Lecture Slides

Welcome!
Lecturer
Giuseppe Pedeliento BSc, MSc
PhD Candidate, University of Bergamo (Italy)
giuseppe.pedeliento@unibg.it

About me …
2006 – BSc in Marketing and Communication (Catholic University, Milan)

2008 – MSc in Management (Catholic University, Milan)

2010 – Ph.D candidate in Strategic Marketing (University of Bergamo)

2011 – Visiting researcher at the Department of Marketing of the Aalto University
School of Economics (Helsinki, Finland)

Forthcoming (next Fall): lecturer in Product and Brand Management (bechelor
level), Strategic Marketing and Company Performances (master level) and in the
MediaBiz Master program at the Aalto University School of Economics
(Helsinki, Finland)

RESEARCH INTERESTS: PROJECT MARKETING, B -TO-B
MARKETING

Giuseppe Pedeliento - May 25-26, 2011 2

Agenda

May 25th -> On line marketing mix: in depth anlysis of product and price

May 26th -> The e-books case study and instruction for the assignment

May 30th -> Discussion of the assignments


On line Marketing Mix: Product

A brief recap of the 4Ps
Marketing Mix (McCarthy, E.J., Basic Marketing, Irwin,
Homewood, 1960).

“The set of controllable tactical tools that the firm blends to
produce the response in wants in the target market”
(Armstrong and Kotler, 1996)



 Product: goods and services that constitute the company’s
offering
 Price: determines company’s profits and the product’
appeal toward the customers.
 Place: how the product is moved from the producer to the
customers
 Promotions: how the company let the consumers know
about their offering


… are a subset of the 7Ps (service marketing mix):

 Product
 Price
 Place
 Promotions
 Physical evidence ALSO PARTICULARLY
RELEVANT IN THE WEB
 Process CONTEXT
 People


What is a product?

“Anything that can be offered to a market for attention,
acquisition, use or consumption that might satisfy a want or
need. It includes physical objects, services, persons, places,
organizations and ideas” (Armstrong and Kotler, 1996)

Differences between product and
services are ever more blurred!!!


Product’s relevant decisions
Variety
Quality
Design
Features
Brand name
Product Packaging
Size
Add value services
Warranties
Return
……..


How the web affect product
management and development
(Lehman & Winter, 2005)

Data explosion
Increased emphasis of brands
Changes in the balance of market power
Increased importance of multichannel
integration
Increased global competition


Introduction
Research before Product Fulfillment
buying the Purchase
product

Online Online Home delivery

Offline Offline Customer collects

Online


Product categories
Products can be classified depending on who the final
purchaser is.

Consumer products (B2C): destined for the final
consumer for personal, family and household use.
Industrial products (B2B): satisfy goals and needs of
organizations.


Product categories

Products can be classified depending on the buying
processes:

Convenience products
Shopping products
Specialty products
Unsought products


Convenience products
Low price goods/services that consumers usually buy
frequently, immediately and with a minimum buying effort


Shopping products
Less frequently purchased, considerable time and efforts to
gather information and compare alternatives


Specialty products
Products with unique characteristics for which a significant
group of buyers is willing to make a special purchase effort.
Buyers know what they want and will not accept a
substitute. Do not compare alternatives and will pay a
premium price if necessary


Unsought products
Unsought products: products that
the consumer knows or not and does
not normally think of buying (e.g new
products). But also products to which
consumers are unaware, products that
people do not necessary think of
purchasing. Sometimes are purchased
as a result of a marketer’s actions or of a
particular event (e.g. rain).


Product attributes and web marketing
AUGMENTED PRODUCT
implications
ACTUAL PRODUCT
CORE PRODUCT Installation
Packaging

Delivery Brand After-
name Core benefits Features sale
service
Quality Styling
Credit
Warranty

How to provide additional on line value?


Relevant product attributes
Why Italian consumers purchaise online?

Quickness of purchasing and delivery process

Low prices compared with offline

Broader choices compared with offline

Exclusivity of the online offering

Other

I don’t know

Source: Casaleggio Associati, 2011


Product categories and web marketing
implications
Are all the products marketable on line?

YES! Of Course!

