Chapter 5

Marketing Strategies for Goods and Services (1)

Answers to Think it over (p.134) 1 I will promote the new soft drink products in supermarkets. For example, we can deliver free samples to encourage consumer trials. We can also use various advertising media, such as TV and printed ads, to create public awareness about the product. Moreover, we can establish a promotional price (i.e., a lower price) to entice first-time purchasers. 2 Since similar products have long been available in the market (such as Fanta), the prices of these competing products must be considered when I set the price for our product. I also need to consider the price sensitivity of our target consumers, and the costs associated with developing and marketing this product as well as the desired profit margin. 3 Introducing the orange flavour first can help test market reaction. Based on the test result, strategies for marketing other flavours can be fine-tuned accordingly. This approach can lower the operating risks. Introducing new flavours at different times can also maintain public awareness of the brand.

p.135 Additional information Three levels of a product When a company plans to produce a new product, it needs to think about the product to be produced on three levels. 1 Core benefit: First, the company has to determine the core benefits that its target consumers are seeking. 2 Actual product: Based on the core benefits, the company can then produce the actual product. At this stage, the company should develop the product features, brand name, design, and packaging. Augmented product: Finally, the company needs to add other values to the actual product, such as offering after-sales service and a warranty.

The three levels of products or services are summarised as follows: Additional information In general, consumer products (i.e., products bought for personal consumption) can be classified into four types:
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Convenience products: Consumer products which customers buy frequently. During the buying process, customers often make their purchase decisions immediately and do little comparison shopping. Examples include fast food and soap. Shopping products: Consumer products which customers buy less frequently. Customers often spend much time and effort on information searches and comparison shopping. Examples include furniture and tour packages. Specialty products: Consumer products with unique characteristics or brand identification for which a significant group of buyers are willing to make a special purchase effort. Prices for these kinds of products are high. Customers do little comparison shopping; instead, they are usually loyal to a particular brand. Examples include prestigious automobiles and jewellery. Unsought products: Consumer products which customers do not know about or know about but do not normally think of buying. Examples include insurance.

p. 136 Check Your Progress Q1 The four marketing variables, also known as the 4Ps, are product, price, place and promotion. Product is the combination of goods and services provided to customers. As for Canons digital camera, the product concerns the combination of Canons brand name and the camera itself, as well as other after-sale services (e.g., warranty). Price is the amount of money customers need to pay to obtain the product. In other words, the amount consumers need to pay for the camera is the price. Place refers to company activities that make the product available to target customers. To enhance the availability of the camera, Canon can sell it in department stores and specialty electronics shops and via online media such as the companys website. Promotion refers to company activities that aim to communicate the merits of the product to target consumers and persuade them to buy the product. In Canons case, it can use TV ads, print ads in newspapers and magazines, website and banner ads on the Internet, and in-store salespeoples recommendations to promote its cameras.

p.137 Additional information A good brand name should fulfill the following requirements: 1 Inform consumers about the products benefits and qualities 2 Easy to pronounce, recognise, and remember 3 Distinctive 4 Can still be used when the company expands into other businesses 5 Able to be easily translated into foreign languages 6 Capable of registration and legal protection

p.138 Answers to Discussion questions 1 McDonalds suffered declining sales because customers got bored with the limited food choices. This discouraged customers from patronising the chain. Second, the general public associates fast food with obesity. Consumers today are more health-conscious. Many have switched to healthier substitutes such as salad and sandwiches. 2 Product: McDonalds has provided new healthy menus. To meet peoples needs, it has introduced healthier dishes, such as salad and fresh corn cup. Price: a reasonable pricing strategy has been adopted to attract consumers. This is especially important in view of the recent economic recession. Place: While McDonalds has a wide distribution network, it has started to extend the opening hours at some outlets (e.g., 24-hours). The fast food chain has also strengthened its delivery services (e.g., McDelivery) so as to make its products more easily available. Promotion: Marketing campaigns have been launched to promote an energetic brand image. The company has recently hired pop singers (Eason Chan and Joey Yung) as spokespersons to promote its products, replacing its self-created character, Uncle McDonald. 3 The golden arch logo, Uncle McDonald and delivery services (Accept any other reasonable answers)

p.139 Additional information The new regulation for nutrition labelling of foods and beverages, Requirements for Nutrition Labelling and Nutrition Claim, was enacted by the Legislative Council and will come into effect on
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1 July 2010. All prepackaged food marketed in Hong Kong will be required to note on the label the amount of energy and seven core nutrients (e.g., total fat, trans fat, carbohydrates, etc.)

