Zara - A unique business model

Zara has proved to be a maverick of its time – it came at a time that the apparel industry was fragmented there was no integration, the costs incurred were enormous it was highly labor-intensive leading to outsourcing to save on costs and the business model prevalent was not proving to be highly successful as compared to the models of other industries. In came Zara and showed that strategic imperatives depended on how a retailer sought to create and sustain competitive advantage through its cross border activities and seamless operations, the power of integration and the importance of sticking to your positioning without adding too many frills. Zara’s factories were heavily automated, specialized by garment type and focused on the capital-intensive parts of the production process.
Zara’s fantastically integrated supply chain has enabled them to deliver on their positioning and promise to offer affordable, trendy clothes to its fashion conscious target market in quick time. With Zara you don’t have to be a millionaire to look like a million dollars.
Zara’s global strategy is to offer cutting edge fashion at affordable prices by identifying which styles are “hot” at fashion shows and moving simulations into production even before the original designer can. This is made possible by exerting a strong influence over almost the entire garment supply chain from design to retail. Product differentiation, variation in styles and speed to market has been the main sources of competitive advantage for Zara.
Segment
Zara offers clothes, footwear and accessories to women (60%) and men (25%), as well as clothing and accessories for children (15%). People at Zara do not define their target by segmenting ages and lifestyles as traditional retailers do. Zara’s global target market is a young, educated one that likes fashion and is sensitive to fashion, but is price-conscious.
Target
Zara's target market is based on women and men aged 15 to 45, and children. The target market is fashion-conscious, educated and relatively middle-class, including students, young professionals and young families. Zara recognized a gap in the market for making medium quality, low cost, designer clothing adaptable to the tastes of the local clientele.
Positioning
Target market provides a demand for good variety, high fashion, low cost clothing within a short timeframe and regular turnover of designs. The main competitors are Gap and H&M. Because it produces its own goods, Zara is far more flexible in responding to the demand of its consumers than its competitors. Zara reacts rather than creates new designs, the skirt a famous rock star wore at a concert will be quickly available for the teeny bopper proving that Zara is at the pulse of the fashion scene and knows what its customer base would want and provides it economically. It uses sale staff for market intelligence better than its competitors. Its main difference is the ability to respond quickly to the market
Business Model
At the heart of Zara's success is a vertically integrated business model spanning design, just-in-time production, marketing and sales. This gives the group more flexibility than its rivals to respond to fickle fashion trends. Zara’s unique approach to product development is instrumental to their success. Rather than chase economies of scale, Zara manufactures and distributes products in small batches. Instead of outside partners, the company manages all design, warehousing, distribution, and logistics functions itself. The result is a super responsive supply chain exquisitely tailored to Zara's business model. The local strategic partnerships that Zara maintains with manufacturers in Europe allow for shortening the throughput time of a product to 4-5 weeks for new designs and 2 weeks for modifications of existing products, in comparison to the industry standard, which is 6 months. The company makes this happen by designing and cutting its fabric in-house and it acquires fabrics in grey to keep costs low. Zara postpones dyeing and printing designs until close to manufacture, thereby reducing waste and minimizing the need to clear unsold inventories. The proximity of these suppliers gives Zara great flexibility in adapting their product lines based on up to date market trends and consumer behavior and responding quickly to shifts in consumer demand. It also decreases costs of holding inventory. Zara gives store managers significant autonomy in both determining the products to display in their stores and which to place on sale, and relaying market research and store trends back to their headquarters in La Coruña. Zara designers continuously track customer preferences and then placed orders. Designers talk daily to store managers, to discover which items are most in demand.
At headquarters there are teams of commercials who take this information into account to design and effectively plan and produce all of Zara’s products. Zara produces approximately 11,000 new styles per year. Zara’s short cycle time reduces working capital intensity and facilitates continuous manufacture of new merchandise – Zara undertakes 35% of design and purchase of raw materials, 40-50% of the purchases of finished products from external suppliers and 85% of the in-house production after the season had started compared with only 0-20% in the case of traditional retailers. Inventory costs are higher for competitors because orders are placed for a whole season well in advance and then held in distribution facilities until periodic shipment to stores.
The result is that Zara can make a new line from start to finish in three weeks, against an industry average of nine months. Moreover, Zara's business model makes it highly price-competitive, allowing it to offer mid-market chic at down-market prices. And it protects against slip-ups, too their mistakes are easy to reverse since they are no more than 2 to 3 weeks forward.
Distribution
Zara’s centralized distribution facility gives the chain a competitive advantage by minimizing the lead-time of their goods. Zara’s internally or externally produced merchandise goes to the distribution center. This is cost-effective due to the close proximities of the distribution center in Arteixo and their factories in Coruña. In the distribution center, products are inspected and immediately shipped, since Zara’s distribution center is a place where merchandise is moved rather than stored. Then, to increase delivery speed, the shipments are scheduled by time zones and shipped by way of air, and land. The typical delivery time within and outside Europe is between 24 to 48 hours.
Advertising and Marketing / Store Operations
As Zara doesn’t spend as much on advertising as its competitors, [Zara spends only 0.3% of total revenues on advertising and marketing] hence maintaining a cost advantage in comparison to their to their competitors in marketing activities so it must enhance customers’ shopping experience to increase repeat purchases and word-of-mouth “promotion” by existing customers. Store layout and interior design are key, as well as superior customer service and so its stores are in visible locations and designed beautifully. Zara strategically locates all of their stores in prime retail districts for visibility marketing. Each Zara store is remodeled every 5 years in order to keep up with current trends.
Additionally, because of the product development cycles mentioned earlier, customers are trained to visit Zara stores often because new items are presented weekly and are often not restocked. This feeling of scarcity encourages customers to come to the stores and buy frequently. Lastly, in order to keep the stores looking fresh and trendy; Zara invests heavily in their store layouts. The store managers are incentivised to perform better by linking commission to the store performance – the staff itself fits the target audience so they are able to ‘feel’ the Zara woman and respond to customers as well as give inputs on design.
Zara does not invest heavily in direct marketing, though their efforts in image/brand marketing do a great deal to attract a loyal customer base. Their cost advantage and ability to maintain brand recognition and customer loyalty are essential elements of Zara’s capabilities that build value in the company.
Information and Communication Technologies
Ortega who was a gadgeteer by inclination relied on computers from the start even when he had just four factories and two stores and when the IT industry had not pervaded into our lives – this give him enormous advantage and showed that what other buyers ordered from his factories was different from what his store data told him customers wanted. Zara also has major investments in Manufacturing logistics and IT and an advanced telecommunication systems.


