marketing
TRANSCRIPT
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LACTURE
2-01
Financial Aspects of Marketing
Management
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1. Define accounting and financial concepts useful in marketing management.
2. Describe how pro forma income statements are prepared.
YOU SHOULD BE ABLE TO:
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Slide 2-3
VARIABLE ANDFIXED COSTS
FINANCIAL ASPECTS OF MARKETING MANAGEMENT
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Slide 2-4
TYPES OF COSTS
VariableCosts
VariableCosts
FixedCostsFixedCosts
Variable/FixedCosts
Variable/FixedCosts
OtherVariable
Costs
OtherVariable
Costs
Cost of Goods Sold
Cost of Goods Sold
MaterialsMaterials
LaborLabor
OverheadOverhead
SalesCommissions
SalesCommissions
DiscountsDiscounts
Programmed Costs
Programmed Costs
CommittedCosts
CommittedCosts
AdvertisingAdvertising
SalesPromotion
SalesPromotion
OthersOthersOthersOthers
OthersOthers
RentRent
Administrative/Clerical
Administrative/Clerical
OthersOthers
SellingExpenses
SellingExpenses
SalarySalary
Commission/Bonus
Commission/Bonus
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Are expenses that are uniform per unit of output within a relevant time period (i.e. budget year).
Fluctuate in direct proportion to the number of units produced.
TYPES OF COSTS
Variable CostsVariable Costs
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Variable expenses not tied to production but do vary with volume. Includes sales commissions, discounts, etc.
Materials, labor, and overhead tied directly to production.
Are divided into two categories:
Variable CostsVariable Costs
OtherVariable
Costs
OtherVariable
Costs
Cost of Goods Sold
Cost of Goods Sold
TYPES OF COSTS
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Are expenses that do not fluctuate with output volume within a budget year.
On a per-unit basis, decrease as the number of units over which they are allocated increase.
Remain unchanged regardless of the number of units produced.
TYPES OF COSTS
Fixed CostsFixed Costs
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TYPES OF COSTS
Fixed CostsFixed Costs
Those that maintain the organization. Includes rent, administrative/clerical salaries, etc.
Those that generate sales. Includes marketing costs such as advertising, sales promotion, salesforce salaries, etc.
Are divided into two categories:
Programmed Costs
Programmed Costs
CommittedCosts
CommittedCosts
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Some costs have both a variable and fixed component. Example:
• Fixed component: salary
• Variable component: commission or bonus
TYPES OF COSTS
Variable/Fixed CostsVariable/Fixed Costs
SellingExpenses
SellingExpenses
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RELEVANT ANDSUNK COSTS
FINANCIAL ASPECTS OF MARKETING MANAGEMENT
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Differ among marketing alternatives being considered.
RELEVANT COSTS
Are expected to occur in the future as a result of some marketing action.
Relevant costs are expenditures that:
Include opportunity costs, the forgone benefits from an alternative not chosen.
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Are the opposite of relevant costs.
SUNK COSTS
Sunk costs are past expenditures for a given activity and are typically irrelevant in whole or in part to future decisions.
Include past R&D, test marketing, and advertising expenses.
Sunk cost fallacy: Recoup spent dollars by spending still more dollars in the future.
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MARGINS
FINANCIAL ASPECTS OF MARKETING MANAGEMENT
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Is expressed on a total volume or individual basis, dollar terms, or percentages.
MARGIN
Margin refers to the difference between the selling price and the “cost” of a product or service.
Consists of three types:
Profit MarginProfit MarginGross MarginGross Margin Trade MarginTrade Margin
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The difference between total sales revenue and total cost of goods sold or
GROSS MARGIN
Gross margin (or gross profit) is:
On a per-unit basis, the difference between unit selling price and unit cost of goods sold.
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GROSS MARGIN
Gross margin is expressed in dollars or percent:
Dollar AmountDollar Amount PercentagePercentageTotal Gross MarginTotal Gross Margin
Unit Gross MarginUnit Gross Margin
Unit sales price $1.00 100%
Unit cost of goods sold -$0.40 -40%
Unit gross profit margin $0.60 60%
Net sales $100 100%
Cost of goods sold -$40 -40%
Gross profit margin $60 60%
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The difference between unit sales price and unit cost at each level of a marketing channel (manufacturerwholesalerretailer).
TRADE MARGIN
Trade margin is:
Frequently referred to as a markup or mark-onby channel members, expressed as a percentage.
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Example: Selling Price = $20; Cost = $10; Margin = $10
Retailer Margin as aPercent of Cost
Retailer Margin as aPercent of Cost
TRADE MARGIN
Retailer Margin as aPercent of Selling Price
Retailer Margin as aPercent of Selling Price
Margin: $10
Cost: $10100 = 100%
Differences in margin percentages show the importance of knowing the base (cost or selling price).
Margin: $10
Selling Price: $20100 = 50%
Trade margin percents are usually based on selling price.
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TRADE MARGIN
Example:
Managers must work backward from the consumerretail selling price through the marketing channel to arrive at the manufacturer’s product’s selling price.
Unit Selling Price
Unit Selling Price
Gross Marginas a Percentageof Selling Price
Gross Marginas a Percentageof Selling Price
Unit Cost ofGoods SoldUnit Cost ofGoods Sold
MarketingChannel
MarketingChannel
Manufacturer $2.00 $2.88 30.6%
Wholesaler $2.88 $3.60 20.0%
Retailer $3.60 $6.00 40.0%
Consumer $6.00
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NET PROFIT MARGIN (BEFORE TAXES)
Dollar AmountDollar Amount PercentagePercentage
Example: Net profit margin in an income statement
Net profit margin is the remainder after cost of goods sold, other variable costs, and fixed costs have been subtracted from sales revenue.
Net sales $100,000 100%
Cost of goods sold -$30,000 -30%
Gross profit margin $70,000 70%
Selling expenses -$20,000 -20%
Fixed expenses -$40,000 -40%
Net profit margin $10,000 10%
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CONTRIBUTION ANALYSIS
FINANCIAL ASPECTS OF MARKETING MANAGEMENT
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Contribution is:
Contribution analysis is used to assess the relationship between costs, prices, volume, and profit.
CONTRIBUTION ANALYSIS
• The difference between total sales revenue and total variable costs or
• On a per-unit basis, the difference betweenunit selling price and unit variable cost
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TotalVariable Costs
TotalVariable Costs
Breakeven analysis identifies the unit or dollar sales volume at which an organization neither makes a profit nor incurs a loss.
Break-even is shown by this equation:
TotalFixed Costs
TotalFixed Costs
TotalRevenue
TotalRevenue
BREAK-EVEN ANALYSIS
= +
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BREAK-EVEN ANALYSIS
An estimate of unit variable costs.
Break-even requires the following:
The selling price for each product or service unit.
An estimate of the relevant total dollar fixed costs to produce and market the product or service unit.
