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Marketing 220 Final Study Guide

Session 12: New Products
o Def: anything that can be offered to a market for attention, acquisition,
or use that might satisfy a want/need.
o From a marketing perspective, a product is “new” if customers
perceive it as new
Types of innovations
o Measured by innovation continuum
o Examples
 The first iPhone was discontinuous, but then the rest of the
releases were continuous
 Products that changed entertainment
 JVC video recorder (VCR)
 Followed by CD Player
 Followed by Nintendo Wii
New Product Development Process
80% of new products fail or dramatically underperform, why?
o Ask around for the reasons from lecture
The process has many steps
Idea Generation
o Two sources for ideas
 Internal
 External
o Internal
 R&D departments
 This comes with high product development costs
 Often the source of technological products
 Also common source for breakthrough products
o External
 Crowdsourcing
 Def: obtaining information by enlisting services of large
group of people, paid or unpaid. Usually done through
the internet
 Competitors
 Different ways to battle competitors
o Reverse engineering
 Reproduction of another manufacturer’s
product following examination of its
o “Me too” or copycat products
 Outsourcing
 Def: using external parties for idea generation and
strategy development to get new products into the
o Screening ideas
 Follow RWW
 Does it address a real need?
 Can we win? (Sustainable competitive advantage?)
 Is it worth doing? (Sufficient profit potential?)
Concept Development and Testing
o Expand ideas into more concrete/complete product concepts
o Describes the features the product should have and their benefits
o Test different concepts with target customers (eg. Through test
Marketing Strategy Development
o Find the strategy to introduce it to the target market
o Done through
 Identifying target market
 Estimate its size
 Determine how the product can be positioned
 Plan pricing, distribution, and promotion expenditures
necessary for roll-out
Business Analysis
o In order to see if there’s a business case for the product, need to
 Projected sales, costs, profits
 Company’s objectives
 Company’s capabilities
Technical/Product Development
o Work with engineers to refine design and production process
o Develop one or more prototypes
o Evaluate prototypes with prospective customers
Market Testing
o Try out the completing marketing plan (4P’s) in a small geographic
area that is similar to larger target market
o This reduces uncertainty, but comes with tradeoffs
 Expensive
 Takes time
 Competition can see what you’re up to
o Must decide on timing
o Must decide on where to introduce the product (eg. Single location vs.
state vs. region vs. nationally etc.)
o Must develop a market rollout plan
Consumer Adoption and Diffusion Process
o The process by which a consumer/business customer begins to buy
and use a new product/service/idea
o Describes how the use of a product/service spreads throughout a
o AKA adoption rate
Diffusion Process
o Concerned with broader issue of how a product is communicated and
adopted throughout a marketplace
o Customer profiles
 Innovators (enthusiasts)
 Risk-taking
 Young
 Higher social status
 Financial liquidity
 Early Adopters (visionaries)
 More judicious
 Opinion leaders
 Higher social status
 Well-educated
 Financial liquidity
 Early Majority (pragmatists)
 Follow early adopters
 Late Majority (conservatives)
 Average person
 Lower social status
 Unsure of innovation
 Laggards (skeptics)
 Advanced in age
 Lower in social status
 Fewer financial resources
 Resistant to change
Factors affecting rate of adoption/diffusion process
o Relative advantage
 When a product innovation is perceived as better than an
existing product
 Positively correlated with an innovation’s adoption rate
 Examples of better things it offers
 Aesthetics
 Social benefits
 Immediacy of reward
o Compatibility
 Positively correlated with an innovation’s adoption rate
 Overcome perception of incompatibility with heavy advertising
o Complexity
 Inverse relationship with an innovation’s adoption rate
 Overcome perception of complexity through demonstrations,
personal selling, and emphasis on easy use
o Trialability
 Use a product on a limited basis before completely putting it
onto the market
 Reduces risk
 Experience provides credible information
o Observability/communicability
 When the product user can observe the positive effects of the
new product
 Positive correlation b/w visibility and adoption rate
o Total time for adoption can be reduced
 I.e. the parabola becomes narrower
New products can also bring losses
o Eg. Online grocery shopping means you can’t choose the freshest
o Ways to avoid these losses
 Make behaviorally compatible products (eg. Prius)
 Be patient
 Find believers (find people who prize the new product
Session 13: Product Lifecycle
Product Lifecycle (PLC)
o Def: refers to the way product categories evolve over time, from their
“births” to their “deaths.”
