Marketing Notes

Table of Contents
Lecture 1: Introduction to Marketing (Fundamentals)........................................................5
What is marketing?....................................................................................................................5
What is a market exchange?.......................................................................................................6
..................................................................................................................................................6
The 4 ‘P’s of Marketing...............................................................................................................6
Why do we need to study consumer behaviour?........................................................................7
Consumer Choices......................................................................................................................7
Why does marketing matter?.....................................................................................................9
Lecture 2: Product Decisions...............................................................................................9
What is a product?.....................................................................................................................9
High involvement products vs Low involvement products.........................................................10
Developing a product concept..................................................................................................11
What is market segmentation?.................................................................................................11
Key Principle of Market Segmentation......................................................................................12
Segmentation Techniques........................................................................................................13
Summary of Segmentation Techniques.....................................................................................16
Segmentation Requirements....................................................................................................17
Benefits of Market Segmentation.............................................................................................18
Which segmentation method to use?.......................................................................................18
Segmentation Process..............................................................................................................20

............20
Targeting..................................................................................................................................21
Positioning...............................................................................................................................21
Example of Positioning (Anderson, HBR)...................................................................................................22
Determining Preferences..........................................................................................................22
 Positioning: Crafting a Value Claim...........................................................................................22
Types of Value Claim..................................................................................................................................22
What’s the point of a Value Proposition?..................................................................................................24
Process of positioning................................................................................................................................24
Summary..................................................................................................................................25
Branding...................................................................................................................................25
What is a brand?......................................................................................................................25
Functions of Brands..................................................................................................................25
Financial Brand Equity..............................................................................................................26
Consumer-based brand equity..................................................................................................27
Spreading Activation Theory (Nedungadi, 1990).......................................................................27
Brand Names............................................................................................................................28
Elements of a Brand.................................................................................................................28
Brand extensions......................................................................................................................29
Perceived fit of brand transfer..................................................................................................29
Two types of brand extension...................................................................................................29
Brand Architecture...................................................................................................................30
Single brand (Branded House Strategy).....................................................................................................30
Multi-brands (House of Brands Strategy)...................................................................................................31
Brand personality.....................................................................................................................32
Lecture 3: Communication Decisions................................................................................33
Characteristics of Communication Channels (Hoyer et al, 2021)................................................33
Owned and Earned Social Media..............................................................................................34
The Sales Funnel........................................................................................................................................34
Key Metrics................................................................................................................................................34
Types of social media communication: Owned Social Media.....................................................................35
Types of social media communication: Earned Social Media.....................................................................35
Impact?......................................................................................................................................................35
What is the upshot?...................................................................................................................................36
Global effectiveness of communication.....................................................................................................37
Branding in the Age of Social Media – Holt, HBR.......................................................................37
Attention and Persuasion.........................................................................................................38
What else makes things go viral? – Improvised Marketing Interventions in Social Media.........................38
Consumer Activation..................................................................................................................................39
Stimuli triggers consumer activation..........................................................................................................40
The effects of visual complexity on the stopping power of advertising – Pieters et al, 2010.....................41
What are attitudes?...................................................................................................................................41
Features and determinants of Strong Attitudes.........................................................................................42
Elaboration Likelihood Model....................................................................................................................43
Ads that don’t overstep – John et al, 2018.................................................................................................45
Influencer Marketing................................................................................................................47
What is an influencer?
Microinfluencers........................................................................................................................................48
CSR Communication.................................................................................................................49
Lecture 4: Pricing..............................................................................................................50
Securing Pricing Power...............................................................................................................................51
Generic Pricing Methods..........................................................................................................51
Price Management.....................................................................................................................................51
Cost-based pricing......................................................................................................................................51
Value-Based Pricing...................................................................................................................................52
Competitor-Based Pricing..........................................................................................................................52
The Economics of Pricing..........................................................................................................53
Elasticity.....................................................................................................................................................54
Mark-up..................................................................................................................................................... 54
Price Elasticities......................................................................................................................................... 55
Pricing Strategies......................................................................................................................55
Penetration strategy..................................................................................................................................56
Skimming Strategy.....................................................................................................................................56
Price Discrimination/Differentiation.........................................................................................57
Bundling.....................................................................................................................................................57
Price Differentiation Definition..................................................................................................................57
Boundary conditions for Price Differentiation............................................................................................58
Pricing to Create Shared Value – Bertini, 2012..........................................................................58
Behavioural Pricing...................................................................................................................59
Thaler’s findings.........................................................................................................................................60
Reference Price..........................................................................................................................................60
In practice – Anchoring and Adjustment....................................................................................................61
Price Quality Heuristic................................................................................................................................62

Lecture 5: Sales Management..........................................................................................64

Integrated Sales Channels.........................................................................................................64
Direct vs Indirect Sales...............................................................................................................................64
Depth of sales channels.............................................................................................................................65
Width of Sales Channels.............................................................................................................................66
Integrated Sales Channels
Store Concept...........................................................................................................................67
Case Study 1 – Bonobos and the Zero Inventory Store..............................................................................67
Case Study 2 – Zeng et al (2016) Chinese department store online/offline...............................................68
Frontline Workers....................................................................................................................69
Compensation and Performance Measurements......................................................................................70
Types of performance measures (Metrics)................................................................................................70
Influence Tactics........................................................................................................................................71
Loyal Customers as Central Goal...............................................................................................72
Lecture 6: Consumer Behaviour........................................................................................73
The Power of Defaults - Choice.................................................................................................74
Self-Signals from Choices – Choice and Context effects.............................................................74
Availability Heuristic – Evaluation and Judgement....................................................................75
Hedonic Editing........................................................................................................................76
Temporal Non-Monoticity........................................................................................................76
Protection Motivation..............................................................................................................77
Lecture 7: Guest Lecture – Strategic Pricing......................................................................78
Advantages of Pricing vs Cost Reductions..................................................................................................78
Strategic Pricing.........................................................................................................................................78
Clarify price positioning.............................................................................................................................78
Value Pricing – Porsche Example...............................................................................................................78
Bundling.....................................................................................................................................................79
Price Metrics..............................................................................................................................................79
Behavioural Pricing....................................................................................................................................80

Lecture 8: Exam Prep........................................................................................................80

Question 1: Product and Brand Management...........................................................................80
Question 2: Pricing...................................................................................................................82
Question 3: Communication Decisions......................................................................................84

Lecture 1: Introduction to Marketing (Fundamentals)

What is marketing?
Definition: It is the process of trying to convince consumer to buy your product with a full
set of instruments e.g. pricing strategy, distribution strategy, product strategy and
communication strategy

Marketing is the activity, set of institutions, and processes for creating, communicating,
delivering, and exchanging offerings that have value for customers, clients, partners, and
society at large. (AMA, approved July 2013)

Marketing management is the art and science of choosing target markets and getting,
keeping, and growing customers through creating, delivering, and communicating superior
customer value. (Kotler and Keller 2016, p. 27)

- Should emphasise customer value above all else

- So, it is not just advertising: Communication management is one part of marketing
- So, it is not just sales: Sales management is one part of marketing
- Comprises various domains and activities
- Has broad implications for other business activities (human resource management:
e.g., behavioural branding; supply chain management; etc.)
o E.g., HRM – the people you recruit
 o E.g., behavioural branding – the people you hire should align with the brand
such as creative people for innovation company vs. for a luxury company
should have people that reflect as such in their image
o The frontline staff e.g., when you go to the shop and speak to someone
needs to reflect
What is a market exchange?

 If the value is greater than the price we have to pay – then we BUY
 If revenue is greater than costs – then companies have an incentive to SELL
o Note that costs include more than just the price of the good, but also
transactional costs
o These are costs involved with facilitating the exchange e.g. searching costs for
online shopping, time to get to the store etc.
 A market enables exchanges AND marketing manages those exchanges
 Marketing can affect peoples’ perceptions of the cost e.g., frame it from a different
perspective “not that expensive”
 NOTE: Benefits include functional or symbolic:
o Symbolic benefits is stuff created by the brand e.g. feeling of enlightenment
or increased self-esteem when you wear a certain brand of shoe
o Functional benefits is the fact that shoe protects your feet.

The 4 ‘P’s of Marketing

 Product: brand, services, packaging

 Price: discounts, offering price
 Promotion: advertising, publicity, sales promotion
  Place: market, channel, distribution

The 4 ‘P’s are considered central elements of marketing and market research informs these
decisions. The decisions are then enacted in the marketplace

Why do we need to study consumer behaviour?

Definition of consumer behaviour: the totality of consumer’s decisions with respect to the
acquisition, consumption, and disposition of goods, services, time, and ideas (over time).

- It is important to understand consumer behaviour to get an idea of how the 4 Ps

influence actually influence consumers and then create the marketing KPIs (key
performance indicators)
- Consumer behaviour theories allow us to explain how the 4 Ps are converted into
marketing KPIs like purchase, loyalty, customer satisfaction etc
- Sometimes, consumer behaviour can be irrational. But consumer behaviour theories
help us predict this irrationality.

Consumer Choices
Asymmetrically dominated alternatives
One item is better on some dimensions and the other better on the others (Economist) or
two items are very similar to each other but not comparable on one dimension (Paris vs.
Rome).
The paradigm of asymmetrically dominated alternatives is one in which the third alternative
(called decoy) is constructed so that it is dominated by one of the options but not by the
other one.
The decoy is designed to be inferior to one of the other alternatives, thus, it is (almost)
never chosen.

 Consumers typically lack knowledge and ability to compare complex multi-

dimensional objects – these choice situations are intrinsically vague.
 Adding an irrelevant – asymmetrically dominated – option helps consumers to justify
their choice.

Asymmetrically dominated alternatives do not work when consumers have strong

preferences
 - Option R2 is called the ‘decoy’ because it is clearly the inferior option to option R. No
one would choose it
o By introducing the decoy, however, you give customers a reason to justify
their choice for Rome over Paris because option R looks superior to option R2
and therefore, somehow, looks superior to option P.

Application to real-life

- Print subscription is the decoy.

- IF we remove the decoy, look at how the percentages change: the most preferred
choice above (print + web) becomes the least preferred, and the least preferred
(web only) becomes the most.
-
Why does marketing matter?
1. Functional product benefits become increasingly similar
a. This means that we rely on symbolic benefits more and more to differentiate
between similar products. These symbolic benefits are derived from
branding, which is an important part of marketing
2. Consumers have more choice options than ever before
3. Information overload and digitalisation
a. Big data is more readily available. Marketing uses big data to come up with
segmentation and targeting strategies.
b. Targeting means that you administer tailored ads to consumers. Tailoring
refers to adjusting features in the adverts so that they become more
appealing to particular segments in the market
i. For example in the following study by Matz et al, targeting customers
based on their level of extraversion/introversion had statistically
significant effects on ad conversion rate.

Lecture 2: Product Decisions

What is a product?
There is a distinction between two different concepts

Substantial Product Definition

This refers to the physical and tangible aspects of the product e.g. marketing a sports car is
just the physical product with its symbolic and functional benefits

Expanded Product Definition

This covers the intangible aspects of the product as well: e.g. marketing a sports car with
free insurance on top would be covered by the expanded product definition
 Important to make this distinction and use the expanded product definition as these
additional services help to differentiate your product in the market.

Overall:
We consider a product “to be a bundle of features that aims at satisfying a customer need”
(Homburg et al, 2013)
This includes both the substantial and expanded product definition.

High involvement products vs Low involvement products

This is relevant for marketing communication because it determines how we process
information and interpret marketing stimuli about products. This is different for high
involvement products vs low involvement products.

Involvement
 This refers to a person’s perceived relevance of a product or service based on
inherent needs, values and interests. (Zaichowsky, 1985)
 This seems like a person-centred definition but there are product-related
characteristics that impact product involvement for individuals.
 High involvement products tend to be expensive, complex products like an
insurance/financial service/house which have high perceived relevance
o Decision-making process tends to be elaborate
o This impacts how brands address consumers in the market and what kind of
marketing stimuli consumers are susceptible to
 Low involvement products tend to be commodities, everyday products like
soap/chocolate which have low perceived relevance
o Decision-making process tends to be heuristic: low thought-involvement

 Note that the above is a continuum.

o An inventory developed in the 80s by Zaichowsky helps determine where
along the spectrum a product is located.
  Determinants of product involvement include:
o Costs
o Interest in product category – e.g. if you are interested in fashion, then
fashion products will be of high involvement to you
o Perceived risk (social, physical, financial, functional):
 Functional risk refers to whether the product will function as
promised
 Financial risk refers to whether they may be financial losses
associated with the purchase or consumption of a product
 Physical risk refers to whether the product might harm you if you use
it
 Social risk refers to whether your peer group might not like the
product you are using
o Situation of use – e.g. if you’re buying an outfit for a particular occasion like a
graduation, that might trigger high involvement, even if the outfit itself is not
a high involvement product

Developing a product concept

A product concept is the more detailed version of the product idea. It is a statement about
the expected product features that will generate specific benefits relative to already existing
offerings

A product concept should include (Homburg, 2013):

 Product features: in addition to the functional features of the product (core product
features), symbolic benefits, formal aesthetic product features (packaging of the
product) and the intended product image (related to branding) are also defined.
 Intended target group(s): when developing the product concept, the intended target
group for the product(s) should be identified (this is the outcome of market
segmentation).
 Unique selling proposition (USP): the unique selling proposition relevant for the
target group should be defined. The USP will also help to differentiate the product
from competitors.
 Target positioning: defining the target positioning for the new product in terms of
relevant product features aims at distinguishing the product from competitor
products in the customers’ minds.

What is market segmentation?