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BREAK-EVEN ANALYSIS
Break-even formula:
UnitVariable Costs
UnitVariable Costs
TotalFixed Costs
TotalFixed Costs
UnitSelling Price
UnitSelling Price
=
–
UnitBreak-Even
Volume
UnitBreak-Even
Volume
Denominator = contribution per unit
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BREAK-EVEN ANALYSIS
Unit Break-Even Volume Example: Unit Selling Price = $5; Unit Variable Costs = $2; Total Fixed Costs = $30,000
=Unit
Break-EvenVolume
UnitBreak-Even
Volume
10,000 units
$30,000
$5 – $2
=Unit
Break-EvenVolume
UnitBreak-Even
Volume
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BREAK-EVEN ANALYSIS
Dollar Break-Even Volume Example: Unit Selling Price = $5; Unit Variable Costs = $2; Total Fixed Costs = $30,000
=Unit
Break-EvenVolume
UnitBreak-Even
Volume
UnitSelling Price
UnitSelling Price ×
DollarBreak-Even
Volume
DollarBreak-Even
Volume
$50,000=Dollar
Break-EvenVolume
DollarBreak-Even
Volume
= ×Dollar
Break-EvenVolume
DollarBreak-Even
Volume10,000 units$5
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CONTRIBUTION MARGIN
Contribution margin formula:
UnitVariable Costs
UnitVariable Costs
UnitSelling Price
UnitSelling Price
=
–
ContributionMargin
ContributionMargin
UnitSelling Price
UnitSelling Price
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Contribution Margin Example: Unit Selling Price = $5;Unit Variable Costs = $2
= 60%$5
=
CONTRIBUTION MARGIN
ContributionMargin
ContributionMargin
ContributionMargin
ContributionMargin
$5 – $2
DollarBreak-Even
Volume
DollarBreak-Even
Volume=
$30,000
0.60=
ContributionMargin
ContributionMargin
TotalFixed Costs
TotalFixed Costs
= $50,000
;
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BREAK-EVEN ANALYSIS CHART
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SENSITIVITY ANALYSIS
Break-even points can change if there are changesin selling price, variable costs, and/or fixed costs.
ContributionPer Unit
CU = (P - UVC)
ContributionPer Unit
CU = (P - UVC)
UnitBreak-Even
Volume(FC / CU)
UnitBreak-Even
Volume(FC / CU)
DollarBreak-Even
Volume(FC / CM*)
DollarBreak-Even
Volume(FC / CM*)
TotalFixed Costs
(FC)
TotalFixed Costs
(FC)
Scenario #1Scenario #1
Scenario #2Scenario #2
Scenario #3Scenario #3
UnitVariable
Costs(UVC)
UnitVariable
Costs(UVC)
UnitSelling Price
(P)
UnitSelling Price
(P)
* Contribution margin (CM) = [(P – UVC) ÷ P]
$5.00
$4.00
$5.00
$2.00
$2.00
$1.50
$3.00
$2.00
$3.50
$40,000
$30,000
$30,000
$66,667
$60,000
$42,857
13,333 units
15,000 units
8,571 units
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A modified break-even analysis is used to incorporate a profit goal since profits are necessary for the continued operation of an organization.
ContributionPer Unit
ContributionPer Unit
TotalFixed Costs
TotalFixed Costs
CONTRIBUTION ANALYSIS AND PROFIT IMPACT
To incorporate a profit goal in the break-even formula, treat it as an additional fixed cost.
=
+ Dollar Profit Goal
Dollar Profit Goal
Unit Volumeto AchieveProfit Goal
Unit Volumeto AchieveProfit Goal
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CONTRIBUTION ANALYSIS AND PROFIT IMPACT
Profit Goal Example: Unit Selling Price = $25;Unit Variable Costs = $10; Total Fixed Costs = $200,000; Profit Goal = $20,000
=Unit
Break-EvenVolume withProfit Goal
UnitBreak-EvenVolume withProfit Goal
$200,000 + $20,000
$25 – $10
14,667 units=Unit
Break-EvenVolume withProfit Goal
UnitBreak-EvenVolume withProfit Goal
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A profit goal can also be specified as a percentage of sales rather than as a dollar amount: Profit goal = 20% on sales.
CONTRIBUTION ANALYSIS AND PROFIT IMPACT
To incorporate a profit goal in the break-even formula, subtract the profit goal from the contribution per unit.
ContributionPer Unit
ContributionPer Unit
TotalFixed Costs
TotalFixed Costs
=
– DollarProfit Goal
DollarProfit Goal
Unit Volumeto AchieveProfit Goal
Unit Volumeto AchieveProfit Goal
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CONTRIBUTION ANALYSIS AND PROFIT IMPACT
Profit Goal Example: Unit Selling Price (P) = $25;Unit Variable Costs (UVC) = $10; Total Fixed Costs (FC) = $200,000; Profit Goal = 20% of Unit Selling Price (P);Contribution per Unit (CU) = P- UVC
=Unit
Break-EvenVolume withProfit Goal
UnitBreak-EvenVolume withProfit Goal
$200,000
[($25 – $10) – $5*]
20,000 units=Unit
Break-EvenVolume withProfit Goal
UnitBreak-EvenVolume withProfit Goal
* Dollar Profit Goal = (P × Profit Goal Percent on Sales) = $25 × 20%; $25 × .20 = $5
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CONTRIBUTION ANALYSIS AND MARKET SIZE
A manager can assess the feasibility of a venture by comparing the break-even volume with market size and market-capture percentage.
Example: Market potential is 100,000 units andunit volume break-even point is 50,000 units. Therefore, a firm’s product or service needs a50 percent market share to break even.
Marketing implication: Can such a percentage can be achieved?
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CONTRIBUTION ANALYSIS AND PERFORMANCE MEASUREMENT
Product Y(20,000 units)
Product Y(20,000 units)
Total(30,000 units)
Total(30,000 units)
Product X(10,000 units)
Product X(10,000 units)
Which product is more profitable?
Which product is more profitable on a unit-contribution basis?
Should Product X or Product Y be dropped? Why or why not?
Unit price $10.00 $3.00
Sales revenue $100,000 $60,000 $160,000
Unit variable cost $4.00 $1.50
Total variable cost $40,000 $30,000 $70,000
Unit contribution $6.00 $1.50
Total contribution $60,000 $30,000 $90,000
Fixed costs $45,000 $10,000 $55,000
Net profit $15,000 $20,000 $35,000
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ASSESSMENT OF CANNIBALIZATION
Cannibalization occurs when a firm obtains revenue by diverting sales from one product or service to another.
Brand Y:New Gel
Toothpaste
Brand Y:New Gel
Toothpaste
Brand X:Existing OpaqueWhite Toothpaste
Brand X:Existing OpaqueWhite Toothpaste
Unit price $1.00 $1.10
Unit variable cost -$0.20 -$0.40
Unit contribution $0.80 $0.70
Which product has the higher unit contribution?
Why is this important?
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ASSESSMENT OF CANNIBALIZATION
Example: Estimate of Brand X sold = 1,000,000 units;Estimate of Brand Y sold = 1,000,000;Cannibalization effect =
How will the introduction of Brand Y affect the total contribution dollars of Brand X?
• Brand X total contribution lost? ($0.10 per unit lost × 500,000 cannibalized units from Brand X to Brand Y = –$50,000)
• Brand Y total contribution gained? ($0.70 unit contribution × 500,000 units of Brand Y = +$350,000)
• Financial effect of introducing Brand Y? (Net contribution dollars = +$350,000 – $50,000 = $300,000)
• Loss of 500,000 units of Brand X sales diverted to Brand Y
• Loss of $0.10 per unit of Brand X for each unit of Brand Y sold
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ASSESSMENT OF CANNIBALIZATION
ProductProduct UnitVolume
UnitVolume
Unit Contribution
Unit Contribution
ContributionDollars
ContributionDollars
+ +
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A firm’s ability to meet short-term financial obligations within a budget year.
LIQUIDITY AND WORKING CAPITAL
Consists of cash, accounts receivable,prepaid expenses, inventory, etc.
Consists of short-term accounts payable,income taxes, etc.
Managers must be aware of the impact of marketing actions on working capital.
LiquidityLiquidity
WorkingCapital
WorkingCapital
CurrentAssetsCurrentAssets= Current
LiabilitiesCurrent
Liabilities–
CurrentAssetsCurrentAssets
CurrentLiabilitiesCurrent
Liabilities
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Operating leverage refers to the extent to which fixed costs and variable costs are used in the production and marketing of products and services.
