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

Value Creation through Product Positioning“Horizontal pricing”

Markets and Prices in Agribusiness

AG BM 420

(c) R.D. Weaver AGBM 420


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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



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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?



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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.



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Horizontal Price Variation

Ketchup Ice cream Artisanal Cheese Beef w/wo fat



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Price of sugar in ice creamSugar

0

0.5

1

1.5

2

2.5

3

3.5

4

0 5 10 15 20 25 30

Grams



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What goes into the price of artisanal cheese?

Product Attributes & Their Price Effectsnote what sheet and model used

-15

-10

-5

0

5

10

15

20

25

30

$/P

ou

nd



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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?



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Product space, categories, & product What is a pickle?

What is ice cream?

A product is a bundle of attributes………



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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]



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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”?



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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

akjaki



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We could also define the “distance” between the attribute positions……this describes “quality” of ith product relative to jth product.

dk, ij = aki / akj

akjaki



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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……



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4 products vary in

Fat, calories, and volume or size…..

0

0.2

0.4

0.6

0.8

1

Fat

1 pint quart 1/2 gal gallon

zero

lo

norm

al

Size



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12 products vary in

Fat, calories, and volume or size…..

0102030405060

Fat

1 pint quart 1/ 2gal

gallonzero

Size

Calories

Product position(/ serving 4 oz)

0-10 10-20 20-30 30-40 40-50 50-60



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Product position and pricesWe 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

akjaki



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Ice cream is ice cream?



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Think of ice cream’s product spaceSuppose 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.



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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……



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Product category Product category is the name given to a set of

products in the same product space.



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How could we define the “ice cream” product space? Ice cream attributes?

Package size Flavor Fat Sugar Brand



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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……



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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



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New Food Label



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Nutrient Content Claims: Characterize the Level of Nutrient

High, Good Source, More Light, Low Free No sugar Added Unsalted Reduced



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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



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Conclusion -

In a general way, all products are characterized by gazillions (sp?) of attributes. Is price an attribute?

Implications: Firms must 1) Decide what to produce product position2) Decide how to price the products

Why are these questions irrelevant in a perfectly competitive market setting? (the textbook case…)



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What is product position?

The marketing story: Value is created by Product attributes Price Promotion Placement (location)

Positioning



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Concept definition: product positioningProduct 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!



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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



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Appeals and claims……….

In food, health claims are apparently important to consumers…….

Fat amount & type\ Sweetners Preservatives Magic powers



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Health claims………



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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



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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



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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



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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



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Or……claims can be ….well consider Anheiser-BuschProduct attributes

Unit size Labeled ingredients Measurable characteristics

Fizzy Scent (olfactories) Mouth feel Taste



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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



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Positioning Strategy

1. Identify the relevant set of competing products or brands and physical attributes and characteristics2. 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.



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Creating value by product positioning Is there value to be harvested? See readings

Price of a DVD player vs. “Blue Ray”



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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?



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Bases for product differentiation Physical attributes –

“quality” Functional attributes

Packaging & volume of unit Bundled attributes (pop top can opening) Perceived attributes Bundled servicesReview: Think about your product, what are the

bases for differentiating it?

Brand value: a price of what?



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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?



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Types of brands

Multinational (MNB) National (NB) Private label (PL) Premium private label (PPL)



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Brands

DefinitionsA 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.



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Why are brands used?

Some say to create a niche in which pricing power can be exercised.

Thoughts?



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Why are brands used?

Industry most often argues, brands serve as signals to help consumers find the product…

Thoughts?



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Take a look at brand value

Best Global Brands 2008

In BusinessWeek ’s annual ranking of the 100 Best Global Brands, several companies are keeping their U.S. marketing budgets steady, as a percentage of ...

Read Romancing the Consumer…..



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Measuring Brand Value

Identify the price of the market leader in a market segment Plt

generic Pgt

the price of any other product in that same market segment Pit

Define relative brand value = Plt – Pit

Absolute brand value = Pit - Pgt



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Creation of brand value

Brand value looks like arbitrage return!

As arbitrage: Brand development involves taking a product from one

product position to another to create value.

How? Research to find the best positioning Investment to create the positioning



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Brand creation as an economic activity As arbitrage:

Investment yields stream of returns Investment decision = arbitrage decision

Does branding create value in the economy? Branding creates product identity? Branding reduces search costs?



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Wrap up – What are key questions? Understanding the economics of product differentiation Implications of product differentiation

Managing search costs & Creating product characteristics Branding Labeling Advertising

Understanding “ how-to” Pricing a differentiated product Measure “category” prices: price indexes latent prices (price of

bread?) Valuation of product attributes



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Key concepts ~ starters…..

Product differentiation, product positioning Product space, product category Branding, brand equity, labeling, …. What else did we cover?

Documents

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