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of target markets. A marketer who knows where the money is knows where the markets

are. If you are seeking a new store location for Dollar General, a retail chain that caters to

lower-income consumers, you would probably concentrate on the South and Midwest,

because most households with annual incomes of less than $45,000 are concentrated in

these areas.

4-5b: Purchasing Power

Rising incomes don’t necessarily mean a higher standard of living. Increased standards of

living are a function of purchasing power. Purchasing power is measured by comparing

income to the relative cost of a standard set of goods and services in different geographic

areas, usually referred to as the cost of living. Another way to think of purchasing power is

income minus the cost of living (i.e., expenses). In general, a cost of living index takes into

account housing, food and groceries, transportation, utilities, health care, and miscellaneous

expenses such as clothing, services, and entertainment. HomeFair.com’s salary calculator

uses these metrics when it figures that the cost of living in New York City is almost three

times the cost of living in Youngstown, Ohio. This means that a worker living in New York

City must earn nearly $279,500 to have the same standard of living as someone making

$100,000 in Youngstown.

purchasing power

a comparison of income versus the relative cost of a standard set of goods and

services in different geographic areas

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Walmart is known as a low-price retailer, but brands such as OP are often found in Walmart stores serving higher-income markets.

When income is high relative to the cost of living, people have more discretionary income.

That means they have more money to spend on nonessential items (in other words, on

wants rather than needs). This information is important to marketers for obvious reasons.

Consumers with high purchasing power can afford to spend more money without

jeopardizing their budget for necessities like food, housing, and utilities. They also have the

ability to purchase higher-priced necessities—for example, a more expensive car, a home in

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a more expensive neighborhood, or a designer handbag versus a purse from a discount

store.

4-5c: Inflation

Inflation is a measure of the decrease in the value of money, generally expressed as the

percentage reduction in value since the previous year, which is the rate of inflation. Thus, in

simple terms, an inflation rate of 5 percent means you will need 5 percent more units of

money than you would have needed last year to buy the same basket of products. If

inflation is 5 percent, you can expect that, on average, prices have risen by about 5 percent

since the previous year. Of course, if pay raises are matching the rate of inflation, then

employees will be no worse off in terms of the immediate purchasing power of their

salaries.

inflation

a measure of the decrease in the value of money, expressed as the percentage

reduction in value since the previous year

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In times of low inflation, businesses seeking to increase their profit margins can do so only

by increasing their efficiency. If they significantly increase prices, no one will purchase

their goods or services. The recent recession brought inflation rates to almost zero.

In creating marketing strategies to cope with inflation, managers must realize that,

regardless of what happens to the seller’s cost, the buyer is not going to pay more for a

product than the subjective value he or she places on it. No matter how compelling the

justification might be for a 10 percent price increase, marketers must always examine its

impact on demand. Many marketers try to hold prices level for as long as is practical.

4-5d: Recession

A recession is a period of economic activity characterized by negative growth. More

precisely, a recession is defined as occurring when the gross domestic product falls for two

consecutive quarters. Gross domestic product is the total market value of all final goods and

services produced during a period of time. The official beginning of the 2007–2009 recession

was December 2007. While the causes of the recession are very complex, this one began

with the collapse of inflated housing prices. Those high prices led people to take out

mortgages they couldn’t afford from banks that should have known the money would not

be repaid. By 2008, the recession had spread around the globe. A very slow economic

recovery began in July 2009.

recession

a period of economic activity characterized by negative growth, which reduces

demand for goods and services

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The 2007–2009 recession, called “the Great Recession” by some, was the largest economic

downturn since the Great Depression of 1929 to 1939. Unemployment rose from slightly

over 4 percent to over 10 percent. The unemployment rate has been slowly falling since

mid-2010 due to job creation and people leaving the workforce entirely. Uncertain economic

times have caused many consumers to shift to store brands—60 percent of shoppers buy

only private label bread or baked goods! More consumers than ever before are using

coupons. Researchers found that during the recession, consumers were sticking very close

to shopping lists and doing their best to completely empty their pantries before restocking.