OPERATING LEVERAGE
The higher the operating leverage, the faster total profits will rise or fall once sales volume rises or falls below break-even volume.
High total fixed costs relative to total variable costs. Example: Airlines
Low total fixed costs relative to total variable costs. Example: Wholesalers
LowOperatingLeverage
LowOperatingLeverage
HighOperatingLeverage
HighOperatingLeverage
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EFFECT OF OPERATING LEVERAGE ON PROFIT
High VariableCost Firm
High VariableCost Firm
High FixedCost Firm
High FixedCost Firm
Base CaseBase Case 10% Increasein Sales
10% Increasein Sales
10% Decreasein Sales
10% Decreasein Sales
High VariableCost Firm
High VariableCost Firm
High FixedCost Firm
High FixedCost Firm
High VariableCost Firm
High VariableCost Firm
High FixedCost Firm
High FixedCost Firm
VariableCosts
VariableCosts
FixedCostsFixedCosts
SalesSales
ProfitsProfits
$100,000
$20,000
$80,000
$0
$100,000
$80,000
$20,000
$0
$110,000
$22,000
$80,000
$8,000
$110,000
$88,000
$20,000
$2,000
$90,000
$18,000
$80,000
($8,000)
$90,000
$72,000
$20,000
($2,000)
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DISCOUNTED CASH FLOW
Discounted cash flows are future cash flows expressed in terms of their present value.
Incorporates the theory of the time value of money or present-value analysis.
Premise: A dollar received next year is worth less than a dollar received today because its future value is affected by risk, inflation, and opportunity cost.
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DISCOUNTED CASH FLOW
The cost of earnings opportunities forgone by investing in a business with its attendant risk as opposed to investing in risk-free securities such as U.S. Treasury bills.
The interest or discount rate is defined by the cost of capital.
DiscountedCash Flow
Factors
DiscountedCash Flow
Factors
Cost ofCapitalCost ofCapital
Net Cash Flow
Net Cash Flow
CashOutflows
CashOutflows
= –Cash
InflowsCash
Inflows
• r = Interest rate• n = Number of the year
1
(1 + r)n = ∑
1 to n
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APPLICATION OF DISCOUNTED CASH FLOW ANALYSIS WITH A 15 PERCENT DISCOUNT FACTOR
Which business has the larger cumulative cash flow? Why is this important?
Which business has the faster payback? Why is this important?
Which business has the greater discounted cash flow? Why is this important?
DiscountedCash Flow
DiscountedCash Flow
DiscountedCash Flow
DiscountedCash Flow
DiscountFactor
DiscountFactor
CashFlowCashFlow
CashFlowCashFlow
Business ABusiness A Business BBusiness B
CumulativeCash Flow
CumulativeCash Flow
CumulativeCash Flow
CumulativeCash Flow
TotalsTotals
YearYear
00
44
33
22
11
55
($105,000)
$43,500
$41,580
$39,480
$37,180
$34,790
$91,530
($105,000)
($55,000)
$0
$60,000
$125,000
$195,000
($105,000)
$50,000
$55,000
$60,000
$65,000
$70,000
($105,000)
$21,750
$26,460
$32,900
$40,040
$44,730
$60,880
($105,000)
($80,000)
($45,000)
$5,000
$75,000
$165,000
($105,000)
$25,000
$35,000
$50,000
$70,000
$90,000
1.000
0.870
0.756
0.658
0.572
0.497
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Slide 2-47
CUSTOMER LIFETIME VALUE
FINANCIAL ASPECTS OF MARKETING MANAGEMENT
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Slide 2-48
CUSTOMER LIFETIME VALUE
The present value of future cash flows from a customer relationship.
The CLV calculation requires this information:
CustomerLifetime
Value(CLV)
CustomerLifetime
Value(CLV)
= +–$M$M VariableCosts
VariableCosts
Other CustomerAcquisition CostOther CustomerAcquisition Cost
SalesRevenue
SalesRevenue ( )
(r)RetentionRate
RetentionRate =
(i)InterestRate
InterestRate =
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Slide 2-49
CUSTOMER LIFETIME VALUE
The customer lifetime value (CLV) formula is:
Example: $M = $2,000; i = 10%; and r = 80%. CLV is:
CLVCLV =1
1.0 + 0.1 – 0.8 $2,000 ×
CLVCLV = $6,666.67
CustomerLifetime
Value(CLV)
CustomerLifetime
Value(CLV)
=1
1 + i – r ×$M$M
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Slide 2-50
CUSTOMER LIFETIME VALUE
Example: $M = $2,000; i = 10%; r = 80%;g (constant growth rate) = 6%. CLV is:
CLVCLV =1
1.00 + 0.10 – 0.80 – 0.06$2,000 ×
CLVCLV = $8,333.33
Marketing affects the customer margin ($M),the retention rate (r), and the growth rate (g)but not the interest rate (i).
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Slide 2-51
PREPARING A PRO FORMA INCOME STATEMENT
FINANCIAL ASPECTS OF MARKETING MANAGEMENT
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Slide 2-52
PRO FORMA INCOME STATEMENT
A pro forma income statement displays projected revenues, budgeted expenses, and estimated net profit for an organization, product, or service during a specific planning period, usually a year.
A pro forma income statement includes a sales forecast and a listing of variable and fixed costs that can be programmed or committed.
A pro forma income statement reflects a marketer’s expectations (sales) given certain inputs (costs).
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Slide 2-53
PRO FORMA INCOME STATEMENT DEFINITIONS
Sales. The forecasted unit volume times unit selling price.
Cost of goods sold. The costs incurred in buying or producing offerings, which:
• Are constant per unit within certain volume ranges
• Vary with total unit volume
Gross margin or gross profit. The remainder after cost of goods sold has been subtracted from sales.
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Slide 2-54
PRO FORMA INCOME STATEMENT DEFINITIONS
Marketing expenses. The programmed expenses budgeted to produce sales.
General and administrative expenses (overhead). The committed fixed costs for the planning period, which cannot be avoided if the organization is to operate.
Net income before (income) taxes or net profit before taxes. The remainder after all costs have been subtracted from sales.
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Slide 2-55
PRO FORMA INCOME STATEMENT FOR THE 12-MONTH PERIOD ENDED DECEMBER 31, 2008
Sales $1,000,000Cost of goods sold $500,000Gross margin $500,000Marketing expenses
Sales expenses $170,000Advertising expenses $90,000Freight or delivery expenses $40,000 $300,000
General and administrative expensesAdministrative salaries $120,000Depreciation on buildings/equipment $20,000Interest expense $5,000Property taxes and insurance $5,000Other administrative expenses $5,000 $155,000
Net profit before (income) taxes $45,000
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Slide 2-56
The Value of a Name
Prof. Dr. MAK Chishty
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Slide 2-57
Aaker: “A brand is a distinguishing name and/or symbol (such as a logo, trademark, or package design) intended to identify the goods or services of either one seller or a group of sellers, and to differentiate those goods or services from those of competitors”
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Slide 2-58
Ogilvy: A brand is the consumer’s idea of a product”
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Slide 2-59
King: “A product is something that is made in a factory; a brand is something that is bought by a consumer. A product can be copied by a competitor; a brand is unique; a product can be quickly outdated; a successful brand is timeless.”
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Slide 2-60
A product is a physical object, but a brand is a concept in the minds of consumers
Key aspect of a brand is not what it does but what it means
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Slide 2-61
Aaker: “A set of brand assets and liabilities linked to a brand, its name and symbol, that add to or subtract from the value provided by a product or service to a firm and/or to that firm’s customers.”
