Marketing management (Week 4)
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Fourteenth Edition
J. Paul Peter University of Wisconsin-Madison
James H. Donnelly Jr. Gatton College of Business and
Economics University of Kentucky
A PREFACE TO MARKETING MANAGEMENT, FOURTEENTH EDmON
Published by McGraw-Hill Education. 2 Penn Plaza, New York, NY 10121. Copyright© 2015 by McGraw-Hill
Education. All rights reserved. Printed in the United States of An1erica. Previous editions © 2013, 2011, and
2008. N o part of this publication may be reproduced or distributed in any forrn or by any means, or stored in a
database or retrieval systen1, without the prior written consent of McGraw-Hill Education, including, but not
limited to, in any network or other electronic storage or transrnission, or broadcast for distance learning.
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United States.
This book is printed on acid-free paper.
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ISBN 978-0-07-786106-3
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All credits appearing on page or at the end of the book are considered to be an extension of the copy1ight page.
Library of Congress Cataloging-in-Publication Data
Peter, J. Paul.
A preface to marketing management/ J. Paul Peter, University of Wisconsin-Madison, James H. Donnelly, Jr., Gatton College of Business and Economics, University of Kentucky.-Fourteenth edition.
pages cm
ISBN 978-0-07-786106-3 (alk. paper)
1. Marketing-Management. I. Donnelly, Ja,nes H. II. Title.
HF5415.13.P388 2013
658.8-dc23
2013046644
The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does
not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not
guarantee the accuracy of the infor1nation presented at these sites.
ww,v .mhhe.com
To Rose and Angie
J. Paul Peter
To Gayla
Jim Donnelly
vi
ors
J. Paul Peter has been a faculty member at the University of Wisconsin since 1981. He was a member
of the faculty at Indiana State, Ohio State, and Washington University before joining the
Wisconsin faculty. While at Ohio State, l1e was named Outstanding Marketing Professor
by the students and has won the John R. Larson Teaching Award at Wisconsin. He has
taught a variety of courses including Marketing Management, Marketing Strategy, Con
sumer Behavior, Marketing Research, and Marketing Theory, among others. Professor Peter's research has appeared in t11e Journal of Marketing, the Journal of
Marketing Research, the Journal of Consumer Research., the Journal of Retailing, and the
Academy o,f Management Journ.ctl, among others. His article on construct validity won the
prestigious William O'Dell Award from the Journal of Marketing Research, and he was a
finalist for this award on two other occasions. Recently, he was the recipient of the ChurchilJ Award for Lifeti1ne Achievement in Marketing Research, given by the American Marketing
Association and the Gaumnitz Distinguished Faculty Award from the School of Business,
University of Wisconsin-Madison. He is an author or editor of over 30 books, including A
Preface to Marketing Management, Fourteenth edition; Marketing Management: Krtowledge and Skills, ninth edition; Consumer Behavior and Marketing Strategy, ninth edition; Strategic
Management: Concepts and Applications, third edition; and Marketirig: Creating Value .for
Custom.ers, second edition. He is one of the most cited authors in the marketing literature.
Professor Peter has served o n the review boards of the Journal of· Marketing, Jour
nal of Marketi11g Research, Journal of Corisumer Research, and Journal of Business Research and was measurement editor for JMR and professional publicatio11s editor for tl1e
American Marketing Association. He has taught in a variety of executive programs and
consulted for several corporations as well as the Federal Trade Commission.
James H. Donnelly Jr. has spent his academic career in the Gatton College of Business a11d Econo1nics at the
University of Kentucky. In 1990 he received the first Chancellor's Award for Outstanding
Teaching given at the university. Previously, he had twice received the UK Alumni Associa
tion's Great Teacher Award, an award one can only be eligible to receive every 10 years. He
has also received two Outstanding Teacher awards from Beta Gamma Sigma, national busi
ness honorary. In 1992 he received an Acorn Award recognizing "those who shape the future"
from the Kentucky Advocates for Higher Education. In 2001 and 2002 he was selected as
"Best University of Kentucky Professor." In 1995 he became one of six charter members
elected to the American Bankers Association's Bank Marketing Hall of Fame. He has also
received a "Distinguished Doctoral Graduate Award" from the University of Maryland.
During his career he has published i n the Journal of Marketing Research,, Journ.al o,f
Marketing, Journal of· Retailing, Administrative Science QiJ-arterly, Academy of Man
agemerit Jourrtal, Journal of Applied Psychology, Personnel Psychology, Jourrial of
Business Researcli, and Operatio,is Research a1nong others. He has served on the edito
rial review boa.rd of the Journal o,f Marketing. He i s the author of more than a dozen
books, which include widely adopted academic texts as well as professional books.
Professor Donnelly is very active in the banking industry where l1e l1as served on the board of directors of tl1e Institute of Certified Bankers and tl1e ABA's Marketing Network. He has
also served as academic dean of the ABA' s School of Bank Marketing and Management.
re ace
We are proud to introdt1ce the fourteenth edition of A Pre.face to Marketin.g Man,agement.
Our plan has always been to deliver a clear and concise presentation of the basic princi
ples of marketing in such a way that the core concepts and ideas are covered in sufficient
depth to ensure in-depth understanding, By offering an engaging, clear, and conceptu
ally sound text, our book has been able to maintain its position as a leading marketing
management text.
Througl1ot1t the history of the book, feedback from botl1 students and instructors has
suggested that our plan is a good one. Our book has been used in a wide variety of set
tings and is the best-selling book of its kind. We introduce the fourteenth edition knowing
that our book and its eight foreign translations have been used around the world vvhenever
courses require an overview of the critical aspects of marketing manage1nent.
With this edition, we seek to n1ore effectively implement our plan by building on a
strong foundation, maintaining the attributes and elements of the book tl1at make i t a very
teachable text, updating existir1g content, adding new content, and focusing the presenta
tion. We seek to emphasize qttality content and examples and avoid excess verbiage, pic
tures, and description.
As usual, each time we revise the book there is a11 e1nphasis on responding to feedback
from students and instructors. These two constituencies plus our own intuitions drive each
revision, Marketing is an exciting and dynamic field of study, We want to capture the
sense of excitement and at the same time respect its history.
Our book has become known simply as tl1e Preface. We want to believe a major reason
it has endured is that because marketing is figuring out how to do a superior job of satisfy
ing customers, we simply try to practice what we preach. Welcorne to the Pre.face.
THE PRESENT EDITION
Every elem.ent of content in our book is designed with one thought in mind: to assist stu
dents in analyzing marketing problems and cases and developing and writing marketing
plans. Section I of the book consists of 13 concise chapters that cover the essentials of mar
keting management. We think of it as the "must know" content of the field. It is divided
into four parts that foct1s on strategic planning and marketing planning, ttnderstanding tar
get markets, tl1e marketing mix, and marketing in special fields. These 13 chapters should
provide students a clear understanding of the tenninology, techniques, tools, and strategies
for effective 1narketing management and marketing strategy development.
In addition to revising and updating the text chapters, this edition contains new content as
well. There are discussions of internal and external secondary data sources, the use of social
media monitoring, a]ten1ative searcl1 in consumer behavior, key characteristics of organi z a
tional buyers, e-procurement, global virtual teams, brand equity, using distinctive compe
tencies in new product development, consumer databases, business-to-business databases,
mobile marketing, online retailing and multichannel marketing, franchising, the effects of t11e Internet on pricing, global account 1nanagers, and ]earning about different cultures.
In the twelfth edition, we altered two of the text elements. The changes have been well
received by instructors and stt1dents. First, "Marketing Insights" are included to assist students
as they solve marketing problems, analyze marketing cases, and develop marketing plans.
Second, we know that our book is often used with case problems, writing assignments,
and constructing marketing plans. Accordingly, there i s an "Additional Resources" section
vii
viii Preface
at the end of each chapter. Our purpose is to highlight current resoLLrces that students can
use in writing assign111ents and oral presentations. The resources have been selected with
students in mind. Tl1ey include resources accessible to students at various stages of 111ar
keting education given the wide spectrum of courses in which the book is utilized.