o Marketing strategies must change and evolve even as a product moves
through the PLC
Since products almost always die, companies must always introduce more
Lifecycle durations (as well as the durations of each stage) can vary
There are four stages, and the graph can look like this
The Four Stages
 Introduction
o Goals: get first-time buyers to try the product
o Sales: increase at a steady but slow pace
o Profits: usually negative or low
o Price: Either high (to recover R&D costs) or low (to attract a large
number of customers)
o Marketing Communications: informing customers and creating
o Distribution: intensive personal selling to retailers and wholesalers
o Nutri-Grain by Kellogg’s case study
 By introduction stage had 50% of the growing cereal bar
 Growth
o Goals: maximize market share
o Sales: rapid increase (which in turn creates economies of scale)
o Profits: increase, max out, and then plateau
o Price: may need to reduce because of increased competition
o Marketing Communications: heavy advertising (either brand or
comparative ads) to counter competition
o Distribution: Wide
 Maturity
o Goals: maximize profits and defend market share
o Sales: peak, plateau, and then often decline
o Profits: decline
o Price: usually lowers to maintain market share
o Marketing communications: sales promotion
o Distribution: Wide
o Product: product lines are widened or expanded on
o Nutri-Grain by Kellogg’s case study
 Sales were growing until around 2000, when category sales
(and Kellogg’s share)
 Kellogg’s then expanded into other products
o Strategies in the Maturity stage
 Modifying the product
 This could attract more users and/or inspire more
 How?
o Add new features
o Improve durability, reliability, etc.
o Improve styling and attractiveness
 Increasing consumption of the current product
 How?
o Look for ways to increase usage among present
customers (eg. Sales)
o Look for new users and market segments
o Reposition the brand to appeal to a larger and/or
fast-growing segment
 Decline
o Goals: remain profitable and decide whether to keep or phase product
Sales: decline
Profits: decline
Price: may be lowered if the product is still profitable
Marketing Communications: reduced to lower costs and maintain
 Products live and die
 Marketers need to be aware of the PLC and adjust their strategy accordingly
 Growth stage doesn’t last forever
 Companies must always develop new products to replace the dying ones.
Session 14: Managing the Brand
Customer Lifetime Value
o The value of the entire stream of purchases that a single customer
would make over a lifetime of patronage
 Definition
o A name, term, sign, symbol, design, or some combination of these, that
identifies the products/services of one or more sellers and
differentiates those from their competitors
 Examples of what makes a brand
o Brand name
o URLs
o Logos + Symbols
o Characters
o Slogans
o Jingles
 Products vs. Brands
o Products
 Do something
 Defined by their function and specs
 Expand choices
 Can be identical to other products
o Brands
 Stand for something
 Defined by their associations and their emotional impact
 Simplify choices
 No two brands are identical
 Brand equity
o Definition: set of brand assets and liabilities linked to the brand, its
name and symbol, that add or subtract value to a product/service
o Elements of brand equity
 Brand loyalty
 Name awareness
 Perceived quality
 Brand associations
 Other propriety assets
o Measuring brand equity
 Many different ways of measuring it
 Can measure it at consumer and market level
 Consumer level example
 Willingness-to-pay for branded vs. generic products
 Different companies have different ways to measure it at
market level
 On average, brands contribute to around 1/3 of a company’s
total market value
 Memory
o Memory is an associative network
o Your brand will be linked with many other concepts
 Company (who makes the product)
 Country of origin (where it’s made)
 Spokesperson or endorser
 Sporting or cultural event
Product Line Decisions
 Product line
o Definition: a firm’s total product offering designed to satisfy a similar
need for target consumers
o Kellogg’s line of cereals is a good example
 All Bran
 Raisin Bran
 Etc.
 Product Mix
o Definition: a firm’s entire range of products
o Kellogg’s product mix is a good example, they sell
 Cereals
 Bars
 Crackers
 Etc.
o Product mix dimensions
 Width: number of different product lines
 Length: number of different offerings within a product line
 Consistency: how closely related the various lines are
 How this works with Kellogg’s
 “House of Brands” vs. “Branded House”
o Examples of the former
 General Mills (Wheeties, Cheerios, Total, etc.)
