BUS4098 Week 3

Number of Models in Styling Budgets

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Business Simulation

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Number of Models and Styling Budgets

Now we can answer the first question: What do you understand about the market? In the footwear industry, there are a number of different markets with different trait bundles and different degrees of differentiation. The branded markets run the range from high price-sensitive on one end to high differentiation-oriented on the other end, with a lot in between. But different markets have different percentages of customers in each category and different weights for the traits in the trait bundle. Understanding the trait distributions in all the markets is, therefore, a critical first step.

Now let's answer the second question.

The second question asks: How do you want to approach that market? It should be clear now why answering this question is critical to answering questions about the number of models, the styling budget, and the other marketing questions. If you want to be a high-end player, you need more models and sharp styling to be successful. But if you want to be at the low end, then fewer models and less styling will result in cost savings and decrease in prices, thereby addressing the most important variable for the customers.

As you look across the footwear industry, you will see the extent to which successful firms have done a good job of aligning their marketing choices on all the marketing variables with the traits of the market that they are addressing. Similarly, firms that are doing poorly have misaligned these traits. These are general rules, but like all general rules, a few added considerations may help enrich your understanding further. Let's discuss some of these considerations.

First, although the more price-sensitive customers are generally not willing to pay more for differentiation traits, they will prefer products or services with these traits when they cost the same as those without these traits. Therefore, firms often find it valuable to slip in a little differentiation and take a low per-unit profit margin, rather than passing along the increased cost to the customers. This, in turn, drives volume higher so that the firm's net income increases. However, this has limited benefits. If rivals copy these moves, there is no resulting volume advantage; there are only higher costs for trying to follow a low-cost strategy.

Second, price signaling is an important variable to consider. In many situations, customers may not have complete information about the quality of a product. Here, they rely on the price to hint at the quality. Therefore, a high-priced shoe will signal high quality, whereas its quality may just be average. However, you cannot take this consideration too far. If quality decreases drastically but the price remains high, then word will get out and sales will plummet. Remember that customers buy passed-on perceptions that you create, which may or may not be real.

Third, remember that just because differentiation is required, all differentiation variables don't have to be emphasized. This is best explained with the power of celebrities. Celebrity identification is a strong factor, particularly in markets where the celebrity has a strong image rating. Here, customers will purchase the product endorsed by their favorite celebrity and ignore other weak traits that it may have. But the extent to which these other traits bring in more customers or increase pricing power may be

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Business Simulation

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[Parent Lecture Name]

marginal. Once again your understanding of the market is critical to know what combinations make sense.

Finally, don't forget the private label. This market has certain requirements. Most dramatically, it emphasizes the role of cost/price management. Therefore, unless you are using the private label market as a place to send excess productions from factories geared to high-end markets, your answers to the two questions should lead you to the minimally acceptable decisions on all marketing variables.