Two sources of problems:
1. Distribution: products and services that cannot be delivered
online
2. Consumer behavior: e.g. product and services that are perceived
as risky by customers


implications
 Physical products: can be purchased online but necessarily
delivered offline.


implications
 Services: can be paid on line and delivered both online (e.g.
shares and bonds virtually exchanged in the trading on line
market) and offline (e.g. flight tickets) .


implications
 Digital products: products that are digital by composition (e.g.
antivirus software) and/or products that can be presented in
digital format (e.g. newspapers) and/or products that are
information (e.g. academic papers)


Does everything could be acquired online?
Internet Perceived
usage importance
Search for informations
67% 75%

61%
Brands’ comparison 70%

Purchasing
28% 57%
decision
Choice of
35% the 51%

reseller FOR
Source: TNS – Google (2007)
HOW
On line purchasing= 0% LONG?

What products are most likely to succeed
in the e-commerce?

http://www.youtube.com/watch?v=wbnYpynvpnA


The hard to find (niche) product

Blackwell's Rare Books Mission: “buys and sells rare and collectable
books in all fields, especially modern first editions, private press and
antiquarian books”
Main advantage: rare products
easily accessible and
purchasable all over the world


The hard to find (niche) product
How does the web add value?

 Rare products easily accessible and purchasable all
over the world;
 Increase in information availability (also through
networking and social communities);
 Transaparency of the marketplace;
 Reduction in search costs;
Bigger set of possible choices;


The hard to find (niche) product and the
“long tale” The biggest part of the market!
THE BUSINESS IS HERE!


“long tale”
Consider the book’s market.
Amazon.com and other internet retailers sell nearly all of
the more than 3 million books in print.
…a typical brick and mortar stores on average has a stock
between 40,000 and 100,000 unique titles.
One might argue that consumers don’t really care about the
remaining 2.9 million book titles … However…we analyzed
Amazon’s sales patterns and found that 30-40 % of sales are
in books that wouldn’t normally be found in a brick-and-
mortar store.
Source: Erik Brynjolfsson, Yu “Jeffrey” Hu, Michael D. Smith 2006.


“long tale”
How does the web add value?

The company can exploit the extreme differences in
customers’ preferences
Online merchant have greatly increased the set of choices
available to consumers
Costs of production and distribution fall
Traditional retailer can only stock the hits, because shelf
space is expensive
Online retailers can stock virtually everything
Easy customer’s access to cultural contents


The brand importance on the web

Brand strategy
Online brand

Brand online

Global vs local branding
Old (Internet as a part of the
Overall branding strategy)

Offline brand

Online brand
New (a different brand for the
Online presence)

A brand is a name, sign, symbol, or a
combination of these, intended to identify the Pure online brand
goods or services of the seller and to
differentiate them from those of competitors


Pure online brand – 5 steps process
Deciding on brand objectives and message

Developing a brand design

Creating the web site using the brand

Launching and promoting the brand

Building the brand experience


Monitoring the brand
The brand is a company’s asset. Thus it must be continuously and routinely
monitored and measured by means of marketing research (quali and
quantitative)
Brand
loyalty
Brand An high brand equity allows to:
reduce marketing costs (especially
Brand awareness advertising);
equity attract new customers;
Perceived makes the demand for company’s
quality products rigid; brand extension ….

Brand
associations


Is the brand important in the internet
arena?
What does differentiate the company vis a vis with competitors?

Brand credibility

Product range

Customer loyalty

Price strategy

Delivery’s time and costs

Additional services

Other

No differentiation


New product development
The marketing perspective (Kotler, 1967)
Idea generation N
P
D
Concept testing
L
i
f
Market analysis e

C
y
Product development & testing c
l
e
Market test

Commercialisation and diffusion


New product development
The technology perspective (Avgerou, 1996)

Problem identification

Requirements
determination
Feasibility study

Systems analysis

Systems design

Programming

Implementation and
testing
Maintenance


1. IDEA GENERATION: Is the idea worth NO
considering?

YES
2.IDEA SCANNING: Is the product idea NO
compatible with comany’s strategy and resources?

YES
3.CONCEPT DEVELOP. & TESTING: Can we find a NO
concept that consumers like?

YES

4.MKTING STRATEGY DEVELOP: Can we find a NO
viable marketing strategy?

DROP
YES

5.BUSINESS ANALYSIS: Will this product meet NO
our profit goals?

YES
6.PRODUCT DEVELOPMENT: Does the product NO
meet commercial trends?
YES
YES
NO Send the idea back to prod NO
7.MARKET TESTING: Have product sales met
dev.?
expectations?

