Providing Value to Customers

LEARNING OBJECTIVES

1. Identify the four Ps of the marketing mix.
2. Explain how to conduct marketing research.
3. Discuss various branding strategies and explain the benefits of packaging and labeling.

After identifying a target market, your next step is developing and implementing a marketing program designed to reach it. As Figure 9.4 "The Marketing Mix" shows, this program involves a combination of tools called the marketing mix, often referred to as the "four Ps" of marketing:

1. Developing a product that meets the needs of the target market
2. Setting a price for the product
3. Distributing the product – getting it to a place where customers can buy it
4. Promoting the product – informing potential buyers about it

Figure 9.4 The Marketing Mix

The goal is to develop and implement a marketing strategy that combines these four elements. To see how this process works, let's look at Wow Wee Toys' marketing program for Robosapien.Information in this section was obtained through an interview with the director of marketing at Wow Wee Toys Ltd. conducted on July 15, 2004.

 This text was adapted by Saylor Academy under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work's original creator or licensor.

The development of Robosapien was a bit unusual for a company that was already active in its market. Generally, product ideas come from people within the company who understand its customers' needs. Internal engineers are then challenged to design the product. In the case of Robosapien, however, the creator, Mark Tilden, had conceived and designed the product before joining Wow Wee Toys. The company gave him the opportunity to develop the product for commercial purposes, and Tilden was brought on board to oversee the development of Robosapien into a product that satisfied Wow Wee's commercial needs.

Robosapien is not a "kid's toy," though kids certainly love its playful personality. It's a home-entertainment product that appeals to a broad audience – children, young adults, older adults, and even the elderly. It's a big gift item, and it has developed a following of techies and hackers who take it apart, tinker with it, and even retrofit it with such features as cameras and ice skates. In fact, Tilden wanted the robot to be customizable; that's why he insisted that its internal parts be screwed together rather than soldered.

Before settling on a strategy for Robosapien, the marketers at Wow Wee did some homework. First, to zero in on their target market, they had to find out what various people thought of the product. More precisely, they needed answers to questions like the following:

• Who are our potential customers? What are they like?
• Do people like Robosapien? What gets them excited about it? What don't they like? What would they change?
• How much are they willing to pay for Robosapien?
• Where will they probably go to buy the product?
• How should it be promoted? How can we distinguish it from competing products?
• Will enough people buy Robosapien to return a reasonable profit?
• Should we go ahead and launch the product?

The last question would be left up to Wow Wee management, but, given the size of the investment needed to bring Robosapien to market, Wow Wee couldn't afford to make the wrong decision. Ultimately, the company was able to make an informed decision because its marketing team provided answers to all the other questions. They got these answers through marketing research – the process of collecting and analyzing the data that are relevant to a specific marketing situation.

This data had to be collected in a systematic way. Market research seeks two types of data:

1. Marketers generally begin by looking at secondary data – information already collected, whether by the company or by others, that pertains to the target market.
2. Then, with secondary data in hand, they're prepared to collect primary data – newly collected information that addresses specific questions.

You can get secondary data from inside or outside the organization. Internally available data includes sales reports and other information on customers. External data can come from a number of sources. The U.S. Census Bureau, for example, posts demographic information on American households (such as age, income, education, and number of members), both for the country as a whole and for specific geographic areas. You can also find out whether an area is growing or declining.

Population data helped Wow Wee estimate the size of its potential U.S. target market. Other secondary data helped the firm assess the size of foreign markets in regions around the world, such as Europe, the Middle East, Latin America, Asia, and the Pacific Rim. This data positioned the company to sell Robosapien in eighty-five countries, including Canada, England, France, Germany, South Africa, Australia, New Zealand, Hong Kong, and Japan.