p.140 Check Your Progress Q2 The product attributes that Nokia needs to consider: The design of the mobile phone. For example, if Nokia wants to appeal to young consumers, the new mobile phone should be fashionable and handy. Functions. For example, if Nokia targets executives, it may add extra functions to the phone, like word processing and Microsoft Office. Battery life has to be sufficiently long. (Accept any other reasonable answers)

Q3

Coca-Cola has developed a good Chinese name for its products. It sounds like its original English name, and also reflects its product position (tasty and happy). (Accept any other reasonable answers) A label can be used to identify the product, describe product features and promote the product.

Q4

p.141 Additional information Downward stretching If the company currently serves higher-end customers, it may add new items to its product line to serve lower-end customers as well. For example, DaimlerChryslers introduction of the C-Class to its Mercedes Benz line. Similarly, besides its well-known birds nest products, Lo Hong Ka has launched other less expensive health food items (e.g., instant aloe vera, aloe vera pudding) to appeal to the lower-end market. Upward stretching If the company currently serves lower-end customers, it may add new items to its product line to also serve higher-end customers. For example, while Red Box Karaoke serves the general public, California Red has established Red Box Plus Karaoke to attract higher-end customers. Two-way stretching If the company currently serves the middle range of the market, it may consider stretching in both directions. In other words, it can add new items to serve both higher and lower-end customers. Marriotts inclusion of two other hotel brands, called Renaissance and Courtyard, is a good example. By stretching this way, the entire hotel group is able to serve top executives (by Renaissance), upper
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and middle executives (by Marriott) and lower ranking executives (by Courtyard).

p.142 Additional information Product mix width In general, companies that are engaged in very different businesses carry more product lines than companies that are engaged in related businesses. Product mix length Large companies usually carry a large number of different product items to cater for their customers various needs. Product line depth As competition becomes keener over time, companies will usually increase the depth (i.e., more models, versions, etc.) of their product mix to retain their existing customers and attract new customers. Consistency Besides the product line depth, product mix width and product mix length, a company may also consider the consistency of the product mix. Consistency of product mix refers to the relatedness of products from different product lines. The degree of consistency greatly depends on the resources and business objectives of the company. If a large company wants to spread its risks by doing business in different markets, the consistency of its product mix will be lower. For example, Fig. 5.10 shows that P&G has a rather high degree of consistency among products from the three product lines. All of these products are fast-moving consumer products and most are aimed at catering for consumers personal care needs. Check Your Progress Q5 Line stretching means lengthening a product line by adding product items for consumers who are not currently served by the company. Line filling is the practice of a company adding more items to its product line to serve its existing consumers. The main difference between these strategies relates to their focus on different customer groups. With line stretching, the company focuses on serving new customers; whereas in line filling it focuses on serving current customers. Q6 Downward stretching is a line stretching method by which the company adds new product items for lower-end consumers who are not currently served by the company.

Upward stretching is a line stretching method by which the company adds new product items for higher-end consumers who are not currently served by the company. The differences between these two line stretching methods lie in the customers the company is serving and the customers the company wants to attract. Q7 Marketers should consider: (1) product mix width; (2) product mix length; and (3) product line depth.

p.143 Additional information Survival This pricing practice was adopted by many small local Chinese restaurants when Hong Kongs economy was badly hit by SARs in 2003.

p.144 Additional information Current profit maximisation In general, marketers (e.g., those in the US) tend to place more emphasis on current profit maximisation than building market share as they are mainly evaluated according to their short-term performance. Market share leadership For example, when many Japanese car manufacturers (Toyota, Nissan, Honda) entered the US market a few decades ago, they set low prices for their products in order to induce consumer trials. Similarly, City Telecom Hong Kong Limited (CTI) has also been using low prices or low tariff rates to widen its customer base in the Hong Kong IDD market. Product quality leadership: This practice was adopted by Samsung when it launched its high-end consumer electronics and appliances (e.g., MP3, mobile phone sets, projection televisions) in China.