IS ITS BUSINESS MODEL SUSTAINABLE?
Acquiring market share and sustaining it, is highly dependent
on positioning – how well you have crafted your positioning in people’s minds and how consistent you have been about it. Whether you are staying ahead of the curve and constantly monitoring where you are going. You have to constantly redefine benchmarks and do what others do better than they do it.
Many retailers still regard the supply chain as the back end of their business, but the modern supply chain has a much bigger contribution to make – it can help companies differentiate themselves from the competition and achieve greater, sustainable growth as demonstrated by Zara.
With its innovative business model and operations concentrating on key differentiating capabilities; improving the effectiveness and efficiency of their core operations; and focusing on their target customers to deliver a tailored offering. One of the core goals of retailers is to run their merchandising and supply chain functions as cost-effectively and efficiently as possible which is what has made Zara so profitable.
Zara’s concept, capabilities, and value drivers, as demonstrated through their business model, have proven to be extremely successful. Fundamental to Zara’s success is their commitment to rapid response in customer trends in fashion, producing clothing often and with short life spans (10 wears). Their commitment to this goal and the capabilities that they have developed to achieve it, have provided significant competitive advantage to Zara especially in the areas of product development, strategic partnerships and cost of production, advertising and marketing, and information technology infrastructure.
But with all advantages come the inevitable trade-offs, in keeping its manufacturing vertically integrated they have opened themselves up to certain vulnerabilities namely diseconomies of scale – since they do not produce in large quantities they have to forego discounts. Inditex has to support high capital investments and major investments to support their unique business model. Since they do not outsource they have to bear the extra cost for ‘made in Spain’, which is around 20 times more expensive as compared to made in Asia.
As Zara expands globally there will also arise issues in distribution it will have to open more distribution centers incurring more cost. But Zara is in a comfortable position due to its strong history and best practices that have aligned customer wants and operational efficiency remarkably. They give the customers what they want and as compared to its competitors Zara keeps its operational expenses down as seen in exhibit 6 although revenue are not as high as Gaps’ but net income is almost 400 times greater.
A firm is profitable when it keeps it operational expenses down and despite not giving into outsourcing or it has still managed to keep costs down.
Its fast and responsive tightly integrated supply chain has put it on a slid ground to compete globally and expand into other markets. The only drawback here is that Zara management will have to exercise caution in their expansion schemes – take small step and not be over ambitious in their plans because the more their model will be stretched the more their supply chain which in concentrated in Spain will be put to the test. Although they have been pretty successful in the Middle east the America market is another ball game where there will be fierce competition and many competitors – so the positioning for expanding in America will have to be extremely well thought out but to date Zara has been a glowing example of operational efficiency and combining giving the customer exactly what they want at the price they want with no extra burden to the organization.
It is customer demand that drives Zara’s supply chain, Zara’s smart use of customer data enables it to translate today’s couture fashions into tomorrow’s must-have outfits in turnaround times of four weeks, shipped to the stores via road or air, as appropriate.Thanks to their customer-driven approach, Zara has won a huge following in the notoriously fickle world of high fashion.