NEW FEATURES AND CONTENT CHANGES
Chapter 1: Strategic Planning and The Marketing Management
Process • Revised basic questions that 1nust be asked when developing a 1nission state1nent. • Marketing Insight 1-3 now contains five actual mission statements for firms of varying
sizes and industries. It provides students with a better mix of alternatives when com
pleting the exercise in Marketing h1sight 1-4. • Updated additional resources.
Chapter 2: Marketing Research: Process and Systems for Decision
Making • Revised section on secondary data to include both internal and external sources
• Added new figure "Common Types of Information Available in a Secondary Data
Search" • Added a new Marketing Insight, "Social Media Monitoring for Marketing Insights" • Updated additional resources
Chapter 3: Consumer Behavior
Updated discussion of consumer and marketer reactions to recession • Revised and updated discussion of Alternative Search • Updated additional resources
Chapter 4: Business, Government, and Institutional Buying • Revised Marketing Insight on "Key Characteristics of Organizational Buying Behavior" • New Marketing Insight, "Organizational Buying on the Internet: E-Procurement" • Revised Discussion of "Organizational Needs" • Updated additional resources
Chapter 5: Market Segmentation • New Marketing Insight, "Segmenting the Mobile Phone Market"
Revised and updated discussion of VALS
Chapter 6: Product and Brand Strategy • Marketing Insight 6-3 now contains the latest information on the value of the top twenty
brands in the world • Contains a new section on branding and brand equity • Revised and updated Marketing Insight 6-6 • Added a new section on global virtual teams • New key terms and concepts • Updated additional resources
Preface Ix
Chapter 7: New Product Planning and Development • New Marketing Insight 7-4 which focuses on utilizing corporate strengths in the new
product development process. It includes eight firms with strengths in either technol ogy or markets
• Updated additional resources
Chapter 8: Integrated Marketing Communications • Revised Marketing Insight 8-1 which presents up-to-date information on the top ten
websites in Brazil, Portugal and South Korea Revised section on direct marketing as part of the pro1notion mix
• Revised Marketing Insight 8-6 • New section on direct marketing • New Marketing Insight 8-7 on the contents of a comprehensive database included are
both consumer and business-to-business databases • Added new Key Tem1s and Concepts • Updated additional resources
Chapter 9: Personal Selling, Relationship Building, and Sales
Management
New Marketing Insight 9-1 wl1ich focuses on what a salesperson actually does A new discussion of an increasingly important customer organization structure, the
global account manager
Added new Key Terms and Concepts • Updated additional resources
Chapter 10: Distribution Strategy • Added New Marketing Insight, "Advantages and Disadvantages of Franchising" • New section on "Online and Mobile Retailing" • Updated additional resources • New "Key Terms and Concepts": online retailing, mobile retailing, multichannel marketing
Chapter 11: Pricing Strategy
Added a new discussion of the Internet as an external influence on pricing decisions • A new Marketing Insight, "Ten Tips for Managing Pricing Strategy"
Chapter 12: The Marketing of Services • The chapter has been significantly revised and has been shortened for this edition • A new section on the importance of all the elernents of the marketing mix in the market
ing of services has been added • Updated additional resources
Chapter 13: Global Marketing • Marketing Insight 13-1 has been updated with the latest data on selected U.S. companies
and their international sales • The section on cultural misunderstanding as a problem i n foreign rnarkets has been
replaced with an entirely new section
x Preface
• Marketing Insight 13-3 has been replaced with a new Marketing Insight which focuses
on ways to lea111 about new cultures
• Updated additional resources
Section 11: Analyzing Marketing Problems and Cases • New Marketing Insight, "Objectives of Case Analysis" • Revised and updated discussion of SWOT analysis • Updated additional resources
Section Ill: Financial Analysis for Marketing Decisions
• Updated dates and additional resources
Section IV: Developing Marketing Plans • Updated dates and additional resources
STUDENT SUPPORT
Knowing tl1at our book is used for a variety of course levels, programs, and students, we
have assembled several elements that we believe will support students for whatever pur
pose they use our book.
Key Terms and Concepts
New to the previous edition, we decided to add a section of key terms and concepts at the conclusion of each chapter. There was mucl1 debate as to wl1ere they sl1ould be placed in
the book. We decided to place them at the end of the chapter in which they appear. In this
way, they are more visible to students than as an appendix at the end of the book. More
than a glossary, it also presents key concepts covered in the chapter.
Analyzing Marketing Problems and Cases
Section TI presents a very practical and comprehensive framework for analyzing, prepar
ing, a.nd presenting case analyses. It includes discussions of what a case is, preparing for
the class discussion and written analysis, pitfalls to avoid i n case analysis, and preparing
to do an oral presentation. It has been praised by both instructors and students.
For courses utilizing marketing problems and cases, w e encourage students to read this
guide before discussing a problem or case. Tl1us, it could l1ave been placed at the begin
ning of the book, but because it is often referred to throughout the semester, we have
placed it after the text chapters. And for those courses that do not utilize cases, the book
1nay be used without reference to tl1is section.
Financial Analysis for Marketing Decisions
It is absolutely critical for marketing students to understand. and appreciate the fact that
the ultimate objectives of marketing are usually expressed in financial terms. Section ill
enables students to assess a company's financial position. It presents important financial
calculations that are useful in evaluating the financial position of a finn and the financial
impact of various decisions and strategies. Included are discussions of breakeven analysis,
net present value, and ratio analysis.
Developing Marketing Plans
Given the purpose of this book and the needs of users, Section IV enables students to develop practical planning skills so they are able to construct a quality marketing plan for
Preface xi
any product or service. It provides a complete format for structuring and presenting one,
including specific questions to ask in competitive analysis, the development of well-stated
objectives, analyzing custo1ners, and implementation and control. A s with Section II, we
know that this section has become a valuable take-away resource for many students long
after their course has been completed.
A Value-Added Website
We encourage students to view the student section of tl1e Online Leaming Center (OLC)
at website www.mhhe.com/peterdonnelly14e, which contains a number of useful aids for
facilitating learning and supporting student achievement. We believe you will find i t a
useful resource.
INSTRUCTOR SUPPORT
The Preface has been used as a resotrrce in college courses and professional development
programs that require an overview of the critical "need-to-know" aspects of marketing
management and marketing strategy development. It has been used:
As the primary introductory text at the undergraduate level.
• At both the undergraduate and MBA level, where several AACSB core curriculum
courses are team-taught as one multidisciplinary 9- to 12-hour course.
• At the advanced undergraduate and MBA level where it is used as the content founda
tion in courses that utilize marketing cases.
• In short courses and executive development programs.
The instructor section of www.mhl1e.com/peterdonne1Jy14e inc]udes an instructor's
manual and other support material. It includes two expanded suppletnents. They were
developed in response to instructors' requests. We offer a test bank of nearly 1,300
multiple-choice, true-false, and brief essay questions. It is available in both print and
EZ Test Online. We also offer Power Point slides that highlight key text material. Your McGraw-Hill representative can also assist in the delivery of any additiona1 instructor
support materia1.
xii
nowe
Our book i s based on the works of many acade1nic researchers and marketing practitioners.
We want to thank those individuals who conuibuted tl1eir ideas to develop the field of m a r keting throughout the years. Indeed, our book would not b e possible without their contri
butions. We would also like to thank our teachers, colleagues, and students for their many
contributions to our education. We would also like to publicly acknowledge those individu
als who served as reviewers of this and previous editions. We appreciate their advice and counsel and have done our best to reflect their insightful com111ents.