p.147 Additional information Consumer demand This implies that the marketer should assess the price sensitivity of customers before setting a price (see also the concept of price elasticity in your economics text).
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p.149 Additional information Product mix pricing strategies When a company offers a group of related products, its pricing strategy should aim to maximise the profitability of the whole group. Some major strategies are as follows: (a) Optional product pricing: Companies may sell optional or accessory products with their main product. Examples include refrigerators (sold at base price) with optional ice makers. The sale of the ice makers (accessory) allows sellers to generate more revenues. (b) Captive-product pricing: Companies offering supporting products (e.g., laser printer toner, blades) that must be used along with a main product (e.g., laser printer, razor) often use this pricing strategy. In general, companies using this strategy set a low price for their main products. Once consumers have bought the main product, companies can then enjoy continued profits from the sale of the supporting products. (c) Product bundle pricing: Companies often combine several products and offer them as a package at a reduced price. For example, a travel agency may sell specially priced travel packages which include air tickets, hotel accommodation and entrance tickets for various sightseeing spots. Activity 1 (Psychological pricing) Teachers may ask students what they think about the quality of the following similar dresses, given the prices. Dress A Dress B HK$205 HK$195 Teachers guide Sometimes, even a small difference in price will make a big difference in consumers psychological responses. In the above example, although the difference is only HK$10, a consumer might think that the $195 one is a bargain item as it is in the $200 range. On the other hand, they may think that the $205 one is of higher quality as it is above the $200 range. Additional information Reference prices This refers to prices that buyers carry in their minds when they look at a given product. To encourage consumers to make a purchase, marketers often try to influence their reference prices. For example, a company may display its product next to more expensive ones. The consumer will then think that the two products are in the same class and the product with the lower price is a

bargain item.

p.150 Check Your Progress Q8 The major objectives are: (1) survival; (2) current profit maximisation; (3) market share leadership; and (4) product quality leadership. Q9 Fixed costs are costs that do not vary with production or the sales level. In running a small grocery store, major fixed costs include rental costs, fixed salaries for employees, costs involved in decorating the store, utility expenses (e.g., electricity) Variable costs vary directly with production or the sales level. In running a small grocery store, major variable costs include the costs involved in securing products from suppliers. Q10 If a product is highly differentiated and delivers the benefits desired by consumers, it is regarded as having low price-sensitivity. This means that consumers will be more willing to pay a higher price. An example of a product with low consumer price sensitivity is an automobile. If a product is undifferentiated and lacks the desired benefits, it is considered to have high price-sensitivity. This means that consumers will be less willing to pay a higher price. An example of a product with high consumer price sensitivity is fast food.

p.151 Additional information The companys channel objectives are influenced by various factors: 1 Nature of the company. The companys financial resources determine whether it can distribute its products directly to consumers or use other channel members to handle the distribution. 2 Product characteristics. If the company sells perishable products (e.g., dairy products), it may use a more direct distribution mode to avoid delays. Competitors strategy. If major competitors use many retailers to sell their products, the company may be under pressure to do the same to maintain sales.

p.154
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Additional information Intensive distribution As consumers need to restock these products frequently, it is important for the company to make its products easily available. Otherwise consumers may simply buy the products from other suppliers. Exclusive distribution Companies using exclusive distribution usually focus on a relatively small number of well-defined target consumers. Using exclusive distribution, companies can exert greater control over their channel members and enhance their products image.

p.155 Additional information The terms of responsibilities between a manufacturer and its channel members include: Price Territorial rights Specific services The manufacturer should The channel member can only The manufacturer may need establish a set of fair enjoy the agreed territorial to provide specific training discounts for the channel rights. It may be given an or assistance to the channel member to acquire the exclusive distribution right in member. product. a certain territory or be It should be stated for required to share the The channel member should which party (the distribution rights with other follow the list price manufacturer or the channel channel members in that established by the member) will provide repair territory. manufacturer when selling or warranty services. the product to customers.