Honda Auto’s: “The added value that a brand gives to `generic products/services’ beyond their functional purpose.”
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Slide 2-62
Adds or subtracts value for consumers Helps them interpret, process, & store
information Can enhance customer satisfaction
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Slide 2-63
Helps attract new customers and recapture old ones KFC……………..(Entertainment ) Agha Khan Hospital …..( Health Care ) K & N Foods………………( Healthy food)
Can enhance brand loyalty, provide reasons to buy, enhance satisfaction
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Slide 2-64
Improves margins by permitting premium pricing makes promotions less necessary
Provides growth platform through brand extensions
Forms barriers to entry for competitors
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Slide 2-65
Brand loyalty Brand awareness Perceived quality Brand associations
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Slide 2-66
United Bakers -- Warmth, act of baking, caring, fun
Season Conola -- Valley, fresh vegetables, “green,” healthy
Marlboro Man -- Outdoor, adventure, full flavor
Iqra University-- Strength, stability, security
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Slide 2-67
A recent survey found that half added nothing weren’t recognized or weren’t associated with
the right product Abstract and futuristic logos were
generally confusing and ineffective half made consumers less likely to trust
company and want to buy product
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Slide 2-68
A product is a physical thing; a brand is an idea in the consumer’s mind
Brand equity is the value of brand meanings and associations provides value for consumers and the firm
Brand equity consists of awareness, loyalty, perceived quality, and associations
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Slide 2-69
Lecture By Prof. Dr. MAK Chishty
Marketing Decision
Making and Case Analysis
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Slide 2-70
1. Describe each step in the decision-making process using the “DECIDE” method.
2. Prepare and present an analysis of a written case.
YOU SHOULD BE ABLE TO:
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Slide 2-71
DECISION MAKING
“Decision making is a rational and systematic process and that its organization is a definite sequence of steps, each of them in turn rational and systematic.”
— Peter Drucker
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Slide 2-72
DECISION-MAKING PROCESS
MARKETING DECISION MAKING AND CASE ANALYSIS
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Slide 2-73
DECISION-MAKING PROCESS: DECIDE
Enumerate the decision factorsEnumerate the decision factors
Consider the relevantinformationConsider the relevantinformation
Define the problemDefine the problem
Identify the best alternativeIdentify the best alternative
Develop a plan for implementingthe chosen alternativeDevelop a plan for implementingthe chosen alternative
Evaluate the decision and the decision processEvaluate the decision and the decision process
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Slide 2-74
STEP 1: DEFINE THE PROBLEM
“A problem well defined is half solved.”
— John Dewey
Problem definition framework includes:
ConstraintsConstraintsSuccess
MeasuresSuccess
MeasuresObjectivesObjectives
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Slide 2-75
STEP 2: ENUMERATE THE DECISION FACTORS
Two decision factors to be enumerated and related to each other:
AlternativeCourses of Action
AlternativeCourses of Action
UncertaintiesUncertainties
Controllable by the decision maker such as the marketing mix.
Uncontrollable factors that the manager cannot influence.
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Slide 2-76
STEP 3: CONSIDER RELEVANT INFORMATION
Relevant information consists of information that relates to the alternatives identified by the manager as being likely to affect future events. Includes characteristics of the following:
ConsumersConsumers
CompetitorsCompetitors
IndustryIndustry
Organization (competitive
strengths and position)
Organization (competitive
strengths and position)
AlternativesAlternatives
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Slide 2-77
STEP 3: CONSIDER RELEVANT INFORMATION
Identifying relevant information is difficult:
• There is often an overabundance of information and viewpoints
• Determining what does and does not matter is a skill learned through experience
• Resist the temptation to consider everything as factual information
• Sometimes relevant information must be created
A manager has performed a situation analysis when steps 1 through 3 are completed.
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Slide 2-78
STEP 4: IDENTIFY THE BEST ALTERNATIVE
The framework for identifying the best alternative is decision analysis, which:
Use a decision tree and a payoff table to show the relationship among alternatives, uncertainties, and potential outcomes.
• Matches each alternative with the uncertainties in the environment
• Assigns a quantitative value to the outcome associated with each match
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Slide 2-79
STEP 4: IDENTIFY THE BEST ALTERNATIVE
Example: El Nacho Foods
AlternativeCourses of Actionfor Frozen Dinners
AlternativeCourses of Actionfor Frozen Dinners
Uncertaintiesabout Competitors
Uncertaintiesabout Competitors
• Reduce price
• Maintain price
• Maintain lower price
• Reduce price further
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Slide 2-80
EXHIBIT 3.1: DECISION TREE FOREL NACHO FOODS
$175,000
$90,000
CompanyAction
CompetitiveResponse
FinancialOutcome
$150,000
$110,000
Maintain priceMaintain price
Maintainprice
Reduceprice further
Maintainprice
Reduceprice further
Reduce priceReduce price
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Slide 2-81
STEP 4: IDENTIFY THE BEST ALTERNATIVE
Displays the alternatives, uncertainties, and outcomes facing a firm.
A payoff table:
Includes management’s determination of the probability of an uncertainty’s occurrence.
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Slide 2-82
EXHIBIT 3.2: PAYOFF TABLE FOREL NACHO FOODS
$110,000$110,000
$90,000$90,000
$150,000$150,000
$175,000$175,000
CompetitorsCompetitorsMaintain PriceMaintain Price
(Probability = 0.9)(Probability = 0.9)
Reduce priceReduce price
Maintain priceMaintain price
UncertaintiesUncertainties
AlternativesAlternatives
CompetitorsCompetitorsReduce PriceReduce Price
(Probability = 0.1)(Probability = 0.1)
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Slide 2-83
STEP 4: IDENTIFY THE BEST ALTERNATIVE
A payoff table computes the “expected monetary value” (EMV) for each alternative.
The EMV is calculated as follows:
EMVEMV Outcome of Uncertainty1
Outcome of Uncertainty1
= +
Outcome ofUncertainty2
Outcome ofUncertainty2
× Probability (p)of Uncertainty1
Probability (p)of Uncertainty1
Probability (p)of Uncertainty2
Probability (p)of Uncertainty2 +×
((
(())
))
EMVPI = EMV of Perfect Information
…
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Slide 2-84
EXHIBIT 3.3: DECISION ANALYSIS AND THE VALUE OF INFORMATION
$110,000$110,000
$90,000$90,000
$150,000$150,000
$175,000$175,000
CompetitorsCompetitorsMaintain PriceMaintain Price
(Probability = 0.9)(Probability = 0.9)
AA11: Reduce price: Reduce price
AA22: Maintain price: Maintain price
Payoff Table UncertaintiesPayoff Table Uncertainties
AlternativesAlternatives
CompetitorsCompetitorsReduce PriceReduce Price
(Probability = 0.1)(Probability = 0.1)
EMVEMVCalculationCalculation
$166,500$166,500
$146,000$146,000
EMVA1 = (0.9 × $150,000) + (0.1 × $110,000) = $146,000
EMVA2 = (0.9 × $175,000) + (0.1 × $90,000) = $166,500
EMVCertainty = (0.9 × $175,000) + (0.1 × $110,000) = $168,500
EMVPI = EMVCertainty – EMVBest alternative
EMVPI = $168,500 – $166,500) = $2,000
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Slide 2-85
STEP 4: IDENTIFY THE BEST ALTERNATIVE
Is a fundamental tool for considering “what if” situations.
Decision analysis is important because it:
Forces the manager to quantify outcomes associated with specific actions.