 Not all customers are alike;
 In the single market, there are different segments of consumers with different needs
and preferences
o So a mass product would leave niches for others to target more specific
needs or preferences of certain segments in the market better than the mass
product.
o Think of an ideal point – mass product might be far from this
 A market segment is a subset of the market.
 o You might have several segments in the market, each with their different
ideal point (in terms of attribute A and B)

 Segmentation is about finding subsets of consumers with similar characteristics that

can be profitable for companies to address
o The idea of market segmentation is to find what kind of ideal points exist in
the market that define segments, and decide whether those segments would
be profitable to a company if they were targeted.
 Example 1: AirBnB + launched in 2018, where they had 2000 licensed homes that
were quality checked before going on the platform:
o Launched at a higher price point
o AirBnB representatives checked the quality, cleanliness, and design of these
homes so that it would be more appealing to a higher level set of customers
who would ordinarily otherwise go to a 5* hotel.
o This is an example of segmentation because AirBnB found that there was this
potentially profitable segment in the market who might be open to booking
AirBnB but weren’t doing so because the current offerings lacked the quality
they required.
 Example 2: Bosch Tools have two different lines on the market: Bosch Green and
Bosch Blue.
o Green is for amateur, everyday users – less performant tools, less expensive
o Blue is for professionals – more performant tools, more expensive to suit the
needs of this segment who are willing to pay a premium for better-
performing tools

  “Many companies say that they do not know how to start to be more consumer-
driven. I would say you really start with a basic understanding of your customers,
right? And that’s segmentation.” (Gavett, 2014, Harvard Business Review)
  “Carefully chosen segments allow tailoring the marketing mix to more individual
customer needs. Thus, they help to invest marketing spending more effectively.”
(www.themanager.org, 2015)
 61% of leaders indicate that they aim at improving market segmentation over the
next three years.
 (n= 652, Ernst & Young, 2016)

Key Principle of Market Segmentation

Principle: Homogeneity within the segment, heterogeneity between segments. If you
maximise homogeneity within and heterogeneity between, then you’re going to have good
segments
 Lots of empirical tools available to use to define market segments
o Cluster analysis
o Profile analysis
o Random forests
o Machine learning approaches

Segmentation Techniques
1. Demographic segmentation
 Age – based on age, different segments, who will have different needs and
preferences. So can develop different products with different price-points
 You can infer age from first names! This helps when you only have
partial data available. (Below shows data from Austria)

o Other demographic criteria you may choose to base your segmentation:

 Gender
 Education level
 Marital status
 Occupation
 Income Level

Pros of demographic segmentation:

 Easy to access data – use government census data which is updated every ten years,
and is very comprehensive
  Easy to interpret – the data is objective, uncomplicated, stable so can monitor trends
effectively and easily
 Cost-effective – because you’re using free census data and free online surveys such
as SurveyMonkey that can be distributed on social media platforms

Limitations of Demographic Segmentation:

Take Ozzy Osbourne and Prince Charles, both have exactly the same demographics, but are
obviously quite different.
While demographics are important, they have limited use in telling us what kinds of
preferences and needs people have and how they behave.
 One-dimensional approach – this can lead to brands making blanket statements
about consumers (which might not effectively target individual needs and can
sometimes cause offence)
 Doesn’t give any/little insight into personality, consumer needs or preferences so
can’t make tailored marketing campaigns
 Not suitable for industries based on consumer’s subjective opinions like music e.g.
Spotify or entertainment e.g. Netflix
 Run the risk of misinterpreting data – demographic criteria such as marital status and
gender can be considered antiquated parameters to analyse since societal changes
has meant that old stereotypes don’t exist anymore.

2. Geographical segmentation
 World region
 Country
 City vs rural
An example of geographic segmentation could be and ice lolly company deciding where in
the country to sell their ice lollies and segmenting the country based on the hottest regions.
Another example, Nike is more likely to sell American football and baseball products in the
US – whereas in the UK, these sports are unpopular, so focus will be on soccer, cricket etc.

3. Behavioural segmentation – this is segmentation based on past behaviour in the

marketplace. Past behaviour of a person has strong correlation with the future
 behaviour, allows us to infer needs and preferences. Types of data that might be
used include:
 Consumption data – we can infer whether a consumer is:
o Luxury-seeking
o Price-sensitive
o Quality-conscious
 Usage Frequency – we can determine whether a consumer is (which might
have implications on their levels of willingness-to-pay):
o Heavy-user
o Regular-user
o Light-user
 Loyalty data (again has implications on levels of willingness to pay)
o Loyal customers
o Switchers

Example: Below you can see two HDMI cables, exactly the same, but with different price-
points. The reason for this is that they were displayed in different departments of the store.
The more expensive one was displayed next to the televisions, the cheaper in the gaming
department. This is because television buyers are less price-sensitive than gamers.

Another example to demonstrate how behavioural segmentation can affect a marketing

campaign: DavidsTea Canadian specialty tea seller lauded as one of the best email
marketing campaigns ever. Every time a customer reaches an anniversary with the company
they are sent a personalised email which contains information such as where they made
their first purchase, how much they had purchased since their first encounter (comparing to
fun metrics like the weight of a chipmunk) etc. This made customers feel valued and noticed
and encouraged future purchase behaviour/extended loyalty.

4. Psychographic segmentation – this is a set of techniques which segments the market

according to personality, hobbies, values, lifestyles resulting in smaller ‘interest
tribes’:
 Lifestyle:
o Environmentalists
o Traditionalists
o Socially aware
 Values:
o Conservative
 o Innovative
 Big 5 personality

Pros of this type of segmentation

 By understanding hobbies and interests of your customers, you are able to better refine
your marketing channels. e.g. If you know that a specific age group is buying your brand
of beer, it may be worth investigating what their interests are. You might find that
they’re interested in rugby and so you can execute a targeted marketing campaign when
rugby games are on (with exclusive discounts)
 Remember the study in Lecture 1 by Matz et al, Persuasive appeals that were matched
to people’s extraversion or openness-to-experience level resulted in up to 40% more
clicks and up to 50% more purchases than their mismatching or unpersonalised
counterparts.
 It is becoming easier to collect psychographic data for segmentation: Recent research in
the field of computational social sciences suggests that people’s psychological profiles
can be accurately predicted from the digital footprints they leave with every step they
take online

Limitation of this type of segmentation:

 The most subjective form of segmentation – are you sure that your interpretation of the
data collected from a small sample of interviews and surveys is representative of the
entire segment
 Is this type of segmentation going to have any impact on your product?
 Can you guarantee you’ll be able to target these specific segments with your marketing
techniques? – For example, are you able to identify on Facebook who fits into these
groups? If not, how are you going to reach them with a targeted campaign?

Summary of Segmentation Techniques

^ Most dominant approach is demographics because it is easy

 EXAMPLE – Fiat 500 – targeted at both men and women (gender)

Female: Fiat 500 Barbie Edition
 Plush
 Pink exterior
 Lip glosses stored on the glove compartment
 Vanity mirror with LED light
Male: Fiat 500 Abarth
 Turbocharged T-Jet engine with 135 PS
 Sports suspension
 EXAMPLE – Diet Coke vs. Coke Zero (Diet Coke is targeted towards women, really saucy
ad with 30y/o women whereas Coke Zero is toward men)

Segmentation Requirements
What are the criteria for evaluation whether a segmentation makes sense?

o Behavioural relevance/Actionability
 Can you address the segment with targeted communication?
 Can you specifically address that segment?
o Clear differentiation
 Are the groups different enough in terms of needs and preferences, that you can
successfully capture the segment with a new product? To warrant investment?
o Measurability
 Can be argued to be the most important of the criteria
 Can you measure the different segments size? Is there a tool available that would
allow you to classify the segment at a bigger scope e.g. digital footprint?
o Stability over time
 Is the segment stable for a reasonable amount of time so that you can actually
develop a targeted product for the segment – as this requires significant
investment?
 If the answer is no, you might face not having enough time to see return
 Lifestyle segmentations tend to last 10-15 years
o Economic feasibility/substantiality
 Is the segment large enough?
 Can it be profitable? Is it growing (because it might not be large enough today
but if the CAGR is large enough then one day it will be big enough to be
profitable)? Is the willingness to pay of the consumer high enough that it
warrants an investment?

Benefits of Market Segmentation

Value creation at both ends: customer and supplier

Which segmentation method to use?

If you had full data access, ask the following three questions to determine which
segmentation method would be most appropriate – known as the 3Ws. Acts a filter to
determine whether the derived segments make sense:
 Who are your customers? (demographics)
 What have the customers bought? (behavioural)
 Why do customers make the decisions they do? (needs and preferences)
 In practice:

Above: Marketing of a two different types of pregnancy test.

 Fearfuls have a higher price-point to trigger the price heuristic – that higher price =
higher quality product BUT this would need to be tested empirically.
 Packaging differs: hopefuls have more positive, baby-associated imagery whereas
fearfuls put emphasis on accuracy
We would then prototype these products, launch in a test market and test initial consumer
response.

“Too Good to Go” Case

Dividing the business into restaurants and consumer segmentation:
- B2B – business to business
- B2C – business to customer
Businesses:
- Businesses with high turnover rate – so which are more likely to have leftover food
at the end of the day
- Ratings – having the customer rating/information from google or websites about
how well they are perceived, so if TGTG only wants restaurants that are well
received
- Type of product – Food would need to be able to spoil and also be taken away in a
box
 - Pricing of the restaurant – many restaurant owners may be concerned about the
price levels e.g., premium restaurants – they may think that consumers wouldn’t
come to the restaurants at normal hours because they know that they could just
come later so it may be bad for the business if consumers just come at later hours
instead
- Type of restaurant – independent or part of a chain e.g., Starbucks cafés are not in
charge of their own decision making so would need to ask higher up, but
independent joints are more likely to be able to join
- Is the food cooked on demand? Pre-cooked? – if on demand then doesn’t make
sense but if something like sushi, cooked in bulk – would participate
- Prestige or exclusivity – they want to maintain their attitude/lifestyle of the
restaurant; is very prestige/exclusive
- Location – if a restaurant is quite far out – not near cities or people or transport then
it might not be worth staying open and doing this for longer vs. if it is an outlet store
or in a busy, urban area
- Consumers of the restaurants – way of segmenting the restaurant market; what
does the typical user of the app look like?
- Cuisine – Asian or European or British etc.
- Pick-up hour – e.g., breakfast, lunch, dinner etc.
Consumers:
- Awareness of environment/food waste – lifestyle/psychographic aspects
- Students on a budget – income demographics
- Interested in cheap food – who is more willing to spend less – some people are very
interested in cheap
- Younger generation – apps are mostly young users
- People in their 20’s/Family status – people that don’t have a family dinnertime
commitment so flexible to eating separately
- Flexibility – are you the kind of person that can wait till 9pm for dinner or do you
need it at 6pm
- People that are not fussy/no allergies – you get a ‘magic bag’ so need to be easy-
going to what you eat
- Commuters – no time to cook; pick up something on the way home

Segmentation Process
Below is a depiction of what follows segmentation -> targeting –> positioning.
We have looked at segmentation, next is targeting.
 Targeting refers to deciding which segments that you have identified in the first
place to target.
 Positioning means that you define the value proposition for each of the chosen
segments

Targeting
Decide which segment will provide the most financial advantage by assessing its
characteristics:
 Segment size
 Growth rate
o Segment size and growth rate are determinants for sales volume
o Enough individuals with enough spending power makes the effort worthwhile
o Forecasted growth for segment is a marker for future profitability
 Structural characteristics of the segment:
o Ability to reach the customers in the segment and the costs of doing so
o Environmental risks (conduct a PESTEL analysis to identify the political,
economic, technological etc. risks)
 Company-market segment fit
o Coherence with the company’s strengths and image
o Opportunities for synergies and image transfer
 Profitability
o This is a function of your manufacturing costs, the competition in the
segment, and the willingness to pay of that segment
o Manufacturing costs should not be overlooked – take the iPhone SE, this was
launched to a segment that preferred smaller display sizes compared to the
other options on the market, but it was launched at a lower price-point
 Why didn’t this hurt profit margins?
 Apple just used specs of a phone that already exists – so they
capitalised on economies of scale by ramping up production
 Production costs for the phone were fairly low, and profitability was
still high

Positioning
You can figure out the position in the market by undertaking:
MARKET RESEARCH – helps to find out customer needs and requirements  primary
techniques include surveys, observations, focus groups etc.; secondary data or
generational trends from companies e.g., Goldman-Sachs did Millennials research

 Unique selling proposition (USP) is a value claim that offers prospective customers a
specific, unique, and superior reason to purchase a product
o Why should consumers buy your product and not another that already exists
in the market?
o No other competitor has this feature
 Most important thing is that the USP is relevant for consumers and addresses some
kind of fundamental need or preference.
o No point offering a unique benefit that consumer don’t care about
o Uniqueness only counts to the extent that it is associated with a relevant
feature

Example of Positioning (Anderson, HBR)

A company that manufactured resins used in exterior paints discovered importance of
positioning. By researching the needs of commercial painting contractors – a key consumer
segment – they realised that labour made up the majority of the contractor’s costs with the
paint only making up 15% of costs. Consequently, the manufacturers emphasised that their
product dried so fast that contractors could do two coats in a day. This clearly met the
consumers’ needs (reducing their labour costs) and as a result they were able to sell their
product at a 40% price premium. This was received well by consumers

Determining Preferences
In consumer surveys, one would expose consumers to a set of different products, then ask
them to rate the features of the products on a 1-10 scale, and then rate the importance of
the features. Then you can derive weighted sums to determine preferences – see
preference figure.
 This also helps determine points of parity and points of difference

Positioning: Crafting a Value Claim

Types of Value Claim
Positioning involves designing an offering so that the target segment members perceive it in
a distinct and valued way relative to competitors
3 ways to position an offering
- Unique – “we have the only products/service with XXX”
- Difference – “more than 2x the features than X-competitor”
o E.g., Steve Jobs – the big difference between NEXT and SUN
- Similarities – “same functionality as X-competitor at lower price”
 Can help to draw a perceptual map: descriptive approach showing brand positions (4-
way grid)

 Points of parity: are those product or brand attributes that are shared across
competitors. Often ‘must-haves’
o This helps with consumer orientation – as it sets the reference for the
consumer.
o Consumers know what kind of product they are dealing with, and this helps
to make the decision process easier.
 Points of difference: are those product or brand attributes that are unique to a
particular competitor. To command a price premium over its competitors, a brand’s
position must contain a point of difference that is large enough to justify the higher
cost to the consumer.
o These are part of the USP

All benefits
 Easiest to construct because requires least knowledge about customer and competitors
 Pitfall is benefit assertion – which is when managers may claim advantages for features
that actually provide no benefit to target customers
 Another drawback is that most of the benefits mentioned are likely to be points of parity
with the next best alternative, which has the effect of diluting the significance of the few
genuine points of difference

Favourable points of difference

 This answers the question of why the consumer should buy the manufacturer’s offering
as opposed to a competitors’.
 Requires detailed knowledge of the alternative
 Pitfall is that it doesn’t convey the value of the differences to target consumers – so
suppliers may end up stressing points of difference that end up delivering little value to
the target consumer. This is called value presumption
Resonating Focus Value Proposition
 This is considered the gold-standard.
 Acknowledges the fact that managers making purchasing decisions are under large
burden and pushed-for-time so want to do with suppliers who grasp ‘critical issues in
their business’ and can deliver a simple and relevant value proposition.
 To better leverage limited resources, a supplier might even concede the least valuable
favourable points of difference to its next competitor so it can focus its resources on the
one or two points of difference customers value the most.
 Need a point of parity to make it clear to the customer that the supplier’s offering is
even worth considering
 Example: Sonoco, a global packing supplier, had 6 favourable points of difference
compared to the next best alternative but decided to focus on two most important to
customers (which delivered cost savings and increased consumer revenue). It also gave s

The kind of value proposition that resonates the most with customers are ones that had
one/two points of difference that are relevant and one point of parity.

t
Above: Point of parity – bottled water

What’s the point of a Value Proposition?