 P&G (Tide, Ivory Crest, etc.)
o Examples of the latter
 Mercedes
 Kellogg’s
o Houses of Brands are everywhere
o Branded House considerations
 Individual profit centers can affect, and be affected by,
decisions made by other parts of the company
 They generally require a greater level of internal
communication and information sharing in relation to brand
o Branded House Benefits
 Money invested in parent brand not wasted even if product
becomes obsolete
 Good brand image is transferrable – benefits all products
 Parent brand acts as solid foundation
 A strong parent brand reassures consumers in new/different
product/service areas like e-commerce transactions or new
financial instruments
 Line extensions
o Definition: a new product that targets a new segment within a product
category currently served by the parent brand
o Examples
 Coke Zero
 Colgate Gel
 Brand Extensions
o Definition: a new product within a product category not served by the
parent brand
o Examples
 Honda Motorcyles  Cars
 Colgate Toothbrush
 Fighter Brands
o See notes for details on what it is
o Hazards
 Cannibalization
 Failure to bury the competition
 Financial losses
 Missing the mark with customers
 Management distraction
Session 16: Managing Services
Services vs. Products
 Service
o Definition: an activity, benefit, or satisfaction offered for sale that is
essentially intangible and does not result in the ownership of anything
Service industry is large and growing
o Makes up 65% of GDP growth
o Most companies have a service component
Domain of Services
o You’re marketing experiences/things people can’t tough
 Eg. Going to a theme park, attending a concert
o Primary product
 Enjoyment
 Knowledge
 Information
 Excitement
Tradeoff of service
o People desire high-quality service but low prices
o Issues with starting a service business at certain levels
 Too high: customers won’t pay
 Too low: consumers will go elsewhere
Characteristics of services
 Core and Augmented services
o Core services
 Benefits that a customer gets from the service
o Augmented service
 Additional offerings that differentiate the firm
o Example: Airlines
 Core service: travel
 Augmented services: in-flight entertainment, internet access
Measuring Service Quality
 Critical incident technique
o When companies collect and closely analyze very specific customer
complaints to identify critical incidents/sources of dissatisfaction
 Gap analysis
o Measuring the difference between customer expectation of service
quality and perceived performance
o Typically done using SERVQUAL surveys
o These surveys are made up of 22 questions based on 5 factors
 Reliability
 Ability to perform the promised service
 Responsiveness
 Willingness to help customers and provide prompt
 Assurance
 Knowledge and courtesy of employees and their ability
to convey trust and confidence
 Tangibles
 Appearance of physical facilities, equipment, personnel,
and communication materials
 Empathy
 The caring, individualized attention the firm provides to
its customers
o Perceptions + expectations are given a rating for certain dimensions
 From 1 (strongly disagree) to 7 (strongly agree)
o Average expectation rating is then subtracted from the average
perception rating
o Conclusions you can draw
 High negative rating: changes needed on dimension
 High positive rating: changes not needed on dimension
Improving Service Quality
 Service Failure and Recovery
o When services fail, they must recover fast
 If it’s a process failure, they must apologize
 If it’s an outcome failure, they must compensate
o Speed of recovery has a substantial impact on repurchases
o A good idea is to empower employees to recover by themselves
 Eg. Mariott gives employees $2,500 to spend on immediate
o In some cases, a good recovery can be better than no failure
 HBR Article
o 3 forces strongly influence how customers feel about a service
 Sequence effects: how people recall experiences
 Duration effects: how people process time
 Rationalization effects: people want things to make sense
(their tendency to want explanations for events)
o How firms can optimize interactions with customers
 Principle 1: finish strong
 Principle 2: get the bad experiences out of the way early
 Principle 3: segment the pleasure, combine the pain
 Principle 4: build commitment through choice
 Principle 5: give people rituals and stick to them
o See article notes for more details + examples
Session 17: Pricing
Definition + basic facts
o Def: the value that customers give up or exchange to obtain a desired
o The one marketing mix element that can change quickly
o Has a direct impact on firm’s bottom line
o Plays a key role in creating customer value
Pricing Methods
 Cost-based pricing
o Two types of costs
 Fixed costs: don’t vary with production levels
 Variable costs: vary with production levels
o Product driven rather than value driven approach
o Cost plus pricing (markup pricing)
 Manufacturer determines all costs per unit and then adds
desired profit per unit
 Markup on cost: cost is calculated by adding a markup on cost
 Price = total cost + (total cost*markup %)