Also, consumers were going to fewer stores but selecting stores where they could get the

widest array of products at the best value. Many people, for the first time, prepared their

lunches to take to work.

4-6: TECHNOLOGICAL FACTORS

The recent economic downturn and slow recovery have had an impact on research and

development (R&D) spending. In order to cut costs and boost short-term profits, many

companies, particularly in the auto and drug industries, slashed R&D, product design, and

laboratory spending. Other firms have taken a different tack and either increased or held

R&D spending steady, hoping that they will be able to compete more effectively when the

economy improves. Companies such as 3M, Microsoft, Google, Intel, and Cisco Systems have

followed this strategy. Without investment in R&D, the United States cannot compete in a

knowledge-based global economy.

4-6a: Research

The United States, historically, has excelled at both basic and applied research. Basic

research (or pure research) attempts to expand the frontiers of knowledge but is not aimed

at a specific, pragmatic problem. Basic research aims to confirm an existing theory or to

learn more about a concept or phenomenon. For example, basic research might focus on

high-energy physics. Applied research, in contrast, attempts to develop new or improved

products. The United States has dramatically improved its track record in applied research.

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For example, the United States leads the world in applying basic research to aircraft design

and propulsion systems.

basic research

pure research that aims to confirm an existing theory or to learn more about a

concept or phenomenon

applied research

research that attempts to develop new or improved products

4-6b: Stimulating Innovation

Companies attempting to innovate often limit their searches to areas they are already

familiar with. This can help lead to incremental progress but rarely leads to a dramatic

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breakthrough. Companies are now using several approaches to keeping innovation strong.

These include:

BUILD SCENARIOS: Some firms use teams of writers to imagine detailed opportunities

and threats for their companies, partners, and collaborators in future markets.

ENLIST THE WEB: A few companies have created Web sites that act as literal

marketplaces of ideas where they can go to look for help with scientific and business

challenges.

TALK TO EARLY ADOPTERS: Early adopters tend to be innovators themselves. They are

risk takers and look for new things or wish for something better to help in daily tasks at

home and work.

USE MARKETING RESEARCH: Firms find out what customers like and dislike about

their products and competitors’ products.

CREATE AN INNOVATIVE ENVIRONMENT: Companies let employees know that they

have the “freedom to fail.” They create intranets to encourage sharing ideas. Most

importantly, top management must lead by example to create an atmosphere where

innovation is encouraged and rewarded.

CATER TO ENTREPRENEURS: Policies that reserve blocks of time for scientists or

engineers to explore their own ideas have worked well at some companies. At 3M,

scientists can spend 15 percent of their time on projects they dream up themselves, and

the company has set procedures for taking bright ideas forward, including grants and

venture funding.

Although developing new technology internally is a key to creating and maintaining a long-

term competitive advantage, external technology is also important to managers for two

reasons. First, by acquiring the technology, the firm may be able to operate more efficiently

or create a better product. Second, a new technology may render existing products obsolete.

Recently, China has been rolling out an array of interlocking regulations and state spending

aimed at making the country a global technology powerhouse by 2020.

The new initiatives—shaped by rising nationalism and a belief that foreign companies

unfairly dominate key technologies—range from big investments in national industries to

patent laws that favor Chinese companies and mandates that essentially require foreign

companies to transfer technology to China if they hope to sell in that market. The U.S.

Chamber of Commerce, a business trade group, calls China’s actions “an intricate web of

new rules considered by many international technology companies to be a blueprint for

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technology theft on a scale the world has never seen before.” This issue promises to

dominate relations between the two countries for years to come.

4-7: POLITICAL AND LEGAL FACTORS

Business needs government regulation to protect innovators of new technology, the

interests of society in general, one business from another, and consumers. In turn,

government needs business because the marketplace generates taxes that support public

efforts to educate our youth, pave our roads, protect our shores, and the like.

Every aspect of the marketing mix is subject to laws and restrictions. It is the duty of

marketing managers or their legal assistants to understand these laws and conform to them,

because failure to comply with regulations can have major consequences for a firm.

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Sometimes just sensing trends and taking corrective action before a government agency acts

can help avoid regulation.

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