Principles of Marketing Reviewer (4th Quarter)

Brand

Brand is a mark of distinction that can be sensed usually in the form of names of terms, signs or symbols,
design elements or even a combination of these and is utilized for the purpose of identifying and
distinguishing the good or service of one provider from another.

Functions of a Brand

1. It identifies the product or service. It enables consumers to accept, reject or communicate their
opinion about it to others.
2. It communicates messages to the markets.
3. It functions as a legal property. It is allowing the owners to invest in building up the value of the
brand.

Elements of the Brand

1. Trade name - The trade mark name by which the product is to be known as (Examples: Coca-Cola and
Jollibee)
2. Generic Category - The category in which the brand would fall under.
3. Logo - The visual symbol or image that will identify the product.
4. Tagline - An optional catchphrase. (Example: Kit Kat - Have a break, have a Kit Kat)
5. Visual Cues - A brand can also be represented with distinctive identifiers.
6. Shapes - The actual shape or form of the product or packaging.
7. Colors - When used to its full potential, consumers can instantly recognize a brand by its color alone.
8. Sounds - Such as advertising jingles, or very short intro sounds.
9. Scents - Some products have signature fragrances made that helps in the overall brand identity.
10. Taste - Includes special recipe or secret ingredients of a product that makes it distinct from the others.

Elements of Logo Design

Graphic design guide Logo Design give important tips on what makes for a great brand logo (Airey 2010):
 Keep it simple. Simplicity gives the logo design versatility, allowing it to be used in a wide range of
media - from business cards to billboards.
 Make it relevant. The design should be appropriate to the business it is identifying - to the industry, to
the market, and to the audience it is addressing.
 Incorporate tradition. Logos should not strive to be trendy but rather contain the symbolic elements
that are timeless as far as the nature of the business is concerned.
 Aim for distinction. The logo should easily stand out versus the competition. Prioritize shape and form
over color. A tip is to work first in just black and white so that distinct form is emphasized over
anything else.
 Commit to memory. Great logos should be memorable even after just one quick glance. This is useful
given the rapidly moving nature of the world that we live in - with people flipping through magazines,
clicking through web pages, and driving past billboards at high speed.
 Think small. Logos may look great on a billboard but they should also be recognizable in small
executions, which will be useful when placing the logo on small items such as zippers and coffee
stirrers. A tip is that the design should still be recognizable even at a minimum size of just one inch,
which means that simplicity is key.
 Focus on one thing. The most iconic logos have just one feature that helps them to stand out.
Incorporating more than one key element will only clutter the mark and make it less memorable.
Honda: Entering the Market via the People’s Car Program

Up until the end of the Martial Law era, there were only three car brands in the country: Toyota,
Mitsubishi, and Nissan. But by the early 1990s, the People’s Car Program, a government initiative to
introduce low-cost automobiles to the market, led to the entry of a host of new automobile brands.

The program, however, had a fairly challenging entry requirement. In order for a new automaker to enter
the Philippine market, it must introduce a “People’s Car” which at that time was classified as a vehicle that
would be on sale for less than 200,000 pesos only. Kia, in particular, became an early entrant into the
market with its highly successful model, the Kia Pride.

To Honda Motors, however, which was intent on entering the local market, this was going to be a serious
challenge. Honda was a producer of cars that were at a slight premium compared to other mid-price
vehicles and there was no way they could produce a vehicle that could be sold for less than 200,000 pesos.

The company eventually got around the entry requirement through the skin of its teeth. For its People’s
Car entry, Honda chose to bring in the two-door Honda Civic--a car which normally would be sold at a loos
if priced below 200,000 pesos. The company then proceeded to strip the car of all its luxuries--air
conditioning, upholstery, sound system, power options--and declare the stripped vehicle to be its People’s
Car. If any buyer wanted to trick out their Civic with these amenities, then they will have to pay for all the
extras, bringing the total price of the package well over 200,000 pesos.

The two-door Civic went on to become a bestseller. Although even at its stripped down state. Honda did
not make any real money from this model. But that did not matter because the car allowed the company
to enter the Philippine market. It was with its more premium vehicles such as the Accord and later, the CR-
V that it was finally able to have profitable operations.

