Principles of Marketing-WK4

1. Describe the difference between product and service. What is ESPN selling? Discuss this in terms of the core benefit, actual product, and augmented product levels of ESPN.

2. Expalin why brand equity is important to the seller. Does ESPN have strong brand equity? How does its brand equity relate to its brand value?

3. Assume the company expects to sell 300 million ounces of M&M Premiums within the first year after introduction but expects that half of those sales will come from buyers who would normally purchase M&M regular candies (that is, cannibalized sales). Assuming the sales of regular M&M candies are normally 1 billion ounces per year and that the company will incur an increase in fixed costs of $5 million during the first year of production for M&M Premiums, will the new product be profitable for the company? Refer to the discussion of cannibalization in Appendix 2: Marketing by the Numbers for an explanation regarding how to conduct this analysis.

4. When introducing new products, some manufacturers set a high initial price and then reduce price later. However, reducing price also reduces contribution margins, which in turn impacts profitability. To be profitable, the reduced price must sufficiently increase sales. For example, a company with a contribution margin of 30 percent on sales of $60,000,000 realizes a total contribution to fixed costs and profits of $18 million ($60 million x 0.30 = $18 million). If this company decreases price, the contribution margin will also decrease. So to maintain or increase profitability, the price reduction must increase sales considerably.

5. 1. Refer to Appendix 2, Marketing by the Numbers, and calculate the new contribution margin for the company discussed above if it reduces price by 10 percent. Assume that unit variable costs are $70 and the original price was $100.

5. 2. What level of total sales must a company capture at the new price to maintain the same level of total contribution as before the price reduction (that is, total contribution = $18 million) ?

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