What factors contributed to the extraordinary success of Starbucks in the early 1990’s?

Brands function at multiple levels in a consumer’s mind and in diverse market segments in the present day. Companies, today wish to build relationships with their customers and to create a brand bond. The brand experience has become a critical factor in establishing brand strategy – and this is achieved by pursuing experiential branding, which means to approach a brand as a user experience.

This would entail creating a relationship of trust and belief with the consumer. Belief drives behavior and by influencing behavior, brands create relationships. Experiential branding requires new tools and methods. A product needs to connect with qualities that people value, appealing to a customer’s sense of value. A competitive price point alone will not motivate today’s intelligent customer to purchase any product.

Schultz’s vision was that drinking coffee should be part of ‘an experience’ that could be weaved into the fabric of the consumers’ everyday lives. He wanted the customer’s experience to be wonderful from the moment he or she walked in the door of a Starbucks. The Barista should recognize the customer and greet him or her by name. The Barista should also know the customer's regular order and start preparing it right away.
But maintaining that vision is hard, so to be able to maintain it, employees of Starbucks are trained. The employees learn about making coffee, they learn how to remember customer names. They are motivated to do this by giving both full-time and part-time employees great benefits and full or limited stock options.
In order to sustain the company's growth and make Starbucks a strong global brand, Schultz believed that the company had to challenge the status quo, be innovative, take risks, and alter its vision of who it was, what it did, and where it was headed. Under his guidance, management was posing a number of fundamental strategic questions: What could Starbucks do to make its stores an even more elegant "third place" that welcomed, rewarded, and surprised customers? What new products and new experiences could the company provide that would uniquely belong to or be associated with Starbucks?
What could coffee be—besides being hot or liquid? How could Starbucks reach people who were not coffee drinkers? What strategic paths should Starbucks pursue to achieve its objective of becoming the most recognized and respected brand of coffee in the world?

Starbucks’ sales have kept on increasing up to 20% a year ever since they went public in 1992. Their success has depended on create superb experiential branding that can be seen in the following brand tests:

1. Brand Awareness. The Starbucks brand embodies the spirit of the company and is a lifestyle brand. The Starbucks logo— the Mermaid— creates immediate recall and recognition. The store design, logo and trendy settings appeal to professionals, youth, and families. The phenomenal brand awareness is a result of word of mouth and not advertising. Starbucks spends not more than $20 million in advertising. The user experience is particularly emphasized upon.

2. Brand Personality. The Starbucks brand is perceived as outgoing, hip, friendly and warm. The space is designed to make one feel comfortable and relaxed. This greatly enhances the user experience.

3. Brand Loyalty. Why do people pay 3 dollars for a Starbucks coffee? Because Starbucks provides more than just coffee it provides an experience. It’s the design of the customer experience and interaction with the brand that people pay for. The quality and quick service, a place to unwind and enjoy the atmosphere makes it attractive to people. The people who work at Starbucks are the brand’s ambassadors and ensure customers get excellent service. This has led to strong brand loyalty.

4. Perceived Quality/Value. The hot, aromatic coffee and a variety of other confectionaries have added to the perceived value of Starbucks brand. Customers receive value for their money. Furthermore, all stores carrying the Starbucks name across the world deliver consistent quality and value. It also promotes cultural events and community activities.

5. Brand Associations. Starbucks is associated with environmentally friendly products and social contributions to the neighborhoods it exists in.