Most obvious benefit is that it leads to superior business performance (think of the resin
example). Lots of empirical evidence for this.
Value propositions can be used to inform internal product development for particular
segments – product can be redesigned to better suit customer needs.
They can also be used to inform the salesperson team – which happens a lot in the
telecommunications industry where callsperson has information about the segment you
belong to, and they get recommendations on what kind of product they can sell to you
based on behavioural segmentation, typically.

Process of positioning
1. Conduct market research to understand customers’ needs and businesses
a. Focus groups and field tests to study product’s performance against key criteria
b. Identify performance trade-offs consumers are willing to make
c. Willingness to pay for enhanced performance
2. Substantiate the value claim
a. Point of parity and 2 relevant points of difference
b. Explain how the differences translate into monetary worth for customers
3. Document value delivered
 a. Create written accounts of cost savings
b. Conduct on-site pilots to gather data on product’s performance
c. This will give the supplier the confidence to make predictions about the cost-
savings and added value of their product -> can even make guarantees to
customers which makes the offering even more attractive
4. Make creating excellent value propositions a central business skill
a. Incentivise the improvement of value propositions like they do a Quaker Oats

Summary
1) Segmentation (divide the market) – e.g., by age, by need, by location
o Determine segmentation criteria
o Compile segment profiles/characteristics
o Validate segments
(2) Targeting (determine the target market)
o Determine evaluation criteria
o Evaluate the segments
o Decide which/how many segments to target
(3) Positioning (position in the market)
o Develop a deep understanding of segments
o Derive target-positioning for each segment
o Develop marketing actions and instruments per segment

Branding
What is a brand?
A brand is a name, term, sign, symbol, or design, or a combination of them, intended to
identify the goods and services of one seller or group of sellers and to differentiate them
from those of competitors (e.g., American Marketing Association)

Functions of Brands
For consumers:
 Consumption risk reduction – brand trust; a branded product is always delivering
the same product quality (there is consistency in the quality)
 Reduction of search costs – eliminates the need to compare multiple options
available in the market, instead consumers just go for the brand they like. Therefore,
the acquiring process is shorter and less intense.
 Serves as a symbolic device – Brands can uplift self-esteem, can communicate
belonging, can communicate an image you desire to have, and through identification
with the brand, you share in the successes resulting in positive emotional feedback
e.g. football club.

For firms:
 Reduction in risks/fluctuations associated with cash flows – Brands generate higher
willingness to pay levels and a more stable cash flow because of the loyal customer
base who repurchase more frequently than for an equivalent unbranded product.
 Increase in level of cash flows – This is because of the loyalty AND the price
premium that can be charged for the products (e.g. Chiquita branding of bananas!).
 Brands can also execute brand extensions which is an easy way to generate more
cash flow if the brand is strong.
 Acceleration of cash flows – Consumers are quicker in adopting branded
commodities

Financial Brand Equity

Financial brand equity is a function of choice and the difference in the price point you can
charge.
 The difference in what can be charged between a branded and unbranded
equivalent is known as the brand value
 The choice aspect comes in when the branded and unbranded option are priced
equally. Most customers would go for the branded option.

Financial Brand equity = Price (branded product) – Price (generic product) x Sales volume
(Branded) – Branding costs

AKA brand value x sales volume(brand ) - branding costs

 You can use a discount factor to extrapolate sales and costs 5-10 years into the
future
 This quantifies equity of the band
Consumer-based brand equity
This explains why consumers have preference for a specific brand.

Consumer-based brand equity is based on brand knowledge which in turn has two
dimensions:
 Brand awareness
o Brand recall - e.g., if you were asked to name 10 brands of soft drink those
which come to mind quickest are those for which you have strong brand
recall
o Brand recognition – e.g., if you were to be shown the logo of a soft drink
brand, you would recognise the brand.
 Brand associations
o Types of brand associations
o Favourability of brand associations – positive or negative?
o Strength of brand associations – that is how easily they can be retrieved?
 Typically measured with response time
 E.g. What do you associate with Apple? How quickly the adjectives
produced are derived are a measure of the strength of the association
o Uniqueness of brand associations – whether you hold these associations for
Apple only or also for other competitors in the market?

Spreading Activation Theory (Nedungadi, 1990)

 Priming a concept can increase the accessibility and evaluation of related concepts
(e.g., exposing participants to pictures of cats increases the evaluation of the brand
Puma).
 Based on spreading activation theory, priming ‘cat’ would automatically activate the
concept of ‘puma’ (a member of the cat family), which in turn would increase the
accessibility of the brand Puma.

Implicit Brand Primes

In German food retail stores, Sven’s research placed mats at the entrance with same text
but different fonts – one being the Coca-Cola font. They also positioned Coca-cola bottles at
impulsive buying spots in the stores e.g. close to snacks and checkouts
 Priming people with the implicit brand primes (i.e. the coca-cola font maps)
triggered them to impulsively buy coca-cola bottles more.
o The Coca-cola font increased impulsive purchase by 7.5%
o An example of spreading activation theory in practice

The success of implicit brand primes will depend on the strength of association between the
brand node and the implicit prime, and the strength of the association between the prime
and competing brands.
 On the latter point, whenever McDonald’s runs TV ads, the sales for Burger King also
increase because in people’s minds these two brands are connected

Brand Names
 Ease of spelling reduce processing efforts and facilitate recall – the heuristic is that
the easier something is to process, the more we like them
 Meaningful and familiar brand names lead to higher recall
 At the same time, brand names should be unique

Elements of a Brand

Brand characters e.g. Tony the Tiger, Captain BirdsEye – represent characteristics of the
brand and makes it easy to communicate features of brands to consumers
Brand extensions
Brand extension is the use of an established brand name by a firm to introduce a new
product.
 Consumers use their brand knowledge and brand equity about the parent brand
when evaluating the new product
 This way, the extension product can capitalize on the parent brand’s equity
 Company has advantage of generating a high level of awareness and brand trust
upfront
 Parent and extension are subject to forward and backward spillover effect.

The key success factor is the perceived fit of the extension:

Perceived fit of brand transfer

Perceived fit is needed between the extension and the parent brand.
 Fit has been defined as the extent to which a consumer believes that the new
product is a reasonable and expected extension of the brand.
 Without fit the new brand may not gain customer acceptance and confuse the
consumer and have negative feedback effects on the parent brand personality.
 As a consequence, consumer based-brand equity may be decreased
 Good brand extension fits have positive feedback effect on parent brand equity and
are evaluated positively by consumers
 Numerous brand extensions (of bad fit) can also lead to a credibility loss of the
parent brand.

Two types of brand extension

It can be distinguished between:
 Line Extension (product line extension - Brand transfer on a product within the same
product category
  Category Extension (brand extension): Brand transfer on a product of a different
product category

Benefits of brand extension

 Economic resources are saved through brand extensions because you are leveraging
existing brand equity in the market, launching to an existing loyal customer base
which should provide return to your investments more easily
 Since the existing brand has awareness, an extension can gain acceptance more
easily
 Spillover effects of loyalty and potential of large customer base upfront
 Increases ease of gaining shelf space. Retailers have less hesitation in adding
extensions of known brands to their shelves.
 Reduces customers’ uncertainty
 Saves costs of building a new brand

Brand Architecture
Single brand (Branded House Strategy)
Examples include: Virgin and Boeing which are parent brands

Advantages of Single-Brand
All the sub-brands/sub-products enjoy the brand awareness and knowledge from the parent
brand

Disadvantages of single-brand
If you are in too many segments, the strength of the parent brand is undermined at some
point.

Multi-brands (House of Brands Strategy)

Examples include P&G, Unilever that launch a different brands into the market under
different names.

Advantages of Multi-brands
Disadvantages of Multi-brands

You can think of House of Brands and Branded House strategies as a continuum with many
companies partaking in both.

Brand personality
Brands can have aspects from a few of these traits, but tend to focus on one
 Sincerity – down to earth, honest, wholesome and cheerful
 e.g. Tropicana, Michelin
 Excitement – daring, spirited, imaginative, up to date
 e.g. Red Bull, Pepsi
 Competence – reliable, intelligent, successful
 e.g. Microsoft, CNN, IBM
 Sophistication – upper-class and charming
 e.g. Aston Martin, Rolls Royce, L’Oreal
 Ruggedness – outdoorsy and tough
 e.g. Jeep, Reebok, Levi’s

You can assess brand image on brand personality scales by positioning them along the
dimensions and correlating those dimensions with important marketing KPIs like intention
to repurchase.

Lecture 3: Communication Decisions

Example
Super Bowl Advertisements:
 Price for a 30 second spot: 5.6 million USD
 Reach: 98.2 million viewers
 Is it worth it?

SunTrust Chief Marketing Office Response (Superbowl ads in 2016)

“There’s a lot of reasons why the Super Bowl is cost-effective for us, and actually more
efficient than other mediums because of the visibility you get before, during and after.
Because we’re sparking a conversation, we’re trying to get people to take action and take
the first step toward financial confidence. The Super Bowl is just one part of a complete
package to do that, but it has the loudest voice and biggest reach of any method we’ll use.”

Characteristics of Communication Channels (Hoyer et al, 2021)

1. Reach
 Traditional media such as television advertisements are limited because they
typically cannot reach large consumer audiences (with the number of people
watching television decreasing year on year)
 This is a contrast to online media – facebook has 2.4 billion users
 Measuring success is difficult with traditional media.
 It is also more difficult to target people with television ads but online it’s
easier
2. Capacity for Two-way communication
 Personally or online delivered sources of influence are valuable because they
allow for a two-way flow of information
 This is not possible with traditional media
3. Credibility
 Marketing and non-marketing sources differ in their credibility.
 Consumers tend to perceive information delivered through marketing
sources(i.e. traditional media) as being less credible, more biased and
manipulative

Because of these reasons, it’s

no surprise that the marketing
communications spending on
social media has increased over
time (see graph on the left from
Chief Marketing Officer
perspective). Now figure is
closer to 25% and if pace is
maintained, social media will
become most important
channel of marketing
communication.
Owned and Earned Social Media
The Sales Funnel
The sales funnel (left) shows
how consumers proceed
through the journey from
awareness to intention.

1. First, awareness –
recall that this is
composed of recall
and recognition
2. Then, consideration –
this is the creation a
favourable attitude
towards the product,
service, social course
or Non-profit organisation. Without favourable attitude, you cannot proceed to
behaviour (which in this case is purchase behaviour, and later, loyalty behaviour)
3. Acquisition – this refers to purchase behaviour
4. Retention – this refers to loyalty behaviour. If someone purchased your good, liked it
(i.e. the good generated customer satisfaction), then there is retention which means
re-purchase, cross and up-buying.
a. Cross-buying means that you buy additional products from the brand e.g
buying a MacBook after buying an iPhone
b. Up-buying means that you buy more products or more expensive products

 At any point in the sales funnel, there can be a bottleneck. You might reach up to
acquisition, but there is no customer satisfaction generated, so there is no retention.
 Social media can address all 4 different stages and bottlenecks that may occur.

Key Metrics
Some key metrics for measuring performance of communication activities include:
Awareness
 Views/Impressions
Consideration
 Time spent with content
 Clicks
 Video view completion
Purchase
 Conversion rate
 Cost to convert
Loyalty
 Up and cross buy
 Repurchase
 Reviews
 Word of mouth
 There is variation across industry in
terms of which metrics are used.

Graph (left) shows more data from

chief marketing officers ad highlights
the top 4 reasons why firms use social
media and why social media should be
invested in:
1. Brand awareness and Brand
Building (the start of the sales
funnel)
2. Acquiring new customers (acquisition in the sales funnel)
3. Introducing new products and services (cross and up buying)
4. Retaining current customers (Customer satisfaction and loyalty)

Types of social media communication: Owned Social Media

This refers to social media activity related to a company or brand that is generated by the
company or brand itself.
(e.g., posts on twitter, facebook brand pages, youtube videos, Instagram pages etc.)

Types of social media communication: Earned Social Media

This refers to Social media activity related to a company or brand that is not directly
generated by the company or brand itself but by other entities such as consumers.
(e.g., posts and likes on social media, videos by consumers and influencers etc.)

Impact?
If we consider the 3 key variables of
awareness, purchase intention and customer
satisfaction, what is the impact of these kinds
of social media?

A large study conducted by Colicev et al from

2018 looked at 45 different brands mostly
from the S&P 500. They studied the brands
over 300 days and collected ESM and OSM
data. The second diagram on right shows the
metrics they collected.

FOR ESM, metrics were number of likes,

number of followers on a brand fan. FOR
OSM, measured number of own posts and
retweets.