Check Your Progress Q11 The major functions include: (1) transportation of the products; (2) stock holding and storage; (3) provision of market information to the company; (4) promoting the product; and (5) displaying the product for sale. Q12 Consumers may look for the following benefits from a channel: Complete the transaction and get the product delivered in a short period of time. For example, a hungry customer who has ordered food in a restaurant may want to get his food delivered as soon as possible.

Wide product variety. For example, a customer buying a shampoo in a supermarket may want to compare different brands and choose the best one. Conveniently located outlets. For example, a customer who buys a cup of instant noodle at mid-night may simply go to the nearby convenience store. Convenient purchasing mode (e.g., in person, by phone, mail or the Internet, depending on the preference of target consumers). For example, a tired customer may order
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McDonalds food by phone so that he can eat the meals at home.

More add-on services (e.g., credit, delivery, installation, repairing services). For example, a customer whose LCD TV is broken may ask for repair services from the distributor.

Q13 The difference among these three distribution approaches lies in the number of channel members involved. Intensive distribution refers to stocking the products in as many outlets as possible. Exclusive distribution refers to giving only a limited number of channel members the exclusive right to sell the products in their territories. Selective distribution refers to the use of a certain number of channel members (more than one and less than all) to distribute a companys products.

p.156 Additional information Identify the target audience If the marketer wants to persuade potential customers to buy the product, these potential consumers will become the target audience. For example, when Hong Kong Broadband Network launched a series of advertisements aimed at persuading consumers using other broadband services to try theirs, these users then became its target audience. Awareness For example, the marketer may heavily emphasise the brand name of the product in the promotional campaign. To create curiosity, he may even show the brand name but not the physical product to the target audience. This was the practice adopted by Toyota when promoting its Infiniti car model. Interest The promotional campaign may do this by demonstrating the features, advantages and benefits of using the product. Desire To increase the target audiences desire for the product, the marketer may offer them a free trial. The promotional campaign may also emphasise how the product can help solve the target audiences problem. This approach is often used by Head and Shoulders. In its TV commercials, actresses constantly emphasise how the shampoo helped solve their dandruff problem. Action This can be achieved by offering special promotional prices, premiums, cash rebates, etc.

p.157
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Additional information Rational appeals Usually, rational-based appeals tend to be informative (i.e., tell the target audience something about the product) and/or persuasive (i.e., persuade the target audience to buy the brand). Message source The company should be careful when selecting a spokesperson for the product. The use of the wrong spokesperson can result in embarrassment and a bad image. Some common message sources include: (i) Celebrity: Celebrities usually refer to famous movie stars, TV personalities, popular entertainers and sports stars. Sportswear manufacturers often hire sports stars to promote their products. Expert: Experts refer to people who, because of their occupation or expertise, are in a unique position to help the target audience evaluate the product. For example, some toothpaste manufacturers have recently had dentists recommending their products in TV commercials.

(ii)

(iii) Common man: Sometimes, companies use the recommendations of satisfied consumers to promote their products. This can enhance the credibility of the message by showing that people who are just like the target audience have found the product to be suitable for them. (iv) The company executive: Companies may use their top executives to promote their products. For example, Ms Angel Leung On Kay, the founder and chairperson of Angel Face Beauty Creations, has appeared in the companys print advertisements and TV commercials for promotional purposes. (v) The company employee: Some companies have their own employees (rather than top executives) recommend their products. This is especially common for service companies that employ their front-line service staff to speak for the companies. In Hong Kong, this approach has been adopted by service companies such as the MTR, Cathay Pacific and DHL.

