978-0132664257 Chapter 5 Solution Manual

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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.

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

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.

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

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.

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.

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 eective? Could others learn from that?

2. Think about the products you own. Assess their product design.

Critique their “aftermarketing” eorts. 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?

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 dierently?

4. Visit a department store and evaluate the in-store marketing eort.

Which categories or brands seem to be receiving the biggest

in-store “push?” What unique in-store merchandising eorts 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?

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.

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.