5 Marketing P’s

1) Product: From latte to espresso, Starbucks purchases, roasts and sells high quality whole bean coffees. They also produce rich-brewed coffees, Italian-style espresso beverages, cold blended beverages, a variety of pastries, and coffee related equipment along with accessories in their retail stores. They buy only the finest Arabica coffee beans that meet their rigorous standards for high quality. These specialty beans are grown at an altitude above 3500 feet in the shade. Customers are willing to pay high prices for their coffee based on Starbucks promise to deliver exceptional quality. Starbucks corporate level strategy has been their ability to form strategic alliances. Alliances with Colombian farmers have been helpful to promote their product uniqueness as well as a good relationship with their suppliers.
2) Promotion: Product promotion is focal point for Starbucks, the company has taken a three tier stance on it. The first tier is selling the “Starbucks coffeehouse experience” which is “making connections with the people and things that are important to us over a cup of coffee” (Schultz, Howard). Starbucks promotes a different type of atmosphere depending on the season. Summer is the time to advertise the iced drinks like Frappuccino® while the winter is for coffee, espresso, and teas. The second part of its promotion plan is the community. Starbucks advertises that it is part of the community. With community programs, environmental seminars, local artist shows, and the like, Starbucks tries to sale itself as an integral part of the community in which it resides. The third tier is Starbucks’ attempt to differentiate itself from its competitors. The basis of this is termed “specialty blend”. Starbucks offers “specialty blend” coffees, teas, iced drinks, and ice cream. Whether in the coffee shop or grocery store, Starbucks’ brands are specialized. Starbucks emphasizes this promotion plan through coffee testing, global coffee competitions, and the Coffee Olympics.
3) Place: Starbucks have their own stores they also have agreements to serve Starbucks coffee in Barnes and Noble, Nordstrom’s, office coffee suppliers, hotels and airlines. Starbucks has also created partnerships with Pepsi Co, Inc., together they developed a bottled Starbuck’s bottled Frappuccino® coffee drink. In a 50/50 partnership, Dreyers’ Grand Ice Cream, Inc. will distribute five flavors of Starbuck’s coffee ice cream. Starbucks also has added tea, utensils, pastries, lunch meal, chocolate, to its stores in order to attract a wider variety of clients. Starbucks has targeted non-coffee drinkers can also to go to the coffee bar and enjoy a hot cup of tea, chocolate and a pastry in a trendy atmosphere.
4) Price: Starbucks redefined what affordability means when it comes to coffee consumption. It shifted the paradigm of coffee consumption pattern and raised the value element in the price-value equation by delivering a much higher value than regular coffee shops did. Consumers are willing to pay premium prices for the experience, service and premium quality they are getting.
5) People: Starbucks’ employees (also known as partners) are required to undergo two types of training; first focuses on the hard skills like learning how to mix drinks, and second focuses on soft skills like connecting with customers, greeting and welcoming them, eye contact etc. Every 6 months, the employees undergo training programs and tests. Starbucks’ ensures employee satisfaction and loyalty, which is clear from the fact that the turnover rate at the company is very low, just about 70% as compared to the industry average of 300%.

Target Market in the 90's: Starbucks’ customers were well-educated, sophisticated coffee-lovers, who were looking to indulge themselves for a premium coffee experience by paying a higher price. Thus, they quickly became the part of the company’s “live-coffee mantra.”

This is probably why Starbucks became so popular and famous with an unbelievably high average visit rate of 18 times a month by a typical consumer (growing 6-8% a year) and a minimum cost of advertising (only 1% of their annual revenues).

{Analysis of Harvard Case study: Starbucks - Delivering Customer Satisfaction}

SUSTAINING VALUE

The main role of marketing in a company is rooted in the fact that marketing is the process through which a company generates value for its target customers.

To create value the company must meet and exceed the customer’s needs. In order to satisfy customer needs, the firm first must understand its external situation, including the customer, the market environment and the firm’s own capabilities. Furthermore it needs to forecast trends in the dynamic environment in which it operates.

A useful framework for performing a situation analysis is the 5 C’s Analysis. The 5C’s is an environmental scan on five key areas especially applicable to marketing decisions. It covers the internal, the micro-environmental, and the macro-environmental situation, each change over time and success lies in anticipating the change and being prepared to win over it.

Customer:
In this day and age, a company’s marketing strategy needs to be customer focused. It’s about understanding the target consumer; their wants, needs and motivations. Not as demographics, psychographics or any other graphics, but as real people. Its understanding why customers do what they do (or don’t do), when they do it and why they do it.

Such knowledge is critical in marketing since having a strong understanding of buyer behavior will help shed light on what is important to the customer. It’s about focusing on the target customer first and then working back to the brand.

It’s imperative that companies have mindshare before focusing on market share. A lot of factors change for the customer which by default change his/her relation with the product – the changes could lie in priorities changing the value of the product, the customer becoming more and more savvy, the decision maker change as well or very simply the ability to pay may change.

Competitors:
Existing competitors. Potential future competitors – consider not only direct competitors, but also indirect threats such as alternative processes, materials, or developments

Strengths, weakness, opportunities, and threats (SWOT analysis) for each competitor

Market share of each competitor.