Is useful in a variety of settings.
Can be used in determining the value of“perfect” information.
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Slide 2-86
STEP 5: DEVELOP A PLAN FOR IMPLEMENTING THE CHOSEN ALTERNATIVE
Allocation of marketing, financial, and manufacturing resources.
Developing an implementation plan involves:
Strategy formulation.
Strategy implementation.
Timing needed to develop a marketing plan.
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Slide 2-87
STEP 6: EVALUATE THE DECISION AND THE DECISION PROCESS
Was a decision made?
With respect to the decision itself, ask two questions:
Was the decision appropriate given the situation?
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Slide 2-88
STEP 6: EVALUATE THE DECISION AND THE DECISION PROCESS
Was the problem defined adequately?
With respect to the performance of the decision-making process, ask five questions:
Were all the pertinent alternatives and uncertainties identified? Were the assumptions realistic?
Was all the relevant information considered?
Was an appropriate course of action recommended?Was the logic consistent? Was any important piece of information overlooked?
How can the recommendation be implemented?
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Slide 2-89
PREPARING AND PRESENTING
A CASE ANALYSIS
MARKETING DECISION MAKING AND CASE ANALYSIS
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Slide 2-90
APPROACHING THE CASE
First reading. Become familiar with the situation of the organization:
Second reading. ay attention to key facts and assumptions:
• Identify insights into the problem
• Obtain background information on the environment and organization
• Determine relevance and reliability of data
• Take extensive notes
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Slide 2-91
APPROACHING THE CASE
Do not rush to a conclusion.
Avoid these pitfalls:
Do not confuse supposition with fact.
Do not “work the numbers” until their meaning and derivation are understood.
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Slide 2-92
Nature of the Industry, Market, and Buying Behavior:
Assess the structure, conduct, and performance of the industry and competitors.
FORMULATING THE CASE ANALYSIS
Identify the buyers and why, where, when, how, what, and how much they buy.
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Slide 2-93
The Organization:
Understand an organization’s resources—financial, human, and material.
FORMULATING THE CASE ANALYSIS
Identify an organization’s strengths and weaknesses and the reasons for success or failure.
Assess the “fit” between an organization and its environment via a SWOT analysis.
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Slide 2-94
A Plan of Action:
Identify possible courses of action based on the situation analysis.
FORMULATING THE CASE ANALYSIS
Calculate realistic estimates of the revenues and costs of each course of action.
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Slide 2-95
Potential Outcomes:
Evaluate the potential outcomes of all courses of action.
FORMULATING THE CASE ANALYSIS
Recommend the best course of action to be pursued.
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Slide 2-96
If Using Teams:
Create a balanced team whose member’s skill sets complement one another (writing, oral presentation, financial, etc.).
FORMULATING THE CASE ANALYSIS
Be committed to the task and dependable.
Avoid “groupthink.”
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Slide 2-97
MARKETING CASE ANALYSIS WORKSHEET
Nature of the industry, market,
and buyer behavior
Nature of the industry, market,
and buyer behavior
1. What is the nature of the industry structure, conduct, and performance?
2. Who are the competitors, and what are their strengths and weaknesses?
3. How do consumers buy in this industry or market?
4. Can the market be segmented? How? Can the segments be quantified?
5. What are the requirements for success in this industry?
TheOrganization
TheOrganization
1. What are the organization’s mission, objectives, and distinctive competency?
2. What is its offering to the market? How can its past and present performance be characterized? What is its potential?
3. What is the situation in which the manager or organization finds itself?
4. What factors have contributed to the present situation?
A Planof ActionA Plan
of Action
1. What actions are available to the organization?
2. What are the costs and benefits of action in both qualitative and quantitative terms?
3. Is there a disparity between what the organization wants to do, should do, can do, and must do?
PotentialOutcomesPotential
Outcomes
1. What will be the buyer, trade, and competitive response to each course of action?
2. How will each course of action satisfy buyer, trade, and organization requirements?
3. What is the potential profitability of each course of action?
4. Will the action enhance or reduce the organization’s ability to compete in the future?
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Slide 2-98
MARKETING CASE ANALYSIS WORKSHEET
Nature of the industry,
market, and buyer
behavior
Nature of the industry,
market, and buyer
behavior
1. What is the nature of the industry structure, conduct, and performance?
2. Who are the competitors, and what are their strengths and weaknesses?
3. How do consumers buy in this industry or market?
4. Can the market be segmented? How? Can the segments be quantified?
5. What are the requirements for success in this industry?
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Slide 2-99
MARKETING CASE ANALYSIS WORKSHEET
TheOrganization
TheOrganization
1. What are the organization’s mission, objectives, and distinctive competency?
2. What is its offering to the market? How can its past and present performance be characterized? What is its potential?
3. What is the situation in which the manager or organization finds itself?
4. What factors have contributed to the present situation?
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Slide 2-100
MARKETING CASE ANALYSIS WORKSHEET
A Planof Action
A Planof Action
1. What actions are available to the organization?
2. What are the costs and benefits of action in both qualitative and quantitative terms?
3. Is there a disparity between what the organization wants to do, should do, can do, and must do?
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Slide 2-101
MARKETING CASE ANALYSIS WORKSHEET
PotentialOutcomesPotential
Outcomes
1. What will be the buyer, trade, and competitive response to each course of action?
2. How will each course of action satisfy buyer, trade, and organization requirements?
3. What is the potential profitability of each course of action?
4. Will the action enhance or reduce the organization’s ability to compete in the future?
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COMMUNICATING THE CASE ANALYSIS
Class DiscussionClass Discussion
Case preparation requires 4–5 hours.
Bring notes to class.
Carefully listen to the viewpoints of other students during the discussion of the case.
Prepare a short summary of the case after discussing it in class.
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COMMUNICATING THE CASE ANALYSIS
Oral PresentationOral Presentation
Rehearse the presentation.
Visual aids do not replace the oral presentation.
• Do not read slides to the audience
• Do not use too many graphics, colors, and transitions
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COMMUNICATING THE CASE ANALYSIS
Oral PresentationOral Presentation
Slides should cover the following:
• Opening slide: Presentation title and presenters’ names
• Outline of the presentation
• Key problems and strategic issues that management needs to address
• Analysis of the organization’s situation or problem
• Recommendations and supporting reasoning for each
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COMMUNICATING THE CASE ANALYSIS
Written ReportWritten Report
Be carefully organized and grammatically correct.
Has three major sections:
• Strategic problem and issue identification
• Analysis and evaluation
• Recommendations
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LECTURE BY: Prof. Dr. MAK Chishty
Product and Service Strategy and Brand Management
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1. Explain the offering concept and offering mix portfolio.
3. Identify and describe the stages in the new-offering development process.
AFTER LECTURE YOU SHOULD BE ABLE TO:
2. Describe how the marketing manager modifies the offering mix.
4. Identify and describe the stages in the product life cycle.
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5. Explain the types of positioning strategies.
AFTER LECTUREYOU SHOULD BE ABLE TO:
6. Define the concepts of brand and brand equity.
7. Describe how brand equity is created as well as its value to organizations.
8. Explain the types of branding and brand growth strategies.
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OFFERING STRATEGY FRAMEWORK
PositioningOfferings
PositioningOfferings
Branding OfferingsBranding Offerings
Modifying theOffering MixModifying theOffering Mix
The profitability of an organization depends on its product or service offering(s) and the strength of its brand(s).
Marketers face three offering-related strategy decisions:
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THE OFFERING PORTFOLIO
PRODUCT AND SERVICE STRATEGY AND BRAND MANAGEMENT
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An offering consists of the benefits or satisfaction provided to target markets by an organization.