Using secondary data that are already available (and free) is a lot easier than collecting your own information. Unfortunately, however, secondary data didn't answer all the questions that Wow Wee was asking in this particular situation. To get these answers, the marketing team had to conduct primary research: they had to work directly with members of their target market. It's a challenging process. First, they had to decide exactly what they wanted to know. Then they had to determine whom to ask. Finally, they had to pick the best methods for gathering information.

We know what they wanted to know – we've already listed the questions they asked themselves. As for whom to talk to, they randomly selected representatives from their target market. Now, they could have used a variety of tools for collecting information from these people, each of which has its advantages and disadvantages. To understand the marketing-research process fully, we need to describe the most common of these tools:

• Surveys. Sometimes marketers mail questionnaires to members of the target market. In Wow Wee's case, the questionnaire could have included photos of Robosapien. It's an effective way to reach people, but the process is time consuming and the response rate is generally low. Phoning people also takes a lot of time, but a good percentage of people tend to respond. Unfortunately, you can't show them the product. Online surveys are easier to answer and get better response rates, and the site can link to pictures or even videos of Robosapien.
• Personal interviews. Though time consuming, personal interviews not only let you talk with real people but also let you demonstrate Robosapien. You can also clarify answers and ask open-ended questions.
• Focus groups. With a focus group, you can bring together a group of individuals (perhaps six to ten) and ask them questions. A trained moderator can explain the purpose of the group and lead the discussion. If sessions are run effectively, you can come away with valuable information about customer responses to both your product and your marketing strategy.

Wow Wee used focus groups and personal interviews because both approaches had the advantage of allowing people to interact with Robosapien. In particular, focus-group sessions provided valuable opinions about the product, proposed pricing, distribution methods, and promotion strategies. Management was pleased with the feedback and confident that the product would succeed.

Researching your target market is necessary before you launch a new product. But the benefits of marketing research don't extend merely to brand-new products. Companies also use it when they're deciding whether or not to refine an existing product or develop a new marketing strategy for an existing product. Kellogg's, for example, conducted online surveys to get responses to a variation on its Pop-Tarts brand – namely, Pop-Tarts filled with a mixture of traditional fruit filling and yogurt. Marketers had picked out four possible names for the product and wanted to know which one kids and mothers liked best. They also wanted to know what they thought of the product and its packaging. Both mothers and kids liked the new Pop-Tarts (though for different reasons) and its packaging, and the winning name for the product launched in the spring of 2011 was "Pop-Tarts Yogurt Blasts". The online survey of 175 mothers and their children was conducted in one weekend by an outside marketing research group.

Armed with positive feedback from their research efforts, the Wow Wee team was ready for the next step: informing buyers – both consumers and retailers – about their product. They needed a brand – some word, letter, sound, or symbol that would differentiate their product from similar products on the market. They chose the brand name Robosapien, hoping that people would get the connection between homo sapiens (the human species) and Robosapien (the company's coinage for its new robot "species"). To prevent other companies from coming out with their own "Robosapiens," they took out a trademark by registering the name with the U.S. Patent and Trademark Office.

Though this approach – giving a unique brand name to a particular product – is a bit unusual, it isn't unprecedented. Mattel, for example, established a separate brand for Barbie, and Anheuser-Busch sells beer under the brand name Budweiser. Note, however, that the more common approach, which is taken by such companies as Microsoft, Dell, and Apple, calls for marketing all the products made by a company under the company's brand name.

Companies can adopt one of three major strategies for branding a product:

1. With private branding (or private labeling), a company makes a product and sells it to a retailer who in turn resells it under its own name. A soft-drink maker, for example, might make cola for Wal-Mart to sell as its Sam's Choice Cola house brand.
2. With generic branding, the maker attaches no branding information to a product except a description of its contents. Customers are often given a choice between a brand-name prescription drug or a cheaper generic drug with a similar chemical makeup.
3. With manufacturer branding, a company sells one or more products under its own brand names. Adopting a multiproduct-branding approach, it sells all its products under one brand name (generally the company name). Using a multibranding approach, it will assign different brand names to different products. Campbell's Soup, which markets all its soups under the company's name, uses the multiproduct-branding approach. Automakers generally use multibranding. Toyota, for example, markets to a wide range of potential customers by offering cars under various brand names (Toyota, Lexus, and Scion).