Competitor positioning – low price? high service?, premium product/service all have to be analysed.

Whether competitor comes out with a Me too product, a low cost knock off or a truly innovative imitation.

All these possibilities pose a threat and the major threat is the damage done through the pricing actions of competitors.

Collaborators:
Distributors and Representatives – region specific, market specific, knowledge specific

Industry associations – target industry associations, trade shows

Suppliers, Partnerships / Alliances – companies with complementing products, technical alliances with competing products - all are capable of bringing about change

Company
Over time company could lose its competitive advantage and the ability to provide and create value

Context:
Macroeconomic – inflation, interest rates, consumer confidence, and more. Social – society’s trends and perceived values. In composites ecological impact will continue to become a growing factor, driving towards closed molded processes and recyclable materials.

Political and Regulatory – policies and regulations that affect the market.

Technological – new technologies that affect existing products

The change in all theses can affect the value proposition.

Sustaining Value: Three Pathways
• Developing and Maintaining Brand Equity
Building the brand is crucial if value has to be created and sustained.

• Sustaining Proprietary Value Creation Processes
Through careful guarding of business processes and products, employing trade secrets and patents.

• New Product Introduction
Companies must remain on the path of product improvement, not fearing but understanding the economics of obsoleting your own products.

The ability to create value at a given moment in time is not the basis of a business. The consumer naturally changes over time; the competitor is more destructively oriented. In competitive battles it is the survival of the fittest. Survive or perish

CRM/Customer Satisfaction

To win in today's marketplace, companies must be customer-centered - they must deliver superior value to their target customers. They must become adept in building customer relationships, not just building products. Today's customers face a growing range of choices in the products and services they can buy. They base their choices on their perceptions of quality, value and service. Companies need to understand the determinants of customer value and satisfaction.

Customer delivered value is the difference between total customer value and total customer cost. Customers will normally choose the offer that maximizes their delivered value. Customer value and satisfaction are important ingredients in the marketer's formula for success. But what does it take to produce and deliver customer value?

Customer satisfaction is the outcome felt by buyers who have experienced a company performance that has fulfilled expectations. Customers are satisfied when their expectations are met and delighted when their expectations are exceeded. Satisfied customers remain loyal longer, buy more, are less price sensitive and talk favorably about the company. To create customer satisfaction, companies must manage their own value chains and the entire value delivery system in a customer centered way.

Ultimately, marketing is the art of attracting and keeping profitable customers. Yet, companies often discover that between 20 and 40 per cent of their customers are unprofitable. Further, many companies report that their most profitable customers are not their largest customers, but their mid-size customers. The largest customers demand greater service and receive the deepest discounts, thereby reducing the company's profit level. The smallest customers pay full price and receive less service, but the costs of transacting with small customers reduce their profitability. In many cases, mid-size customers that pay close to full price and receive good service are the most profitable.

Customer profitability Analysis [CPA], conducted with the tools of Activity Based Costing, helps companies estimate the amount by which revenues from a given customer over time exceed the company's costs of attracting, selling and servicing that customer and a customers lifetime value is the net present value of the stream of future profits.

Few companies actively measure individual customer value and profitability. The company's goal should not be only to get customers, but to retain them, aiming to ultimately result in high customer equity.

Customer equity is the total discounted lifetime value of all the firms customers – the more loyal customers the higher the equity. Customer relationship marketing provides the key to retaining customers and involves building financial and social benefits as well as structural ties to customers.

Companies must decide the level at which they want to build relationships with different market segments and individual customers, from such levels as basic, reactive, accountable and proactive to full partnership. Which is best depends on a customer's lifetime value relative to the costs required to attract and retain that customer.

CRM plays a key role in helping an enterprise to enable its marketing departments to identify and target their best customers, manage marketing campaigns with clear goals and objectives, and generate quality leads for the sales team. Craft the right value proposition and institute best processes with proper motivation for employees and training in the art of retaining customers. This is achieved by allowing the formation of individualized relationships with customers, with the aim of improving customer satisfaction and maximizing profits, identifying the most profitable customers and providing them the highest level of service.

Providing employees with the information and processes necessary to know their customers, understand their needs, and effectively build relationships between the company, its customer base, and distribution partners and studying what products and services are required after doing a thorough survey of what’s available in the market and what is lacking.

The goal of CRM is achieved when the firm has learnt why its customers are not being retained and how its competition is wooing them away and senior management is actively monitoring customer defection metrics.