It consists of the following elements:
PackagingPackagingWarranties/GuaranteesWarranties/Guarantees
Brand name(s)Brand name(s)
Tangibleproduct/service(a physical entity)
Tangibleproduct/service(a physical entity)
Related services(delivery, setup, etc.)
Related services(delivery, setup, etc.)
Other FeaturesOther Features
THE OFFERING CONCEPT
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THE OFFERING MIX
ProductLinesProductLines
Product ItemsProduct Items
Offering Mix/PortfolioOffering Mix/Portfolio
The totality of an organization’s offerings is known as its product or service.
Groups of offerings similar in terms of usage, buyers marketed to, or technical characteristics.
A specific product or service noted by a brand, size, or price.
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THE OFFERING MIX
DepthDepth
ConsistencyConsistency
Width(breadth)Width(breadth)
The number of items in each line.
The number of offering lines.
The extent to which offeringssatisfy similar needs, appeal to similar buyer groups, or usesimilar technologies.
Offering mix decisions concern the:
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THE OFFERING MIX
Offering mix decisions depend on the:
CompetitiveSituationCompetitiveSituation
OrganizationalResources
OrganizationalResources
MarketingStrategyMarketingStrategy
High-Profit orHigh-Volume Offerings
High-Profit orHigh-Volume Offerings
CompleteLinesCompleteLines
OneOfferingOneOffering
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Bundling involves the marketing of two or more product or service items in a single “package” that creates a new offering:
THE OFFERING MIX
Value Meals Vacation Packages
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Means that consumers value the package more than the individual items.
Provides a lower total cost to buyers and lower marketing costs to sellers.
THE OFFERING MIX
Bundling:
Is due to benefits received from not having to make separate purchases and the satisfaction from one item given the presence of another.
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MODIFYING THE OFFERING MIX
PRODUCT AND SERVICE STRATEGY AND BRAND MANAGEMENT
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OFFERING MIX MODIFICATON STRATEGY DECISIONS
Eliminatingthe OfferingEliminatingthe Offering
Modifyingthe Offering
Modifyingthe Offering
Harvestingthe Offering
Harvestingthe Offering
Adding to theOffering MixAdding to theOffering Mix
New OfferingDevelopmentNew OfferingDevelopment
SingleOfferingSingleOffering
EntireLineEntireLine
Trading UpTrading Up
Trading DownTrading Down
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ADDITIONS TO THE OFFERING MIX
Additions take the form of:
How consistent is the new offering with existing offerings?
Questions to ask when considering new offerings:
SingleOfferingSingleOffering
EntireLineEntireLine
Does the organization have the resources to introduce and sustain the offering?
Is there a viable market for the offering?
ResourcesResources
ConsistencyConsistency
MarketMarket
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ADDITIONS TO THE OFFERING MIX
ConsistencyConsistency
Consider demand interrelationships (offering substitutes or complements) —the cannibalization effect.
Consider the degree to which the new offering fits the organization’s existing selling and distribution strategies.
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ADDITIONS TO THE OFFERING MIX
ResourcesResources
Consider the organization’s financial strength—R & D and marketing programs.
Consider the speed and magnitude of the competitive response.
Consider the market growth rate.
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ADDITIONS TO THE OFFERING MIX
Consider whether a market exists.
Consider whether the new offering has a relative advantage over competitive offerings at a price consumers are willing and able to pay.
Consider if there is a distinct buyer group or segment for which no present offering is satisfactory.
MarketMarket
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STAGES IN THE NEW-OFFERING DEVELOPMENT PROCESS
IdeaScreeningIdeaScreening
Business AnalysisBusiness Analysis
IdeaGenerationIdeaGeneration
MarketTestingMarketTesting
Commercial-izationCommercial-ization
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STAGES IN THE NEW-OFFERING DEVELOPMENT PROCESS
Sources of new offering ideas include:
EmployeesEmployees BuyersBuyers CompetitorsCompetitors
Idea GenerationIdea Generation
Ideas are obtained through marketing research (formal) and informal means.
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STAGES IN THE NEW-OFFERING DEVELOPMENT PROCESS
Idea ScreeningIdea Screening
Ideas are screened based on:
OrganizationalDefinition
OrganizationalDefinition
OrganizationalCapability
OrganizationalCapability
ProspectiveBuyersProspectiveBuyers
Ideas deemed incompatible with organizational definition and capabilityare quickly eliminated.
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STAGES IN THE NEW-OFFERING DEVELOPMENT PROCESS
Assess the match between prospective buyers andoffering characteristics by asking:• Does the offering have a relative advantage over existing offerings?
• Is the offering compatible with buyers’ use or consumption behavior?
• Is the offering simple enough for buyers to understand and use?
• Can the offering be tested on a limited basis prior to actual purchase?
• Are there immediate benefits from the offering once it is consumed?
If the answers are “yes” and the offering satisfies a felt need,then go to the business analysis stage.
Idea ScreeningIdea Screening
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STAGES IN THE NEW-OFFERING DEVELOPMENT PROCESS
Business AnalysisBusiness Analysis
Assess financial viability based on estimated:
SalesSales CostsCosts ProfitsProfits
Forecasting sales is difficult for new offerings.
Profitability analyses relate to:
InvestmentInvestment Break-evenBreak-even Payback PeriodPayback Period
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STAGES IN THE NEW-OFFERING DEVELOPMENT PROCESS
Business AnalysisBusiness Analysis
The number of years required foran organization to recapture its initial offering investment.
=PaybackPeriodPaybackPeriod
Total Fixed CostsTotal Fixed Costs
=
Cash FlowsCash Flows
PaybackPeriodPaybackPeriod
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STAGES IN THE NEW-OFFERING DEVELOPMENT PROCESS
Business AnalysisBusiness Analysis
The ratio of average annualnet earnings (return) divided byaverage annual investment,discounted to the present time.
=Return onInvestment(ROI)
Return onInvestment(ROI)
Annual Net EarningsAnnual Net Earnings
=
AnnualInvestmentAnnualInvestment
× DiscountFactorDiscountFactor
Return onInvestment(ROI)
Return onInvestment(ROI)
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STAGES IN THE NEW-OFFERING DEVELOPMENT PROCESS
Market TestingMarket Testing
May include product concept or buyer preference tests in a laboratory situation or field test market.
Ideas that pass through this stage are commercially introduced into the marketplace.
A test market is a scaled-down implementation of one or more alternative marketing strategies for introducing the new offering.
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STAGES IN THE NEW-OFFERING DEVELOPMENT PROCESS
Market TestingMarket Testing
Generate benchmark data for assessing sales volume when the product is introduced over a wider area.
Examine the relative impacts of alternative marketing strategies and programs under actual market conditions.
Assess the incidence of trial, repeat-purchase, and quantities purchased by potential buyers of the offering.
Inform competitors of the organization’s activities,which may increase the speed and effectiveness of competitive response.
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STAGES IN THE NEW-OFFERING DEVELOPMENT PROCESS
CommercializationCommercialization
3,000 raw ideas are needed to produce a single commercially successful new offering.
New offering success depends on a fit with:
• Market needs
• Organizational strengths and resources
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LIFE-CYCLE CONCEPT
A life cycle plots sales of an offering(a brand of coffee) or a product class(all ground coffee brands) over a periodof time.
Life cycles are divided into four stages:
Maturity-SaturationMaturity-SaturationGrowthGrowthIntroductio
nIntroduction DeclineDecline
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EXHIBIT 5.1: GENERAL FORM OF A PRODUCT LIFE CYCLESales
Time
Maturity-SaturationMaturity-SaturationGrowthGrowthIntroductionIntroduction DeclineDecline
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LIFE-CYCLE CONCEPT
The sales curve can be viewed as the result of offering trial and repeat purchasing behavior.