Wow Wee went with the multibranding approach, deciding to market Robosapien under the robot's own brand name. Was this a good choice? The answer depends, at least in part, on how the product sells. If customers don't like Robosapien, its failure won't reflect badly on Wow Wee's other products. On the other hand, people might like Robosapien but have no reason to associate it with other Wow Wee products. In this case, Wow Wee wouldn't gain much from its brand equity – any added value generated by favorable consumer experiences with Robosapien. To get a better idea of how valuable brand equity is, think for a moment about the effect of the name Dell on a product. When you have a positive experience with a Dell product – say, a laptop or a printer – you come away with a positive opinion of the entire Dell product line and will probably buy more Dell products. Over time, you may even develop brand loyalty: you may prefer – or even insist on – Dell products. Not surprisingly, brand loyalty can be extremely valuable to a company. Because of customer loyalty, the value of the Coca-Cola brand is estimated at more than $70 billion, followed by IBM at $65 billion, Microsoft at $61 billion, and Google at $43 billion.

Packaging – the container that holds your product – can influence a consumer's decision to buy a product or pass it up. Packaging gives customers a glimpse of the product, and it should be designed to attract their attention. Labeling – what you say about the product on your packaging – not only identifies the product but also provides information on the package contents: who made it and where or what risks are associated with it (such as being unsuitable for small children).

How has Wow Wee handled the packaging and labeling of Robosapien? The robot is fourteen inches tall, and it's almost as wide. It's also fairly heavy (about seven pounds), and because it's made out of plastic and has movable parts, it's breakable. The easiest, and least expensive, way of packaging it would be to put it in a square box of heavy cardboard and pad it with Styrofoam. This arrangement would not only protect the product from damage during shipping but also make the package easy to store. Unfortunately, it would also eliminate any customer contact with the product inside the box (such as seeing what it looks like and what it's made of). Wow Wee, therefore, packages Robosapien in a container that is curved to his shape and has a clear plastic front that allows people to see the whole robot. It's protected during shipping because it is wired to the box. Why did Wow Wee go to this much trouble and expense? Like so many makers of so many products, it has to market the product while it's still in the box. Because he's in a custom-shaped see-through package, you tend to notice Robosapien (who seems to be looking at you) while you are walking down the aisle of the store.

Meanwhile, the labeling on the package details some of the robot's attributes. The name is highlighted in big letters above the descriptive tagline "A fusion of technology and personality". On the sides and back of the package are pictures of the robot in action with such captions as "Dynamic Robotics with Attitude" and "Awesome Sounds, Robo-Speech & Lights". These colorful descriptions are conceived to entice the consumer to make a purchase because its product features will satisfy some need or want.

Packaging can serve many purposes. The purpose of the Robosapien package is to attract your attention to the product's features. For other products, packaging serves a more functional purpose. Nabisco, for example, packages some of its tastiest snacks – Oreos, Chips Ahoy, and Lorna Doone's – in "100 Calorie Packs" that deliver exactly one hundred calories per package. Thus, the packaging itself makes life simpler for people who are keeping track of calories (and reminds them of how many cookies they can eat without exceeding one hundred calories).

• Developing and implementing a marketing program involves a combination of tools called the marketing mix (often referred to as the "four Ps" of marketing): product, price, place, and promotion.
• Before settling on a marketing strategy, marketers often do marketing research to collect and analyze relevant data.
• First, they look at secondary data that have already been collected, and then they collect new data, called primary data.
• Methods for collecting primary data include surveys, personal interviews, and focus groups.
• A brand is a word, letter, sound, or symbol that differentiates a product from its competitors.
• To protect a brand name, the company takes out a trademark by registering it with the U.S. Patent and Trademark Office.
• There are three major branding strategies:

1. With private branding, the maker sells a product to a retailer who resells it under its own name.
2. Under generic branding, a no-brand product contains no identification except for a description of the contents.
3. Using manufacture branding, a company sells products under its own brand names.