p.158 Additional information Affordable method Although this method is easy to apply, it completely ignores the fact that promotion should not be regarded as an expenditure (i.e., if you can afford it, then you spend more, or vice versa). Rather, it should be viewed as an investment to generate more future revenues. Percentage of sales method
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Although this method is also easy to apply, there is often no strong rationale for why a particular percentage is chosen. Competitive parity The arguments for using this method are two-fold. First, it takes advantage of competitors collective wisdom. Second, the use of similar promotional budgets among rivals can avoid promotional wars among the different companies. However, some disagree with these arguments as they believe that a particular company should know better than its competitors what constitutes an appropriate amount of spending on promotion. Moreover, they believe that as different companies have different characteristics and backgrounds (e.g., reputations, resources, promotional objectives), there is no reason why their promotional expenditures must be the same. Objective and task method The advantage of this method is that it encourages the marketer to define his communication objectives clearly, and to develop an in-depth understanding of the necessary tasks and costs involved in achieving these objectives.

p.160 Teachers guide Teachers should highlight the pros and cons of different promotional mix tools as this has been frequently included in previous public examinations.

Additional information Push strategy The manufacturer first focuses on promoting his product to the wholesaler. The wholesaler will then be motivated to promote the product to the retailer. Finally, the retailer will promote it to the end consumer. To use the push strategy effectively, the manufacturer often needs to rely heavily on personal selling to cultivate a relationship with the wholesaler. It also needs to rely on sales promotion (e.g., in the form of price discounts) to urge the wholesaler to carry its product. Pull strategy Once the retailer perceives a strong demand, it will ask the wholesaler for the product. Consequently, the wholesaler will also request the product from the manufacturer. In using the pull strategy, the manufacturer often relies heavily on advertising and sales promotion to boost
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consumer demand for the product.

p.162 Check Your Progress Q14 The people with whom a company wants to communicate are its target audience. Since young people are more receptive to new technologies and are eager to buy trendy phone models, Samsung may target this group of customers. In other words, youngsters could be Samsungs target audience. Q15 The difference between a rational appeal and an emotional appeal lies in the way the company appeals to its target audience. A rational appeal emphasises the product features and/or the benefits of owning or using that product. It focuses on the consumers practical and functional needs for the product. An emotional appeal focuses on creating a positive feeling and transferring that feeling to the product or the company. It tries to convince people that buying the product can help them satisfy their social and psychological needs. Q16 The major sources are the company itself or a spokesperson hired by the company (a celebrity or an expert). Q17 The major promotion mix variables include advertising, sales promotion, public relations, personal selling and direct marketing. Donations made by CLP Power Hong Kong Limited to construct schools in China can be considered as a way of establishing its corporate image with the public. It is aimed at building good public relations with various stakeholders (e.g., consumers, government). This helps create long-term customer relationships and facilitate future development. Q18 There are four methods for setting a promotional budget: 1 Affordable method: the promotional budget is set at what a company can afford; 2 Percentage of sales method: the budget is set at some percentage of current or predicted 3 4 sales; Competitive parity: the marketer simply follows the promotional expenditures of his major competitors; and Objective and task method: the promotional budget is set by estimating the costs of performing all tasks that help achieve specific objectives

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Assessment Short Questions 1 The marketing mix is the set of marketing tools or variables that marketers can control in order to deliver satisfaction to their target markets. The four marketing variables are product, price, place and promotion. At KFC, which mainly sells fried chicken, product refers to the food it sells as well as the services it provides. To market its fast food, KFC may provide a wide variety of food to meet its customers needs. Providing better services to customers, such as delivery services and friendly and efficient in-store services, can improve its competitiveness and enhance consumer satisfaction. Price concerns how KFC establishes prices for its products. Within the cost constraints and/or constraints concerning the targeted profit margin, KFC should set prices which are perceived by its target customers to be a good bargain or at least affordable. Place concerns KFCs activities that make the product available to target customers. KFC should carefully select locations for its outlets. These outlets should be perceived by target customers as being conveniently located. Moreover, the provision of delivery services can also greatly enhance the accessibility of KFCs products to its target customers. Promotion refers to KFCs activities that aim to communicate the merits of the product to target customers and persuade them to buy it. In this respect, KFC may launch TV commercials, newspaper and/or magazine advertisements to promote the merits of its products. Sales promotions such as giving small gifts and coupons may also help boost short-term sales at KFC. 2 The major issues include: Product attributes: For example, Apple needs to make sure that its iPhone is free from defects, with features (e.g., various multi-media functions) desired by its target consumers, stylish and well-designed (e.g., with touch screen functions). Branding: Apple needs to consider if the brand name iPhone is appropriate. Such a brand name connotes a cyber image for the product. Indeed, this brand name is now generally perceived as a symbol for high-tech and trendy mobile phones. Besides, the letter i makes consumers recall Apples products (e.g., iPod, iMac).