Then they got YouGov data on the customer

journey variables of brand awareness,
purchase intent and customer satisfaction. YouGov has a consumer panel that asked 5000
customers about these variables with regards to the 45 brands studied. They controlled for
the valence of the data – whether the posts/tweets were favourable/unfavourable etc.
The results were as follows:
 The data is displayed in terms of
elasticities i.e. if OSM increases
by 1%, how much does brand
awareness go up by?
 In terms of brand awareness,
ESM is much more effective
than OSM. This is because
people believe ESM to be more
credible
 The same case is shown for
purchase intention, here there
is actually a negative impact of OSM on purchase intention. This is due to a reactive
effect – when companies overdo their own marketing communication, people feel
like they are being pushed into buying something, or get annoyed because the
company over-contacts them, which results in lowered purchase intention.
 In terms of customer satisfaction, conversely OSM is more effective than ESM. The
reason for this is that they observed that people complained on the owned social
media pages of the company when something went wrong with the product they
purchased, and when the company reacted, that created customer satisfaction

What is the upshot?

 Use owned media to increase Brand Awareness and Customer Satisfaction rather
than to directly increase Purchase Intentions.
 Design owned media in order to generate earned social media.
 It pays to use OSM to address customer complaints, potentially increasing perceived
quality and positive word of mouth

Global effectiveness of communication

Marketing return on Investment is calculated:
Branding in the Age of Social Media – Holt, HBR
 Companies used to put their faith in own-branded content on social media but empirical
evidence has forced them to reconsider
o Ranking Instagram and Youtube by subscriber count, you will find that almost no
corporate brands appear
 Instead ‘crowdcultures’ – digital crowds cum powerful cultural innovators – have
created countless genres from fashion advice to gaming comedy. They are championed
by normal people like PewDiePie who make content for free in the comfort of their own
homes
 “It turns out consumers have very little interest in the content brands churn out”
 Rise of crowdculture has greased the wheels of an alternative approach that Holt terms
‘cultural branding’
o Map the cultural orthodoxy – in cultural branding, the brand promotes an
innovative ideology that breaks category conventions. First you need to
understand what those conventions are in the first place.
 e.g. America’s fast food ideology was created in early 20th century when
scientific discoveries like Instant coffee and the establishment of
standardised production processes meant that big companies could
produce relentless sums of tasty food.
o Locate the cultural opportunity – disruptions in society cause orthodoxy to lose
traction and consumers begin looking for an alternative. This present a window
of opportunity for brands to push a new ideology into their categories.
 e.g. In 2001 seminal books and TV programmes promoting fast food
anxiety were released. Before social media, the influence of these works
would have been limited to a small fraction of society, but in this age,
crowdcultures latched onto these critiques and blew them up. In this way
an elite oncern was converted into a ‘national social trauma’
o Target the crowdculture – Jump into the crowdculture and take on its cause
 As social media took, a variety of diverse yet influential subcultures
started pushing for food innovation, calling for the revival of preindustrial
food. Chipotle jumped into this crowdculture and took on its cause.
o Diffuse the new ideology – Create content that passionately encapsulates the
new ideology
 Chipotle created two short-films that were seeded out on social media
platforms parodying industrial food companies – i.e., showing pigs being
injected with chemicals and being fed to children etc – and showing a
reversal to traditional farming processes. They were a massive success,
watched by millions and generating impressing revenue through
increased sales. They weren’t just well-made films, the real advantage
came by tapping into the industrial food anxiety crowdculture. They
never had to compete with other crowdculture champions.
 o Innovate continually, using cultural flashpoints – Brands can sustain their
cultural relevance by interacting/playing on contentious issues related to an
ideology. By targeting novel ideologies from crowdcultures, brands can find a
way to stand out.
 Issue is that the brand must walk the walk or its equity will suffer.
 A good example of a brand that has managed to sustain cultural
relevance is Dove. It used to be a mundane brand. By the early 2000s,
narratives around women’s bodies had reached dangerous extremes and
beauty marketing was alienating. Feminist critiques began to circulate – a
new crowdculture was established. Dove tapped into this with their
‘Campaign for Real Beauty’ showcasing and celebrating real women’s
physiques from tall to small, wrinkly to smooth. This was received
extremely well by women around the world. Dove has continued to tap
into relevant cultural flashpoints e.g. the use of heavily photoshopped
women in fashion and beauty advertising.

The effect of Electronic Word of Mouth on Sales – Rosario et al. 2016

 In marketing, word of mouth (WOM) is the act of consumers providing information
about goods, services, brands, or companies to other consumers.
o Such information communicated through the Internet (through, e.g., reviews,
tweets, blog posts, “likes,” “pins,” images, video testimonials) is called
“electronic word of mouth” (eWOM), and it represents one of the most
significant developments in contemporary consumer behavior.
o Form of earned media
 eWOM has become ubiquitous and accessible, turning consumers into “web-fortified”
decision makers (Blackshaw and Nazzaro, 2006)
 Inducing, collecting, and displaying eWOM have become priorities of many companies as
part of their efforts to stimulate sales.

 First, we account for the different types of platforms: (1) social media platforms (e.g.,
Facebook, blogs, discussion forums), (2) review platforms (e.g., Epinions, Yahoo!Movies),
(3) e-commerce platforms (e.g., Amazon.com, eBay), and (4) other platforms (e.g.,
Internet overall)
o we acknowledge that consumers often evaluate the value of online platforms as
information channels on the basis of additional information provided about the
eWOM sender. Of particular importance are signals of homophily (similar others)
and trustworthiness
o Reputation of platform
o additional information provided about the eWOM message, such as time stamp
and helpfulness rating, increases sales
 In terms of product characteristics:
o In particular, the performance quality of services (e.g., hotel stays, restaurant
dinners) is usually more difficult to assess before purchase than that of goods
 o Because eWOM may replace information obtained through sampling or
purchase, consumers may rely more on eWOM for services than for goods to
reduce perceived functional risk
o Similarly, functional risk is higher for hedonic products, which are pleasant and
enjoyable and appeal to the senses (e.g., perfume)
o In the case of high financial risk, consumers rely more heavily on eWOM
 Results:
o Volume of eWOM is more more strongly related to sales than all other eWOM
operationalizations such as valence, variance etc.
o impact of eWOM on sales is stronger for e-commerce platforms than social
media platforms,

Attention and Persuasion

The New York Times continually reports which articles from its website have been the most
e-mailed in the past 24hours. Berger and Milkman examine how:
1. an article’s valence (whether it was positive or negative – this was coded by
software) and
2. the extent to which it evokes various specific emotions (e.g., awe, anger, anxiety,
emotionality, positivity or sadness) (this was coded by research assistants)
affect whether it makes the New York Times’ most e-mailed list.

Then a regression model was created relating the coding to the extent to which the articles
were shared.

 Results indicate that positive content is more viral than negative content
 Sharing is not about valence alone.
 Virality is partially driven by physiological arousal or activation as it is also known as.
o Content that evokes high-arousal, or activating, positive (awe) or negative
(anger or anxiety) emotions is more viral.
o Content that evokes low-arousal, or deactivating, emotions (e.g., sadness)
is less viral.
 Controlled for how e.g., how interesting, or practically useful content is (all of which
are positively linked to virality), as well as external drivers of attention (e.g., how
prominently content was featured)

What else makes things go viral? – Improvised Marketing Interventions in Social Media
o Evidence from Borah et al., suggests that improvised marketing interventions which are
social media actions that are composed and executed in real time proximal to an
external event, through quick wit and, in particular, the interaction between humor
paired with timeliness and humor paired with unanticipation—enables firms to drive
both virality and firm value.

o Quasiexperimental method imitating Oreo’s IMI in Superbowl 2013. Control was Oreo
non-IMI tweets.
o Research has shown that internet users like to engage with events as they happen in a
spontaneous manner.
o Was shown that IMIs lead to significantly greater virality. Effect lasts for 10
hours.
o Timeliness boosted virality by a significant level
o Participants are more likely to retweet for unanticipated humour that is high in
timeliness.

o Similarly, hypothesised that firm value would be increased because investors would
perceive that the virality of IMIs would increase brand attitudes (awareness, purchase,
intent, advocacy) and that IMIs show that a brand is empowered in its reputation and its
employee’s judgements.
o Firm value did increase with humourous IMIs that are timely and increased with
humourous IMIs that were unanticipated
o Find that an IMI with high humor and high unanticipation can generate $5.1
million, on average, in market capitalization while high humor and high
timeliness can generate $3.1 million, on average, in market capitalization.

o Implication on marketing strategy: Many managers think that a firm’s marketing

message should be pre-planned, organised and 100% controlled by the firm. This
research shows that this view could be considered outdated and by not capitalising on
the impressive benefits of IMIs, brands could miss out capturing the zeitgist of their
audience towards current, spontaneous events.
o Improvised marketing interventions break through the clutter and hubbub of the
competitive marketplace by engaging consumers in a conversation about ‘What
is happening now?’ in a witty way.
o It is important that firms identify the right employees to execute IMI (e.g., their
sense of humor and timing should be on point and not offensive)

o Example: Consider Oreo’s famous tweet in response to the power outage during Super
Bowl XLVII in 2013. Within moments of the power outage, Oreo tweeted, “Power out?
No problem,” along with a starkly lit image of a solitary Oreo cookie. A caption within
the photo read, “You can still dunk in the dark.” This exemplar of IMI received 15,000
retweets within the next eight hours, creating significant publicity for Oreo at minimal
expense. By contrast, a Super Bowl ad costs an average of $4.5 million

Consumer Activation
o Activation can be defined as a physiological and psychological ready state of the
body for reaction.
o Activation regulates consciousness, attention, and information processing. You
require a certain level of activation in order to direct and dedicate attention towards
it.
o Therefore, it is the basis of emotions, motivation, and behavioral reactions

How can we trigger consumer activation?

Stimuli triggers consumer activation

There are 3
categories
of stimuli that trigger consumer activation:
o Emotional stimuli
 Sexual stimuli
 These tend not to be used anymore because they can be
controversial and also brand recall and recognition suffers
because people tend not to remember the brand as all the
attention is on the stimulus.
 Fear appeals
 You can overdo this to the extent that consumers dismiss the
ad and are not willing to be exposed to it/dedicate attention.
Triggers negative emotions which can overspill onto the brand.
 Childlikeness
 Humour
 Issue with this as that humour quickly becomes stale. After
looking at the ad once or twice, it doesn’t trigger the same
level of activation.
o Cognitive stimuli
 Novel
 Surprising
 Puzzling
 Unusual
o Physical stimuli
 Specific texture
 Loud colours
This results in a higher level of consumer activation which in turn results in the consumer
dedicating more attention to something and being encouraged to share it.

The effects of visual complexity on the stopping power of advertising – Pieters et al, 2010
 Advertising should activate the consumer causing them to ‘stop’
o In line with the saying: “Where the eye stops, the sale begins”
 Some schools of thought emphasise simplicity because complexity is unliked and
therefore hurts the brand whereas others would say that complexity is needed because
people like the challenge of figuring something out.
 Results: Advertisement’s feature complexity has a negative effect on brand attention
and attitude whereas an advertisement’s design complexity has a positive effect on
these parameters
o Feature complexity refers to visual clutter – i.e. more detail and variation in the
colour, luminance and edges of a picture. This can be measured quantitatively by
how much computer memory is needed to store the image
o Design complexity refers to the use of complex shapes, patterns and objects.
There are 6 principles of design complexity: quantity of shapes, asymmetry,
irregularity being examples
o They also tested or brand identifiability which differs from complexity because an
image can be visually complex or simple independently of whether the
advertisement and the brand it is for is easy or difficult to understand.
 Justification of the results:
o Feature complexity prevents people from looking carefully at the brand because
they can’t locate objects. The reduced attention means people can’t tell what the
advertisement is for and therefore like it less.
o Design complexity manifests as complex pictorial which is more engaging and
likeable as opposed to simple designs which result in heuristic judgement.
 Implications for advertising:
o Attention to the advertised brand plays a crucial role in building subsequent
brand memory
o reduced brand attention can have long-term detrimental effects for brand equity.
o On the basis of these findings, we recommend a reduction of feature-based
clutter in advertisements whenever possible.
o This is particularly important in environments with high attention competition,
such as in the Yellow Pages, retail, and newspaper advertising, as well as in
media contexts with brief exposure durations, such as outdoor and point-of-
purchase advertising.

What are attitudes?

Even if people dedicate attention to something, it doesn’t necessarily mean that their
attitude towards it will be changed/favourable attitudes will be created
 An attitude is an overall evaluation that expresses how much we like or dislike an
object, issue, person or action (Petty, Unnava, and Strathman 1991).
 Attitudes are acquired and they tend to be relatively stable over time if they are
strong.

Long-standing social psychology theory dictates that

attitudes drive behaviour. This is known as the A-B
hypothesis.
 Empirical evidence shows that the strength of the attitude matters.

Attitude Strength: “a latent psychological construct that is presumably represented

in memory by various attributes of the attitude” (Petty and Krosnick, 1995, p.3)

Graph on left is from the Journal

of Consumer Research. On the x-
axis is the valence of an attitude
ranging from negative to positive.
On the y axis, you have
probability of consideration –
whether you would consider a
brand for purchase.

You have two types of line,

strong and weak attitudes, and in
both consideration of purchase increases as valence increases. The strong attitude
line is steeper so there is an interaction effect. So the effect of attitude on
probability of consideration is dependent on the strength of that attitude.

Features and determinants of Strong Attitudes

Strong attitudes are characterised by:
 Elaboration – this means that you have reconsidered your attitude multiple times,
thought about it and can now justify it once prompted. Justification is absent for
weak attitudes
 Accessibility – this refers to how easily you can retrieve an attitude, and response
latency
 Stability- they don’t change over time.

The stronger an attitude, the more reliably the attitude predicts behaviour.

Determinants of attitude strength include:

 Importance of the attitude
 Whether it is learned from own experience vs others’ experience (with our own
experience generating stronger attitude)
 Elaboration (this is both an input factor and characteristic of strong attitudes i.e.
elaboration -> strong attitudes but also strong attitudes tend to be more elaborate)
Elaboration Likelihood Model

If the goal is to create strong attitudes with advertising or viral marketing campaigns, how
do we do this? ->Using the elaboration likelihood model

This model is empirically backed, created in the 80s

It shows that there are two routes for processing information:
 Central route -> results in a strong attitude
o Central route processing involves high elaboration of a stimulus. You really
think about the quality of arguments, scrutinise it even and check for
plausibility, resulting in a strong attitude
 Peripheral route -> results in a weak attitude
o Peripheral route processing involves more heuristic processing. Judgements
are made based on superficial things like aesthetics. This results in weak
attitudes.

