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Chapter 5
Designing Marketing Programs to Build Brand Equity
Chapter Objectives
1. Identify some of the new perspectives and developments in
marketing.
2. Describe how marketers enhance product experience.
3. Explain the rationale for value pricing.
4. List some of the direct and indirect channel options.
5. Summarize the reasons for the growth in private labels.
Overview
This chapter explores the contribution of three of the four marketing Ps
-- product, price, and place – to customer-based brand equity. The
creation of equity e+ectively begins with the design of a product or
service that satis,es consumer wants and needs. Perceived quality,
which in-uences attitude and behavior, re-ects consumer assessments
of the relative superiority of a brand on dimensions related to
performance, design, durability and other factors. Perceived value
re-ects consumer judgments about a brand’s price-quality relationship.
The chapter also discusses some of the new developments in
personalized marketing. Experiential marketing, where the marketer
focuses on connecting the consumer to the brand through a unique
experience, is one emerging personalized marketing technique. Others
include one-to-one marketing, where the marketer uses technologies
such as the Internet to target individual consumers with individualized
marketing messages; and permission marketing, where the marketer
seeks permission in advance from consumers to send them
appropriate, relevant marketing materials.
Pricing strategy can a+ect consumers’ perceptions of a brand’s
position in its product category, and of its overall quality. Many ,rms
now employ value pricing, in which a brand’s price is based on
considerations of product quality, product costs, and product prices
that satisfy consumer needs as well as the pro,t goals of the ,rm.
Another popular strategy is everyday low pricing, which entails
reducing or eliminating discounts and sales promotions in favor of an
everyday fair price.
© 2013 Pearson Education, Inc. publishing as Prentice Hall.
A brand’s distribution strategy also has an important in-uence on the
creation of customer-based equity. Channels are of two broad types:
direct, which involves selling to customers by mail, phone, Internet, or
personal visit, and indirect, which involves selling through
intermediaries. The image a retailer has in the minds of consumers and
the actions it takes with respect to stocking and selling products can
a+ect the equity of the brands it sells. Therefore, it is in a ,rm’s
interest to treat channel members as customers and assist in their
selling e+orts.
The chapter concludes with a discussion of private labels in Brand
Focus 5.0, noting that they primarily threaten brands that are
overpriced, under-supported, or undi+erentiated. It is important not to
confuse private labels with generic brands, because private labels
identify the source of the product. The source is usually the chain in
which the private label is sold, which is why private labels are also
called “store brands.” Major brands employ a number of strategies to
,ght private labels, from value pricing to continued product innovation.
Science of Branding
THE SCIENCE OF BRANDING 5-1
MAKING SENSE OUT OF BRAND SCENTS
When Rolls-Royce customers complained in the 1990s that the new
cars weren’t as good as the old models, researchers tracked the
problem to the car’s smell. The company then recreated the aroma of a
1965 Rolls and now sprays it in all the new models. Las Vegas casinos
have long infused scents into gaming areas to encourage gamblers to
stay a little longer.
Now the connection between scent and shopping experience is being
explored in more venues than ever. More and more companies looking
for an edge are tinkering with scent as a way to distinguish their brand
or store. Retailers are looking to capitalize on scent as a way to lure
customers into their stores and into lingering longer than they
otherwise might. But experts caution that scents aren’t guaranteed to
boost sales. The best scents are unobtrusive. Anything overwhelming
can be a negative. And smells should appeal to the same gender the
product is trying to appeal to.
Scents that are appropriate or consistent with a product can in-uence
brand evaluations and judgments. Some brands have a built-in sensory
marketing advantage. Crayola Crayons were not originally designed to
© 2013 Pearson Education, Inc. publishing as Prentice Hall.
have a signature scent, but the manufacturing process left them with a
recognizable odor.
Of course, some products are all about scent. For example, Procter &
Gamble built a $1 billion brand with Febreze air freshener.
THE SCIENCE OF BRANDING 5-2
UNDERSTANDING CONSUMER PRICE PERCEPTIONS
Consumers and customers often actively process price information,
interpreting prices in terms of their knowledge from prior purchasing
experience, formal communications such as advertising, informal
communications from friends or family members, and
point-of-purchase or online information. Consumer purchase decisions
are based on consumers’ perceived prices.
When examining or considering an observed price, consumers often
compare it with internal frames of reference or external frames of
reference. When consumers evoke one or more of these frames of
reference, their perceived price can vary from the stated price. Most
research on reference prices has found that “unpleasant surprises,”
such as a stated price higher than the perceived price, have a greater
impact on purchase likelihood than pleasant surprises.
Consumer perceptions of prices are also a+ected by alternative pricing
strategies. Even the competitive environment has been shown to a+ect
consumer price judgments: deep discounts can lead to lower perceived
prices over time than frequent, shallow discounts, even if the average
prices are the same in both cases. Clearly, consumer perceptions of
price are complex and depend on the pricing context involved.