Roger D. Absmire
Sam Houston State University
Anna Andriasova
University of Ma,ylarid University College
Catherine Axinn
Syracuse University
Mike Ballif
University o_f Utah
Andrew Bergstein
Pennsylvania State University
Edward Bond
Bradley University
Donald Brady
Millersville Universitv
Tim Carlson
Judson University
Glenn Chappell
Meridith College
Newell Chiesl
Indiana Stc,te University
Reid P. Claxton
East Caroline, University
Larry Crowson
University of· Central Florida
Mike Dailey
University of Texas, Arlington
Linda M. Delene
Western Michigan University
Gera.rd DiBartolo
Salisbury University
Casey Donoho
North.ern Arizona University
James A. Eckert
Western Mich.igan University
Matthew Elbeck
Troy University Dothan
Karen A. Evans
Herkimer County Community College
R. E. Evans
University of· Oklahoma
Lawrence Feick
University of· Pittsbitrgli
Robert Finney
California State University, Hayward
Stephen Goldberg
Fordham University
David Good
Grand Valley State University
David Griffith
University of Oklahoma
Perry Haan
Tiffin University
Lawrence Hamer
DePaul University
Harry Harmon
Central Missou,ri
Jack Healey
Golden State University
Betty Jean Hebel
Madonncl University
Catherine Holderness
University of North Carolina-Greensboro
JoAnne S. Hooper
Western Carolina University
David Horne
Wayne State University
Nasim Z. Hosein
Northwood University
Nicole Howatt
UCF
Fred Hughes
Fciulkner U,iiversity
AnupamJaju
GMU
Chris Joiner
George Mason University
Benoy Joseph
Cleveland State University
Sol Klein
Northeastern Uriiversity
Robert Brock Lawes
Cha,ninade University of Hc)nolulu.
Eunkyu Lee
Syracuse University
Tina Lowrey
University of Texas at San Antonio
Franklyn Manu
Morgan State Un.iversity
Edward J. Mayo
Western Michigan. University
Edward M. Mazze
University o_f Rhode Island
Donald J. Messmer
College of William & Mary
Albert Milhomme
Texas State Vn.iversity
Chip Miller
Drake University
David L. Moore
LeMoyne College
Johannah Jones Nolan
University of.Alabama, Birmingham
R. Stephen Parker
Southwest Missouri State University
Joan Phillips
Uriiversity of'Notre Dame
Thomas Powers
University o.f Alabama at Birmingham
Debu Purohit
Ditke Un,iversity
John Rayburn
University o_f Ten.nessee
Martha Reeves
Duke
Ga.ry K. Rhoads
Brigh.am Young University
Lee Richardson
University of Baltimore
Henry Rodkin
DePaul University
Ritesh Saini
Gec>rge Mason U11iversity
Matthew H. Sauber
Eastern Michigcin University
Alan Sawyer
University of' FlcJrida
Ronald L. Schill
Brig/iam Young University
Mark Spriggs
University of· St. Tho,nas
Vernon R. Stauble
Cal(fomia State Polytechnic University
David X. Swenson
College of· St. Scholastica
Ann Marie Thompson
Northern. Illin.ois U11iversity
John R. Thompson
Memphis State University
Gordon Urquhart
Cornell College
Sean Valentine
University of· Wyoming
Ana Valenzuela
Baruch College, CUNY
Stacy Vollmers
University of.St. Thomas
Jacquelyn Warwick
Andrews University
Kevin Webb
Drexel Urziversity
Kathleen R. Whitney
Central Michigan University
J.B . Wilkinson
University of Akron
Dale Wilson
Micliigan State University
It is always easy to work with professionals. That is why working with tl1e profession
als at McGraw-Hill is always enjoyable for us. Sankha Basu, publisher, and Jane Mohr,
project manager, support what we do and we are very grateful. Thank you Heather Darr,
develop1nent editor, and welcome to our team. We also wish to acknowledge Francois
Ortalo-Magne, dean of the School of Business at the University of Wisconsin, and David
Blackwell, dean of the Gatton College of Business and Economics at the University of
Kentucky, who support what we do.
J. Paul Peter
James H. Donnelly, Jr.
SECTION
ESSENTIALS OF MARKETING
MANAGEMENT 1
PART A
INTRODUCTION 3
Chapter Strategic Planning and the Marketing Man agement Process 4
The Marketi11g Concept 4
What Is Marketing? 5
What Is Strategic Planning? 6
Strategic Planning and Marketing Manage,nent 6
The Strategic Planning Process 7
The Complete Strcitegic Plan 16
The Marketing Management Process 16
Situation Analysis· 16
Marketing Planning 19
Implementation and Control of the Marketing Plan 20
Marketing lnforniation Systems and Marketing
Research 21
The Strategic Plan, tl1e Marketing Plan, and
Other Functional Area Plans 21
Marketing's Role in Cross-Functional Strategic
Planning 21
Summary 22
Appendi,
Portfolio Models 27
PARTS
MARKETING INFORMATION, RESEARCH, AND UNDERSTANDING THE TARGET MARKET 31
Chapter 2
Marketing Research: Process and Systems
for Decision Making 32
Tl1e Role of Marketing Research 32
The Marketing Research Process 33
xiv
Purpose o,f the Research 33
Plan of· the Research 34
Pe,formance o,f the Research 37
Processing of Researcli Data 39
Preparation of' the Research Report 40
Limitcitions o,f the Reselirc/1 Process 40
Marketing Information Systems 42
Summary 43
Chapter 3 C onsumer Behavior 45
Social Influences on Consumer Decision
Making 46
Culture and Subculture 46
Social Class 47
Re,ference Groups and Fa,nilies 48
Marketing Influences on Consumer Decision
Making 48
Product lnfluences 48
Price Influences 4 8
Promotion Influences 49
Place Influences 4 9
Situational Int1uences on Consumer Decision Making 51
Psychological Influences on Conswner Decision
Making 51
Product Kno�vledge 51
Product Involvement 52
Consruner Decision Making 52
Need Recognition 53
Alternative Search 54
Alternative Evaluation 55
Purchase Decision 55
Postpurchase Evctluation 56
Summary 58
Chapter 4 Business, G overnment, and Institutional Buying 60
Categories of Organizational Buyers 60 Prollucers 60
Intermediaries 61
Government Agen.cies 61
Other Institutions 61
The Organizational Buying Process 61
Purchase-Type Influences on Organizational
Buying 62
Straight Rebuy 62
Modi f
ied Rebuy 62
New Task Purchase 62
Structt1ral Influences on Organizational Buying 63
Purchasing Roles 63
Organization-Specific Factors 64
Purchasing Policies ancl Procedures 65
Behavioral Influences on Organizational Buying 65
Personal Motivations 65
Role Perceptions 66
St.ages in the Organizational Buying
Process 68
Or < (?anizational Need 68
Vendor Analysis 68
Purchase Activities 69
Postpurchctse Evaluation 70
Summary 70
Chapter 5 Market Segmentation 72
Delineate the Firm's Current
Situation 72
Detenuine Consumer Needs and Wants 73
Divide Markets on Relevant Dimensions 73
A Priori versus Post Hoc Segnientation 74
Relevance of Segmentation Diniensions 75
Bases for Segmentation 75
Develop Product Positioning 81
Decide Segmentation Strategy 82
Design Marketing Mix Strategy 84
Summary 84
PARTC
THE MARKETING MIX 85
Chapter 6 Product and Brand Strategy 86
Basic Issues in Product Ma11agement 86
Product Definition 86
Procluct Classification 87
Product Quality and Value 88
Procluct Mix and Product Line 89
Bran.cling and Brand Equity 90
Packaging 96
Product Life Cycle 97
Product Adoption and Diffusion 99
Tl1e Product Audit 100
Deletions 100
Product lmprovenient 101
Organizing for Product Management 10 l
Su1nmary 103
Chapter 7 New Product Planning and Development 105
New Product Strategy 106
New Product Planning and Development
Process 108
Idea Generation 108
Idea Screening 110
Project Planning 111
Product Develop,n.ent 112
Test Marketing 112
Comniercialization 113
The /1nportance l?f Ti,ne 113
Contents xv
Some Important New Produ.ct Decisions 114
Quality Level 114
Product Features 115
Product Design I 16
Product Safety 116
Causes of New Product Failure 116
Needfor Research 117
Summary 118
Chapter 8 Integrated Marketing Communications 120
Strategic Goals of Marketing
Co1n111unication l 20
Create A ivareness 120
Build Positive Images 120
Identify Prospects 120
Build Channel Relationships 121
Retain Custoniers 121
The Promotion Mix 121
Integrated Marketing Communications 122
Advertising: Planning and Strategy 124
Objectives of Advertising 724
Advertising Decisions 126
The Expenditure Question 126
The Allocation Question 127
Sales Promotion 132 Push versus Pull Marketing 132
Trade Sales Proniotions 133