The model also comes up with predictors i.e. whether we process something via the central
or peripheral route:
 Involvement
o If the involvement is low as is the case with everyday necessities, then
processing will be through the peripheral route
o If involvement is high, as is the case with buying a house or insurance or
deciding which party to vote for, then processing goes through the central
route
 Ability – this refers to cognitive capacity that is available to an individual at the
moment the individual encounters the stimulus
o So if that person is cogitatively depleted, despite whether the product is high
involvement, the person would process the information via the peripheral
route
 E.g. if you’re advertising outside an exam hall, it’s likely that the
students viewing your ad will be using peripheral route processing
because they are cogitatively depleted.
 o High arousal e.g., if you’re in a state of high excitement already, reduces
processing capacity and increases reliance on peripheral cues and decreases
the influence of central arguments

 You need high involvement and high ability to go down the central processing
route

Multiple exposure
So if you’re trying to advertise an everyday commodity which via the peripheral processing
route results in weak favourable attitudes, how do you influence behaviour?
 You can simple repeat a message enough times that people begin to believe it
o The exposure effect
o If you have multiple exposures to a peripheral route ads, you start to believe
it and a strong attitude develops

Music
Music as a peripheral cue is important for persuasion through both routes (MacInnis and
Park 1991)
However, the music must have a high subjective fit to the overall ad message
 Fit in this case refers to the consumer’s subjective perceptions of the music’s
relevance and appropriateness to the central ad message
 High fit underpins the persuasive qualities of the ad
 Low fit can undermine the quality of the ad
 Fit is tested with pre-screening, show to a set of potential consumers and survey

Involvement

Wear-out effect
When you repeat an ad multiple times, you have wear-out effects. This is described by the
two-factor theory (Berlyne, 1970).
This points out the relationship between frequency of exposure on the x-axis and
favourability of attitude on the y-axis.
When you start exposing people to ads, there’s
a positive habituation effect. This means that
the level of conflict induced by novel stimuli
goes down, people get less uncertain, people’s
curiosity about the stimulus gets satisfied.

But there’s a tipping point, where attitude

favourability goes down.

This is because people start getting bored – the

ad becomes tedious, and if the ad continues to
be exposed to them, people feel like they’re
getting pushed to buy something (reactance),
and they’re bored by the message because the
incremental learning diminishes.

Positive habituation and tediousness occur

simultaneously – just initially, positive
habituation dominates, but by the end
negative habituation dominates.

Graphs of spending vs number of phone contacts/email contacts (Godfrey et all, 2011) show
an inverted U-shape, which the two-factor theory predicts. There is a maximum in spending
between 2-4 contacts, and after that, spending decreases.

Wear-out can be avoided by:

 Maximising positive habituation
 Minimising tediousness effects
So generate variate ads (generic ad with small variations – which retain consistency in ad
message, but reduces tedium as you still have something which interests consumers
 Variate ads generate more positive than ads without variation

Ads that don’t overstep – John et al, 2018

o How to make sure you don’t take personalisation too far:
o We already know that digital targeting increases ad performance – more purchasing
interest for marketers and a more enjoyable and relevant shopping experience for
consumers
 o But these findings were based on research on consumers who didn’t know their
data was being used to dictate which ads they saw
o Now, consumers are aware of the use of their data and over-personalised may trigger
concerns surrounding their privacy sue, provoking consumer opposition.
o The insight:
o Consumers dislike two techniques:
 when information is used that has been obtained from a third-party
website rather than the website on which the ad appears
 These kinds of ads (when consumers were made aware of the fact
that they were seeing the ad based on the products they had
clicked on while browsing a third-party website) resulted in 24%
decrease in interest in purchasing
 when the ad is based on inferred information about the consumer
 For instance, about a pregnancy. This was a major scandal
forTarget who used individuals’ consumption data to send
maternity coupons for users they inferred were pregnant. A
teenager’s dad was sent a coupon and was shocked to find out his
daughter was expecting.
 Ads based on inferred information resulted in a 17% decrease in
interest in purchasing.
o Implication on marketing strategy:
o Three factors can increase the upside of targeted ads for marketers and
consumers
 Trust – if the platform delivering the ad is trusted by the consumer,
disclosing why the consumer is seeing the ad (from acceptable flows i.e.
1st party information) actually increased click-through rates.
 Control – when consumers are given a greater say over the information
they’ve consciously shared (i.e. options to keep connections private),
transparently incorporating this information can result in better ad
performance.
 Justification – revealing why personal data has been used to generate ads
can help consumers realise the upside of targeted ads
o What to do to maximise the potential of ad targeting:
1. Stay away from sensitive personal data e.g. sexual orientation, medical
conditions etc. Google and Facebook have rules preventing targeted
advertising on these bases.
2. Commit to at least a minimum level of transparency e.g. have a clear and
easily accessible disclosure about data-use practices/an opt-out button
for targeted advertising. This will foster trust.
3. Use data appropriately e.g. make sure recommendations based on
personal information are appropriate and non-intrusive, or will benefit
the consumer in some way.
4. Justify your data collection
5. Try traditional data collection – don’t neglect information you can collect
from consumers directly e.g., from surveys. Supplementing less-
transparent ways of obtaining consumer information with traditional,
 more-open ones where consumers can state their own preferences, can
decrease feelings of invasiveness.

Influencer Marketing
Seeded marketing campaigns – this is a form of consumer-to-consumer marketing. First you
influence a consumer, and that consumer then influences other consumers. There’s an
indirect spill-over of the communication message.

 Send free (or discounted) product to select group of customers, the seeds
 The customers test the product and are then
 Encourage them to generate WOM like an online review, blog, unboxing video
(amplified WOM as opposed to organic WOM)
 Seeds tend to be “normal” or “regular” people
 Refer a friend strategy is a type of seeded marketing campaign – incentivise sharing
the product (e.g Harry’s razors’ subscription service sent freebies to customers who
referred their friends when they started up. This was very successful as within 2
weeks, they had 100,000 people signed up in the waiting list. Company has grown
even more 2 years later due to the effects of word of mouth)

Influencer marketing – This is another form of consumer-to-consumer marketing, that is

similar to seeded marketing campaigns. Except in this case the seeds are not just regular
people:
 Seeds tend to be special or have additional qualities that make them worth using for
campaigns
 You will either pay for the influencer or send them a free product

What is an influencer?

An influencer must have reach, contextual credibility and salesmanship

 Don’t always need to think about the most expensive e.g., Christian Ronaldo charges
millions for one post – they also usually represent multiple brands
 So, consider micro-influencers (reach between 1,000 and 100,000)
  They represent target group better because they occupy specific niches
(contextual credibility)
 Less users and followers but they are more active so better reach
 More credible and better salesmanship

< an example of very good for Too Good To Go

– very food orientated; small enough to be
credible (81K subscribers) but still big enough
to have an audience – everything she does fits
the ethos of too good to go so when she talks
about it, they believe her

< Example of a really HUGE influencer – you

probably have to pay a higher price for her to
talk about your product but then huge
potential numbers of new consumers

Microinfluencers
 Microinfluencers have a follower count between 1k-100k, typically.
 They are able to generate a higher level of engagement that macroinfluencers (as
can be seen by higher ratio of likes and comments)
o Microinfluencers can be seen to get an average of 2-5 x more organic
engagement per Instagram post compared to those with over 100,000
followers (Chriz Gonzales, CEO Gnack)
o The reason for this can be cited as microinfluencers being perceived to be
more expert and relevant because they address particular niches
o Microinfluencers are also perceived to be more credible than major
influencers.
 92% of consumers consider microinfluencers to be more believable
and credible
 82% of consumers are likely to trust a microinfluencer’s
recommendation
 So engaging with people through a trustworthy figure is likely to have
a positive spill-over effect on your brand – people are likely to trust
your brand
 In terms of cost-benefit ratio, these are a lot better – more cost-effective and more
credible
o Ideal for start-ups and small businesses
However, there are risks associated with influencer marketing, shown by research by Chae
et al (2017):
1. Spill-over effect – during a marketing campaign promoting a particular product, that
product becomes the centre of brand-related conversation. Conversations about
other products the brand supplies go down. If the product you are advertising
receives negative word of mouth, then this might spill-over onto other products the
brand supplies.
2. Choice of influencer – As is the case with the Kids Youtube Star, Blippi – an
unpleasant video of him surfaced which can have negative spill-over effects on to
your brand

CSR Communication
Corporate Social Responsibility
This is defined as a company’s obligation to exert a positive impact and minimise its
negative impact on society. (Pride and Ferrell, 2006)
o e.g. In 2015, Unilever ran a campaign where there were huge trees in different major
capitals of Europe, which turned out to be people dressed as trees, and they were
trying to encourage people to sign a pledge to protect rainforests
o This campaign turned out to be hugely successful, generating massive online
engagement and impressions – double the brand average

But other CSR campaigns can generate consumer scepticism – why?

Attributions are critical for the success of a CSR initiative.

When consumers attribute self-centred or ulterior motives to companies engaging in CSR
campaigns, the positive effects that should be triggered by such a campaign will NOT
materialise
o Typically a CSR campaign will trigger identification with that brand, and that has
positive spill-over effects onto purchase and loyalty
Determinants of negative attribution towards CSR campaigns

Lecture 4: Pricing
Pricing is the only marketing instrument that impacts revenue directly.
A study by McKinsey showed that price is the most
important factor in influencing operating profit
improvements (ranking above improvements in fixed
costs, volume and variable costs)

Consumer-centric definition
Price is the cost of receiving the benefits from a product/service over the life of its
ownership/use.
Securing Pricing Power
 In perfect competition (e.g. pure commodities), firms are price takers as price = marginal
costs
o There is no pricing power
 Marketing can allow us to secure some ‘monopoly’ power and hence have some pricing
power i.e. the ability to set prices (above marginal costs)

Generic Pricing Methods

Price Management
Three methods:
1. Cost-based pricing - According to the Bank of
England, this is the most popular pricing
method in the UK
2. Value-based pricing – this is the best way to
price
3. Competitor-based pricing

Cost-based pricing
In cost-based pricing, we determine the price of a product by considering the average full
cost per piece (fixed costs/number of units + unit variable costs) and adding a markup as
contribution to our profit

Price = average cost x (1 + percent markup)

Advantage
 Very easy to implement

Disadvantages
 Willingness to pay of consumers is not considered
o Revenue could be given away because of under-pricing which means that
revenue per unit that could have been earned if you had considered WTP is
lost
 Competitors’ prices are ignored
o Could end up pricing yourself out the market e.g. if you have highest industry
costs and then add markup to that you could end up being the most
expensive firm in the market, and then you’re not attractive to consumers
anymore

Circular Reasoning
o Costs are a function of how many units
you produce – the more units you
produce, the lower your costs will be
because they are economies of scale
o The price you charge has impact on demand and is impacted by unit costs. Costs are a
function of demand and so on.
o This is circular reasoning
When you come up with cost-based pricing, costs will be based on the demand, demand will
be based on the price, and price will be based on the costs – which presents an issue
To resolve
Companies typically set a fixed amount of demand, and they plan with that level of demand

Value-Based Pricing
Value-based pricing is a strategy of setting prices primarily based on a consumer’s perceived
value of a product or service

o Value based pricing is customer-focussed pricing, meaning companies base their pricing
on a customer’s willingness to pay
o Therefore, you must first measure the willingness to pay of your target segments
o There are multiple techniques to do this but the most simple is to ask your target
group what is the maximum they would pay for this service or product.

Advantage
o Tends to exploit the potential revenue

Disadvantage
o One needs to know the customers’ willingness to pay

Competitor-Based Pricing
In competition-based pricing, we determine the price of a
product by considering the competitor’s price and adding or
subtracting a difference in price
Selling price = competition price +/- difference in price

If you add a mark-up, you have a premium-price strategy

If you reduce, you have more of a mass type of strategy
where you are undercutting the price of the competitors

An example of this is the gas market where the pricing is

reactionary – stations copy each other/undercut
Advantage
o Easy to implement (can be fully automated)

Disadvantage
o Willingness to pay of consumers is not considered (potential revenue loss)
o Risk of price wars – these are likely to occur when:
o There is an extreme focus on competitive prices and getting the largest share of
the market
o Overcapacities - excessive capacity for production or services in relation to
demand.
 o Lack of product differentiation (as is the case with gas market) means that
competition is limited solely to price

The Economics of Pricing

Profit margin = Quantity sold (which is a function of price and inversely related to price)
multiplied by contribution per unit

Profit function

Profit function looks like an inverted U

This is because when you increase price, demand goes down,
but at the same time you increase the contribution per unit.

When you decrease price, demand goes up but contribution per

unit goes down.

At the maximum point, both forces are equally strong

How can we find the price at which profits are maximised?
o Take the derivative and set it equal to 0
o This is because the derivative is the slope of the curve
o Setting it equal to 0 lets you find the turning point i.e. the maximum
o The price that can be set is -1/elasticity of price

Price elasticity
Price elasticity defines the ratio of the relative change in demand with respect to the
relative change in demand (i.e., it describes how demand reacts to changes in price at a
specific point ) and usually has negative values, indicating that price and demand are
inversely related.

Understanding the Formula

Elasticity
o Elasticity measures the responsiveness of demand to price
o Example: elasticity of -2 -> when price increased by 10%, demand decreased by 20%
o At this elasticity, we should set the markup to be 50% = -1/-2

Mark-up
o Mark-up is equivalent to % difference of price compared to marginal costs (price-
marginal costs/marginal costs)

How does this map on the 3 archetypes of pricing?