 Markup on selling price: price is calculated by adding a markup
on selling price
 Price = total cost / (1 – markup %)
o Pros
 Simple to calculate
 Relatively risk free
o Cons
 Difficult to estimate costs accurately
 Fails to consider non-monetary costs
 Value based pricing
o Difference b/w it and cost based
o Two main calculations
 Price to retailer = selling price * (1 – markup %)
 Target unit cost = price to retailer * (1 – profit %)
o “Good Value” pricing
 Offering just the right combination of quality at a fair price
 Focus on introducing less expensive versions of products to
meet the needs of frugal customers
 Eg. McDonald’s dollar menu
o “Value Added” pricing
 Attached value added features to differentiate products and
support higher prices
 Competition based pricing
o Assumes customers base their judgments of a products value based
on how competitors price similar products
o Assessing competitor’s pricing strategies
 How does the firm’s offering compare in terms of customer
 How strong are the competitors, and what are their pricing
 Break even analysis
o Firms could also do this with the target profit goal included
Pricing Strategies
 Price skimming
o Def: refers to setting a high price for a new product in order to “skim”
revenues, layer-by-layer, from those willing to pay a high price
o The company will make fewer, but more profitable sales
o Electronics often use this strategy
o Conditions for success
 Highly desirable products, unique benefits, company focused
on profit objectives
 Substantial number of customers with low price sensitivity
 Lower probability that competitors can enter the market
 The reduced price must sufficiently increase sales
o Calculations
 Profit margin = (price – unit variable cost) / price
 New sales level = original profit / new profit margin
 Penetration pricing
o Def: refers to setting a low initial price in order to penetrate the
market quickly
o Can attract a large number of buyers quickly and win a large market
o Considerations
 Creates barriers to entry
 Gain market share early on
 Production + distribution costs must fall as sales volume
 Company needs to be able to maintain low price strategy
 Skimming vs. Penetration
o Skimming results in a slower acceptance of a new product but higher
unit profits
o Penetration results in greater initial sales volume but lower unit
 General pricing tactics for multiple products
o Product line pricing (eg. Line extensions)
o Price bundling (2+ products for a single price)
 Encourages sale of slow-moving items
 Encourages stock up
 Encourages trial of new brand
 Gives customers an incentive to purchase
o Captive pricing (sell initial product at lower price, then charge higher
prices for “accessories”)
 Eg. Gillette w/ blade prices after purchasing a razor
o Leader pricing (sell one product at a loss to get customers through the
 The hope is that they’ll be encouraged to buy other products
Deceptive Pricing Practices
 Overview of the types
o Illegal practices
 Price-fixing (vertical and horizontal)
 Predatory pricing
o Going-out-of-business sales
o Bogus reference prices
o Bait-and-switch tactic
 Horizontal price-fixing
o When two or more competitors conspire to set prices
 Vertical price-fixing
o When parties at different levels of a system of production &
distribution act to fix a good’s market price
Predatory pricing
o The pricing of goods at such a level that competitors can’t compete
and are forced to leave the market
Going-out-of-business sales
o Sales made to clear stock in anticipation of the business closing
o Some businesses make these sales and then end up staying open
Bogus reference prices
o Companies sometimes give high fake reference prices to justify selling
the product for more than it’s actually worth
o Customers are “baited” by ads that show low-priced goods
o When they arrive to the store they find those goods either “sold-out”
or lower quality than expected
o Retailers then try and “switch” them to similar products at higher
Psychological Concerns in Pricing
 Psychological pricing
o Considers psychology of prices
 Here price is used to say something about the product
o When unable to judge quality, customers use price as a reference
point for quality
 Eg. Who is the better lawyer? The $50/hour or the $500/hour
Reference prices
o Definition: the price that people expect/deem to be reasonable for a
certain type of product
o They are an important driver of consumer behavior
o Several factors can influence reference prices
 Memory of past prices
 Frame of reference
 Prices of other products in the same shelf, catalog, or product
 Presentation/format
 Order in which prices are learned
Price placebo effects
o Works similarly to other effects – by the power of suggestion
o Paying more for a product increases product efficacy just because of
higher expectations
Short term sales vs. Long term retention
o Managers must find a balance between the two
o Consumers are more likely to purchase products they actually use
o Also more likely to consume when they feel “out of pocket”
Timing of payments by customers
o Consumption closely tracks this timing
o How could managers use this insight?