Consunier Pro,notions 133
What Sales Promotion Can and Can't Do 134
Public Relations 135
Direct Marketing 136
Summary 137
Appendix
Major Federal Agencies Involved in Control
of Advertising 139
xvi Contents
Chapter 9 Personal Selling, Relationship Building, and Sales Management 140
Importance of Personal Selling 140
The Sales Process 141
Objectives of the Sales Force 141
The Sales Relationship-Buildirig Process 142
People Who Support the Sales Force 146
Managing the Sales and Relationship-Building
Process 147
The Sales Management Task 148
Con.trolling tlie Sales Force 149
Motivating and Compensating Perjorrnance 152
Summary 154
Chapter 10 Distribution Strategy 156
Tl1e Need for Marketing Intermediaries 156
Classification of Marketing Intermediaries and
Fttnctions 156
Channels of Distribution 158
Selecting Channels of Distribution 159
Spec�fic Considerations 159
Managing a Channel of Distribt1tion 162
RelationshiJJ Marketing in Channels 162
Vertical Marketing Systenis 162
Wholesaling 164
Store and Nonstore Retailing 165
Store Retailing 166
Nonstore Retailing 167
Summary 170
Chapter 11 Pricing Strategy 172
Demand Influences on Pricing Decisions 172
Deniographic Factors 172
Psychologiccil Factors 172
Price Elasticity 174
Supply Influences on Pricing Decisions 174
Pricing Objectives 174
Cost Considerations in Pricing 174
Product Considerations in Pricing 176
Environmental Influences on Pricing
Decisions 177
The Internet 177
Conipetition 177
Government Regulations 178
A General Pricing Model 178
Set Pricing Objectives 179
Evaluate Product-Price Relationships 179
Estiniate Costs and Otlier Price Liniitations 180
Analyze Proftt Potentictl 181
Set Initial Price Structure I 81
Change Price as Needecl 181
Summary 181
PARTD
MARKETING IN SPECIAL FIELDS 183
Chapter 12
The Marketing of Services 184
Important Characteristics of Services 186
Intangibility 186
Inseparability 187
Perish.ability and Fluctuating De,nand 188
Client Relationship 188
Customer Effort 189
Un(formity 190
Providing Quality Services 190
Custo1n.er Sati.�faction, Measurement 192
Th.e Importance of Internal Mcirketing 192
Overcoming the Obstacles in Service Marketing 194
Liniited View o,f Marketing 194
Li,nited Co,npetitiori 194
Noncreative Management 195
No Obsolescence 195
Implications for Service Marketers 196
Swnmary 197
Chapter 13
Global Marketing 199
The Competitive Advantage of Nations 200
Organizing for Global Marketi11g 201
Problems with Eriterin,g Foreign Markets 201
Organizing the Multinational Company 204
Programming for Global Marketing 206
Global Marketing Research 206
Global Product Strategy 209
Global Distribution Strategy 209
Global Pricing Strategy 210
Global Advertising and Sales Promotion
Strategy 210
Entry and Growth Strategies for Global Marketing 211
Summary 214
SEC ION II
ANALYZING MARKETING PROBLEMS
AND CASES 215
A Case Analysis Framework 216
1. Analyze and Record the Current Situation 217
2. Analyze and Record Problems and Their Core
Elements 221
3. Formulate, Evaluate, and Record Alternative Courses
of.Action 222
4. Select and Record the Chosen Alternative and l1nple
mentation Details 223
Pitfalls to A void in Case Analysis 223
Communicating Case Analyses 226
The Written Report 226
The Oral Presentation 228
Su1nmary 228
SECTION Ill
FINANCIAL ANAL Y.SIS FOR MARKET
ING DECISIONS 229
Financial Analysis 230
Breakeven Analysis 230
Net Present Value Analysis 232
Ratio An.alysis 234
Summary 238
Contents •vii
SECTION IV
DEVELOPING MARKETING PLANS 239
A Marketing Plan Fra1nework 240
Title Page 241
Executive Sunimary 241
T,1ble of Contents 242
Introduction 242
Situational A,ialysis 242
Marketing Planning 242
Implementation and Control o_f the Marketing Plan 244
Sunim.ary 246
Appendix-Financilll Analysis 246
References 249
Summary 249
Chapter Notes 251
Index 256
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Es ent1als
of Marketing
Management
Section
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Part
Introduction
I Strategic Planning and the Marketing Management Process
Chapter
• •
ann1n
ana emen rocess
The purpose of this introdL1ctory chapter is to present the marketing management process and outline what 111arketing managers 111ust manage if tl1ey are to be effective. In doing so,
it will also present a framework around which the remaining chapters are organized. Our
first task is to review the organizational philosophy known as the marketing concept, since
it underlies much of the thinking presented in this book. The remainder of this chapter will
:focus on the process of strategic planning and its relationship to tl1e process of marketing
planning.
THE MARKETING CONCEPT
4
Simply stated, the marketing concept means that an organization shoitld seek to make a
profit by serving the needs of· customer groups. The concept is very straightforward and
has a great deal of commonsense validity. Perhaps t11is is wl1y it is often misunderstood, forgotten, or overlooked.
The purpose of the marketing concept is to rivet the attention of marketing ma.nagers on
serving broad classes of customer needs (customer orientation), rather than on the firm's
current products (prodLtction orientation) or on devising methods to attract custo1ners to
cu1Tent products (selling orientation). Thus, effective marketing starts with the recogni
tion of customer needs and then works backward to devise products and services t o satisfy
these needs. In this way, marketing managers can satisfy customers more efficiently i n
the present and anticipate cl1anges in customer needs more accurately in the future. This 111eans that organizations should focus 011 building long-tenn customer relationships in
which tl1e i11itial sale is viewed as a beginning step in the process, not as an end goal. As a
result, the custorner will be more satisfied and the firm will be more profitable.
The principal task of the marketing function operating under the marketing concept is
11ot to 1nanipL1late custo1ners to do . what suits the interests of the firm, but rather to :find
effective and efficient meai1s of making tl1e business do what suits tl1e interests of custom
ers. This is not to say that all firms practice marketing in this way. Clearly, many firms still
emphasize only production and sales. However, effective marketing, as defined in this text,
requires that consumer needs come first in organizational decision making.
.MARKETING INSIGHT Some Gµideli_nes_ for lrr1pl�n1enti17g the
·Mara�etimg Comcegt· d1-- �,
1 . Create customer focus throughout the business.
2. Listen to the customer.
3. Define and nurture your distinctive competence, that is, what your organization does well, better than competitors.
4. Define marketing as market intelligence.
5. Target customers precisely.
6. Manage for profitability, not sales volume.
7. Make customer value the guiding star.
8. Let customers define quality.
9. Measure and manage customer expectations.
10. Build customer relationships and loyalty.
11. Define the business as a service business.
12. Commit to continuous improvement and innovation.
13. Manage the culture of your organization along with strategy and structure.
14. Grow with strategic partners and alliances.
15. Destroy marketing bureaucracy.
Source: For a very early discussion of the marketing concept, see Robert L. King, "The Marketing Concept: Fact or Intelligent Platitude," The Marketing Concept in Action, Proceedings of the 47th National Conference (Chicago: American Marketing Association, 1964), p. 657. Also see Frederick E. Webster Jr., "Defining the New Marketing Concept," Marketing Management 2, no. 4 (1994) pp. 22-31; William 0. Bearden, Thomas N. Ingram, and Raymond W. LaForge, Marketing: Principles and Perspectives, 5th ed. (Burr Ridge, IL: McGraw-Hill/Irwin, 2007), p. 9; and William D. Perreault Jr., Joseph P. Cannon, and E. Jerome Mccarthey, Basic Marketing: A Managerial Approach, 19th ed. (Burr Ridge, IL: McGraw-Hill Education, 2014), pp. 19-26.
