Value Creation through Product Positioning “Horizontal pricing”

1. Value Creation through Product Positioning“Horizontal pricing” Markets and Prices in Agribusiness AG BM 420

2. Schedule for this module • Today overview • Homework – go out an look at food products • Thurs……..Discuss project for this module • Next Tues lecture on prices and product attributes • Next Thurs In the field – gather data for your project Markets and Prices in Agribusiness

3. Key questions • What do we mean by product position? • How does product positioning create value? • How can we predict the value of a product position? • Can we think of product positioning as arbitrage? • If products are highly differentiated, search cost increases for consumers, how will they find them? • Branding • Advertising • Labeling • Does horizontal price variation reflect variation in product attributes? Is there structure to horiz. price variation? Markets and Prices in Agribusiness

4. Bigger questions……… • Why does an economy generate an ever changing basket of products? • Is product differentiation good for an economy? • If product differentiation increases search cost, and highly differentiated products have a short life, what is the point? What do you think? Economic growth is reflected not only through per capita income levels of a country but also through the quality of products due to the transition from generating goods with lower value added to goods with higher economic value produced in developed countries. Markets and Prices in Agribusiness

5. Horizontal Price Variation • Ketchup • Ice cream • Artisanal Cheese • Beef w/wo fat Markets and Prices in Agribusiness

6. Price of sugar in ice cream Markets and Prices in Agribusiness

7. What goes into the price of artisanal cheese? Markets and Prices in Agribusiness

8. Product positioning as arbitrage • Suppose you produce pickles • What aspects of your product define its value? • How do those compare vs. other pickle products? • What is the “product position” of your pickles? Markets and Prices in Agribusiness

9. Product space, categories, & product • What is a pickle? • What is ice cream? • A product is a bundle of attributes……… Markets and Prices in Agribusiness

10. Product space as geometry • Define a “product” as a bundle of characteristics or “attributes” some of which are valued by the consumer. • Examples: Ice cream – packaging, volume, fat content, ….. flavor? • Define the list (vector) of product attributes for product j as: Aj =[a1, a2,…..an] Markets and Prices in Agribusiness

11. Product space as geometry Define the list (vector) of product attributes for product j as: Aj =[a1j, a2j,…..anj ] Consider the “position” of product j vs, product i How could we describe “position”? Markets and Prices in Agribusiness

12. Product space as geometry Define the list (vector) of product attributes for product j as: Aj =[a1j, a2j,…..anj ] How could we describe “position”? Consider any particular attribute, say the kth aki akj Markets and Prices in Agribusiness

13. Product space as geometry We could also define the “distance” between the attribute positions……this describes “quality” of ith product relative to jth product. dk, ij = aki / akj aki akj Markets and Prices in Agribusiness

14. Product space as geometry Suppose the product has n attributes, then you have an n-dimensional “space” Each product has a unique position in that space. Example in three dimensions…… Markets and Prices in Agribusiness

15. Product space as geometry Example in three dimensions…… 4 products vary in Fat, calories, and volume or size….. Markets and Prices in Agribusiness

16. Product space as geometry Example in three dimensions…… 12 products vary in Fat, calories, and volume or size….. Markets and Prices in Agribusiness

17. Product position and prices We could also define the “distance” using price, Can we think of price as an indicator of relative value of the bundle of attributes in one vs another product? Suppose the products have only one attribute……… rk,ij = pki / pkj = ($/aki)/ ($/akj)= akj /aki = dk,ij aki akj Markets and Prices in Agribusiness

18. Ice cream is ice cream? Markets and Prices in Agribusiness

19. Think of ice cream’s product space Suppose you could compare the attributes of each product. Define each product’s position as its “distance” from another product. Product space Define a product space as “conceptual” space in which “similar products” reside…… Products are in the same product space if they are such close substitutes that the consumer will choose only on product type in each product space. Markets and Prices in Agribusiness

20. Why “space” ? • Although products in the same product space are similar, they differ by the mix of attributes that define them. • We can define the “distance” between products based on a measure of how similar they are. e.g. difference in probability of choice…… Markets and Prices in Agribusiness

21. Product category • Product category is the name given to a set of products in the same product space. Markets and Prices in Agribusiness

22. How could we define the “ice cream” product space? • Ice cream attributes? • Package size • Flavor • Fat • Sugar • Brand Markets and Prices in Agribusiness

23. Product space, category, and product • Ice cream is product category Product category – • Ice cream has several product spaces …….what are they? • A particular ice cream product…… Markets and Prices in Agribusiness

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25. Nutritional Information on Food Labels - product attributes of value? • nutrition panel • list of ingredients • serving size and no. of servings • nutrient content claims • health claims Markets and Prices in Agribusiness

26. New Food Label Markets and Prices in Agribusiness

27. Nutrient Content Claims: Characterize the Level of Nutrient • High, • Good Source, More • Light, Low • Free • No sugar Added • Unsalted • Reduced Markets and Prices in Agribusiness

28. Other food product attributes • Cause-related claims (pink, images on label) • Expiration date • Technology of origin • Country of origin • Ingredients • Manufacturer, plant # • Batch of manufacture • Brand reputation Markets and Prices in Agribusiness

29. Conclusion - • In a general way, all products are characterized by gazillions (sp?) of attributes. Is price an attribute? Implications: Firms must • Decide what to produce  product position • Decide how to price the products Why are these questions irrelevant in a perfectly competitive market setting? (the textbook case…) Markets and Prices in Agribusiness