YES YES NO
Modify the product or mkting
8.COMMERCIALIZATION: Are product’s actual NO NO
Giuseppe Pedeliento - May 25-26, 2011 strategy? 39
sales satisfying?

New product development online
Internet impacts on new product development in terms of
efficiency and speed of the process
It allows:
1. Interactions with consumers to provide ideas, feedback
and testing on new product concepts
2. A real time platform for collaboration for all supply side
participants in the design, delivery and promotion of
new products
3. A tool to make the market adoption process faster
4. A tool to gather information in real time


The role of online brand community on
NPD

Mulino Bianco takes care of its customers’ needs and desires.
Thanks to new communication channels that facilitate the interactions and relationships
with our clients we have decided to develop our growth with them.
For this reason we have decided to launch the project “Il Mulino che vorrei” : we want to
receive consumer’s idea regarding new product, evaluate all these idea with them and –
if are feasible and compatible with our mission, values and resources – realize them.

All the idea proposed are considered by our teams. We ask to the community just to vote
all those product idea that they consider interesting .


Internet exposes brands to consumer’s
threats

Source: Krishnamurthy and Kucuk, 2009


The role of reseller web site on (new)
product’s sales, firm’ brand and
customers

http://www.amazon.com/Apple-touch-Generation-
NEWEST-
MODEL/dp/B001FA1O0O/ref=sr_1_1?s=electronic
s&ie=UTF8&qid=1305730066&sr=1-1


Influences on pricing strategies

Within the marketing mix price is the variable that most often makes or breaks the deal

Internal factors External factors

1. Marketing objectives 4. Nature of the market
PRICING demand
2. Marketing-mix strategy DECISIONS 5. Competition
6. Other environmental
3. Costs factors


Price marketing objectives

Survival
Profit maximization
Market share maintenance
Product quality leadership
Prevent competitors from entering the market
Targeting
Positioning and repositioning


Price marketing objectives

Price is a
choice
criterion


Costs
Costs determine the lower price the
company can charge
What kinds of costs?
 Variable costs: depend on the output.
Variable costs are the sum of
marginal costs over all units
produced
 Marginal costs: is the production’
cost of a single item
 Fixed costs: are independent by the
production’ volume


Price elasticity of demand
Demand: is the amount of a good consumers will purchase
as a function of prices.
So demand depends (first of all) on price!

Price elasticity = % change in quantity demanded
% change in price

Inelastic Demand -> Price Quantity = Revenues

Elastic Demand -> Price Quantity Revenues


Understanding elasticity – some tips

Demand is more elastic for …
 Categories characterized by intense competition (the
lesser the competition, the higher the rigidity of demand)
 Smaller share brands (the higher the brand share, the
higher the rigidity of demand)
 Brands with low level of loyalty (the higher the loyalty,
the higher the rigidity of demand)
…..


Cost comparison between on & off line

Offline Online
Consumers
still Product Costs Higher Lower
consider
transaction Search Costs Higher Lower
on the web
more risky Risk Costs Lower Higher
than offline

The supply Distribution Costs Lower Higher
chain is
hard to
organize!


How to set up the price: brief
overview
Cost oriented approach

Competition based approach

Value based approach


Cost oriented approach

Is the most common pricing method (approx. 60% of firms). It
consists in marking up average total unit cost by some constant

Benefits
Easy
Tangible (plenty of data available)
Justifiable

Problem
It’s product and not brand oriented
It’s strictly correlated with (production/selling) volume


Competition based approach
Is less common than the former and it consists in setting up the
price on the basis of competitor’s price strategy

Benefits
It’s more strategic oriented
Tangible (when the firm has a good marketing intelligence)
Justifiable

Problem
It require a deep understanding of the market and of
competitors
It’s risky when the firm’s competitiveness is over (but also
under) estimated
It could not works in the long term
Its difficult when competitors have very similar products
It’s hard to use for convenience product


A typical competition based schema
Important:
Feedbacks must be taken into account
Complicated in presence of low concentration


Is based on the concept of value in use. The price is set up on the
basis of customer’s perceived value and not on any other factor

Benefits
It’s more target oriented
Allow to overcome (in part) the elasticity of the demand
Is the best way to set up the price when the product is boundled
with add value services

