Download Chapter 5: Marketing Considerations

Chapter 5: Marketing Considerations
This chapter discusses marketing related issues, such as selecting target customer segment,
deciding how amber jewelry has to be positioned and choosing correspondent to it pricing
method, and lastly defining the appropriate elements of promotional mix. Since it has been
already decided for Lithuanian firm to export offering through sales representative or
distributor, this chapter can be useful for Taiwanese party or Lithuanian company can refer
for the future procedures.
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Marketing
Considerations
Target Customer
Segments
Product
Positioning
Lower Cost
Differentiation
Pricing
Factors
Influencing
Pricing
Pricing
Methods
Selecting Pricing
Strategy
Promotion
Figure 5.1: Chapter Contents
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Section 1: Target Customer Segments
“Segmentation is often the key to developing a sustainable competitive offering.” A
successful segmentation is the concept, which states that despite the reduced market space, it
is possible to create a dominant position that competitors will be unwilling or unable to attack
successfully. Segmentation strategy should be able to answer three important questions:
1. Can offering be developed and implemented that will be appealing to the target
segment?
2. Can appeal of the offering and the subsequent relationship with the target segment be
maintained over the time despite competitive responses?
3. Is the resulting business from the target segment worthwhile, given the investment
required to develop and market an offering tailored to it?
Defining the segment it is important to choose the segment-defining variables for the offering.
In the below table depicted most suitable variables for the selected product offering, which in
this case is amber jewelry.
Table 5.1: Defining segments
Segment
Geographic
Sex
Age
Occupation
Characteristics
Taipei city
Young and senior women
From around 20 to 50
Students, business ladies
Taipei City was chosen as a market entry location due to the before mentioned reason as it is
the largest city in Taiwan with the highest number of income recipients, furthermore the
income level is higher compared to other locations. Obviously, the competition is imminent,
but the right product positioning, pricing, sales channels it can be bypassed since here trying
to be designed the offering to fulfill missing potential customers needs.
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Probably if there were be no women, many businesses would never be developed. In general,
women more than men like smarten up, wear make-up, jewelry. Not surprising that the
selected sex segment targeting women, furthermore, since starting from around 20 to 50 years
person is considered employed and earning the most of his/her income, thus, from this age
segment can be expected the highest portion of customers.
The last part discusses occupation. In connection with the age segment, can be projected
segment group occupation, which is likelihood starting from students to business ladies,
maybe even women taking managing or executive positions.
In summary, the selected customer segment is women living in Taipei, who are around 20 –
50 years old, that are working or having income from other parties.
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Section 2: Positioning of the Offering
Product positioning is the allocation product in the market alongside key competitors in the
mind of consumers. It refers to the place the product occupies in the consumers perceptual
map in the market. This section focuses to create the future image and attitude of the
consumers towards the Lithuanian amber jewelry.
The first step is to find companies strengths. Porter (1980) described a category scheme
consisting of three general types of strategies that are commonly used by businesses: cost
leadership, differentiation, and market segmentation (or focus). The following table illustrates
Porter’s generic strategies.
Table 5.2: Porter’s generic strategies
Target Scope
Broad (Industry Wide)
Narrow (Market Segment)
Advantage
Low Cost
Cost Leadership Strategy
Focus Strategy (low cost)
Product Uniqueness
Differentiation Strategy
Focus Strategy
(differentiation)
As discussed in the previous chapter “Market Entry Strategy“, it has already been decided
that the best tactics to enter is the Strike Force strategy, which focuses on narrowly defined
market. Compliying with this decision the upper segment of the above table must be
eliminated leaving a discussion to the lower segment and here there are two options: low cost
and differentiation.
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Section 2.1: Lower Cost
Comparingly lower cost can be achieved employing simplier to other competitors distribution
scheme, which is depicted Figure 5.2.
Exporter
Exporter
Distributor
Sales Rep
Importer
Retailer
Distributor
Wholesaler
Retailer
Figure 5.2: Comparison: Lithuanian company‘s versus competitors‘ distribution
scheme.
It is very evident that competitors has more complicated distribution scheme resulting in a bit
higher price. Eliminating one or two blocks in Lithuanian company‘s scheme leaves more
flexibility adjusting the price to the market demand so as to increase the sales volume in order
to gain more profits.