This approach takes into account all of the 3 methods
1. Cost-based: you are adding a mark-up to your marginal costs
2. Value-based: the willingness to pay of consumers is reflected in the price elasticity
3. Competitor-based: elasticity is also influenced by competitors in the market, for
example if there is a strong competitor, consumers are likely to substitute for that,
resulting in a higher elasticity

Price Elasticities
o Elasticities are much lower for more essential commodities such as nappies vs stuff you
don’t really need like jam
o Inelastic demand (-1<e<0) is observed when:
o There are no available substitutes
o Necessity
o High switching costs
o Chance to brand product
Inelastic vs Elastic

To derive demand function and price

elasticity when launching a
completely new product, you can
conduct research via:
o Expert survey
o Customer surveys
o Market Data – econometric
methods are most commonly
used as they tend to be most
precise (supermarket scanner
data e.g.)

If econometric data not available:

o Price experiments – AB tests, where companies launch products at different price-
points and see how demand reacts
o Indirect consumer surveys – measures WTP using conjoint analysis
o Direct consumer surveys
o Expert surveys – 10-20 experts come up with WTP estimate

Pricing Strategies
There are 2 archetypes of pricing strategy:
1. Penetration strategy
2. Skimming strategy

Penetration strategy
The idea is to offer a new product at a very low price to
achieve diffusion and gain a high market share
o Higher sales volume will drive down costs: if you
produce more units, then cost per unit will decrease
due to experience curve effects
o Example: Disney+ launched with a very low price to
quickly gain market share
o At some point, they will raise their prices

o Conditions for success:

 o Consumers must be price-sensitive about your product as otherwise a low price
will not give you a high market share upfront
o You need to have experience curve effects– where your costs go down over time
the more units you produce
o Low price discourages competition because there is no way competitors can
make profit which acts as a deterrent (Think Porter’s 5 force, profitability of an
industry)
o Network effects - e.g. if you are starting a gym or social media, where the value
consumers get out of consuming a product is a function of how many other
consumers have signed up for that service

Skimming Strategy
This is what Apple typically do when introducing new
products
The idea is that a product is offered with an initial high price
to create a huge contribution per unit (i.e. maximised profit
per unit).
o This sends a quality signal to other consumers
Secondary versions are released at lower prices
o Example: Apple with the first launch of the Apple
watch that was launched at a very high price, newer
version were priced lower

Conditions for success:

o Enough consumers who are price-insensitive (i.e. have a high WTP) to create high
initial demand
o High quality signal
o Not excessive small-value unit costs – because this results in high production costs
(for only a small quantity of units that are being sold) and so prices would have to be
outrageously high to compensate
o Capacity constraints

Price Discrimination/Differentiation
Bundling

These consumers have different WTP for Product 1 and 2. Instead of either charging £60 or
charging £100, a form of price discrimination called bundling, would sell the two products
together at a price of £160.
o That way, both consumers will buy both products instead of one or the other/losing
revenue by selling at a lower price
o Bundling occurs when you have consumer segments in the market that have high
WTP for one product and low WTP for another:
 o You bundle the products together and charge the price that would
maximise revenue
o Example: McDonald’s with their meal deals – achieve higher revenue

Price Differentiation Definition

Price differentiation occurs when a company sells a product or service at two or more prices
that do not reflect proportional differences in costs and/or performance (i.e. the
products/services are highly similar)

To the left is an example of traditional price

differentiation. Demand curve.

Segment 2 has a higher WTP than segment 1.

Dilemma is that if you were to price at the WTP of
segment 2, you would lose segment 1, and if you
were to price at the level of segment 1, revenue
would be lower.

So in this case, you want to charge each segment at their level of WTP

Forms of implemematation:
o Demographic discrimination e.g. for
museum tickets, student, kids and family
prices as income level is different so WTP is
different. The museum will be able to
generate a higher revenue
o Geographical discrimination
o Temporal discrimination e.g. airlines, if you
book earlier, you pay less
o Benefit-based discrimination this is based on
the needs and preferences of the segments (think about the HDMI cable in TV vs
gaming departments)
o Quantity-based discrimination this is when you buy more products, you get lower
prices. If there are economies of scale in a company, they want you to buy more
o Bundling – see above

Boundary conditions for Price Differentiation

o There must be underlying differences in the market that the firm can identify
o Differences in consumer responsiveness to price
o Differences in demand (needs, desires, etc.)
o Different cost to serve different customers
o The firm needs to be able to set up a mechanism for separating customers
o The separating mechanism needs to be related to what distinguishes
customers
 o E.g. with Demographics it is easy as customers can self-select by showing
their ID
o Need some pricing power to differentiate the prices
o Consumers should not be able to engage in arbitrage – selling products on for a
higher price once acquired for a cheaper price
o Apple limits this by having a small student discount and limiting the number
of units one individual can consume

Pricing to Create Shared Value – Bertini, 2012

 Consumers nowadays aren’t passive price-takers – they care about the fairness of
pricing, taking to social media to expose unjust pricing policies, and abandoning
companies they feel are too aggressive with their pricing strategies
o E.g., Netflix in 2011 decided to implement a 60% increase in price for consumers
who rented DVDs and streamed videos. 800,000 users cancelled their service
causing Netflix’s market cap to fall by over 70%
 Problem is that firms think they are the ‘rightful owners of value’ and should price to the
extent that the market can manage. They exploit any consumer disadvantage e.g., lack
of information, limited choice and limited attention in the pursuit of profit.
 However, without the consumer, there is no demand and therefore there is no value.
Therefore, Bertini argues that value should be shared between consumer and firm, and
indeed value can be enlarged through effective collaboration between consumer and
firm.
 Shared value is about ‘expanding the total pool of economic and social value’
o Example is when a firm offers a well-thought discount which increases sales
volume and revenue, boosts referrals, and promotes positive brand attitudes and
loyalty.
 Price is one of the best ways to communicate shared value
o Brand campaigns can be dismissed as clever methods of persuasion
o Price puts the customer in control – it is robust
 What does a shared-value pricing approach to pricing look like?
1. Focus on relationships, not transactions
Sometimes pricing decisions undermine the relationship between brands and
followers. Focus on serving your customer’s needs rather than selling physical
products – can create additional value for customers and can capture more of
the market. E.g., London Olympics called themselves ‘Everybody’s games’ and
made sure that ticket prices reflected that they value people more than money.
Employed price discrimination based on demographics – age ‘pay your own age’
for younger attendants and discounted rates for over 65. Psychological utility
created by ensuring that no tickets were given away for free (a practice which
had caused outrage in previous Olympics)

2. Be proactive
Don’t set prices reactively, remember that customers are sensitive to sunk costs
and recurrent costs (as opposed to larger one-time fees). Price proactively in line
with specific consumers’ needs and how they will react to your pricing strategy.
E.g., Amazon realised that their customers disliked delivery costs and long
 delivery times, so introduced Amazon prime for an annual fee of $79 which
provided consumers with 2-day delivery for all of their purchases all year long.
This eliminated the act of paying individual delivery costs each time and
consumers actually bought more from Amazon to capitalise on the benefits of
the membership scheme. Amazon experienced a 30% increase in sales during the
recession years of 2008-2010, which many attribute to the introduction of
Amazon Prime.

3. Put a premium on flexibility

Pricing tends to be rigid – doesn’t take into account that different consumers
value the same product differently and what actually constitutes value for a
given consumer may vary over time. E.g.m where inflexible pricing has gone
wrong are mobile phone operators who offered ‘all you can eat’ data package -
has caused overloaded networks which diminish the experience of other
customers. Now trying to link pricing with data usage but high data users are
opposing the change.

4. Promote transparency
A firm that is transparent about how it achieves its revenue builds trust,
engagement and goodwill with its consumers. Engaged consumers are more
likely to be loyal, engage in up and cross-buying, and leave positive reviews. E.g.
London Olympics issued a continuous flow of information about the rationale of
ticket prices , major dates in ticket timelines, informed that more expensive
tickets had better views. This meant that media attempts to stir controversy
largely fell on deaf ears.

5. Manage the market’s standards for fairness (psychological utility)

When prices seem fair, consumers buy more and often are willing to pay a
premium. When prices are unfair, consumer punish companies. Perceptions of
fairness extend not to just the final prices but the process in which that price is
set. E.g. a company that has managed the expectations of fairness is IKEA – if
customers are willing to engage in the laborious process of getting through the
maze-like store, and assembling furniture themselves, they are rewarded with
good-looking furniture that is priced at 30-50% less than competitors’ offerings.

Behavioural Pricing
A lot of research into behavioural pricing was conducted by Richard Thaler, 1985.

Thaler’s findings
o Consumer’s WTP is not only driven by economic utility of transaction (perceived value –
price), but also by the psychological utility
o Psychological utility is also influenced by consumers’ perception of fairness (i.e. It is a
function of fairness)
o Psychological utility impacts WTP and purchase intention
o Thaler conducted a lot of experiments to find out what influenced what is perceived to
be fair. Below is a famous example

o Thaler predicted that if the person was a friend, you would charge a fair price, whereas,
if the person was a stranger, you would charge the market price
o This was confirmed by the results
o Average friend price was equal to the cost
o Average stranger price was equal to the market price
o This showed that what drives our fairness perception is the input costs of manufacturers
o Example in practice: Everlane, an online based clothing retailer, publishes the
manufacturing costs for every one of their products on their website (e.g. labour,
materials, transport etc.) They also provide a reference price which is the traditional
price of another manufacturer.
o Recall that Thaler’s research found that input price determines fairness
perceptions. This is what they are trying to capitalise on here.
o Providing competitor price makes it seem like you’re getting a bargain and
stimulates the anchoring bias.

Conclusion
Customers consider the economic
utility of the transaction as well as the
consistency between the actual price
and a salient reference price

In case 1, there is no reference price

since the prices are consistent. In case
2, the reference price is 20, and from there the price doubles. This makes the consumer
think that Case 2 is unfair.

Reference Price
Definition
Each price, in relation to which another price is judged.

Types
There are two different types of reference price:
o External reference price
o This is made up in specific buying situations and is based on observed prices in
the buying environment e.g.
 Prices of similar products of the same or other providers
  Price recommendations on the packaging or special offer signs
o Internal reference price
o These tend to be based on memorised/learned price concepts e.g.
 Prices paid in the past
 WTP
 Prices perceived as fair
 Prices paid by other persons

In practice – Anchoring and Adjustment

Research conducted by Nunes, 2004
When consumers were exposed to a random product with a low incidental price e.g. a
pullover for 10 euros and then asked to bid on a CD, the WTP was lower than when
consumers were exposed to the same random product but with a high incidental price (e..g
the same pullover but now priced at 80 euros)

The results show how the price of an unrelated commodity (which acts an external
reference price) can affect people’s WTP for another commodity – this is called anchoring
and adjustment heuristic
 Incidental, random numbers can serve as an anchor (a reference point for estimates
for prices, WTP levels) from which we adjust the price we pay for a product
 The adjustment tends to be insufficient and in this case we end up paying more.

Tversky and Kahneman’s wheel of fortune experiment

By this account, any number present in the environment or highly salient in memory at
the moment of judgment may function as an anchor, regardless of its source, context,
scale, or relevance.

Price Quality Heuristic

This refers to the phenomenon where people think the higher the price, the higher the
quality is

People tried the same wine but

priced at different points.

More expensive wine was

enjoyed more (objectively
measured via brain scan)!

This is the heuristic that people tend to go for

the middle option

If people have no set preferences, they go for

the middle option (same logic as the
asymmetrically dominated alternatives)
It is a way of reducing choice uncertainty

Valuation of digital goods

People paid more for a physical photograph than a digital one
This cannot be attribute to manufacturing costs (because this was assessed to be the same
for both the digital and physical photograph)
The reasons for this price disparity:
 Materiality of physical goods
 Greater possession-self link
with the physical good. The
consumer has more perceived
control over the good (you can
touch and feel it) and that is a
predictor of psychological
ownership (you feel like you
own it) and this results in
 greater connection to your self-concept. Therefore, you attribute more value to the
product.

Boundary conditions
 When consumers don’t expect to own the product e.g. renting
o An experiment was conducted where students were offered a textbook to buy or
to rent in a digital or physical form for a course they had been enrolled to
o They were told that the textbook resale value was 0 after the course was
completed
o For the digital textbook, WTP disparity was negligible between renting and
buying
o For the physical textbook, WTP disparity was huge: WTP to rent was much lower
than what it was to buy
o Psychological ownership when renting a physical product is lower compared to
purchasing a physical product -> less likely to attach it to your self-concept

 When the product is of low identity relevance to consumers

o An experiment was conducted where a physical Star Wars DVD was used vs a
streaming service of a Star Wars movie
o Consumers were asked to rank movies from 1-10, the higher the number the
more relevant the movie was to people’s self concept
o < Results show that for streaming
service, identity-relevance had
negligible effect on purchase intention
 However, for the
physical DVD, the
opposite was true
 The Johnson
Newman point gives
the point where the
two lines are
significantly different to each other which was deemed to be 6.74

If you don’t think something is relevant to your identity, your purchase intention isn’t
different between digital and physical goods.

Pricing implications
Prices for fans or for people for whom the purchase is identity relevant, you would price the
physical copy higher than the digital copy. (e.g. physical book more expensive than digital on
amazon.com)
Sales management
You can change the way digital goods are presented so that they seem more like physical
goods. That should increase the perceived ownership of the digital good -> allowing the firm
to price them a bit higher.
Segmentation
Conduct Market research to understand identity relevance of product category and
offerings to consumers
 You can segment the market based on fan-culture.
 If you have people that identify with a certain thing like a musician, you can price the
physical goods for those segments higher than digital goods.
Then, this also tells you where to advertise the physical goods vs the digital goods to
maximise revenue.