• When consumers have a favorable experience with a product, it builds brand equity. If consumers are loyal to it over time, it enjoys brand loyalty.
• Packaging – the container holding the product – can influence consumers' decisions to buy products or not buy them. It offers them a glimpse of the product and should be designed to attract their attention.
• Labeling – the information on the packaging – identifies the product. It provides information on the contents, the manufacturer, the place where it was made, and any risks associated with its use.

(AACSB) Analysis

When XM Satellite Radio was launched by American Mobile Radio in 1992, no one completely understood the potential for satellite radio. The company began by offering a multichannel, nationwide audio service. In 1997, it was granted a satellite-radio-service license from the FCC, and in 2001, the company began offering more than 150 digital channels of commercial-free satellite-radio programming for the car and home. Revenues come from monthly user fees. In the decade between 1992 and 2001, the company undertook considerable marketing research to identify its target market and refine its offerings. Answer the following questions as if you were in charge of XM Satellite Radio's marketing research for the period 1992 to 2001:

• To what questions would you seek answers?
• What secondary data would you look at?
• What primary data would you collect and analyze?
• How would you gather these primary data?

(By the way, in 2008 XM Satellite Radio merged with its competitor, Sirius Satellite Radio, and the two became Sirius XM Radio Inc.)

LEARNING OBJECTIVE

Identify pricing strategies that are appropriate for new and existing products.

The second of the four Ps in the marketing mix is price. Pricing a product involves a certain amount of trial and error because there are so many factors to consider. If you price too high, a lot of people simply won't buy your product. Or you might find yourself facing competition from some other supplier that thinks it can beat your price. On the other hand, if you price too low, you might not make enough profit to stay in business. So how do you decide on a price? Let's look at several pricing options that were available to those marketers at Wow Wee who were responsible for pricing Robosapien. We'll begin by discussing two strategies that are particularly applicable to products that are being newly introduced.

When Robosapien was introduced into the market, it had little direct competition in its product category. True, there were some "toy" robots available, but they were not nearly as sophisticated. Sony offered a pet dog robot called Aibo, but its price tag of $1,800 was really high. Even higher up the price-point scale was the $3,600 iRobi robot made by the Korean company Yujin Robotics to entertain kids and even teach them foreign languages. Parents could also monitor kids' interactions with the robot through its own video-camera eyes; in fact, they could even use the robot itself to relay video messages telling kids to shut it off and go to sleep.

Skimming and Penetration Pricing

Because Wow Wee was introducing an innovative product in an emerging market with few direct competitors, it considered one of two pricing strategies:

1. With skimming pricing, Wow Wee would start off with the highest price that keenly interested customers would pay. This approach would generate early profits, but when competition enters – and it will, because healthy profits can be made in the market – Wow Wee would have to lower its price.
2. Using penetration pricing, Wow Wee would initially charge a low price, both to discourage competition and to grab a sizable share of the market. This strategy might give the company some competitive breathing room (potential competitors won’t be attracted to low prices and modest profits). Over time, as its growing market discourages competition, Wow Wee could push up its prices.

In their search for the best price level, Wow Wee's marketing managers could consider a variety of other approaches, such as cost-based pricing, demand-based pricing, target costing, odd-even pricing, and prestige pricing. Any of these methods could be used not only to set an initial price but also to establish long-term pricing levels.

Before we examine these strategies, let's pause for a moment to think about the pricing decisions that you have to make if you're selling goods for resale by retailers. Most of us think of price as the amount that we – consumers – pay for a product. But when a manufacturer (such as Wow Wee) sells goods to retailers, the price it gets is not what we the consumers will pay for the product. In fact, it's a lot less.