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Packaging: Apple should also consider the package design for its iPhone. In general, the packaging should help protect the product, be simple but easily recognised by consumers. Labelling: Apple should consider what information should be put on the package. As a general principle, the information displayed should help consumers identify the product, describe the product features; and help promote the product (e.g., technologies used, country of origin, etc.). Product support services: Apple should also consider what product support services its iPhone should offer. These may include warranty, other add-on features, etc. 3 Downward stretching: the company adds product items to an existing product line in order to attract low-end new consumers (e.g. Courtyard of the Marriott Hotel group). Upward stretching: the company adds product items to an existing product line in order to attract high-end new consumers (e.g., CEO Neway as a premium karaoke lounge within the entire Neway group). Line filling: the company adds new product items to an existing product line to serve existing consumers (e.g., different Dreyers ice cream flavours). 4 Three key considerations for Wellcome in setting prices for its products may include: Internal factors Marketing objectives: Wellcome should consider its marketing objectives. For example, if it wants to capture a greater market share, it may set low prices for its products.

Marketing mix strategy: Wellcome should consider the total marketing mix when setting prices. To build a desired product position, it needs to coordinate its pricing decisions with those of its product, place and promotion strategies. Costs for Wellcome to operate supermarket stores: These would include costs incurred to secure goods from various suppliers, salaries of employees, utility expenses, rental costs, costs for free delivery to customers, etc. Wellcome should set prices that can cover all of its costs and also create profits.

External factors Nature of the market: Hong Kong has only a few large supermarkets (i.e., oligopoly). The pricing decisions of Wellcome will be greatly influenced by those of the others. Therefore, Wellcome should take the pricing decisions of other large supermarkets into account. Demands of Wellcomes consumers: When setting price for a particular product,
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Wellcome should consider how many of its target consumers are willing to pay for the product. For undifferentiated products, consumers are more price-senstitive. As such, Wellcome should not charge a high price for this kind of product. For highly differentiated products, consumers are less price-sensitive. Wellcome may charge a higher price for the product. Competitors strategies: Wellcome should also consider the pricing strategies and strategic moves (e.g., special promotions for selected items, aggressive advertising campaigns) of its major competitors (e.g., ParkNShop) when setting its own prices. (Any three of the above) 5 The three approaches are: Intensive distribution: This refers to stocking products in as many outlets as possible. Exclusive distribution: This refers to giving only a limited number of channel members the exclusive right to sell the products in their territories. Selective distribution: This refers to the use of a certain number of channel members (more than one and less than all) to distribute the products. Dairy Farm should use the intensive distribution approach as the products sold by the company are daily necessities and fast-moving consumer products. The target market in this case probably refers to the general public. As the target customers are widely dispersed in different areas and need to frequently buy Dairy Farms products, the company should make the products conveniently available for them. Teachers guide Students should consider the nature of the products (e.g, the perishability of dairy products) in answering this question. 6 An emotional appeal would be more appropriate. Jeans are a product that reflect personal style and taste. By and large, unlike high-tech products (e.g., cameras), there is no significant difference in terms of the functions among different brands of jeans. Hence, to differentiate its jeans from others, Levis needs to appeal to consumers emotionally. For instance, the company may project an elegant image (an emotional appeal) for its jeans to attract consumers who also perceive themselves as elegant. 7 Factors affecting the choice of promotion mix tools are:

Push strategy vs. pull strategy: Depending on the promotion strategy adopted, companies
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may rely on different promotion mix tools to sell their products. There are two basic strategies, push strategy and pull strategy. To use the push strategy effectively, a wholesaler, for instance, needs to rely heavily on personal selling to cultivate a relationship with retailers. It also needs to rely on sales promotions (e.g., in the form of price discounts) to urge retailers to carry its product. To illustrate, Unilever has used this strategy to promote its products to Wellcome and ParkNShop. In contrast, the pull strategy requires a company to create a demand for its products by directly promoting them to its end consumers. For example, P&G has relied heavily on advertising and sales promotions to help end consumers develop a preference for its products and to decide to purchase them.