 Yield management
 Reduce consumption
 Smooth consumption
 Price Bundling
o Affects decisions to consume
o Offering multiple product units for one single price decouples costs
and benefits, resulting in lower consumption rates
 Stopping customers from fixating on price
o You normally want to do this in mature, commoditized markets
o Three main ways to do this
 Change your price structure
 Use it to clarify and call attention to the value your
product delivers
 This encourages them to focus more on value than price
 For this to work, price should depend on what’s most
distinctive about your offering rather than its
 To do this, pick a single thing to differentiate it (eg.
Goodyear prices tires based on how many miles they’ll
 Stimulate curiosity by overpricing
 There’s a price range above which will make customers
ask themselves “do I need this benefit?” instead of
“what’s the cheapest option?”
 Eg. Starbucks’ premium pricing made people question
the importance of a coffee break in their lives
 Equalize price points to crystallize personal relevance
 When you make all prices the same, it becomes more of
a question of what customers like instead of price
Session 18: Distribution
The Value Delivery Network
 Definition
o Comprised of the company, suppliers, distributors, and ultimately
customers who “partner” with each other to improve the performance
of the entire system in delivering customer value
 Producing + selling products requires relationships with two types of supply
chain partners
o Upstream partners: firms that supply raw materials, components,
parts, and other elements necessary to create a good
o Downstream partners: firms that link companies to customers
 See slide 15 for benefits to channel players
Channel Design
 There are two options for who provides the functions in slide 15:
manufacturers or intermediaries
o If the former does it, costs increase
o The latter is more efficient
 Deciding on channel breadth
o Intensive distribution (eg. Wrigley’s)
 As many outlets as possible
 Price and convenience are a priority
 Selling support unnecessary
 Typical for convenience or commodity products
o Selective distribution (eg. Sony)
 Multiple but limited outlets per region
 Some selling/support effort needed for customers
 Typical for “shopping” products
o Exclusive distribution (eg. Rolex)
 Single outlet per region
 Substantial selling support required (service becomes a
 Typical for “specialty” products
 Vertical integration
o One firm consolidates all the different intermediaries (producer,
wholesaler, retailer, etc.) under them
o There are three types of vertical integration
 Corporate (eg. Zara)
 Administered (eg. Wal-Mart)
 Contractual (eg. McDonald’s)
The Internet in the distribution channel
 Has triggered disintermediation as companies now question the value of the
layers added in the distribution channel
 Resellers and intermediaries must adapt to survive
 Producers must seek additional direct channels to remain competitive, but
this often results in channel conflict (eg. Theatre owners conflicting with
producers that opt to use Netflix instead)
Deciding on Channel Depth
 Indirect is better than direct when
o One-stop shopping is important
o After sale service is important
o Resources are limited
 Direct is better than indirect when
o Product is technical and info needs are high
o Quality assurance matters
o Transportation and storage are complex
o Cross selling is important
o You want to own your customers
 Distribution can add value
 There is a trade-off between efficiency and “owning” your customer
 Channels can provide different opportunities depending on design and
Session 19: Online and Social Marketing
Online and Social Marketing
 Internet usage is increasing
o This is important for retailers
o It also disrupts traditional markets
o A lot of products/services are tailored around the idea that people
should get what they want, when they want
 Social media usage is increasing too, but there is a knowledge and skills gap
o A survey of 180 North American senior execs asked them about social
90% understood its impact
Only 32% monitored it, though
14% used it when measuring corporate performance
59% use it to interact w/ customers, 49% to advertise and
35% to research their customers
 30% used it to research competitors, new products, etc.