One qualification to this statement deals with the question of a conflict between con sumer wants and societal needs and wants. For example, if society deems clean air and water as necessary for survival, this need may well take precedence over a consumer's want for goods and services that pollute the environment.
WHAT IS MARKETING?
Everyone reading this book l1as been a customer for most of lus or l1er life. Last evening you stopped at a local supermarket to graze at the salad bar, pick up some bottled water and a bag of Fritos coin clups. Wlule you were there, you snapped a $1.00 coupon for a new flavor salad dressing out of a dispenser and tasted som.e new breakfast potatoes being cooked in the back of the store. As you sat down at home to eat your salad, you answered the phone and so1neone suggested that you need to have your carpets cleaned. Later on in the evening you saw TV commercials for tires, soft drinks, athletic shoes, and the dangers of smoking and drinking during pregnancy. Today when you enrolled in a marketing course, you found tl1at tl1e instruc tor has decided that you 1nust purchase this book. A friend has already purchased the book on the Internet. All of tl1ese activities involve marketing. And each of us knows something about marketing because it has been a part of our life since we had our first dollar to spend.
Since we are all involved in marketing, it may seem strange tl1at one of the persistent problems in t11e field has been its definition. The American Marketing Association defines marketing as "the activity, set of institutions, and processes for creating, co1nmunicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large.''1 This definition takes into account all parties involved in the marketing effort: members of tl1e prodt1cing organization, resellers of goods and services, and custom ers or clients. While the broadness of the definition allows the inclusion of nonbusiness
5
6 Part A Introduction
FIGURE 1.1
Major Types of
Marketing
Type Description Example
Product Marketing designed to create exchange Strategies to sell for tangible products. Gateway computers.
Service Marketing designed to create exchanges Strategies by Allstate for intangible products. to sell insurance.
Person Marketing designed to create favorable Strategies to elect actions toward persons. a political candidate.
Place Marketing designed to attract people to Strategies to get places. people to vacation
in national or state parks.
Cause Marketing designed to create support Strategies to get for ideas, causes, or issues or to get pregnant women not people to change undesirable to drink alcohol. behaviors.
Organization Marketing designed to attract donors, Strategies designed to members, participants, or attract blood donors. volunteers.
exchange processes, the primary emphasis in this text is on marketing in the business environ-
1nent. However, this emphasis is not meant to imply that marketing concepts, principles, and techniques cannot be fruitfully en1ployed in other areas of exchange as is clearly illustrated i11
Figure 1.1.
WHAT IS STRATEGIC Pl.ANNING?
Before a production manager, marketing manager, and personnel manager can develop plans
for their individual depa1t1nents, some larger plan or blueprint for the entire organization
should exist. Otherwise, on what would the individual departmental plans be based? In other words, there is a larger context for planning activities. Let us assun1e that we are
dealing with a large business organization that has several business divisions and several
prod11ct lines within each division (e.g., General Electric, Altria). Before individual divi
sions or departments can implement any marketing planning, a plan has to be developed for
the entire organization.2 Tl1is 1neans that senior 1n.anagers must look toward the future and evaluate their ability to shape their orga1lization' s destiny in the years and decades to come.
The output of this process is objectives and strategies designed to give the organization a
chance to compete effectively in the future. The objectives and strategies established at the
top level provide the context for planning in each of tl1e divisions and departments b y divi
sional and departmental n1anagers.
Strategic Planning and Marketing Management Some of the most successful business organizations are here today because many years
ago tl1ey offered the right product at the right time to a rapidly growing market. Tl1e
same can also be said for nonprofit and governmental organizations. Many of the criti
cal decisions of the past were made without the benefit of strategic thinking or planning.
Whether these decisions were based on wisdom or were just luck is not important; they
worked for these organizations. However, a worse fate befell countless other organiza tions. More than three-quarters of the 100 largest U.S. corporations of 70 years ago have
fallen from the list. These corporations at one time donlinated their markets, controlled
vast resources, and had the best-trained workers. In the end, they all made the same criti
cal mistake. Their managements failed to recogruze tl1at bttsiness strategies need to reflect
1 . It costs a great deal more to acquire a new customer than to keep an old one.
2. Loyal customers buy more from your firm over time.
3. The longer you keep a customer, the more profitable they become over time.
4. It costs less to service loyal customers than new customers.
5. Loyal customers are often excellent referrals for new business.
6. Loyal customers are often willing to pay more for the quality and value they desire.
Source: One of the earliest works on the value of the loyal customer was Frederick F. Reichheld, The Loyalty Effect, BOSTON: HBS Press, 1996. Also see Roland T. Rust, Katherine N. Lemon, and Valerie A. Zeithaml, "Return on Marketing: Using Customer Equity to Focus Marketing Strategies," journal of Marketing, January 2004, pp. 76-89; William 0. Bearden, Thomas N. Ingram, and Raymond W. LaForge, Marketing: Principles and Perspectives, 5th ed. (Burr Ridge, IL: McGraw-Hill/Irwin, 2007), p. 8; and W. D. Perreault Jr., J. P. Cannon, and E. Jerome McCarthy, Basic Marketing: A Marketing Strategy Planning Approach, 19th ed. (Burr Ridge, IL: McGraw-Hill/Irwin, 2013), pp. 42-43.
changing environments and emphasis 111ust be placed on developing bt1siness systems that
allow for continuous improvement. Instead, tl1ey attempted to carry on business as usual.
Present-day managers are increasingly recognizing that wisdom and innovation alone
are n o longer sufficient to guide the destinies of organizations, both large and small. These
same managers also realize tl1at the true mission of the organization is to provide value
for t11ree key constituencies: customers, e1nployees, and investors. Witl1out this type of
outlook, no one, including shareholders, will profit i n the long run.
Strategic planning includes all the activities that lead to the development of a clear
organizational mission, organizational objectives, and appropriate strategies to achieve
the objectives for the entire organization. T11e form o f the process itself has come under
criticism in some quarters for being too stru.ctured; l1owever, strategic planning, if per
formed successfully, plays a key role in achieving an equilibrium between the short and
the long term by balancing acceptable financial performance with preparation for inevita
ble changes in markets, technology, and competition, as well as in economic and politi
cal arenas. Managing p1incipally for current cash flows, market share gains, and earnings
trends can mortgage the firm's future. An intense focus on the near term can produce an
aversion to risk that dooms a business to stagnation. Conversely, an overemphasis on the
long run is just as inappropriate. Companies tl1at overextend themselves betting on the
future may penalize short-te1m profitability and other operating results to such an extent
that the company is vulnerable to takeover and other threatening actions.
The strategic planning process is depicted in Figure 1.2. In the strategic planning process,
the organization gathers information about the changing elements of its environment.
Managers from all functional areas in the orga11ization assist in this infonnation-gathering
process. This infon11ation is useful in ruding the organization to adapt better to tl1ese changes
througl1 the process of strategic planning. The strategic plan(s)3 and supporting plan are
then implemented in the environment. The end results of this implementation are fed back
as new information so that continuous adaptation and improvement can take place.
The Strategic Planning Process The outpt1t of the strategic planning process is the development of a strategic plan. Figure 1.2
indicates four components of a strategic plan: mission, objectives, strategies, and portfolio
plan. Let us carefully examine each one.