In addition, to bypassing some blocks in the distribution scheme there is one more advantage
compared to other competitors, which are usually Taiwanese companies buying from foreign
firms (mostly Polish). When there are foreign companies doing business, it is almost
impossible avoid culural differences between two parties. Those differences often result in
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also increase cost and/or decrease efficiency of communication. Therefore, two different
companies will bear costs associated with the cultural differences. There are many
discrepancies between Lithuanian and Taiwanese cultures, but in terms of business, the main
barriers exist in language differencies and the way of processing information and tasks.
Obviously, it is very hard to find Taiwanese who can speak Lithuanian. On the other hand,
there are few Lithuanians speaking Chinese, but sometimes for those people who have
studied Sinology 15 and know Mandarin it is difficult to understand business terms and
elements, it is hard for that person successfuly implement bargaining. Even if the
representatives from two sides can speak English, still their spoken English will be related to
their native language and translating directly from native language can generate
misunderstanding between two parties. Moreover, Lithuania is considered as a low-context
culture, while Taiwan as a high-context, so there are some misapprehensions in terms the way
things have to done and the speed of getting them done. Solution to this problem is to employ
Lithuanian person to work in Taiwanese company. That person must have business
knowledge living in Taiwan experience, preferred working in Taiwan experience, but this is
not necessary as the main point here is understanding Taiwanese culture, so to smooth away
cultural problems.
Section 2.2: Differentiation
The nature of product suggests that differentiation is invetable. Amber jewelry comes in
various designs and since it is usually made by professional designers, only few similar items
could be seen in the market. Considering the fact that this company will be the only
15
The study of Chinese history and language and culture.
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Lithuanian jewelry supplier16 in Taiwan market, this even more reduces the probability to
meet similar design items.
What is more important that it will take the time for local companies to copy imported
products as they will first have to buy raw amber ship to Taiwan and purchase special
equipment in order to process amber. And knowing the fact that the demand for amber
jewelry is not high (so far), it is pretty profitless to start. Of course, there can be expected
similar fake amber products, but knowledgeable customers can easily distinguish such
products and those who are looking for quality and real items are not loath obtaining such.
To conclude, Lithuania amber jewelry can be positioned as a good quality jewelry for the
middle income consumer, so as to best match the selcted target customer segment. However,
to gain the lower cost characteristics so have the advantages compared to other competitors,
in addition Taiwanese importer should hire native Lithuanian.
16
Now majority of amber jewellery is imported from Poland, Ukraine and Check Republic.
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Section 3: Pricing
Price is one of four important elements of the marketing mix. It is closely related to
positioning affecting other marketing mix elements, such as product features, channel
decisions and promotion. There is a tradeoff between price and product quality, so the price is
an important variable in product positioning. In other words, if the price is set too low,
customers might perceive product as the low quality, which can result in their reluctance to
buy in the short run. In the long run they will eventually find out, but then the company might
face the difficulties to achieve its set profit margin. And in opposite, if the price is set too
high, there will be less sales volume since many customers simply will not be able to afford.
Hence, it is important to find the middle point to balance the product image and the sales
volume. Therefore, first there is a discussion regarding factors impacting pricing decision,
second, pricing methods and finally, making pricing decision to balance all discussed factors.
Section 3.1: Factors Influencing Pricing
There many pricing strategy methods, which must be chosen to match demand curve, costs,
environmental factors and pricing objectives.
A. Demand Curve of Amber Jewelry
Jewelry is considered as a luxury good. Even though a lot of women (and men) wear it every
day, but they do not buy it as often as necessity goods, only on some occasions and several
times a year, when there is enough amount of money has been saved for this kind of purchase.
The elasticity of demand for this category items is greater than 1 and on the plot diagram the
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curve is nearly horizontal, suggesting even minor price changes will result in a large shift of
quantity demanded: the price change and the change in total revenue move in opposite
directions, that increasing the price will result in the drop of revenue, and in opposite, the
decrease of price will lead to the revenue increase. Therefore, it is essential to get as low as
possible cost to maintain the set profit margin.
B. Costs
Since the product already exists in other markets, the price has been determined there and the
supplier will approximate price. This is the primary cost and the production costs of the
amber jewelry do not has to be taken into account since it is already included in the price set
by the jewelry producers. To that price must be added other costs, such as shipment cost, duty
taxes, distribution cost and etc.
C. Environmental Factors
In Taiwan amber jewelry sellers bear the same type of costs, then adding the profit margin to
determine the final price. And considering that there only few amber jewelry suppliers in this
market, competition is note very intense giving the freedom to choose best pricing method.
D. Pricing Objectives
Company’s pricing objectives must be identified in order to determine the optimal pricing.