 These low stats are despite the fact that 80% had a LinkedIn
account and 68% had a Facebook account
 See slides for graphs detailing internet, social media, and smartphone usage
Disruptions to Traditional Marketing
 Digital disruptions
 Market Research
o You can use social media to get consumer intelligence
o Companies like radian6, Topsy, etc. allow you to get both consumer
and competitor intelligence
 New Product Development examples
o Starbucks crowdsourcing ideas
o Kickstarter
 Targeting
o You can microtarget thanks to the internet
 Customer interactions
o Brands now directly interact with their customers
o Fake reviews can be a problem, though, now that websites like Yelp
are popular
 Brand Positioning
o Cautionary Tale from United Airlines (ask about it)
 Content Generation
o User generated/interactive campaign
 Pros
 High consumer involvement
 Novel
 Low financial costs
 Cons
 Less control
 Less persuasive
Session 20: Advertising Decisions and Information Processing
Promotion (Last of the 4 P’s)
 Promotion Mix
o Definition: the specific blend of promotion tools the company uses to
engage consumers, persuasively communicate customer value, and
build customer relationships.
o It is shaped by various efforts, such as
 Advertising
 Public relations
 Personal selling
 Sales promotion
 Advertising
o Definition: paid for promotion of ideas, goods, and services by an
identified sponsor
Advertising Decisions
 Goal of Advertising
o It bridges between the boxes: so it informs, persuades, and reminds
o This flow chart is known as the purchase decision process
 Examples of advertising objectives
o Informative advertising
 Communicating customer value
 Explaining how a product works
 Informing the market of a price change
 Describing available services and support
o Persuasive advertising
 Encouraging switching to a brand
 Persuading customers to purchase now
 Convincing customers to tell others about the brand
 Changing the customers’ perceptions of product value
o Reminder advertising
 Maintaining customer relationships
 Prompting customers on where to buy the product
 Keeping the brand in customers’ minds during the off-season
 Reminding customers that the product may be needed in the
 Advertising Budget approaches
o Affordable approach
 “We can only afford to spend $x million”
o Percentage-of-sales approach
 “We’ll spend 10% of our revenue on advertising”
o Competitive-parity approach
 “We need to spend at least as much as our competitors, if not
o Objective-and-task approach
 “We’ll spend what it takes to achieve our goal of 15% market
share by year x”
 Advertising strategy
o There are two types of decisions
o Creative/message decisions
 Content (what do you say?)
 Evidence (why should they buy it?)
 FBI (features, benefits, image)
 Source of message (eg. A celebrity or ordinary person)
 Execution (how do you say it? what emotion do you convey?)
o Media decisions
 Medium and vehicle
 Eg. Broadcast vs. print vs. web
 Schedule
 Reach (how many?)
 Frequency (how often?)
How Consumers Process Messages
 Elaboration likelihood model
o ELM argues that there are two processing routes through which we
process persuasive information
o Central processing route
 High involvement
 Effortful processing of information
 Appeals to cognitive side
o Peripheral route
 Low involvement
 Heuristic processing of information
 Appeals to the affective side
o Two factors determine which route we use/will promote attitude
 Motivation
 Ability
 Central processing route
o We process information through here when we are motivated and
able to elaborate on it
o Focuses people on the claims being made about the product/brand,
and they tend to generate counterarguments and support arguments
o When processing information through this route, arguments need to
be solid
o Attitudes formed along this route are stronger and more resistant to
change, but aren’t always positive.
 Peripheral processing route
o We process information through here when our motivation and
ability to elaborate on it are low
o People rely on peripheral cues present in communication, rather than
o Essentially anything other than the message itself, for example
Celebrity endorsers
Emotional appeals
Attractive sources
Number of arguments, rather than quality
o Attitudes formed along this route are weakly held and rather
 To be persuasive, marketers must provide consumers with information
compatible to the route they will use to process it
 When to use each route
o If people are likely to be in an effortful and highly-involved mode
 Go with a complex message from a credible source
 Consider print medium – it takes time to absorb complex
 You can still use peripheral cues like attractive sources, but
they aren’t as much of a priority
o If people are likely to be in a heuristic, low involvement mode (PPR)
 Keep the message simple
 Use attractive sources or one that seems similar
 They won’t make an effort to process message claims, so try to
tug on their emotions
 Summary
o Understanding consumers’ cognitive and affective responses to
persuasive appeals is critical to understanding attitudes and attitude
o If you can anticipate how involved your consumers will be when
processing information, you can predict the route they are likely to
take when forming attitudes
o This will allow you to craft a message that is most likely to persuade
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