Type of product market: In general, marketers selling consumer products rely more on advertising and sales promotion to reach a large number of potential buyers in the consumer market (e.g., Dreyers selling of ice-cream). On the other hand, marketers selling business products (e.g., a medical equipment supplier selling equipment to hospitals) usually rely more on personal selling for promotional purposes. This is because the nature of most business products is complex and there are a relatively smaller number of buyers in the business market.

Buyer-readiness stage: In general, promotion mix tools vary in cost-effectiveness at different buyer-readiness stages. For example, advertising and public relations play more important roles in building consumer awareness of and interest in a product. On the other hand, sales promotion and personal selling play more important roles in making consumers develop a strong desire for a product as well as buying it.

Product life cycle: A company often needs to adjust its promotion mix as its product goes through the relevant product life cycle. For example, the marketer may rely more on sales promotions (e.g., price discounts) to entice trial buying when the product is being launched. However, he may spend less on sales promotion as the product enters into its growth stage and has been well-received by consumers.

Essay Questions 8 In general, a company must set a price that should at least cover its operating costs. Otherwise the company cannot break even and will consequently suffer a loss. This suggests that Mannings should take its operating costs (e.g., rental costs, salaries, administrative and marketing expenses, costs of securing goods from suppliers, etc.) into account when it sets prices for its products.
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Perceived benefits reflect what consumers are willing to pay for the product. If consumers perceive that products from Mannings offer important benefits to them, they will be willing to pay higher prices. As a general principle, Mannings should set prices equivalent to consumers perceived benefits so as to maximise its profits. Moreover, Mannings needs to observe closely the pricing strategies (e.g., price discounts) and competitive moves (aggressive promotion) of its major competitors (e.g., Watsons). For example, if Mannings finds that Watsons has recently adopted substantial price cuts for most of its products, it may need to follow suit to avoid losing customers. 9 Market skimming pricing refers to a strategy in which a company sets a high initial price in order to earn revenues from consumers willing to pay a high price for a new product. The marketer will gradually lower the price to attract other more price-sensitive consumers. For example, this strategy has been widely practised by high-tech companies (e.g., Apple, IBM) when selling new computing or telecommunications products. Market penetration pricing refers to a strategy in which a company sets a low initial price in order to attract a large number of consumers to try its new product. It is aimed at building a large market share as quickly as possible. For example, when Fords joint venture in China launched its first small sedan model in the Mainland of China, this strategy was adopted. 10 (a) The strategy is appropriate. The magazine uses a market penetration pricing strategy in which it sets a low initial price to attract a large number of consumers to try the product. As this new magazine has not established a reputation, it is difficult to attract consumers by product features (i.e., content) only. Moreover, competing products (other magazines) are widely available in the market. Hence, the magazine needs to set a lower price to attract consumers. (b) It is appropriate. In this case, a market skimming pricing strategy is used. Mobile phones are high-tech products which will become outdated soon. This implies that the company should maximise its profits as soon as possible. The new mobile phone may have several unique selling points (in terms of high-tech functions and features). In other words, the mobile phone is a highly differentiated product. The company would be justified in setting a high price as some consumers are willing to pay more to acquire an innovative product. (c) It is appropriate. Survival is the major marketing objective of the restaurant. One-dollar dishes are a gimmick to attract consumers to the restaurant. It can also help create publicity. The main purpose of this strategy is to retain customers and maintain cash flow.
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(d) It is inappropriate. Salt is a basic necessity or a commodity. It is an undifferentiated product. In such a perfectly competitive market, there are many competing brands. Consumers are thus highly sensitive to any price changes. Hence, if the manufacturer charges a higher price, consumers will switch to other brands. However, if the company really has some hard evidence (e.g., scientific reports from a reputable laboratory) which can support that the quality and nutritional value of its salt are much higher than other competing brands, it may use this unique attribute to target high-end consumers. Should this be the case, it would become appropriate for the company to adopt a high price strategy. (Accept any other reasonable answers) 11 (a) This is an intensive