CRM is best suited to help businesses use people, processes, and technology to gain insight into the behavior of, and to identify high-value customers. This allows a company to create new distribution channels, new pricing models, improved transaction processes, efficient logistics and supply-chain, it helps to track customer satisfaction and retention levels, the development of incentives and metrics to judge.

CRM also leads to improved customer service, it helps in building communities and catalyses collaborative commerce it streamlines sales and marketing processes, improved customer profiling and targeting, reduced costs, and increased share of customer and overall profitability.

The success generated by a well-executed customer relationship program can improve net income and increase market share tremendously as was experienced by Harrah’s Entertainment Inc. a casino in Las Vegas. After launching a loyalty program that pulled all data into a centralized warehouse they were able to identify and target their most profitable customers leading to increase in income of 12.4%

To survive, today's marketing managers cannot think only about selling products and mass marketing, but they have to move towards one-to-one marketing, with messages especially designed to appeal not to a mass audience but to the individual customer.

In the past, many companies took their customers for granted, customers often did not have many alternative suppliers, or the other suppliers were just as poor in quality and service, or the market was growing so fast that the company did not worry about fully satisfying its customers.

Today, outstanding companies go all out to retain their customers. Many markets have settled into maturity and there are not many new customers entering most categories. Competition is increasing and the costs of attracting new customers are rising. In these markets, it might cost five times as much to attract a new customer as to keep a current customer happy, so it is of paramount importance to build loyalty through different levels of marketing. Increasingly, marketing is moving away from a focus on individual transactions and towards a focus on building value-laden relationships and marketing networks.

The goal is to deliver long-term value to customers and the measure of success is long-term customer satisfaction. Relationship marketing requires that all of the company's departments work together with marketing as a team to serve the customer. It involves building relationships at many levels - economic, social, technical and legal - resulting in high customer loyalty.

Strong customer bonds can also be formed through adding financial benefits the example being frequency programs that reward frequent usage, adding social benefits, this is done though individualizing and personalizing each relationship so that the customer feels important, and finally by adding structural ties through long term contract and the like.

Smart companies first capture information and organize it into a data warehouse and then through data mining extract useful information. Relationship marketing is not effective in all situations. Transaction marketing, which focuses on one sales transaction at a time, is more appropriate than relationship marketing for customers that have short time horizons and can switch from one supplier to another with little effort or investment.

The downside to CRM is that it costs a lot and needs for the entire company to be aligned to customer satisfaction, plus not all customers want a relationship. To implement CRM properly a strategy has to be created first and organization changed to match it.

Marketing - Pricing

Pricing is an integral part of the branding process, it is also the only element of the marketing mix that produces revenue, and others’ produce cost. Price is perhaps the easiest element of the mix to adjust – it communicates to the market the company’s intended value positioning – a well designed and marketed product can command a price premium in fact that is what the good brands do. The art of pricing and knowing how sensitive the customers are to price requires a systematic approach. The price/value relationship is not linear but based on different factors.

In order to judge price sensitivity and influence it through marketing efforts we have to instigate these five factors.
• Product Category Factors: Price sensitivity tends to be lower in products that do not cost too much – three things have to be considered – the absolute dollar cost, how often the product is used one tends to be less price sensitive for one time only products and what component of your cost is the product, one is more sensitive the greater the proportion.
• Who Pay: The question of ‘who pays’ is an important one. Is it the end user of the product that is paying or where the person paying is the decision maker but not the end-user for e.g. the mother who buys chocolate for her child is he decision maker but not the end user.
• Competitive Factors: There are several other things that influence price sensitivity – such as the availability of substitute products, the perception of the buyer and whether he perceives added quality in the product or if it is replaceable for him/her. The availability of information about substitute products and whether they are comparable plays an important role of course the presence of switching costs and difficulty in switching.
• Reference Pricing: Consumers have in their minds a reference price –this is their benchmark price. Although consumers could have fairly extensive knowledge of the range of prices involved few can recall exact prices and thus employ reference prices. This can be in form of an internal reference price i.e. pricing information from memory or an external frame of reference such as the posted regular price. The reference price may be a function of what seems like a fair price, the price being paid in the market, a competitor’s price for similar item, the price last paid an upper bound price the max one will pay and the lower bound price the least one would pay, expected future price and the usual discounted price.
• Price Quality Relationships: When there is missing information from which customers can judge the quality of a product, price is often used as an indicator of quality.

In setting pricing policy a company follows the following procedure.
It estimates the demand curve, the probable quantities it will sell at each possible price.
It estimates how its costs vary at different levels of outputs & levels of accumulated production experience and for differentiated marketing offers.
It examines the competitors’ costs, prices and offers and then selects the final price.