Branding Briefs
BRANDING BRIEF 5-1
MARLBORO’S PRICE DROP
On April 2, 1993, or “Marlboro Friday,” Philip Morris dropped a
bombshell in the form of a three-page announcement. He announced
four major steps to be necessarily taken to grow market share. The
fourth of these steps was a major promotional cut in the price of
Marlboro, which was expected to decrease earnings in Philip Morris’s
most pro,table unit by 40 percent. The action was justi,ed by the
results of a month-long test in Portland, Oregon.
© 2013 Pearson Education, Inc. publishing as Prentice Hall.
The stock market reaction to the announcement was swift. By day’s
end, Philip Morris’s stock price had declined from $64.12 to $49.37, a
23 percent drop that represented a one-day loss of $13 billion in
shareholder equity. There was a ripple e+ect in the stock market, with
signi,cant stock price declines for other consumer goods companies
with major brands.
A number of factors probably led Marlboro to cut prices so dramatically.
The economy certainly was still sluggish, coming out of a recession.
Private-label or store-brand cigarettes had been increasing in quality
and were receiving more attention from customers and retailers. A
prime consideration suggested by many was related to Philip Morris’s
hefty price increases.
An accurate interpretation of the whole episode is that it showed that
new brands were entering the scene, as evidenced by the ability of
discount brands to create their own brand equity on the basis of strong
consumer associations to “value.” At the same time, existing brands, if
properly managed, can command loyalty, enjoy price premiums, and
still be extremely pro,table. By cutting the di+erence between
discount cigarettes and Marlboro to roughly 40 cents, Philip Morris was
able to woo back many customers. Within nine months after the price
drop, its market share increased to almost 27 percent.
BRANDING BRIEF 5-2
GOODYEAR’S PARTNERING LESSONS
A well-respected brand that once managed the top tire reseller
network in the United States, Goodyear earned dealer loyalty in the
1970s and ‘80s through competitive pricing, on-time deliveries, and
very visible marketing in the form of the Goodyear blimp.
In the subsequent years, Goodyear managed to damage its own
reputation through its apparent indi+erence to the distributors who
sold its products. The company’s prices varied from month to month,
and when distributors ordered tires, often only 50 percent of their order
would be ,lled. Distributors nationwide said it was just getting hard to
do business with Goodyear and many began hawking other brands
instead.
Goodyear announced a distribution deal with Sears, even though the
company had previously promised dealers that it would not sell tires
through discount retailers, and then made similar deals with Walmart
and Sam’s Club. To increase sales, the company began to o+er the big
retailers bulk discounts. As a result, smaller individually owned dealers
had to pay as much for their tires as customers could pay at other
© 2013 Pearson Education, Inc. publishing as Prentice Hall.
retailers. Goodyear management annoyed many of its distributors
instead of taking advantage of its competitor’s legal and image
problems. Goodyear dealership owners complained of pressure to buy
more tires than they needed, uneven pricing, and poor quality.
Goodyear has taken a number of steps in trying to win back its dealers
since that time, including originally selling its popular Assurance tires
exclusively through authorized dealers. Recent Goodyear price hikes,
however, have forced dealers to take lower pro,ts in selling its tires.
Brand Focus
BRAND FOCUS 5.0
PRIVATE-LABEL STRATEGIES AND RESPONSES
Private Labels
Private labels can be de,ned as products marketed by retailers and
other members of the distribution chain. Private labels can be called
store brands when they actually adopt the name of the store itself in
some way. The appeal to consumers of buying private labels and store
brands often is the cost savings involved; the appeal to retailers of
selling private labels and store brands is that their gross margin is
nearly twice that of national brands.
The recession of the 1970s saw the successful introduction of low-cost,
basic-quality, and minimally packaged generic products that appealed
to bargain-seeking consumers. Today, private-label makers have begun
improving quality and expanding the variety of their private-label
o+erings to include premium products. In recognition of the power of
bold graphics, supermarket retailers have been careful to design
attractive, upscale packages for their own premium branded products.
Private-Label Status
Private-label appeal is widespread. In supermarkets, private-label sales
have always been strong in product categories such as dairy goods,
vegetables, and beverages. More recently, private labels have been
successful in previously “untouchable” categories such as cigarettes,
disposable diapers, and cold remedies. Nevertheless, private labels
have been relatively unsuccessful in categories such as candy, cereal,
pet foods, baby food, health and beauty, and beer. One implication is
that consumers are being more selective in what they buy, no longer
choosing to buy only national brands. Categories that are particularly
vulnerable to private-label advances are those in which there are little
perceived quality di+erences among brands in the eyes of a sizable
group of consumers.
© 2013 Pearson Education, Inc. publishing as Prentice Hall.
Private-Label Branding Strategy
Private-label growth could be seen in some ways as a consequence of
cleverly designed branding strategies. In terms of building brand
equity, the key point of di+erence for private labels in consumers’ eyes
has always been “good value.” As a result, private labels can be
extremely broad, and their name can be applied across many diverse
products. Implementing a value-pricing strategy for private labels
requires determining the right price and product o+ering. The
challenge for private labels has been to determine the appropriate
product o+ering.