Here's an example. Say you buy a shirt at a store in the mall for $40. The shirt was probably sold to the retailer by the manufacturer for $20. The retailer then marks up the shirt by 100 percent, or $20, to cover its costs and to make a profit. The $20 paid to the manufacturer plus the $20 markup results in a $40 sales price to the consumer.

Cost-Based Pricing

Using cost-based pricing, Wow Wee's accountants would figure out how much it costs to make Robosapien and then set a price by adding a profit to the cost. If, for example, it cost $40 to make the robot, Wow Wee could add on $10 for profit and charge retailers $50.

Demand-Based Pricing

Let's say that Wow Wee learns through market research how much people are willing to pay for Robosapien. Following a demand-based pricing approach, it will use this information to set the price that it charges retailers. If consumers are willing to pay $120 retail, Wow Wee will charge retailers a price that will allow retailers to sell the product for $120. What would that price be? Here's how we would arrive at it: $120 consumer selling price minus a $60 markup by retailers means that Wow Wee can charge retailers $60.

Target Costing

With target costing, you work backward. You figure out (again using research findings) how much consumers are willing to pay for a product. You then subtract the retailer's profit. From this price – the selling price to the retailer – you subtract an amount to cover your profit. This process should tell you how much you can spend to make the product. For example, Wow Wee determines that it can sell Robosapien to retailers for $70. The company decides that it wants to make $15 profit on each robot. Thus, Wow Wee can spend $55 on the product ($70 selling price to the retailer minus $15 profit means that the company can spend $55 to make each robot).

Prestige Pricing

Some people associate a high price with high quality – and, in fact, there generally is a correlation. Thus, some companies adopt a prestige-pricing approach – setting prices artificially high to foster the impression that they're offering a high-quality product. Competitors are reluctant to lower their prices because it would suggest that they're lower-quality products. Let's say that Wow Wee finds some amazing production method that allows it to produce Robosapien at a fraction of its current cost. It could pass the savings on by cutting the price, but it might be reluctant to do so: What if consumers equate low cost with poor quality?

Odd-Even Pricing

Do you think $9.99 sounds cheaper than $10? If you do, you're part of the reason that companies sometimes use odd-even pricing – pricing products a few cents (or dollars) under an even number. Retailers, for example, might price Robosapien at $99 (or even $99.99) if they thought consumers would perceive it as less than $100.

• With a new product, a company might consider the skimming approach – starting off with the highest price that keenly interested customers are willing to pay. This approach yields early profits but invites competition.
• Using a penetration approach, marketers begin by charging a low price, both to keep out competition and to grab as much market share as possible.
• Several strategies work for existing as well as new products.
• With cost-based pricing, a company determines the cost of making a product and then sets a price by adding a profit to the cost.
• With demand-based pricing, marketers set the price that they think consumers will pay. Using target costing, they figure out how much consumers are willing to pay and then subtract a reasonable profit from this price to determine the amount that can be spent to make the product.
• Companies use prestige pricing to capitalize on the common association of high price and quality, setting an artificially high price to substantiate the impression of high quality.
• Finally, with odd-even pricing, companies set prices at such figures as $9.99 (an odd amount), counting on the common impression that it sounds cheaper than $10 (an even amount).

(AACSB) Communication

Most calculators come with a book of instructions. Unfortunately, if you misplace the book, you're left to your own devices in figuring out how to use the calculator. Wouldn't it be easier if the calculator had a built-in "help" function similar to the one on your computer? You could just punch the "Help" key on your keypad and call up the relevant instructions on your display screen. You just invented a calculator with this feature, and you're ready to roll it out. First, however, you have to make some pricing decisions:

• When you introduce the product, should you use skimming or penetration pricing?
• Which of the following pricing methods should you use in the long term: cost-based pricing, demand-based pricing, target costing, or prestige pricing?

Prepare a report describing both your introductory and your long-term alternatives. Then explain and justify your choice of the methods that you'll use.