In selecting the objective the company can pursue five objectives through pricing:
[1] survival (short-run objective to combat over capacity, intense competition or changing tastes)
[2] maximum current profit (the price that will produce maximum current profit and cash flow)
[3] Maximum market share (they set the lowest price s a market penetration strategy in order to win a large market share)
[4] maximum market skimming (companies might start with a high price but which they gradually bring down in order collect revenues from all pockets of the market
[5] product-quality leadership ( a company might aim to be the provider of affordable luxury and their prices are tied to this perceived quality, taste and status – with prices that are high but not out of the reach of the consumer.

Once the value of a product to a consumer is understood – pricing decisions become easier. This judgement can also be based on the understanding of the buyers cost structure and through direct and indirect surveys and questionnaires about the value of the product to the consumers. In cost structure studies the true economic value of a product is assessed. Simply put TEV is the cost of an alternative to which is added the value of the performance differential between alternatives. To assess this, the competitive alternatives, their prices and performance and the buyers’ cost have to be understood. TEV usually sets the upper bound to what a customer will pay.

To assess value surveys can be conducted – direct price response surveys in which the customers are asked how much they will be willing to pay for a product etc or through a preference-based inference also called conjoint measurement. Here the questions posed to respondents replicate the realistic scenario of a customer facing an array of competitive alternatives with different features and prices and having to choose among them.

The value attached to products varies among people who have different priorities, and interests. It can be a matter of taste, the availability of substitutes, the availability of good deals from competitors. How important the difference in quality is to the person using the product, how much they would use it and of course the ability to pay – all these factors are different for different people and so value can vary.

This is the reason that prices have to be customized and there are four ways to do so
Product Line Sorting – a choice to add on features by paying extra. A basic stripped down model and a fully loaded one. In controlled availability – different prices available for certain groups, for example old customers can be send money-off coupons.
Price can based on buyer characteristics – different prices for different buyers as is in the case of children paying less for tickets – or discounts for large buyers.
Price can also be based on transaction characteristics – price tied to how much one buys or the time they buy as is in the case of airline tickets.
The most effective route to pricing is through offering added value – a superior product backed by strong marketing that boosts perceived value.

There are various pricing methods that a company can select to reach a final price. In mark-up pricing, a percentage is added to the costs as a mark-up.
The company can go for ‘target-return pricing, here the firm determines a target rate of return that they want to achieve and tat is built into the pricing.
Another method is ‘perceived-value’ pricing, in which the price is based on what the customers perception of the value is, of course buyers differ in the perceptions and the importance they set certain attributes, there maybe value buyers and others may be price buyers. In value pricing companies win customers by charging fairly low prices for good quality offerings. An important type of value pricing is Every Day Low Pricing.
In going-rate pricing the firm bases its prices largely on competitors prices – it charges more or less the same as the rest of the major players in the market.
Another pricing method that is becoming popular these days is auction-type pricing. There are three major types of auction; English auctions [ascending bids] in which there is one seller and many buyers, the seller puts up an item and bids are offered until the highest is reached.
In Dutch auction [descending bid] there is one seller and many buyers or one buyer and many sellers, a high price is announced and slowly decreased until a price is accepted and in the case of one buyer, potential sellers compete to get the sale by offering the lowest prices.
The last kind is the sealed bid auction in which suppliers submit one bid

Marketing - Branding

The pivot of any exercise in Marketing would be branding! According to the AMA a brand is ‘a name, term sign, symbol or design, or combination of them intended to identify the goods of a seller and to differentiate them from those of competitors’. What helps to differentiate a brand may have its roots in various dimensions – rational, functional or tangible – relating to actual performance of the product or it may have its roots in the intangible - an emotional connection – symbolic and intangible –its what the brand represents.

The world’s strongest brands share certain attributes – they excel at delivering the consumers hearts’ desires – they stay relevant & in touch with the consumer, they are priced optimally and positioned precisely. They are consistent and create a seamless umbrella for all the brands in their portfolio, they capitalize on their brand equity, the brand’s managers know exactly what the consumers feel about the brand and how they can leverage that, the brand is supported and its sources of brand equity are constantly monitored.

A brand serves to create associations and expectations among a firm’s products, firms that are able to achieve affinity with their customers heap a host of benefits including greater price premiums and more efficient and effective marketing among other benefits such as those of improved product performance perception, greater loyalty, less vulnerability to competitive marketing actions and crises. It makes people less sensitive to price increases and buy more during sales or price decreases. A good brand results in support from trade, the avenue of licensing is much broader and possibilities for bringing out new products or extension are greater.