“Price should never be just about cost plus markup. It should also be a tool for communication and for
strategy.”

Product Mix Pricing

Product line pricing. If you have a line of products, chance are that many of these try to target distinct
markets by being placed at different price points. The flagship product in the line, for instance, will likely
have a popular price point as it seeks to attract a wide audience. The premium product gets a premium
price while a populist offering will have a low price point. P&G, for instance, has Tide as its high-value
flagship brand, while Ariel has (ideally) a slightly more premium price-quality point because of its more
effective cleaning power, and Bonux is the low priced good-value offering that goes against cheap
detergents.

Optional feature pricing. It is difficult to sell complete packages to consumers. It may be easier to sell them
a basic stripped-down model first, then everything else becoming optional add-ons. This is how a number
of automobiles are sold--the base model is stripped of most luxuries, but can therefore be offered at an
attractive price point. However, once the buyer chooses to add on the options--leather seat covers, audio
system, navigation--the total amount rises precipitously. But the original intent has been achieved, which
was to make the base price as attractive as possible, especially as compared to the competition.

Captive product pricing. You buy a printer for a very low outlay, but when it is time to get new ink
cartridges, the thinks turn out to be expensive. Companies that are in the business of selling supplies tend
to work this way, to the point that they are willing to sell the product (such as a printer) at a loss because
they end up having the customer as a captive market for the consumables on which they really make their
money.

By-product pricing. In case the production of your product generates by-products and you manage to find
a way to make money out of these by-products, then this becomes an opportunity for realigning the price
of your primary product. Here is how it works: Imagine you are producing beer and have had no use for the
spent grains that are a by-product of the brewing process. But the one day you learn how to process the
spent grains and turn then into animal feeds, so now you can create another business unit that will focus
on feeds. But will this business unit simply get the spent grains for free? No, it will have to buy the spent
grains from the brewing business (because nothing comes free). Suddenly, the beer business is getting
additional revenue from what used to be a waste matter, effectively lowering its costs of goods which will
allow to lower its beer prices.

Product bundle pricing. If you have a portfolio of products to sell, chances are that not all of them would
be fast-moving goods. Some many be laggards or simply be items that the market is not that aware of. In
cases like these, bundling the slower moving products together with star performers can be a strategic
option. The bundle will be offered at a discount, making the package attractive to consumers. The tricky
part, however, comes in determining how much goes to which product in the bundle. On one extreme, the
star performer ends up subsidizing the laggard in order to keep it alive, while on the other extreme, the
laggard is sold at a loss just to get rid of inventory.

Product mixes also give you an opportunity to “guide” consumers into buying the products that you want
them to buy. In his book Predictably Irrational, behavioral economist Dan Ariely notes that people often
take the middle choice out of three given price points. Therefore, the trick is to use the higher priced and
the lower priced products as “runway lights” to guide consumers toward the middle-priced product. This is
why the presence of high-priced foods in restaurants often boost their revenues if people do not buy them.
People often buy the second most expensive dishes, so restaurants can actually put out high-profit dishes
and position them as their second most expensive dishes simply with the addition of an even more pricey
dish! (Ariely 2010)

Trade discounts, VAT, and Taxes

There is still one more factor to consider when setting the final price and it is an important one. Before
rolling out your suggested retail prices, you will still first need to map out all the possible discounts,
incentives, and even taxes that you would want to and have them plug into your price schema.

Trade discounts are the incentives that you offer to resellers or participants in your selling process. This can
include commissions for sales personnel. Plan out how much you intend to give each party and consider
mapping out bulk discounts that are higher with greater levels of sales.

In order to properly set sufficient margins that can be given as trade discounts and incentives, begin by
laying out your incentive scheme rather than by determining the suggested retail price.

You are selling Widgets and the cost per Widget is 10 pesos. You want a scheme where your distributor
gets 20 percent of the suggested retail price (SRP) as standard margin. But this will increase to 22 percent if
the distributor buys six Widgets, and then to 24 percent if the distributor will buy ten Widgets.