Sales volume
=(Number of triers × average purchase amount × price) + (number of repeaters × average purchase amount × price)
Time
Sales
TrierVolume
RepeaterVolume
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Focus on stimulating trial of the offering by:
The vast majority of sales volume is due to trial purchases.
• Advertising
• Giving out free samples
• Obtaining adequate distribution
Introduction StageIntroduction Stage
LIFE-CYCLE CONCEPT
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An increasing share of volume is due to repeat purchases.
Marketers focus on retaining existing buyers of the offering through offering:
• Modifications
• Enhanced brand image
• Competitive pricing
Growth StageGrowth Stage
LIFE-CYCLE CONCEPT
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Proportion of buyers who are repeat purchasers(i.e. few new buyers or triers exist).
There is an increase in the:
Standardization of production operations and product-service offerings.
Incidence of aggressive pricing activities by competitors.
LIFE-CYCLE CONCEPT
Maturity-Saturation StageMaturity-Saturation Stage
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Finding new buyers for the offering.
Significantly improving the offering.
Increasing the frequency of usage among current buyers.
Marketers focus on:
Marketers decide to harvest or eliminate the offering.
LIFE-CYCLE CONCEPT
Maturity-Saturation StageMaturity-Saturation Stage
Decline StageDecline Stage
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MODIFYING OFFERINGS
Modifyingthe Offering
Modifyingthe Offering
TradingUpTradingUp
Trading DownTrading Down
Involves adding new features and higher-quality materials or augmenting the offering with attendant services and then raising the price.
Is the process of reducing the number of features or quality of an offering and lowering the price.
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HARVESTING OFFERINGS
Harvesting is the strategic decision to reduce the investment in a business entity in the hope of cutting costs and/or improving cash flow.
The decision is not to abandon the offering outright but to minimize the human and financial resources allocated to it.
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HARVESTING OFFERINGS
Harvesting should be considered when:
The market for the offering is stable.
The offering is not producing good profits.
Market share becomes increasingly costly to defend from competitive inroads.
The offering enhances the firm’s image or provides a full product line despite a poor future.
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ELIMINATING OFFERINGS
• What is the future sales potential of the offering?
• How much is the offering contributing to offering mix profitability?
Elimination means that the offering is dropped from the firm’s offering mix.
An offering may be eliminated if the answers to these questions are “very little” or “none.”
• How much is the offering contributing to the sale of other offerings in the mix?
• How much could be gained by modifying the offering?
• What would be the effect on channel members and buyers?
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POSITIONING OFFERINGS
PRODUCT AND SERVICE STRATEGY AND BRAND MANAGEMENT
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POSITIONING
Positioning is the act of designing an organization’s offering and image so that it occupies a distinct and valued place in the target customer’s mind relative to competitive offerings.
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POSITIONING STRATEGIES
Strategies include positioning by:
Product or Brand UserProduct or Brand User
Use orApplicationUse orApplication
Attribute or BenefitAttribute or Benefit
Product orService ClassProduct orService Class
Price andQualityPrice andQuality
CompetitorsCompetitors
Marketers often combine two or more of these strategies when positioning a product, service, or brand.
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POSITIONING BY ATTRIBUTE OR BENEFIT
Requires determining:
• Which attributes are important to target markets
• Which attributes are being emphasized by competitors
Is the strategy most frequently used.
• How the offering can be fitted into this offering-target market environment
Accomplished by designing an offering that contains appropriate attributes or stressing the appropriate attributes if they already exist.
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ATTRIBUTE OR BENEFIT POSITIONING MATRIX
Benefits of the positioning matrix:
• Can judge the competitive response to a new offering more effectively
• Can spot potential opportunities for new offerings and determine if a market niche exists
• Permits subjective estimation of the extent to which a new offering might cannibalize existing offerings
Develop a matrix relating attributes of the offering to market segments (see Exhibit 5.2).
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ATTRIBUTES AND MARKETING SEGMENT POSITIONING
AdultsAdults
ToothpasteAttributesToothpasteAttributes ChildrenChildren Teens;
Young AdultsTeens;Young Adults FamilyFamily
Market SegmentsMarket Segments
Principal Brandsfor Each SegmentPrincipal Brandsfor Each Segment
Topol;RembrandtTopol;RembrandtAim; StripeAim; Stripe Ultra Brite;
McCleansUltra Brite; McCleans Colgate; CrestColgate; Crest
NOTE: A check () indicates principal benefits sought by each market segment.
FlavorFlavor
ColorColor
Whiteness of TeethWhiteness of Teeth
Decay PreventionDecay Prevention
Fresh BreathFresh Breath
PricePrice
Plaque PreventionPlaque Prevention
Stain PreventionStain Prevention
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CRAFTING A POSITIONING STATEMENT
Once the desired positioning has been determined, marketers prepare a succinct, written positioning statement.
A positioning statement identifies:
• The offering’s unique attributes or benefits
• The target market and needs satisfied
• The product (service) class or category in which the organization’s offering competes
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CRAFTING A POSITIONING STATEMENT
A positioning statement takes this form:
For (target market and need), the (product, service,brand name) is a (product/service class or category)that (statement of unique attributes or benefits provided).
Example:
“For upscale American families who desire a carefree driving experience, Volvo is a premium-priced automobile that offers the utmost in safety and dependability.”
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REPOSITIONING
Repositioning is necessary when:
• Better positioning opportunities arise
• The initial positioning of a product, service, brand, or organization is no longer competitively sustainable or profitable
It takes time and is costly to establish a new position, so do this after careful study.
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MAKING THE POSITIONING STRATEGY DECISION
Who are the likely competitors, what positions have they staked out in the marketplace, and how strong are they?
What position, if any, does the organization already have in the target consumers’ mind?
What are the preferences of the target consumers and how do they perceive competitors’ offerings?
The choice of which positioning strategy to use can be made by answering the following:
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MAKING THE POSITIONING STRATEGY DECISION
What position do we want to own?
Do we have the marketing resources to occupy and hold the position?
What competitors must be outperformed if we are to establish the position?
Positioning strategy implementation decisions can be made by answering the following:
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MAKING THE POSITIONING STRATEGY DECISION
Frequent positioning changes should be avoided since the development of a position is a lengthy and expensive process.
The position must be clearly communicated to and valued by targeted customers.
The success of a positioning strategy depends on the following factors:
The position taken in the marketplace should be sustainable and profitable.
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BRAND EQUITY AND BRAND MANAGEMENT
PRODUCT AND SERVICE STRATEGY AND BRAND MANAGEMENT
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BRAND AND BRAND EQUITY
BrandBrand Brand EquityBrand Equity
A brand name is any word, “device” (design, sound, shape, or color), or combination of these that are used to identify an offering and set it apart from competing offerings.
Brand equity is the added value a brand name bestows on a product or service beyond the functional benefits provided.
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BRAND EQUITY
Provides a competitive advantage, such as signifying quality.
Brand equity has two marketing advantages:
Can charge a higher price for an offering since consumers are often willing to pay for the equity premium present in the brand.
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CREATING BRAND EQUITY
1. Develop positive brand awareness in consumers’ minds and associate it with a product class or need to give the brand an identity.
2. Establish a brand’s meaning in the minds of consumers, consisting of:
• Brand functional performance
• Brand imagery
Brand equity arises from a four-step process:
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CREATING BRAND EQUITY
3. Elicit the proper consumer responses to a brand’s identity and meaning—how they think and feel.
4. Create a consumer-brand resonance evident in an intense, active loyalty relationship (psychological bond) between consumers and the brand.