Common objectives of superincumbent companies include following:
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•
Current profit maximization – only focuses on maximizing current profit, taking
into account revenue and costs. This strategy does not consider the long-term
situations, so it may not be the best objective if results in lower long-term profits.
•
Current revenue maximization – focuses only on maximizing current revenue
regardless the profit margin.
•
Maximize quantity – seeks to maximize the number of units sold or the number of
customers served in order to lower long-term costs as predicted by the experience
curve.
•
Maximize profit margin – targets to maximize the unit profit margin, recognizing
that quantities will be low.
•
Quality leadership – price is employed to signal high quality. The objective to
position product as the quality leader.
•
Partial cost recovery – company that has other revenue sources may seek only
partial cost recovery.
•
Survival – when the market is declining or has overcapacity, the firm may choose the
price, which will cover costs and permit to remain in the market. This objective is
temporary as the market situation will change and the company will switch to the
price so as to maximize profits.
•
Status quo – the firm may seek price stabilization in order to avoid price wars and
maintain a moderate but stable profit level.
For the discussed company several points has to be mentioned: first, it is the new incomer, so
it does not have any customer base; second, Strike Force market entry has been selected
suggesting that the company has to be non-aggressive and focused; final, amber jewelry is a
luxury good and setting price, which is to low can damage the image. The matching pricing
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objective would be status quo, so the company could penetrate the market without causing
any turbulence.
Section 3.2: Pricing Methods
Companies may make use of several pricing methods in order to achieve their pricing
objectives. The main methods include premium pricing, penetration pricing, economy pricing
and price skimming; however there are many other important approaches, but here will be
mentioned the one related to discussed product:
•
Premium pricing – high price is set due to the product or service uniqueness. This is
approach is used by the firms that have a substantial competitive advantage.
•
Price skimming – high price is charged because of substantial competitive advantage
to attempt to “skim the cream”. However this advantage is sustainable and the high
price sooner or later will attract new competitors, and the price will fall to the
increased supply. This approach is appropriate when the demand expected to be
relatively inelastic; that is, customers are not price sensitive.
•
Penetration pricing – this method is used by incoming companies whose goal is to
gain the market share. It is appropriate when demand is expected to be highly elastic;
that is, customers are price sensitive and the quantity demanded will increase
significantly as price declines.
•
Economy pricing – the cost of marketing and manufacturing are kept at minimum, so
as the product price. This is demand oriented pricing and often practiced by
supermarkets that have economy brands.
•
Psychological pricing – this method is used, when the marketer wants the consumer
to respond on an emotional, rather than rational basis.
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•
Product bundle pricing – combining several products in the same package. This
method serves to move old stock or slow buying goods.
•
Promotional pricing – applying promotional techniques in order to increase sales.
The first four of above mentioned most suit for new products or incoming companies, while
the rest generally used for promotional reasons in order to get more customer attention and
could be applied by the already existent firms that know their experience curve. Therefore
psychological pricing, product bundle pricing and promotional pricing will be included in the
later analysis.
Beyond the above mentioned, there is one more commonly used by firms – cost plus pricing.
It is easy to calculate and requires little information. Simply set the price at the production
cost plus certain profit margin.
After defining all possible pricing methods, now has to be selected the one that best matches
company’s market entry strategy, target segment, product positioning strategy, product
demand curve and pricing objective. Summary of previous mention is presented in Figure 5.3.
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Market Entry
Strategy:
Strike Force
Pricing:
Elastic demand
curve, status quo
pricing
objectives, costs
Strategy
Target Segment:
Young and senior
women living in
Taipei
Product
Positioning:
High quality for
middle income
customer
Figure 5.3: Summary points of company’s strategy.
Following the figure the pricing strategy will be selected.
Section 3.3: Selecting Pricing Strategy
To choose the pricing strategy, all pricing methods was plotted into the matrix according to
the three variables: price, quality and type of demand. Even though price and demand are
quantitative measures, but to match the “quality” variable, which is a qualitative variable,
they are also converted to the qualitative ones and depicted in Figure 5.4.
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Low
Economy,
Cost-plus
Penetration,
Cost-plus
Skimming,
Cost-plus
Premium,
Cost-plus
Price
High
Demand
Elastic
Inelastic
Low
High
Quality
Figure 5.4: Pricing strategy mix.
For new products or new companies that want to win market share or maximize profit margin,
skim pricing and penetration pricing strategies often are employed, however, for importing
company skimming is not suitable because it does not match the demand firm will face.