Problem
It require a deep understanding of customers
Value and perceptions are difficulty measurable
It’s hard to use for convenience product
Instable concept; varies markedly across individuals, because of
different tastes, knowledge, importance of performance
differentials to the user (e.g. computer), ability to pay, …


Sources of Customer Value
1. Economic: the economic benefit
a customer derives from using a
product
E
2. Functional: those aspects of a
product that provide functional or
utilitarian benefits to customers F P

3. Psychological: the image of the
product, including how the
product “feels” and whether that
feeling matches the image the
customer wants to project (e.g.
hedonistic products/consumption)



Long term objective: maximize customer lifetime value
(CLV)
To maximize CLV, prices should be customized according
to consumers’ perceived value
The issue is:
What is the actual
V = Σt (Rt - Ct) / (1+ i)t value of a
Net Value = V - A customer whose
Where
lifetime value is
R = Revenue estimated in T
C = Cost to Serve years?
T = Lifetime of the Customer
A = Acquisition Cost


Impact of perceived customer value

 Price sensitivity: the higher the perceived value the
lesser price sensitivity
 Satisfaction: the higher the perceived value the higher
the satisfaction
 Complaints and compliments: the higher the
perceived value the lesser (higher) are complaints
(compliments)
 Word-of-mouth: the higher the perceived value the
higher the likelihood of positive wom (ewom)


Having the right price
Dolan R. J. (1995) How do you know when the price is right,
Harvard Business Review, 73 (5), 174 – 183

Eight steps to better pricing:
1. Assess the value your customers place on a product/service
2. Look for variation in the way customers value the product
3. Assess customer’ price sensitivity
4. Identify an optimal pricing structure
5. Consider competitor’s reactions
6. Monitor prices realized at the transaction level
7. Assess customer’s emotional response
8. Analyze whether the returns are worth cost to serve


Upward and downward price pressure
Web related costs
Upward Downward
Distribution (depending on the Transaction costs of ordering
product category) processing (e.g. e-tickets or b2b
exchanges)
Affiliate marketing: commissions to Online customer service
be paid to the affiliate for the link
(e.g. 15%)
Site development and maintenance Online direct mail (e.g. no printing
costs (depending on the complexity expenses)
of the site and the need for frequent
updates)
Search engine marketing costs (paid Other costs (e.g. inventory)
listings)


Skimming vs penetration pricing
strategy

Skimming strategy: the marketer sets a relatively high price for a
product or service at first, then lowers the price over time. It allows
the firm to recover its sunk costs quickly before competition steps in
and lowers the market price.

Penetration strategy: the marketer sets a relatively low price for a
product or service at first, then higher the price over time. It allows
the firm to gain a (temporary) price competitive advantage.


Skimming vs penetration pricing strategy
Skimming strategy: Penetration strategy:
Suitable when: Suitable when:
Strong relationship between price and Initiating mass market entry
perceived quality Building and keeping market share
Demonstrating strong competitive Discouraging competitors
advantages Establishing a standard
Positioning at the high end Facing high price elasticity
Little chance for competition
Costs are not strongly related to volume Not suitable when:
Trying to recover the investment fast Strong relationship between price
and perceived quality
Not suitable when: Demonstrating strong competitive
Economies of scale matter advantage
Costs are related to volume
Competitors are catching up quickly


Skimming vs penetration pricing strategy
A skimming strategy is much more viable online rather than offline because of the
advantageous cost structure, smaller marketing investment (Wom, social network,
…), bigger market (without physical barriers), no or less inventory costs, …

1GB 79 € 2GB 149 € 30 GB 289 €


Psychological pricing strategy
Pricing approach that considers the
psychology of prices and not simply the
economics. So it is strongly based on
perceived value

Customers use the price to judge the quality
(e.g. perfume or restaurants)

Even small differences in price can suggest
product differences (e.g. 199€: 100€
range instead of 200 € range )


Differential pricing strategy
When the seller charges different prices for the same
product/service to buyers in different locations, different segments
or by purchase quantity.

Sometimes different prices are not based on significant differences
in costs:

customer-segment pricing (e.g. adults, children, students
museums admission)
product-form pricing (e.g. gift packages)
location/channel pricing (online/offline)


Differential pricing strategy
Different prices
and different
offering


Price lining strategy
Is the technique of categorizing goods and services according to price.
Customers can clearly identify which products are superior considering the
price.


Price on the web
Seems to be important …

Low prices compared with offline



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