• Thinking: Focuses on a brand’s perceived quality, credibility, and superiority relative to other brands
• Feeling: Relates to the consumer’s emotional reaction to a brand
Brand equity arises from a four-step process:
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CUSTOMER-BASED BRAND EQUITY PYRAMID
1. Identity =Who are you?
1. Identity =Who are you?
Consumerbrandresonance
4. Relationships = What about you and me?
4. Relationships = What about you and me?
Intense,activeloyalty
Intense,activeloyalty
2. Meaning =What are you?
2. Meaning =What are you?
3. Response =What about you?
3. Response =What about you?
Positive, accessible reactions
Positive, accessible reactions
ConsumerjudgmentsConsumerjudgments
ConsumerfeelingsConsumerfeelings
Strong, favorable,and unique brandassociations
Strong, favorable,and unique brandassociations
BrandperformanceBrandperformance
BrandimageryBrandimagery
Deep, broadbrand awarenessDeep, broadbrand awarenessBrand salienceBrand salience
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VALUING BRAND EQUITY
Successful brand names provide organizations with financial benefits because they:
Have economic value as intangible assets.
Enjoy a competitive advantage.
Create earnings and cash flow in excess of the return on its tangible (plant and equipment) assets.
Can be bought and sold, generating earnings.
Can appreciate in value, not depreciate as tangible assets do with time and use.
Achieve a high rate of return relative to competitors.
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BRANDING STRATEGY
Three common branding strategies are:
MultiproductBrandingMultiproductBranding
PrivateBrandingPrivateBranding
MultibrandingMultibranding
A company uses one name for all its products in a product class.
A company gives each product or product line a distinct name.
A company supplies a reseller with a product bearing a brand name chosen by the reseller.
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BRANDING STRATEGY
Multiproduct BrandingMultiproduct Branding
Is also called family branding or corporate branding.
Establishes dominance in a product or service class.
Allows consumers to transfer the good brand equity of one product to other company offerings with the same name.
Lowers advertising and promotion costs and raises overall brand awareness since the same name is used on all products.
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BRANDING STRATEGY
Multiproduct BrandingMultiproduct Branding
Builds a global brand, which:
• Is a brand marketed under the same name in multiple countries with similar and centrally coordinated marketing programs
• Requires a large financial investment to create a unified global message
Dilutes the meaning of a brand for consumers if there are too many uses for one brand name.
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BRANDING STRATEGY
Multiproduct BrandingMultiproduct Branding
Firms can also can employ sub-branding, which:
Combines a corporate/family brand with a new one.
Builds on favorable associations consumers have toward the corporate/family brand while differentiating the new offering.
Differentiates offerings along a price-quality continuum by adding high-end, midlevel, and low-end offerings.
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BRANDING STRATEGY
Is a useful strategy when each brand is intended for a different market segment or uniquely positioned in the marketplace.
Often arises from company acquisitions.
Increases promotional costs because the firm must generate acceptance among consumers and distributors for each new brand.
MultibrandingMultibranding
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BRANDING STRATEGY
Since each brand is unique toeach market segment, there is reduced risk that an individual brand’s failure will transfer to the firm itself or to its other brands.
The complexity and expense of implementing this strategy canoutweigh the benefit.
MultibrandingMultibranding
AdvantageAdvantage
DisadvantageDisadvantage
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BRANDING STRATEGY
If a reseller carries its own private brands:
Private BrandingPrivate Branding
Price competition with other resellers is avoided.
Brand equity for an offering accrues to the reseller.
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BRANDING STRATEGY
If a manufacturer offers its own private brands:
Private BrandingPrivate Branding
• Profits contribute to overhead if production capacity is underutilized
Brand name companies also produce private label branded offerings.
• Thwarts competitors who may want to obtain the rights to produce competing private label brands
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BRANDING STRATEGY
Dangers in producing private brands:
Private BrandingPrivate Branding
Becoming too reliant on private-brand revenue, only to have it curtailed when a reseller switches suppliers or produces its own.
May adversely affect the trade relationship between a producer and reseller.
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BRAND GROWTH STRATEGIES
LineExtensionLineExtension
NewBrandNewBrand
BrandExtensionBrandExtension
Occurs when an organization introduces additional offerings with the same brand in a product class that it currently serves.
Fighting/Flanker BrandFighting/Flanker Brand
Is the practice of using a current brand name to enter a completely different product class.
Involves the development of a new brand and often a new offering for a product class that has not been previously served by the organization.
• Creates new brands for an existing product class that attracts specific consumer segments not served by an organization’s existing products/brands
• Represents a defensive move to counteract competitors
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BRAND GROWTH STRATEGIES
NewBrandStrategy
NewBrandStrategy
LineExtension Strategy
LineExtension Strategy
BrandExtensionStrategy
BrandExtensionStrategy
Fighting/FlankingBrand Strategy
Fighting/FlankingBrand Strategy
Existing Product ClassExisting Product ClassNew Product ClassNew Product Class
New BrandNew Brand
Product/Service ClassProduct/Service ClassServed by the OrganizationServed by the Organization
Brand NameBrand Name
Existing BrandExisting Brand
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BRAND GROWTH STRATEGIES
Line Extension StrategyLine Extension Strategy
Responds to customers’ desire for variety. Eliminates gaps in a product line.
Lowers advertising and promotion costs because the same brand is used on all items.
Risks product cannibalism as buyers substitute one item for another in the extended product line.
Can create production and distribution problems and added costs without incremental sales.
Examples: New or different flavors, forms, colors, ingredients, features, and package sizes. This strategy:
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BRAND GROWTH STRATEGIES
Dilutes the meaning of a brand for consumers if the brand name has too many uses.
Brand Extension StrategyBrand Extension Strategy
Provides consumers with the familiarity of an established brand when introducing an offering in a new market.
Requires that the perceptual fit and core product benefit of the brand exists with and transfers to the new product class.
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BRAND GROWTH STRATEGIES
Allows for co-branding, which:
Brand Extension StrategyBrand Extension Strategy
• Pairs the two brand names of two manufacturers on a single product (General Mills and Hershey’s)
• Permits firms to enter a new product class (Hershey’s—cereal) and capitalize on an already established brand name (Hershey’s—Reese’s)
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BRAND GROWTH STRATEGIES
This strategy is akin to diversification.
Used when existing brand names are not extendable to a new product class for whichit is targeted.
May be the most challenging to successfully implement and the most costly: $50 to $100 million to introduce a new brand.
New Brand StrategyNew Brand Strategy
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BRAND GROWTH STRATEGIES
Adding new brands on the high orlow end of a product line based on a price-quality continuum.
Adding a new brand whose sole purpose is to confront competitive brands in a product class being served by an organization.
Fighting/Flanker Brand Strategy Fighting/Flanker Brand Strategy
Fighting BrandFighting Brand
Flanker BrandFlanker Brand
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BRAND GROWTH STRATEGIES
Introduced when:
An organization has a high relative share of the sales in a product class.
Its dominant brand is susceptible to having its high market share reduced by competitors through aggressive pricing or promotion.
The organization wishes to preserve its profit margins on its existing brand.
Fighting BrandFighting Brand
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BRAND GROWTH STRATEGIES
Fighting and flanker brand strategies risk cannibalizing other, particularly lower-priced, brands in a product line.
Marketers should engage in preemptive cannibalism—the conscious practice of stealing sales from an organization’s existing products or brands to keep customers from switching to competitors’ offerings—than lose sales volume.
Fighting/Flanker Brand Strategy Fighting/Flanker Brand Strategy