brands.

The choice depends on desired control, cost, credibility, distribution power, and the compatibility of the brand partners.

Price-setting decisions are influenced by both internal and external factors.

Internal factors:

• Marketing objectives and desired market positioning.
• Product, promotion, and distribution strategies.
• Fixed costs, variable costs, and total cost structure.
• Organizational responsibility for pricing decisions.
• Required profit, cash flow, and return on investment.

External factors:

• Customer perceptions of value and willingness to pay.
• Price elasticity and the nature of market demand.
• Competitors' prices, costs, offers, and likely reactions.
• Characteristics of intermediaries and distribution channels.
• Economic conditions, including inflation and interest rates.
• Government regulations and social considerations.

A sound price lies above the level needed to cover costs over time but below the level at which customers perceive insufficient value. It must also support the firm's positioning and wider marketing strategy.

Cost-based pricing starts with the product's production and selling costs. The firm adds a markup or sets a price that achieves a target return. It is simple but may overlook customer value and competitors.

Value-based pricing starts with customers' perceptions of value. The firm determines the benefits customers desire, estimates their willingness to pay, and designs the product and costs around the target price. It is customer-oriented but requires reliable value research.

Competition-based pricing uses competitors' strategies, prices, costs, and market offerings as major reference points. A firm may price above, equal to, or below competitors according to its relative value. This method is useful in competitive markets but can lead to imitation or price wars.

The principal difference is the starting point: cost-based pricing begins with internal costs, value-based pricing begins with the customer, and competition-based pricing begins with market rivals.

Let:

• = selling price per unit
• = variable cost per unit
• = total fixed cost
• = quantity sold

Total revenue is:

Total cost is:

At the break-even point, total revenue equals total cost:

Rearranging:

Therefore, the break-even quantity is:

The term is the unit contribution margin.

Break-even analysis helps managers estimate the minimum sales volume needed to avoid a loss, compare alternative prices, assess the effects of changes in cost, and evaluate profit targets. Its limitations are that it assumes constant price and variable cost, clear separation of fixed and variable costs, and sale of all units produced.

Price elasticity of demand measures how strongly quantity demanded responds to a change in price. It is calculated as:

Because price and demand usually move in opposite directions, elasticity is commonly interpreted using its absolute value:

• Elastic demand: . Quantity demanded changes by a greater percentage than price.
• Inelastic demand: . Quantity demanded changes by a smaller percentage than price.
• Unitary elastic demand: . Quantity and price change by equal percentages.

When demand is elastic, a price increase may reduce total revenue, while a price reduction may increase it. When demand is inelastic, a price increase may increase total revenue. Managers must also consider costs, competitor reactions, customer perceptions, and long-term brand effects before changing prices.

Market-skimming pricing sets a high initial price to obtain maximum revenue from customers willing to pay more. The price may be reduced gradually as additional market segments are targeted.

It is suitable when:

• Product quality and image support a high price.
• Enough buyers value innovation and are less price-sensitive.
• Competitors cannot enter the market easily.
• Small-volume production costs do not eliminate the benefit of the high price.

Market-penetration pricing sets a low initial price to attract many buyers quickly and gain a large market share.

It is suitable when:

• The market is highly price-sensitive.
• Unit costs decrease as production and sales volume rise.
• A low price discourages competitors from entering.
• The company can serve rapid growth efficiently.

Skimming emphasizes high margins from selected segments, whereas penetration emphasizes sales volume, rapid adoption, and market share.

Product mix pricing aims to maximize profit from an entire range of related products rather than from one item alone. Its principal forms are:

• Product line pricing: Price differences among items in a line reflect cost differences, customer evaluations, and competitors' prices.
• Optional-product pricing: Optional accessories or services are priced separately from the main product.
• Captive-product pricing: Products required for using the main product, such as printer cartridges, carry separate prices.
• By-product pricing: Secondary outputs are sold to recover disposal or production costs, allowing the main product to be priced more competitively.
• Product bundle pricing: Several products or services are combined and offered at a price lower than the sum of their separate prices.

These strategies require firms to consider demand relationships, customer perceptions, costs, and the possibility that one product's price will affect sales of another.

Major price adjustment strategies include:

• Discount and allowance pricing: Prices are reduced for early payment, volume purchases, seasonal buying, trade-ins, or promotional support.
• Segmented pricing: Different customers, product forms, locations, or times are charged different prices even when cost differences do not fully explain the variation.
• Psychological pricing: Prices are designed to influence perception, such as using reference prices or pricing an item just below a whole number.
• Promotional pricing: Prices are temporarily reduced to create urgency, increase store traffic, or stimulate short-term sales.
• Geographical pricing: Prices vary according to customer location and freight arrangements.
• Dynamic pricing: Prices are continually adjusted according to demand, supply, customer characteristics, or market conditions.
• International pricing: Prices differ across countries because of costs, taxes, competition, regulations, and purchasing power.

Adjustments should remain consistent with brand positioning, legal requirements, profitability, and customer perceptions of fairness.

Reasons for a price cut:

• Excess production capacity or weak demand.
• A desire to gain market share.
• Falling costs or improved operating efficiency.
• Competitive pressure or the threat of new entrants.

Risks include price wars, reduced margins, lower perceived quality, and customers postponing purchases in expectation of further reductions.

Reasons for a price increase:

• Cost inflation and rising input prices.
• Demand exceeding available supply.
• Product improvements or increased customer value.
• A strategic move toward premium positioning.

Risks include customer resistance, loss of market share, negative publicity, and aggressive competitive responses.

Competitors may match the change, maintain their prices, improve value, or selectively respond in important segments. Before acting, the firm should assess customer sensitivity, competitor objectives, cost structures, available capacity, and long-term brand effects. Clear communication and added value can reduce resistance to a price increase.