Organizational Mission
Tl1e organization's environment provides the resources that sustain the organization,
whether it is a business, a college or university, or a government agency. In exchange 1
8 Part A Introduction
FIGURE 1.2 The Strategic Planning Process
The environment
Cooperative Competitive Economic Social Pol itica I Legal
I
- - The organixation's strategic plan -
- Organ izationa I
Information . .
m1ss1on .
I
Organizational ,_
r
objectives
I -
-
Organizational r
strategies
-
. Organizational r
portfolio plan
I
I
Implementation
for these resources, the organization must supply the environment with quality goods
and services at an acceptable price. In other words, every organization exists to accom
plish something in the larger environment and that purpose, vision, or mission usually is
clear at the organization's inception. As time passes, however, t11e organization expands,
and the environment and managerial personnel change. As a result, one or more things
are likely to occur. First, the organization's original purpose may become irrelevant as
the organization expands into new prodLLCts, new markets, and even new industries. For
example, Levi Strauss began as a manufacturer of work clothes. Second, the original
mission may re1nain relevant, but managers begin to lose interest in it. Finally, changes
in the environment may make the original mission inappropriate, as occurred with the
March of Dimes when a cure was found for polio. The result of any or all three of these
conditions is a "drifting" organization, without a clear mission, vision, or purpose to guide critical decisions. When this occurs, 1nanagen1ent must search for a purpose or emphati
cally restate and reinforce the original purpose.
The mission statement, or purpose, of an organization is the description of its reason
for existence. It is the lon g -run vision of what the organization strives t o be, the unique
ai1n tl1at differentiates tl1e organization from si1nilar ones and the means by which this
differentiation will take place. In essence, the 1nission statement defines the direction in
which the orga.nization is heading and how it will succeed in reaching its desired goal.
While some argue that vision and mission statements differ in their purpose, the per
spective we will take is that both re f
lect the organization's attempt to guide behavior, create a culture, and inspire commitment. However, it is more i1nportant that the 1nis
sion statement comes from the heart and is practical, easy to identify with, and easy to
remember so that i t will provide direction and significance to all members of the organi
zation regardless of their organizational level. The basic questions tl1at must be answered when an organizatio11 decides to examine and
restate its mission are, What is our business? Who are our customers? What do customers
value? and What is our business? The answers are, i n a sense, the assumptions on which ilie
:MARKETING INSIGHT :.s·.om.e: A.G<t,ual M<iss:io:n' ~ . •. • - • • • • -, • - • 0 • • • • . • • • • • • J' • • r • - - . - · . . . . . - .. , ' Sta·t·e rime m � s
Organization
Large pharmaceutical firm
Mission
We will become the world's most valued company to patients, cus tomers, colleagues, investors, business partners, and the communities where we work and live.
Community bank To help citizens successfully achieve and celebrate important life events with education, information, products, and services.
Skin care products
Hotel chain
Mid-size bank
We will provide luxury skin-care products with therapeutic qualities that make them worth their premium price.
Grow a worldwide lodging business using total-quality-management (TQM) principles to continuously improve preference and profitability. Our commitment is that every guest leaves satisfied.
We will become the best bank in the state for medium-size businesses by 2017.
organization is being run and from which future decisions will evolve. While such ques
tions may seem simplistic, they are st1ch difficult and critical ones that the major respon
sibility for answering them must lie with top management. In fact, the mission statement re1nai11s the 1nost widely used 1nanagement tool in business today. ln developing a state
ment of mission, management 1nust take into account three key elements: the organiza
tion's history, its distinctive competencies, and its environment.4
1. The organization's history. Every organization-large or small, profit or nonprofit
has a history of objectives, accomplishments, mistakes, and policies. In formulating a
mission, the critical characteristics and events of the past must be considered.
2. The organ.ization 's distinctive co,npetencies. While there are many things an
organization may be able to do, it should seek to do what it can do best. Distinctive
con1petencies are things that an organization does well-so we]] in fact tl1at they give it an
advantage over similar organizations. For Honeywell, it's their ability to design, manufac
ture, and distribute a superior line of thermostats. Si1nilarly, Procter & Gamble's distinctive
co1npetency is its knowledge of the market for low-priced, repetitively purchased consumer
products. No tnatter how appealing an opportunity may be, to gain advantage over competi
tors, the organization 1nust. formulate strategy based on distinctive co1npetencies.
3. The organization's environment. The organization's environment dictates the oppor
tunities, constraints, and threats that must be identified before a mission statement. is
developed. For example, managers in any industry that is affected by Internet technology
breakthroughs should continually be asking, How will the changes in technology affect 1ny
customers' be]1avior and tl1e means by which we n.eed to conduct our business?
However, it is extremely difficult to write a useful and effective mission statement. It is
not uncommon for an organization to spend one or two years developing a useful mission state1nent. When completed, an effective 1nission statement will be focused on ,narkets
rather th.an products, achievable, m.<>tivating, and specific. 5
Focused on Markets Rather Than Products The customers or clients of an organiza
tion are critical in determining its mission. Traditionally, many organizations defined their
business in terms of what they made ("our business is glass"), and i n many cases they
nained the organization for the prod11ct or service (e.g., A1nerican Tobacco, Hormel Meats,
National Cash Register, Harbor View Savings and Loan Association). Many of these
organizations have found that, when products and technologies become obsolete, their
mission is no longer relevant and the name of the organization may n o longer describe
what it does. Thus, a more enduring way of defining the mission is needed. In recent years, 9
10
I
1. Incomplete-not specific as t o where the company is headed and what kind o f com pany management is trying to create.
2. Vague-does not provide direction to decision makers when faced with product/market choices.
3. Not motivational-does not provide a sense o f purpose or commitment to something bigger than the numbers.
4. Not distinctive-not specific to our company.
5. Too reliant on superlatives-too many superlatives such as #7, recognized leader, most successful.
6. Too generic-does not specify the business or industry to which it applies.
7. Too broad-does not rule out any opportunity management might wish to pursue.
Source: Adapted from Arthur A. Thompson Jr. Margaret A. Peteraf, John E. Gamble, and A. J. Strickland 111, Crafting and Executing Strategy, 19th ed. (Burr Ridge, IL: McGraw-Hill/Irwin, 2014), p. 22.
Examine the mission statements in Marketing Insight 1-3. Do any of these shortcomings apply to them?
therefore, a key feature of mission statements has been an external rather than internal
focus. In other words, the mission statement should focus on the broad class of needs
that tl1e organization is seeking to satisfy (external focus), not on the physical product or service tl1at the orga1tizatio11 is offering at present (internal focus). These market-driven
firms stand out in their ability to continuously anticipate market opportunities and respond
before their competitors. Peter Drucker has clearly stated this principle:
A business is not defined by the company's name, statutes, or articles of incorporation. lt is
defined by the want the customer satisfies when he buys a product or service. To satisfy the
custo1ner is the mission ru1d purpose of every business. The question "What is our business?"
can, therefore, be answered only by looking at the business from the outside, fro1n the point
of view of customer and 1narket.6
While DrLtcker was referring to business organizations, the same necessity exists for
both nonprofit and governmental organizations. Tl1at necessity is to state the mission in
ter1ns of serving a particular group of clients or customers a.nd meeting a particular class
of need.
Achievable While the mission statement should stretch the organization toward more
effective performance, it should, at the same time, be realistic and achievable. In other
words, it should open a vision of new opportunities but should not lead the orga1rization into unrealistic ventures far beyond its competencies.
Motivational One of the side (but very important) benefits of a wel l -defined mission is
the guidance it provid.es employees and managers working in geographically dispersed
units and on independent tasks. It provides a shared sense of purpose outside the various
activities taking place within the organization. Therefore, such end results as sales, patients
cared for, students graduated, and reduction in violent cri1nes can then be viewed as tl1e result of careful pursuit and accomplishment of tl1e mission and not as the 1nission itself.