Economy pricing is related to the low price and lower quality products and often used by the
supermarkets to market their brands. This approach is most suitable when selling necessities,
but not luxuries, so it does not match product positioning concept. Penetration pricing is
referred to large quantities, when companies want to gain market share. This approach might
create turbulence in the market and the intense competition can be expected from the
competitor side as a response to this pricing. And as Strike Force tactics has been selected as
the best, thus, penetration pricing does not comply with it. The last one is cost-plus pricing,
which is probably the safest pricing strategy since applying it profit margin can be achieved
to ensure the company’s survival and it is easy to manipulate by changing the profit margin:
if there is a need to increase sales volume, profit margin can be lowered and in opposite, if
the sales volume is too high, profit margin can be raised.
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Section 4: Setting Price Bands
This section identifies the specific price bands taking into account selected customer segment
and that the position offering is considered as good quality. This implies that it would be
inappropriate choosing very cheap and lower quality items to import, such as costing 100
NTD or less. Furthermore, the target customer segment is middle income ladies ranging from
20 to 50 years, it is necessary to define class boundaries because 20 – 50 years is too big year
range and cannot be used to define only one group since within that year interval incomes,
tastes and needs for different age women are changing. Therefore, the suggested class
boundary is 5 years, the first class interval ranging from 20 to 24 years, the second from 25 to
29 years, and so on, until they have been tallied into 6 classes. The reason for choosing class
boundary of 5 years is if looking at the first interval, the lady of 20 – 24 years old is still a
student, with a limited income; the jewellery she would select is simple, not heavy and
comparatively cheap. Later on she starts working, and with the income the needs grow, with
the age the tastes change. Usually more mature ladies prefer heavier and more exposed
jewellery; this fact implies the higher price. Class intervals and price bands are presented in
table 5.3.
Table 5.3: Projected price distribution among classes of targeted customers
Class Interval (years)
Price Band (NTD)
20 – 24
500 – 2,000
25 – 29
2,000 – 2,500
30 – 34
2,000 – 3,000
35 – 39
2,000 – 4,000
40 – 44
2,000 – 5,000
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45 – 49
2,000 – 10,000
From the table, the prices of the imported items should fit the range from 500 NTD to around
10,000 NTD. Of course there might be some “price migration” within the classes as it is hard
exactly to predict the needs, and there might happen that the student would be willing to
purchase the product, which was targeted for 35 – 39 year old woman.
Section 5: Promotion
Promotion is very important element of the 4 P’s marketing mix; particularly in this case,
since many Taiwanese are not aware of the amber jewellery, thus, it is needful to formulate
the strategy in order to get people interested in the offering. What is interesting about
Taiwanese that they are very curious, this curiosity is very helpful when raising the interest of
new product and there is no need for very aggressive promotion. Moreover, the population
density in Taipei (and in Taiwan in general) is very high and “word of mouth” technique
often serves as method to promote product and/or services.
There are many elements of promotional mix, but some of them do not fit here and the ones
should be considered are as follows:
1. Advertising. There are many advertising 'media' such as newspapers (local,
national, free, trade), magazines and journals, television (local, national,
terrestrial, satellite) cinema, outdoor advertising (such as posters, bus sides). For
the time being, the importer should consider very expensive techniques and
rather proceed with women magazines and posters.
2. Sales promotion. This is very powerful method because many Taiwanese
“swallow the bait” and has been noticed that many stores apply this technique
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while starting the business. However, each sales promotion should be carefully
costed and compared with the next best alternative
3. Trade fairs and exhibitions. This approach is very useful for making new
contacts and renewing old ones. Since in Taipei annually there are held several
jewellery exhibitions, thus, it is a good opportunity to make Lithuanian amber
more exposed to interested parties: sellers and end customers.
These promotion methods should be considered just for the starting point and of course
constantly applied, so as to raise the popularity and remind customers of the existence in the
market. In the long run, if the business appears to be successful, importer (or Lithuanian
company, if it sets the business entity in Taiwan) should review the strategy and might
include advertising on television and/or sponsorship. However, these two require more
financial resources and can be applied if the sales, profit and in general company’s targets are
met.
To summarize marketing related issues, it is recommended start selling Lithuanian amber
jewellery in Taipei, targeting 20 – 50 year old middle and upper income since the discussed
offering is positioned as a good quality and so expensive product. The best starting pricing
method to apply is cost-plus method since it is easy to manipulate and it can serve to build
experience curve. The importer/distributor should select the items so as the price in Taiwan
would be within the range of 500 – 10,000 NTD and surely implement promotion to let
customers know about the product as nescience of amber jewellery appear to be one of the
biggest problems for the incumbent companies.
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