Speci,cally, to achieve the necessary points of parity, or even to
create their own points of di+erence, private labels have been
improving quality, and as a result are now aggressively positioning
against even national brands. Sellers of private labels are also adopting
more extensive marketing communication programs to spread the
word about their brands.
Major Brand Response to Private Labels
Marketers of major brands have attempted to decrease costs and
reduce prices to negate the primary point of di+erence of private labels
and achieve a critical point of parity. In instances in which major
brands and private labels are on a more equal footing with regard to
price, major brands often compete well because of other favorable
brand perceptions that consumers might have. One problem faced by
marketers of major brands is that it can be diIcult to actually lower
prices even if they so desire. Marketers of major brands may not want
to alienate retailers by attacking their store brands too forcefully,
especially in zero-sum categories in which their brands could be easily
replaced.
Marketers of major brands have increased R&D expenditures to
improve products and identify new product innovations. They have also
increased advertising and promotion budgets and tracked store-brand
growth more closely than in the past and are competing on a
market-by-market basis. Marketers have also adjusted their brand
portfolios. They have eliminated stagnant brands and extensions and
concentrated their e+orts on smaller number of brands. They have
introduced discount “,ghter” brands that are specially designed and
promoted to compete with private labels.
Marketers of major brands have also been more aggressive about
legally protecting their brands. One controversial move by some
marketers of major brands is to actually supply private-label makers.
© 2013 Pearson Education, Inc. publishing as Prentice Hall.
Future Developments
Many marketers feel that the brands most endangered by the rise of
private labels are second-tier brands that have not been as successful
at establishing a clear identity as market leaders have. Highly priced,
poorly di+erentiated, and under-supported brands are especially
vulnerable to private-label competition. At the same time, if nothing
else, retailers will need the quality and image that go along with
well-researched, eIciently manufactured, and professionally marketed
major brands, because of consumer demand.
Discussion questions
1. Have you had any experience with a brand that has done a great
job with relationship marketing, permission marketing, experiential
marketing, or one-to-one marketing? What did the company do?
Why was it eective? Could others learn from that?
2. Think about the products you own. Assess their product design.
Critique their "aftermarketing" eorts. Are you aware of all of the
products' capabilities? Identify a product for which you feel you are
not fully capitalizing on all of its bene)ts. How might you suggest
improvements?
© 2013 Pearson Education, Inc. publishing as Prentice Hall.
3. Choose a product category. Pro)le all the brands in the category in
terms of pricing strategies and perceived value. If possible, review
the brands' pricing histories. Have these brands set and adjusted
prices properly? What would you do dierently?
4. Visit a department store and evaluate the in-store marketing eort.
Which categories or brands seem to be receiving the biggest
in-store "push?" What unique in-store merchandising eorts do you
see?
5. Take a trip to a supermarket and observe the extent of private-label
brands. In which categories do you think private labels might be
successful? Why?
© 2013 Pearson Education, Inc. publishing as Prentice Hall.
Exercises and assignments
1. For each of the four Ps, have students identify an exemplary brand
whose strategy is di+erent from and superior to that of its
competitors. Discuss the role the particular strategy plays in the
brand’s success. For example, Microsoft has an outstanding record
of new product hits; Walmart’s pricing strategy is a major factor
behind the retailer’s market domination; BP’s policy of not locating
gas stations on corner properties gives it a distribution cost
advantage over rivals; Snapple’s unique advertising quickly built
national awareness and preference for what initially was a tiny,
unknown brand.
2. Ask students to survey consumers to identify product categories in
which they engage in brand switching and determine what
in-uences their behavior. Discuss the implications for marketing
strategy of those in-uencing factors.
3. NASCAR teams – and the collateral merchandise and sponsorships
that go along with them – have been growing in popularity in recent
years. Have students pick a NASCAR team and analyze the factors
(team name, drivers, sponsors, licensing, promotions, etc.) that
contribute to its brand equity.
© 2013 Pearson Education, Inc. publishing as Prentice Hall.
4. Ask students to ,nd a brand whose sole or primary distribution
channel is the Internet. Discuss the likely reasons for the brand’s
highly focused strategy and the positive and negative
consequences of it.
Key take-away points
1. All of the four Ps – not just promotion – have important roles to play
in the creation and maintenance of brand equity.
2. Personalized marketing is an emerging strategy to build brand
awareness and brand loyalty.
3. The products and services that ,rms design are the cornerstones of
customer-based brand equity.
4. Product strategy entails choosing both tangible and intangible
bene,ts the product will embody, and the marketing activities that
consumers desire and the marketing program can deliver.
5. Pricing strategy must be based on consumers and the competition,
as well as cost and quality considerations.
6. Channel members should be thought of and treated as valuable
customers whose image and actions can hurt or enhance brand
equity.
© 2013 Pearson Education, Inc. publishing as Prentice Hall.