Specific As we mentioned earlier, public relations sl1ould not be the primary purpose of
a statement of mission. I t must be specific to provide direction and guidelines to manage
ment when they are choosing between alternative courses of action. I n other words, "to
produce the highest-quality products at the lowest possible cost" sounds very good, but it does not provide direction for 1nanage1nent.
ll Part A Introduction
FIGURE 1.3
Sample
Organizational
Objectives (manufacturing firm)
FIGURE 1.4
Organizational
Growth Strategies
Area of Performance
1 . Market standing
2. Innovations
3. Productivity
Possible Objective
To make our brands number one in their field in terms of market share.
To be a leader in introducing new products by spending no less than 7 percent of sales for research and development.
To manufacture all products efficiently as measured by the productivity of the workforce.
4. Physical and financial resources To protect and maintain all resources-equipment, build ings, inventory, and funds.
5. Profitability
6. Manager performance and responsibility
To achieve an annual rate of return on investment of at least 15 percent.
To identify critical areas of management depth and succession.
7. Worker performance and attitude To maintain levels of employee satisfaction consistent with our own and similar industries.
8. Social responsibility To respond appropriately whenever possible to societal expectations and environmental needs.
organizational mission into specific objectives that support the realization of the mission.
The objectives 1nay flow directly from the mission or be considered subordinate necessi
ties for carrying out the n1ission. As discussed earlier, the objectives are specific, measur
able, action commitments on the part of the organization.
Organizational Strategies
Hopefully, when an organization has formulated its mission and developed its objec
tives, it kI1ows where it wants to go. The next 1nanagerial task is to develop a "grand
design" to get there. Tl1is grand design constitutes the organizational strategies. Strategy
involves the cl1oice of 1najor directions the organization will take in pursuing its objec
tives. Toward this end, it is critical that strategies are consistent with goals and objec
tives and that top management ensures strategies are implemented effectively. As many
as 70 perce11t of strategic plans fail because the strategies in. them are not well defined and, thus, cannot be i1nple1nented effectively. What follows is a discussion of various
strategies organizations can pursue. We discuss three approaches: (1) strategies based o n
products and markets, (2) strategies based on competitive advantage, and (3) strategies
based on valLle.
Organizational Strategies Based on Products and Markets One means to developing
organizational strategies is to focus on the directions the organization can take in order
to grow. Figure 1.4, which presents the available strategic choices, is a product-market
matrix. 7 It indicates that an organization can grow by better managing what it is
Products Present Products New Products
Markets
Present customers Market penetration Product development
New customers Market development Diversification
1. The Fit Test: How well does the strategy fit the company's situation? A strategy must have good external fit, which means it will be well matched to industry and competitive condi tions, the company's best market opportunities, and other relevant aspects of its business environment. It also must have a good internal fit, which means it is tailored to the com pany's resources and distinctive competencies and be supported by a complementary set of functional capabilities (sales and marketing, production, etc.).
2. The Competitive Advantage Test: Can the strategy help the company achieve a sustainable competitive advantage? Strategies that fail this test are unlikely to produce superior performance for more than a brief period of time. A good strategy should enable the organization to achieve a long-term competitive advantage.
3. The Performance Test: Is the strategy producing good company performance? Critical performance indicators are (a) profitability and financial strength and (b) competitive strength and market standing. Above average performance in these two areas is an indi cator of a winning strategy.
Source: Adapted from Arthur A. Thompson Jr. Margaret A. Peteraf, John E. Gamble, and A. J. Strickland 111, Crafting and Executing Strategy, 19th ed. (Burr Ridge, IL: McGraw-Hill/Irwin, 2014), p. 12.
presently doing or by finding new things to do. In choosing one or both of these paths,
i t must also decide whether to concentrate on present customers or to seek new ones.
Thus, according to Figure 1.4, there are only four paths an organization can take i n
order t o grow.
Market Penetration Strategies These strategies focus primarily on increasing the sale of
present products to present ct1stomers. For example:
• Encouraging present customers to use more of the product: "Orange Juice Isn't Just for
Breakfast Anymore."
Encouraging present customers to purchase more of the product: mLtltiple packages of
Pringles, instant winner sweepstakes at a fast-food restaurant. • Directing programs at current participants: A university directs a fund-raising program
at those graduates who already give the most money.
Tactics used to in1plen1ent a market penetration strategy 1night i11clude p1ice reductions,
a.dvertising that stresses the many benefits of the product (e.g., "Milk Is a Natural"), packag
ing the product i n different-sized packages, or making it available at more locations. Other
functional areas of the business could also be involved in implementing the strategy in addi
tion to marketing. A production plan might be developed to produce tl1e product more effi
ciently. This plan might include increased production runs, the substitution of preassembled
components for individual product parts, or the automation of a process that previously was
performed manually.
Market Development Strategies Pursuing growth through market development, an
organization woLtld seek to find new customers for its present products. For example:
• Arm & Hammer continues to seek new uses for its baking soda. • McDonald's continually seeks expansion into overseas markets. • As the consumption of salt declined, the book 101 Things You Can Do with Salt Besides
Eat It appeared.
13
14 Part A Introduction
Market development strategies involve much, much more than simply getting the prod
uct to a new .market. Before decidi11g on marketing techniques such as advertising and
packaging, companies often find they must establisl1 a clear position in the market, some
times spending large sums of money simply to educate consumers as to why they should
consider buying the product.
Product Development Strategies Selecting one of the remaining two strategies means
the organization will seek new things to do. Witl1 this particL1lar strategy, tl1e new products developed would be directed pri1narily to present customers. For example:
• Offering a different version of an existing product: mini-Oreos, Ritz with cheese. • Offering a new and improved version of their product: Gillette's latest improvement in
shaving technology.
• Offering a new way to Ltse an existing product: Vaseline's Lip Therapy.
Diversification This strategy can lead the organization into entirely new and even unre
lated businesses. It involves seeking new products (often through acquisitions) for custom
ers not currently being served. For example:
• Altria, originally a manufacturer of cigarettes, is widely diversified in financial s e r
vices, Post cereals, Sealtest dairy, and Kraft cheese, among others.
• Brown Foreman Distillers acquired Hartmann Luggage, and Sara Lee acquired Coach
Leather Products.
• Some universities are establishing corporations to find commercial uses for faculty research.
Organizational Strategies Based on Competitive Advantage Michael Porter devel
oped a model for formulating organizational strategy that is applicable across a wide
variety of industries. 8 The focus of the model is 011 devising means to gain competitive
advantage. Co1npetitive advantage is an ability to outperform competitors i n providing
something that the market values. Porter suggests that firms should first analyze their
industry and then develop either a cost leadership strategy or a strategy based ori dij�
ferentiation. Tl1ese general strategies can be used on 1narketwide bases or in a niche
(seg1nent) within the total market.
Using a cost leadership strategy, a firm would focus on being the low-cost company
in its industry. They would stress efficiency and offer a standard, no-frills product. They
could achieve this through efticiencies in production, product design, manufacturing,
distribution, technology, or some other 1neans. The important point is that to succeed, the
organization must continually strive to be the cost leader in tl1e industry or market segment
it competes in. It must also offer products or services that are acceptable to customers
when compared to the competition. Walmart, Southwest Airlines, and Timex Group Ltd.
are companies tl1at have succeeded in using a cost 1eadersl1ip strategy.
Using a strategy based on differentiation, a firm seeks to be unique in its industry or
market segment along particular dimensions that the custo1ners value. These dimensions
might pertairt to design, quality, service, variety of offerings, brand name, or some other
factor. The important point is that because of uniqueness of tl1e product or service along one
or more of these di1nensions, the finn can charge a pre1niurn price. L.L.Bean, Rolex, Coca
Cola, and Microsoft are companies that have succeeded using a differentiation strategy.
Organizational Strategies .Based on Value As competition increases, the concept of
"customer value" has become critical for .marketers as well as customers. It can be thought
of as an extension of the marketing concept philosophy that focuses on developing and
delivering superior value to customers as a way to achieve organizational objectives. Thus,
it focuses not only on customer needs, but also on the question, How can we create value
for them and still achieve our objectives?