30. What is product position? The marketing story: Value is created by • Product attributes • Price • Promotion • Placement (location) Positioning Markets and Prices in Agribusiness

31. Concept definition: product positioning Product position Actual ? Or Perceived? Perceived….is the placement of the product in the consumer’s mind within the spectrum of related products…….within the product space! Markets and Prices in Agribusiness

32. Intuition….. What is involved in product positioning? • Specify physical product attributes - measurable and identical for all consumers • Create product perception - this may vary across consumers e.g.? What is a Prius? Perception is not limited to physical attributes… • Specify the price – price is an attribute? • Specify the venue of sale • Specify transaction characteristics Markets and Prices in Agribusiness

33. Appeals and claims………. • In food, health claims are apparently important to consumers……. • Fat amount & type\ • Sweetners • Preservatives • Magic powers Markets and Prices in Agribusiness

34. Health claims……… Markets and Prices in Agribusiness

35. Health Claims: Characterize the Relationship of a Nutrient to a Disease • Dietary sugar alcohol and dental cavities • “Frequent between-meal consumption of foods high in sugars and starches promotes tooth decay. The sugar alcohols in this food do not promote tooth decay” • sugarless candy and gum Markets and Prices in Agribusiness

36. Health Claims: Characterize the Relationship of a Nutrient to a Disease • Folate and neural tube birth defects • “Healthful diets with adequate folate may reduce a woman’s risk of having a child with a brain or spinal cord birth defect” • enriched cereal grain products, dried beans, peas, oranges, grapefruit, berries, fortified breakfast cereals Markets and Prices in Agribusiness

37. Health Claims: Characterize the Relationship of a Nutrient to a Disease • Fiber and coronary heart disease • “Diets low in saturated fat and cholesterol that include 3 g of soluble fiber from whole oats per day may reduce the risk of heart disease” • oatmeal cookies, muffins, oat bran Markets and Prices in Agribusiness

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39. Can Nutritional Labels create value? • only 12% of Americans eating healthfully • 4 of the top 10 causes of death (heart disease, cancer, stroke, diabetes) are associated with poor diets • diet-related health conditions cost US society $250 billion annually in medical costs and lost productivity

40. Or……claims can be ….well consider Anheiser-Busch Product attributes • Unit size • Labeled ingredients • Measurable characteristics • Fizzy • Scent (olfactories) • Mouth feel • Taste Markets and Prices in Agribusiness

41. A-B is the brand that Product positioning: (www.anheuser.busch.com) • Provides refreshing difference relative other brands: clean, crisp, .. • Premium quality (the best) • Made using all natural ingredients • Long heritage of quality, American roots • Affiliated with world class sports Markets and Prices in Agribusiness

42. Positioning Strategy 1. Identify the relevant set of competing products or brands and physical attributes and characteristics 2. Determine current perceptions held by consumers about your product/brand and the competition. 3. Develop possible positioning themes. 4. Screen the positioning alternatives and select the most appealing one. Markets and Prices in Agribusiness

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44. Creating value by product positioning • Is there value to be harvested? • See readings • Price of a DVD player vs. “Blue Ray” Markets and Prices in Agribusiness

45. Implications of Product Differentiation • Search costs increase • Consumer can possibly find exactly what they want. What is the value of “black model T” vs. what we have to choose from today? Markets and Prices in Agribusiness

46. Bases for product differentiation • Physical attributes – • “quality” • Functional attributes • Packaging & volume of unit • Bundled attributes (pop top can opening) • Perceived attributes • Bundled services Review: Think about your product, what are the bases for differentiating it? Markets and Prices in Agribusiness

47. Brand value: a price of what?

48. Labeling Position with Brand • Brand is a symbol that identifies or labels a product position Check Chevron to see an example of how a corporation manages perception of its brand http://www.chevron.com/prodserv/aviation/Brandvalue.shtml • What is the positioning of • Bacardi? • Fresh milk? • Angus beef? Markets and Prices in Agribusiness

49. Types of brands • Multinational (MNB) • National (NB) • Private label (PL) • Premium private label (PPL) Markets and Prices in Agribusiness

50. Brands • Definitions A National Brand (NB) is a brand name used by a manufacturer whenever that product is sold. For example, Del Monte is a national brand for food products. National brand marketing requires greater advertising expenditure on the part of the manufacturer to compete with lower priced private label brands. If consumer preference for the national brand is strong, then pricing can be high enough to support the additional advertising and provide the desired profit margin. National brands are often perceived to be of higher quality and can therefore demand a premium price. Many national brands are now experiencing a loss of market share to private label brands as a result of the narrowing quality gap. Private label (PL) products are typically those manufactured or provided by one company for offer under another company's brand. Private label goods and services are available in a wide range of industries from food to cosmetics to web hosting. They are often positioned as lower cost alternatives to regional, national or international brands, although recently some private label brands have been positioned as "premium" brands to compete with existing "name" brands (All Business, 2010). Discount Private Labels (DPL) are the classical private labels, where the enterprise saves expenditures in production and marketing in order to gain the cost leadership in this product category. Price is the main consumer attraction here, so the distributor doesn’t need to invest in high promotion expenditures. Premium Private Labels (PPL) are competing with ordinary National Brands at higher price levels. The higher price level enables the supermarket chain, to earn more margin profit, but this added profit is needed to set a focus on the strengths of this premium private label and to promote them: this could be superior quality promoted by a certain quality or ethic seal (e.g. fair trade), an organic seal, etc. Markets and Prices in Agribusiness