There are various brand equity models – one of them – the brand resonance model views brand building as a pyramid. A sequential series that can trace the journey of a consumer with a brand – this brand building journey has dual routes - what the brand does for you and what the brands represents. All steps involve accomplishing certain objectives with customers, both existing and potential. The first step is to ensure identification of the brand and an association of the brand in the customers mind with a specific product class or need – the second is to establish the meaning by strategically linking it to a host of tangible and intangible brand associations. The 3rd step is to elicit the proper customer response to this brand identity and brand meaning and the final step is to convert brand response to create an intense, active loyal relationship between customers and the brand. Creating significant brand equity means reaching the pinnacle of the pyramid achieving brand resonance requires eliciting the proper cognitive appraisals and emotional reaction to the brand from the customers.

A brand is a collection of images and ideas representing an economic producer; more specifically, it refers to the concrete symbols such as a name, logo, font, slogan, and design & color scheme, symbols, which is one of the main drivers of brand equity. Other drivers of brand equity include the product and service and all accompanying marketing activities and supporting marketing programs and other associations that are leveraged by linking the brand to another entity be it a place or a person. These brand elements are developed to represent implicit values, ideas, and even personality and thus have to be chosen carefully they should be memorable, meaningful and likeable. One brand element should be such that it can be applied to other extensions ass well, like the brand it should stay relevant and adaptable to changing times and of course it should be legally protected against theft. To manage brand equity we need to measure it.

Brand audits are in-depth brand examinations of the health of a brand and can be used to set strategic directions for a brand. A brand inventory provides a comprehensive profile of how all al the products marketed and branded – it is detailed and in depth brand exploratory as suggestive of the name is an exploration into the consumer’s awareness, feelings and knowledge of the brand.

A branding strategy identifies which brand element a firm chooses to apply across various products it sells. In a brand extension a firm uses an established name to introduce a new product. Potential extensions must be judged by how effectively they leverage existing equity. Brands can play different roles within the brand portfolio – there are flanker brands that are positioned to defend the flagship brand they are the fighters that serve as an armor for the champion brand – the pawns. The cash cows are brands that are kept around despite dwindling sales because they bring in cash without having cash spent on them. Then there are the low-end entry brands which are introduced so that the firm can attract more customers to the franchise – they are the means through which a firm gets customers accustomed to itself so tat they can trade-up when economics permit. The mirror to this is a high-end prestige brand; this brands role is to be the star of the portfolio, the prestigious this is the showstopper.

The key to making branding work is to clearly define your company’s branding goal and be consistent with your message, communications, graphics and all aspects of your business. Effective marketing requires an integrated communications plan. Communication can be two-way or one-way, personal and non-personal. There is a trade-off between reach and information dispersion – in mediums where there is high reach e.g. television information is low and vice versa. Under mass messaging we have mediums such as television, radio, newspapers and magazines and under two-way communications we have sales force and telemarketing; email, direct mail catalog and infomercials can be classified as mediums that are two-way but with a time lag.

The marketing communications mix consists of six major modes of communication: advertising, sales promotion, public relations and publicity, events and experiences, direct marketing and personal selling. To get their messages through marketers must encode them in a manner with which the target message is familiar and can decode easily, through efficient media that effectively reaches the target as well as relays feedback so that responses can be monitored. Consumer response to a communication can be modeled in three steps – a hierarchy which first starts with learning about something, this cognitive process leads to affections or feelings about the product, the penultimate of which is action. Developing effective communications involve various steps which starts from identifying target market and deciding what we want the communication to achieve whether it is to persuade or inform, then the communications has to be designed – what the message will say what will be its appeal will it be product related or extrinsic, whether the message is informational or aspirational – who will be the one to deliver the message and whether they will add credence to the brand or harm brand equity.

Research has led to interesting revelations, buzz can be created for any product not only outrageous ones, it doesn’t just happen has to be carefully created, countercultures can often start buzz as well, its not necessary to have first mover advantage, if you know when to jump in you can benefit from the buzz too. Word-of-mouth marketing is very effective and to use it properly one has to build a network of referral sources - involve your customers in delivering the message, solicit testimonials from them, tell them stories about your brand, educate them and most importantly handle complaints fast.

To asses whether your communications are truly integrated there are six criteria, the proportion of audience reached, the creation of desired response and awareness built, the consistency and cohesiveness of the brand image, the effectiveness with which complementary associations are linked and capitalized and carried through to all communications, the versatility and ability of the communications to work for different groups of consumers and last but not least the cost of arriving at this program.