This tells you that the SRP should support up to 24 percent trade margin for your distributors, along with
sufficient margin for your firm. If you want at least 20 percent margin for yourself, then the minimum SRP
would be computed as:

SRP = 10.00 + 24%SRP + 20%SRP

 SRP - 24%SRP - 20%SRP = 10.00
0.56SRP = 10.00
SRP = 10.00 / 0.56
SRP = 17.86

This, however, still does not factor in VAT or other possible add-ons.

VAT or value-added tax is a form of input tax where the tax is earmarked onto the added value that your
firm produces. The current rate of VAT is 12 percent, this means that an additional 12 percent of your
suggested retail price should be earmarked for the payment of VAT.

However, since the 12 percent only applies to your own inputs, you are not expected to pay VAT for the
part of your price that pays for the inputs that you bought (I.e., the cost of goods).

Example

You want to sell your set meal at an end price of 1,000 pesos, with cost of goods at 300 pesos. The
customer pays you 1,000 pesos. How much of this goes for the payment of VAT?

Solution

Since VAT was added on, we should take it off. Knowing that VAT is 12 percent of the retail price, the
formula would be:

PRICE BEFORE TAX = PRICE / 1.12 = 1,000 / 1.12 = 892.86

VAT COMPONENT = 1,000 - 892.86 = 107.14

But this is not all. We should still deduct the part of the VAT that is pegged onto the cost of goods sold
(COGS).

COGS VAT = 300 - 300 / 1.12 = 300 - 267.86 = 32.14

Therefore, the total VAT for the product sold would be 107.14 - 32.14 = 70 pesos.

Senior citizen discount is yet another factor to consider. Assuming you are selling a product that falls under
R.A. 9994 or the Expanded Senior Citizens Act which includes restaurants and medications. If your products
are subject to senior citizen discounts, then note that (a) seniors are exempted from Vat and (b) 20 percent
of your net-of-VAT price is removed as their discount.

Example

Continuing from the example above, if your meal costs 1,000 pesos, then how much will a senior citizen be
billed?

Solution

First, remove the VAT from the meal price. So 1,000 / 1.12 = 892.86.

Next, remove 20 percent from this net-of-VAT price. So 892.86 × (1 - 0.20) = 892.86 × 0.80 = 714.29.

Make sure that your markup is robust enough to still give you sufficient margins, even after removing all of
these discounts and trade allowances.
Mini-Case: The Strange Case of Mighty Cigarettes

In January of 2013, the government’s revised “sin tax” law came into effect. With this came the stipulation
that cigarette makers were to begin paying 12 pesos per pack as a “sin tax,” which was a staggering rise
over the previous sin tax of just less than three pesos per pack.

It was in this new regulatory environment that, almost miraculously, Mighty Corporation of Bulacan came
practically out of nowhere to take over a substantial share of the country’s cigarette market. (Magno
2013)

Mighty Corporation manufactures Mighty cigarettes. Before the revised sin tax, Mighty cigarettes were a
near-insignificant presence in the market. But with the revised sin tax in place, Mighty sales suddenly
exploded. The reason: the brand’s impossibly low price.

All other cigarette manufacturers had been forced to raise their prices astronomically because of the
revised tax scheme. Aside from the additional sin tax per pack, there was also the value added tax of 1.58
pesos per pack. In all, taxes alone should account for over 13.50 pesos per pack.

Yet Mighty cigarettes were being sold at wholesale for just 14.70 pesos per pack. That is just a little over a
peso per pack to pay for the cost of producing the pack, for profits, and even for collateral costs such as
shipping and handling. One peso compared to the typical prices of other low-cost cigarettes that were
already hovering at the 30 peso mark. One can see why Mighty cigarettes can suddenly capture market
leadership, especially for the cost-conscious market.

As far as the Department of Finance was concerned, the only possible reason for this was that the
company was misdeclaring the total number of cigarettes that it was producing. It is effectively
“smuggling” manufactured cigarettes to wholesalers without paying taxes on them--based on AC Nielsen
studies of nationwide cigarette sales which showed Mighty to be the leading brand in provincial markets.

Mighty Corporation insisted that they were doing everything above-board and the reason for their very
low price was that they were super-efficient in their production, so that they can in fact produce a pack of
cigarettes at less than a peso per pack.

What do you think? Is it in fact possible for the Mighty Corporation to produce cigarettes at less than one
peso per pack?