Lecture 5: Sales Management

Integrated Sales Channels
Direct sales – sales channels owned by the firm i.e. own brand stores, website
Indirect sales – sales channels owned by an intermediary i.e. third party retailers like
amazon, asos

Direct vs Indirect Sales

 The level of customization and complexity of the product: (e.g. healthcare)
o If a product is strongly aligned with the individual requirements of the customers
(specificity), direct sales is usually cost-efficient.
o The same also applies in the case of highly complex products e (see also the
empirical findings of Anderson 1985; Anderson and Gatignon1986; John and
Weitz 1988).
 o This also clarifies why direct sales play such a major role in the industrial goods
sector.
o Involves training of salespersons, customising the channel so that complex
information can be communicated – which might not be possible in indirect sales
because would have to train a third-party employee
 The number of customers/concentration of demand:
o when demand is very concentrated on a relatively small number of customers,
(i.e. If you’re selling to a niche like Harry’s razor blades who are targeting high-
income males ) direct sales tend to be the more efficient option (Jackson and
d’Amico 1989).
o On the other hand, indirect sales are usually the better alternative for a company
with a large and diffuse customer base.
 The monetary value of the product:
o products with a low monetary value are more often sold indirectly (see Anderson
and Schmittlein 1984; Ranganet al. 1992)
o This is because setting up direct sales channels so if you are selling cheap
products, the proportion of sales costs relative to the price of the product is fairly
high
 Direct sales channels allow access to transaction-and customer data which enables
sellers to know their customers, can observe shopping behaviour e.g. frequency of use.
o This data is valuable for developing strategy on how to target consumers better,
developing products which better suit consumer needs and preferences,

Depth of sales channels

 Zero level = direct sales, manufacturer sells directly to
consumer
 Two level = occurs typically for grocery, pharmaceutical products
o Wholesaler buys products from manufacturer in big batches and stores products
in warehouses
o Products are then distributed to retailers who buys smaller batches
o Then products are distributed to end consumer via retail shops and creating an
assortment
 One-level = difference is no wholesaler involved e.g. Waitrose, Aldi, which enables
retailer to save on costs
 o The trade-off is that the company has to be big enough to take on the role of a
wholesaler

Width of Sales Channels

Exclusive selling means

that the
distributors/retailers are
cherry-picked to create
and maintain the image of
exclusivity and to
guarantee a consistent
level of quality in the
retail experience
This is typical of luxury
manufacturers like Gucci.

Intensive selling is more typical for mass brands like Coca Cola – they want high market
coverage
Then there are companies which sit in between exclusive selling and intensive selling.

Integrated Sales Channels

1. Started off with traditional sales which were conducted primarily through physical
means
2. Then, e-commerce: companies set up websites and started selling online
3. Next, apps were created which were partly integrated with the website
4. Current state, hybrid sales: customers have online and offline channels which they
can access – these channels are integrated for a seamless customer experience. No
matter if you are shopping on the app or in a physical store, there should be same
level of personalisation, and communication of your data is available across all
channels. Industry is lagging on how to link physical stores with online channels, but
there has been some experimentation…
Store Concept

 It would appear (according to the graph) that in the US there’s a increasing trend of
physical stores closing – in 2020, there were 12,200 physical store closures – more
than the financial crisis of 2008.
 On other hand, flagship stores are opening like the Samsung one in NYC, which
opened in 2018 – experience the products, hang out, and have seasonal instalments
to display the new technology and experience the brand e.g. virtual reality rides. This
is also happening with other brands such as Nike and Amazon who have recently
launched physical bookstores and are planning to open 2000 grocery stores.

Case Study 1 – Bonobos and the Zero Inventory Store

Bonobos is a male apparel brand has been
touted as a pioneering brand for the launch
of its zero-inventory store – a new store
concept.

Beginning as an online-only brand, they moved

into physical stores with their main value
proposition being to serve men with better
fitting clothes. It was sold to Walmart 10 years
later for 350 million dollars.

Idea is you go into a store – small footprint

stores, which are organised like showrooms.
You can view all the products they manufacture
and try them on. You engage with the brand
and engage with the frontline workers instead
of focussing on buying things. If you decide to buy, there are tablets which you can order
from. The order will be shipped to a delivery address of your choosing, but it is not possible
to buy stuff from the store directly.

Research (Simon Bell et al, 2018) looked at the effects of showroom visiting on shopping
patterns. Graph below shows data that has been collated over 10 years and compares 3
parameters.
Orange columns show
customers that never visited the
store and are online-only.
Yellow columns show customers
prior to ‘supercharging’ – i.e.
before they visited the store.
Green columns show customers
that have been supercharged –
i.e. those that have purchased
online-only and then visited
stores.

Orange columns are indexed at 100, so everything is relative to that.

Findings
 Average transaction value went up by 41% after visiting the store
 Average time between purchases went down by 10%
 Average number of product categories purchased went up by 26%

The reason why this is happening is because people engage with the brand more when they
visit, develop more emotional attachment to the brand, and a greater sense of context. As a
result, they become more loyal – which comes into play when they purchase online in the
future. This is described as being more immersed in the brand experience (Bell et al, ‘The
Store is Dead- Long Live the Store’.)

Furthermore, being in physical store means that customers are more likely to search and
sample products from a broader set of categories. Physical interaction is required for this –
cannot be replicated via online channels only at the moment.

Another finding was that average return rate went down by 5% because of the ability to try
on products at the stores. This is in contrast to the online return rate experienced by
retailers like ASOS which experience rates of 40% - very costly.

Reading - (Bell et al, ‘The Store is Dead- Long Live the Store’.)
o Showroom experiences creates better consumers and better retailers
o Better consumers because they are exposed to the brand in a more immersive
and meaningful way. They can also resolve any uncertainties about the nondigital
attributes of the retailer’s products.
o Better retailers because when customers are physically inside their showrooms,
retailers can observe their behaviour e.g. emotional and sensory response to
products, salespeople, in-store stimuli etc. which can lead to reciprocal learning –
salespeople can learn to pick up on cues from customers and provide better
service, for example.
Case Study 2 – Zeng et al (2016) Chinese department store online/offline

This is a study based on a

department store in
China (Zeng et al, 2016).
They made online-only
customers visit physical
stores and offline-only
customers visit online
stores. Sample size of
56,000 customers used.
Coupons were used to be
able to track people.

Findings
 People that lived close to a store, no type of coupon made any difference.
 Amongst those that lived further away who were online-only shoppers, the coupon
for physical store generated twice as much profit as control group (who did not
receive any coupon), and the flexible coupon (for either online or offline) increased
profits by 800%
 But for customers who previously were offline shoppers (i.e. only physical stores
shoppers), the online only coupon caused profits to fall by 51%)
This shows that you can increase your profits by getting customers to occasionally shop in
physical stores – why?
 When consumers shop in physical stores, they tend to impulse buy more which
increases revenue. Physical stores are often designed to have concepts e.g.
positioning of products close to checkout, that trigger spontaneous buying
behaviour.
 Consumers also purchase more experiential goods like clothes, make-up, shoes
in-person because of the ability to try it on and experience the product.

Therefore, the ideal distribution concepts links both physical stores and the online world.
Current limitations are that brands are unsure how to integrate the two and lack the data
warehouse to create a personalised experience in the online world.

Frontline Workers
 Examples of frontline workers include the Apple geniuses, Starbucks baristas, Big Issue
newspaper sellers.
 Frontline workers communicate the brand value through their behaviour to customers.
 Their behaviour contributes to a consumer’s brand experience
 Success of branding of services depends on whether frontline workers live up to brand
promises and brand values
o I.e. there can be positive or negative spillover effects depending on how well
they interface with the customers
 o If the experience is inconsistent for the consumer, brand equity is killed off as the
entire brand comes across as inauthentic

Case study – the RoadWay Study

 Fake brand called RoadWay which sells equipment for offroad motorcycling, with brand
personality dimension of ruggedness.
 Then consumers would meet a frontline worker who was either consistent (leather
trousers) or inconsistent (watering plants, button-down shirt)
 Then, brand-value perception (i.e. how rugged the brand was) and attitude towards the
brand was measured
 Results showed that inconsistent brand
behaviour brought down perceptions of
ruggedness by 2.54 units whilst consistent
brand behaviour brought this perception
up.
 Consistent brand behaviour also raised
favourability of brand by more compared to
inconsistent behaviour

Compensation and Performance Measurements

To ensure that consistent brand-behaviour is maintained in frontline workers there are
compensation and performance measures in place
1. Encourage brand building behaviour
2. Improve frontline workers performance
3. Identify over and under- performance
aTypes of performance measures (Metrics)

 These are stratified into objective and subjective performance measures

o Which are further themselves stratified into behaviour and outcome-based
measures
 Outcomes looks at the KPIs that an individual achieves
 Behaviour looks at how those KPIs are achieved – this is important because negative
behaviour like coercing customers (which harms customer satisfaction and perception of
brand) into buying things can result in ‘positive’ outcomes, like high sales volume.
 Subjective measures tend to look at things which are hard to measure objectively like
leaderships, support of peers, contribution to team success.

Characteristics of Effective Performance Measures

Influence Tactics
These are the tactics salespeople use to create compliance.

Normative influence tactics

 Foot-in-the-door technique – generate compliance through consistency
o Works by getting consumer to agree to a small favour and then a larger one
o E.g. can you sign a pledge for protecting wildlife? Then, ask to donate £10 to the
cause
o People want to behave consistently so if they agreed to the first request, they
are more likely to agree to the second one
 Door-in-the-face technique – generate compliance through reciprocity
o This works by asking for a very large, borderline outrageous favour (which the
consumer will say no to), and then asking a smaller, more reasonable request
o E.g. Can you donate £100 to protecting wildlife? Can you at least do £5?
o Study (Cialdini, 1975): The extreme request was posed to students at a university
to work as voluntary counsellors at a detention centre for 2 hours a week for a
minimum of 2 years. Then the smaller request was for the student to go out with
a group from the detention centre and take them on a day-trip to the zoo on one
afternoon/evening for 2 hours. The control group was exposed to both requests
and asked if they would be interested in signing up to either of the programmes.
 Results: very underpowered study (only 24 students in each scenario) but
the results have been replicated many times later
 People exposed to extreme then smaller (door in the face technique)
generated compliance for the smaller request of 50%
 Vs. smaller request only generated compliance of 16.7%
 Control group compliance was 25%

Social information tactic

 This tactic works by providing social proof to people
 Social proof means that you are giving a behavioural standard of how people similar to
yourself behave in certain conditions. Consumers then resort to the behavioural
standard
 This tactic tends to work better when you prime that there is identity similarity to people
in the consumer’s age-group/behavioural group
 Below is a study done at a hotel trying to encourage guests to reuse their towels. One
token group received a message without social proof, the other group received token
that conveyed social proof (‘almost 75% of guests who are asked reuse their towels).

Results of this study:

For the standard, no social
information, environmental
message, 35% of guests
reused their towels

For the message that

provided social information,
43% of guests reused their
towels.
Loyal Customers as Central Goal
Why are loyal customers a central goal of sales and distribution?
 Loyal customers tend to be more profitable
 Typically, when you acquire new customers you have set up costs, acquiring costs, which
bring down profits in the initial customer lifetime stages, and then those profits go up
over time.
o No acquisition costs selling to existing customers
o Profits from reduced operation costs
o Additional profits from referrals i.e Positive WOM
 A key driver of profitability is and up and cross buying where consumers buy more
products (volume and upgrading) and additional products (across the line)
o Cross-buying is 2 to 5 times greater with existing customers than new ones
(Kamakura, 2008)

Loyalty and Discounts

 Consumers request discounts for their loyalty
 A study on a European jewellery chain showed that highly loyal customers received an
average discount of 10.8% compared to low loyalty customers who received a discount
of around 7.9%
o Loyalty was measured via frequency of store visits
 This is costly for companies (negative impact on revenues and profitability) and destroys
reference prices (as every time the discount is given, the customer’s internal reference
price is lowered, and in the future customer expects more whilst WTP is lower)
o This is called the loyalty discount cycle
 Loyal customers have greater perceived negotiation power (because they think their
loyalty is an asset to the provider) and greater reward expectation (based on their
loyalty), and as a result, they claim higher discounts
o E.g. with phone contract companies
 To mitigate this:
o Companies can reward loyal customers with non-financial incentives so sending a
thank you card or inviting customer to extra services
Lecture 6: Consumer Behaviour

The Power of Defaults - Choice

This graph shows the consent percentage
for organ donations in different countries.
What is the difference between yellow
countries and blue ones?
Cannot be attributed to cultural
differences because Denmark and
Sweden, Germany and Austria, are
considered culturally similar but have
vastly different consent rates
 For yellow countries, organ donation is NOT the default. They have to opt-in
o People don’t check the opt-in box and hence their organs are not donated
 Blue countries, organ donation IS the default. People must opt-out
o People don’t check the opt-out box and hence their organs are donated
 This is the result of status quo bias
o People are unwilling to make decisions if they are unsure how to go about
deciding i.e., if it’s a complex decision, if they don’t have set preferences
o So they just go with the default i.e. whatever has been chosen for them
 This is done frequently in marketing – ‘check this box if you don’t want to receive
promotional material’ <- people don’t check the box
Self-Signals from Choices – Choice and Context effects

 Classic economic theory would predict that the utility of the chosen item is independent
of the non-chosen items in the choice set
o i.e. the utility from choosing the red apple from Set A and Set B are the same
 The idea is that choosing a red apply over a green apple (Set B) would bring you less
utility than choosing the red apple in Set A
o This is because choosing a red apple over a Snickers would send a positive self-
signal that you are a moral and strong person for resisting temptation
 Original study by Dhar et al, 2012 asked study participants to choose from which set
picking a cookie would give them the most satisfaction: a homogenous choice set (only
containing unhealthy snacks) or a mixed choice set (containing both healthy and
unhealthy snacks) or neither.
o 54% of study participants said choosing from the homogenous set would give
them the greater satisfaction vs 22% from the mixed set
o This is because choosing from the homogenous set does not bring about a
negative self-signal, because there are only vices.
o Also works in the opposite direction i.e., choosing prunes from mixed vs only
healthy snacks choice sets. Choosing prunes from mixed choice set derives
greater satisfaction.
o This is a phenomenon called context effects which is contrary to classic economic
theory
 There are two boundary conditions:
 The magnitude of the self-signalling utility depends on
o The intensity of the temptation from the non-chosen options
 The more you need to resist temptation, the stronger the self-signal you
get, and the higher the utility you derive
o The possibility of people to attribute choice to their underlying self.
 For example, choosing a virtue (e.g., a less tasty but healthy prunes) from
a mixed opportunity set that also includes tempting vices serves as a
stronger positive self-signal than choosing the virtue from a
homogeneous opportunity set that consists of healthy items only.
 If choice of the alternative option is impossible (e.g., because one is
allergic or if there is a price discount) self-signaling effects disappear
because people can no longer attribute their choice to an underlying
characteristic about themselves (for price discount example, people
attribute their choice to the price as opposed to an underlying desirable
characteristic)
o Effects of self-signalling are stronger for people with low self-concept clarity (this
refers to how well one knows oneself, and how stable one’s character traits are)
 People who know themselves well don’t get impressed by their choices
 This implies that, in contrast to standard economic theory, non-chosen options can
potentially influence the utility associated with the chosen option

Availability Heuristic – Evaluation and Judgement

If it is easy for us to retrieve information about something, this will influence the way we
perceive that thing - i.e. the higher the probability of that thing to occur and the more we
like the thing
 This judgmental heuristic has been demonstrated in the literature
o Participants were given a page of written English text which contained a large
proportion of words where ‘r’ was the third letter
o They were then asked if ‘r’ was more likely to be the third letter in words or the
first letter
o Despite having read the text, most people said ‘r’ was most likely to be the first
letter (wrong answer)
o This is because it is much easier to recall words which begin with ‘r’ than have ‘r’
as the third letter
A more applied example:
One group was asked to
name 10 reasons to choose
a BMW whereas the other
was asked to give only one
reason. Group 2 had a
more favourable attitude
towards BMW because it is
easier to find one reason
than 10.
Favourability towards
Mercedes was then assessed. For the group asked to name one reason,
favourability was greater for BMW. For the group that was asked for 10 reasons,
favourability was greater for Mercedes.