distribution. The newspaper in this case is sold in as many places as possible. This strategy is appropriate as a newspaper is a fast-moving consumer product purchased by consumers everyday. Availability is the key to increasing sales. (b) This is an exclusive distribution. That means the company is using only one distributor located in a prime area to distribute its products. This helps create a highly prestigious image for the products. (c) This is an exclusive distribution. The company gives an exclusive right to only one department store chain (though it may have a number of stores/distribution outlets) to sell its products. The company adopts this distribution strategy because it wants to maintain a prestigious image for its products. (d) This is a selective distribution. The product is made available at a selected number of dispensaries (instead of all dispensaries or only one dispensary). The manufacturer uses this distribution strategy because it wants to maintain reasonable control of the intermediaries (i.e., dispensaries) at a reasonable cost. 12 (a) Advertising (e.g., TV commercials) can be used to arouse public awareness. The fast food chain can convey messages to a large target audience in a short period of time. As it wants to promote its new dishes, sales promotions (e.g., promotional price/price discount) can also be used to attract trial purchases. (b) Sales promotion in terms of samples or price discounts may be used to induce a trial. (c) Personal selling is appropriate. For example, customer service officers or financial planning consultants can introduce new products to customers who visit the bank for
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other transactions. As financial products are usually complicated in nature, face-to-face recommendations and explanation are desired. If the bank financially cannot afford to use personal selling, it may consider direct marketing. Its tele-customer service officers can call existing customers to introduce the products to them. (d) Public relations can be adopted as it is most appropriate for companies to handle crises or re-establish their corporate images. The company should take appropriate measures to minimise the negative effects of the accident promptly (e.g., recall all the problematic drugs from end-users, retailers and wholesalers immediately). It should also host press conferences to explain all these measures and make sincere apologies to all the affected parties. Case Analysis 13 Teachers guide In answering this question, students are required to apply the concepts learnt in the previous chapter about target markets and differentiation. (a) Itamae Sushi has set reasonable prices for its food and targets the general or mass public. On the other hand, Itacho Sushi sets higher prices and offers distinctive sushi items and targets more upscale consumers (e.g., consumers with higher incomes who belong to the middle to upper class). (b) (i) A price war to knock off competitors is not recommended for the following reasons. First, it will intensify competition among rivals. All competitors including Itamae Sushi would eventually suffer from decreased profits or even losses. Second, as mentioned, Itamae Sushi spends a lot of money buying fish for sushi and sashimi. This suggests that the operating cost is probably high. If the sushi chain launches a price war, it may not be able to break even or may even suffer a severe loss. (ii) This strategy is not recommended either. The sushi chain has kept the prices of its products reasonable because it targets the general public (as discussed in (a)). If it sets high prices for its products to establish a premium image, it may lose its existing customers. Second, Itacho Sushi, another chain in the same group, already targets high-end consumers. The proposed pricing strategy may lead to direct competition between
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Itacho and Itamae. This will hurt the profits of the entire group. (c) Itamae Sushi has adopted product differentiation. It buys special marine products from suppliers to differentiate its products. Its previous bidding for the largest tuna at a Tokyo auction was regarded as a successful strategy as it enabled Itamae Sushi to offer unique sushi to its customers and created publicity. (d) Itamae Sushi has opened outlets in both first-tier and second-tier districts in order to enhance the availability of its products. It has thus used the selective distribution approach by opening a number of outlets in selected areas (first and second tier areas) in Hong Kong. (e) Ricky is using the upward stretching strategy to differentiate Itacho Sushi from Itamae Sushi. When compared with Itamae Sushi, Itacho Sushi targets a more upscale consumer group by offering foods and services that are of even higher quality. It also charges consumers higher prices. (f) Itamae Sushi boss Mr Ricky Cheng, is the message source as he acts as a spokesperson for the chain. 16 Teachers guide In examinations, students are often required to combine different concepts and apply those concepts. In this question, the two concepts involved are differences between consumer and business markets and marketing mix. Students should consider the natures of consumer and business markets and refer to the appropriate marketing mix strategies.

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