Availability heuristic – there are situations in which consumers base judgements on the
ease with which they can bring information about an object to mind

Hedonic Editing
This is based on prospect theory (Thaler, 1980) – losses loom larger than gains shown by
asymmetric curve
Prospect theory has been criticised:
- It has been found to only apply to large
losses
- The mechanism is called loss aversion
Hedonic editing is an extension of prospect
theory.
Thaler asked the question of whether the
occasions of losses/gains made a difference –
e.g. would we prefer to win/lose £100 once
 or £50 twice? It was found out that it does, based on the same asymmetry principle as
prospect theory.
Hedonic Principles
 Segregate gains – people would prefer to be exposed to more wins than just one big win
 Integrate losses – people would prefer one loss rather than being exposed to two even if
the loss constitutes the same monetary sum

Application
 For all-inclusive holidays, you pay only once – so the pain of payment is integrated, and
then you have a lot of occasions of pleasure because everything is included and free
o Pleasure is segmented
 Same goes for designing roller-coasters, people are happier with multiple shorter rides
than one long one.

Temporal Non-Monoticity
 Duration plays a small role in retrospective evaluations of events
 Peak effect (the emotional peak in an episode) and the final moments of episodes are
dominating such evaluations and shape the favourability of our memories
 Kahneman classic experiment – people underwent two trials, randomised order,
controlled for dominant/non-dominant hand:
o First trial was 60 seconds in 14 degrees water
o Second trial was 60 seconds in 14 degrees water followed by 30 seconds in 15
degrees water
o Participants were asked which trial they’d rather do again and 70% chose the
longer trial because the finish was slightly less unpleasurable
o Same results have been replicated in other trials e.g. Redelmeier colonoscopy
trial where tip of device was left in rectum for 3 additional minutes without being
used vs taken out. Most people rated the longer procedure as less painful
because the end of the procedure was less unpleasurable. During the procedure,
there was no difference in pain level between the two groups.
 Implication: focus on the customer end-of-encounter experience
o Airlines give chocolate freebie at the end of the flight

Protection Motivation
To get people to not smoke anymore, to get vaccinated etc. the protection motivation
theory model can be used:

The model includes 4 indicators that increase consumer protection motivation:

 Severity of threat – how threatening a particular activity is to one’s health
 Perceived vulnerability – does the subject feel that they may be harmed by this activity
o There is an interaction between the two above. Severity of threat is dependent
on perceived vulnerability such that the severity of threat only matters when
there is high perceived vulnerability – there is a multiplicative effect
 Self-efficacy – does the subject believe they can engage in behaviour that would protect
themselves?
 Response-efficacy – how good is the behaviour that would prevent the health issue
from occurring?

and 2 indicators that decrease consumer protection motivation:

 Perceived costs – this refers to the cost (both monetary and psychological) of the
protective behaviour e.g losing smoking breaks, psychological costs
 Perceived benefits – this refers to the benefits (both monetary and psychological) of the
injurious activity e.g. socialisation from smoking, peer group effect
Lecture 7: Guest Lecture – Strategic Pricing
Advantages of Pricing vs Cost Reductions
 Lower initial investment – since cost-cutting
usually requires higher investment e.g. in more
efficient production equipment
 Faster effect – since price adjustments can
theoretically be done in a second
 Higher profit impact - pricing is the most
important lever in manipulating profit according
to the profit formula (assumption that there is
no corresponding change in volume)

Strategic Pricing
Pricing operating model should cover everything that touches on pricing. Consists of:
 Pricing strategy
 Operation pricing
 Price enforcement

Pricing has impacts on:

 Mindset – pricing can become an emotional
topic, acting as a hurdle in good firm-
consumer relationships
 Controlling – “What you can’t measure, you can’t control” develop tracking
methodologies and dashboard to control the prices
 Incentives – from a sales perspective, it is easier to sell a product at lower price. This
impacts profitability. Therefore, it is necessary to develop fitting incentives
 Organisation – need to have the manpower and IT structure for pricing changes

Clarify price positioning

Determining the price position is a prerequisite for well-informed pricing decisions

Key questions
Where are we now (where are my competitors?)
What do we want to achieve?
How do we get there? (marketing mix)

Must develop within the consistency corridor

A move away from the current price position is a strong
signal and this can either be friendly (providing less value
for a lower price) or hostile (providing more value for a
lower price)

Value Pricing – Porsche Example

 In 2005, Porsche introduced the new coupé Cayman S which was based on an existing
car they had in the market, the convertible Boxster S
o How were they going to price the coupé?
 Traditionally, convertibles are priced higher in the market than the like-for-like hardtop
coupé version – it is industry practice
 What value does the Cayman bring?
o Engine mounted in the middle – makes for more even weight distribution
from a speed perspective
o Hard top means that the whole body of the car is stiffer and therefore
quicker
o This makes the Cayman the ideal sports car (if it had the same engine as the
iconic 911 it would be the quickest round the track)
 What was the recommendation?
o Market the Cayman as the ideal sports car
o Add more horsepower to the Cayman compared to the Boxster
o Still have the natural fencing to separate the Cayman from the 911 (their
premium sports car offering)
o Different product name
o Specific positioning as an intermediate between the Boxster and the 911
 In this way, Porsche successfully sold the Cayman for more than its convertible
equivalent, debunking conventional wisdom.

Bundling
Take the McDonald’s meal – one of the most famous bundles globally
They set an incentive to buy something we don’t really want (the fries and drink) by making
it seem like a great deal.

How to construct the perfect bundle?

 Leader product – a high value product that most consumer want or ‘must’ buy.
Consumers will purchase leaders anyway so don’t include too many of these in the
bundle. In the case of McDonald’s these are the burgers, nuggets (main meal).
 Filler Products – Medium value products that most customers consider ‘nice to have’.
Customers transfer excess willingness-to-pay from high value to medium value items.
For McDonald’s, these are the fries and drink.
 No ‘Killer’ Products – Exclude products for which many have a low willingness to pay or
doesn’t fit with the leader product. The discount would have to be so high that the
bundle doesn’t make sense.

Price Metrics
It’s worth being innovative with price metrics – doesn’t always have to be £ per unit.

e.g. Coca Cola in the 90s had a vending machine which would change
the price of a coke according to the temperature outside – i.e. on
hotter days, the coke would be more expensive.
However, this needs to be balanced with ethical pricing.

Best practice price metric change

Coffee used to be sold as beans only – 5-6€ per 500g. But then
Nespresso came up with the concept of capsules retailing for around
37c per capsule. This was a very good move, because if you projected to a two-person
household over 5 years, a lot more money was paid to Nespresso compared to a coffee
bean retailer.

Behavioural Pricing
 Due to framing effects, we perceive 9.99€ as much cheaper than 10€
 Anchoring – WTP can be biased by random number at point of sale
 Quality-price effect – Price and quality are combined
 Default options – pizza with just a tomato base and it costs to have to put on toppings vs
a pizza with all the toppings and you can select which ones to take off. The one where
you had to opt-out on average had more toppings, which correlates with a higher price.

Lecture 8: Exam Prep

Question 1: Product and Brand Management

PART A
Recall from Anderson 2006 paper, ideally when crafting your value proposition you have
two points of difference, one point of parity so you would base the USP on A1 and A2. In this
case you only have one point of difference because with respect to A3, the brand is inferior
with respect to the competitor so cannot be used as a point of difference.

PART B
Positive word of mouth, Repurchase, and Cross and Up-Buying

PART C
Recall that social information works better when people perceive identity relevance in the
claim. Could say something like 85% of upper-class people purchase upper-class-clean – this
way you convey how the majority behave and the perceived similarity between the target
group and the reference group.

PART D
Tracksuits don’t really convey brand value of sophistication. In the study, there were two
EVs that were negatively impacted by inconsistent frontline worker behaviour:
- Brand perception – brand appears less sophisticated
- Brand attitude – favourability towards brand decreases
These consequences emerge because brand equity is destroyed – the brand appears
inauthentic and untrustworthy

PART E
Send a coupon to the online only customers to attract them to the stores. This would boost
revenue because of impulsive buying behaviour, the fact that they will be able to engage
with the brand, interact with the frontline workers, and the fact that they will be able to try
out the product which means that they will purchase more experiential products such as
makeup and clothes. Don’t give coupon to the offline only customers – study shows that
giving them online coupon actually decreased sales/ sending offline voucher didn’t make a
difference. Study also showed that this effect was only true for people who lived further
away from stores – a boundary condition which must be taken into account in terms of
deciding who to distribute the coupon to.

PART F
Going into new product category like an air purifier for example. For category extensions to
become successful, there are certain conditions:
- Perceived fit of brand transfer between the extension and the parent brand.
- Fit has been defined as the extent to which a consumer believes that the new product is
a reasonable and expected extension of the brand.
- Without fit the new brand may not gain customer acceptance and confuse the consumer
and the brand personality i.e. negative spill-over effect.
- Consequently, consumer based-brand equity may be decreased
- Numerous brand extensions can also lead to a credibility loss of the parent brand.
- What companies do typically is test out the extension in test market or create
prototypes and have a sample of consumer evaluate the prototype to see whether is fit.
Question 2: Pricing

PART A
Walnut P is employing skimming strategy – prices start high and then go down with time.
For subsequent launches, the initial price gets lower. Example of a brand that employs this
strategy is Apple.
Reasons for why a company does this:
3 reasons: 1) profitability 2) capacity constraints 3) high quality
signal
The idea is that a product is offered with an initial high price to create a huge contribution
per unit (i.e. maximised profit per unit) which increases revenue and profits . Often when a
product is launched there are capacity constraints (production can’t be ramped up to cater
for full market demand) and so to exploit this, there is initially a high price, to maximise
profitability. High price also sends a quality signal to other consumers
o Example: Apple with the first launch of the Apple watch that was launched at a very
high price, newer version were priced lower
Conditions for success:
o Enough consumers who are high price-insensitive (i.e. have a high WTP) to create
high initial demand
o High quality signal so that consumers can justify the high price paid
 o Not excessive small-value unit costs – because this results in high production costs
(for only a small quantity of units that are being sold) and so prices would have to be
outrageously high to compensate.
o Capacity constraints

PART B
1. Anchoring and adjustment- set an external reference price which will act as an
anchor at the point of sale. Since there is insufficient adjustment to the anchor, there
will be increased WTP
2. Compromise effect – if you have three different options, consumers will tend to go
for the middle one if they have no set preferences
3. Psychological utility – prime fairness by making production costs transparent and
price fairness perception will lead to higher WTP
4. Asymmetric dominance effect

PART C
Can’t see very clearly but there are two bars – the competitor bar
acts as a reference price e.g. Dell Screen retailing for £1000 vs out
screen retailing for £1200. The difference between the two bars is
the price premium.

Advantage of competitor-based approach is that is easy to

implement, easy to measure – companies most likely have the
manpower and IT structure to manage this, and less costly to
implement. Cons of competitor-based approach: you do not
consider willingness-to-pay which might mean that you miss out on additional revenue that
could have been earned.

PART D
This concept is based on price discrimination. Price differentiation
occurs when a company sells a product or service at two or more
prices that do not reflect proportional differences in costs and/or
performance (i.e. the products/services are highly similar). The
segments have different WTP and the difference in price points
reflect this. By doing so, you can maximise profits. On graph you
can see two triangles at top and bottom which are additional profit.
Question 3: Communication Decisions

PART A
This question is centred around the Berger and Milkman Paper. Results indicate that
positive content is more viral than negative content. Sharing is not about valence alone.
Virality is partially driven by physiological arousal or activation as it is also known as.
 Content that evokes high-arousal positive (awe) or negative (anger or anxiety)
emotions is more viral.
 Content that evokes low-arousal, or deactivating, emotions (e.g., sadness) is less
viral.
To evoke consumer activation, there are stimuli you can use – which can be elaborated on
e.g. emotional, physical, cognitive

PART B
High involvement product so you use the central route of processing in the elaboration
likelihood model. Use central cues – cognitively stimulate the consumer using strong, well-
qualified argument and information as opposed to emotional cues. Central route processing
involves high elaboration of a stimulus. You really think about the quality of arguments,
scrutinise it even and check for plausibility, resulting in a strong, positive attitude. No need
to repeat too often.

PART C
After students have finished exam they might not have high cognitive ability because their
cognitive capacity is low (being brain dead after the exam, ego depleted, no motivation to
process complex information) so even if the product that is being advertised is high
involvement, the ad will go through peripheral route processing. This means that a weak
attitude will be cultivated.

PART D
Make the ad based more on emotional cues as opposed to rational arguments. Need more
frequent exposure and in order to combat effects of wear out create variate ads.