Chapter One Strategic Planning and the Marketing Managernent Process 1S
It has become pretty clear that in today's competitive environment i t is unlikely
that a firm will succeed by trying to be all things to all people. 9 Thus, to succeed firms
must seek to build long-term relationships with their customers by offering a t1nique
value that only they can offer. It seems that many firms have succeeded by choosing
to deliver superior customer value using one of three value strategies-best price, best
product, or best service.
Dell Inc., Costco, and Southwest Airlines are among the st1ccess stories in offering cus
tomers the best price. Rubbermaid, Nike, Starbucks, and Microsoft believe they offer the
best products on tl1e 1narket. Airborne Express, Roadway, Cott Corporation, and Lands' End provide superior customer value by providing outstanding service.
Choosing an Appropriate Strategy
On what basis does an organization choose one ( or all) of its strategies? Of extreme
importance are the directions set by the 1nission statement. Management should select those
strategies consistent with its lnission and capitalize on tl1e organization's distinctive com petencies that will lead to a sustainable competitive adva11tage. A sustainable con1petitive
advantage can be based on either the assets or skills of the organization. Technical superi
ority, low-cost production, customer service/product support, location, financial resources,
continuing product innovation, and overall marketing skills are all examples of distinctive
competencies that can ]ead to a sustainable competitive advantage. For exa111p]e, Honda is
known for providing quality automobiles at a reasonable price. Each succeeding genera
tion of Honda automobiles has shown marked quality improvements over previous genera
tions. Likewise, VF Corporation, manufacturer of Wrangler and Lee jeans, has formed
"quick response" partnerships with both discounters and department stores to ensure the
efficiency of product flow. The key to sustaining a competitive advantage is to continu
ally focus and build on the assets and skills that will lead to long-term performance gains.
Organizational Portfolio Plan
The final phase of the strategic planning process is the formulation of the organizational
portfolio plan. In reality, most organizations at a p articular tim.e are a portfolio of busi
nesses, that is, product lines, divisions, and schools. To illustrate, an appliance manufac
turer may l1ave several product lines (e.g., televisions, washers and dryers, refrigerators,
stereos) as well as two divisions, consumer appliances and industrial appliances. A college
or university will have numerous scl1ools (e.g., education, business, law, architecture) and
several progran1s within each school. Some widely diversified organizations such as Altria
are i11 numerous unrelated businesses, such as cigarettes, food products, land develop1nent,
and industrial paper products.
Managing sucl1 groups of businesses is made a little easier if resources are plentiful,
cash is plentiful, and each is experiencing growth and profits. Unfortu11ate]y, providing
larger and larger budgets each year to a]l businesses i s seldom feasible. Many are not
experiencing growth, and profits and resources (financial and nonfinancial) are becom
ing more and more scarce. In such a situation, choices must be made, and some method is
necessary to help management make the choices. Management must decide which busi nesses to build, maintain, or e]i1ninate, or which new businesses to add. Indeed, much of
the recent activity in corporate restructuring has centered on decisions relating to which
groups of businesses management should focus on.
Obviously, the first step in this approach is to identify the various divisions, product Jines, and so on that can be considered a "business." When identified, these are refen·ed to
as strategic business units (SB Us) and have the following characteristics:
• They have a distinct mission.
• They have their own competitors.
16 Part A Introduction
• They are a single business or collection of related businesses.
• They can be planned independently of the other businesses of the total organization.
Thus, depending on the type of organization, an SBU could be a si11gle product, product
line, or division; a college of business ad1ninistration; or a state mental health agency.
Once the organization has identified and classified all of its SBUs, some method must
be established to determine how resources should be allocated among the various SB Us.
These methods are k11own as JJOrtjolio models. For those readers interested, the appendix
of this chapter presents two of the 1nost popular portfolio models, the Boston Consulting
Group model and the General Electric model.
The Complete Strategic Plan Figure 1.2 indicates that at this point the strategic planning process is complete, and the
organization has a time-phased blt1e_print that ot1tlines its mission, objectives, and strate
gies. Completion of the strategic plan facilitates tl1e development of marketing plans for
each product, product line, or division of the organization. The 1narketing plan serves as
a subset of the strategic plan in that it allows for detailed planning at a target market
level. This important relationship between strategic planning and marketing planning is
the SLLbject of the final section of this chapter.
THE MARKETING MANAGEMENT PROCESS
Marketing management can be defined as "the process of planning and executing the
conception, pricing, promotion, and distribution of goods, services, and ideas to cre
ate exchanges with target groups that satisfy customer and organizational objectives."10
It shouJd be noted that tl1is definition is entirely consistent with the marketing concept,
since it emphasizes serving target market needs as the key to achieving organizational
objectives. The remainder of this section will be devoted to a discussion of the marketing
management process according to the model in Figure 1.5.
Situation Analysis Witl1 a clear understanding of organizational objectives and m1ss1on, the marketing
manager must then analyze and monitor the position of the firm and, specifically, the
1narketing depart111.ent, in tenns o f its past, present, and future situatio11. Of course, tl1e
future situation is of primary concern. However, analyses of past trends and the current
situation are most useful for predicting the future situation.
The situation analysis can be divided into six major areas of concern: (1) the coopera
tive environment, (2) the competitive environment, (3) the economic envirorunent, (4) the
social environ1nent, (5) the political environment, and (6) the legal environ111ent. In ana
lyzing each of tl1ese environments, the marketing executive must search both for oppor
tunities and for constraints o r threats to achieving objectives. Opportunities for profitable
marketing often arise from changes in these environments that bring about new sets of
needs to be satisfied. Constraints on 111arketing activities, such as limited supplies of scarce
resources, also arise from these environments.
The Cooperative Environment The cooperative environment includes all firms and indi
viduals who have a vested interest in the firn1' s accomplishing its objectives. Parties of pri
mary interest to the marketing executive in this environment are (1) suppliers, (2) resellers,
(3) otl1er departments in the firm, and (4) subdepartments and employees of the marketing
department. Oppo1tunities in this environ111ent are pri111arily related to n1etl1ods of increas
ing efficiency. For example, a company might decid.e to switch from a competitive bid
process of obtaining materials to a single source that is located near the company's plant.
FIGURE 1.5
Strategic
Planning and
Marketing Planning
I
I
I
Chapter One Strategic Planning and the Marketing Managernent Process 17
,_
The strategic plan Organizational mission Organizational objectives Organizational strategies ' Organizational portfolio plan
- Marketing information system and marketing research
,_
I The marketing plan Situation analysis Marketing objectives Target market selection
I ◄ Marketing mix
Product strategy Promotion strategy Pricing strategy Distribution strategy
'
,_
Implementation and control
Likewise, members of the marketing, engineering, and manufacturing functions may use a
tean1work approach to developing new products versus a sequential approach. Constraints
consist of such things as unresolved conflicts and shortages of 1naterials. For example, a
co111pany 1nanager may believe that a distributor is doing an insufficient job of promoting
and selling the product, or a marketing manager may feel that manufacturing is not taking
the steps needed to produce a quality product.
The Competitive Environment The competitive enviro11ment includes pri1narily other
finns in the industry that rival the organization for both resources and sales. Opportuni
ties in this environment include such things as (1) acquiring competing firms; (2) offering
demonstrably better value to consumers and attracting them away from competitors; and
(3) in so1ne cases, driving competitors out of the industry. For example, one airline p u r
chases another airline, a bank offers depositors a free checking account with no minitnum
balance requirements, or a grocery chain engages i n an everyday low-price strategy that
competitors can't meet. The primary constraints in these environments are the demand
stimulation activities of competing firms and the number of consumers who cannot be lured away from co111petition.
The Economic Environment The state of the macroeconomy and changes in it also
bring about marketing opportunities and constraints. For example, such factors as l1igh
inflation and une1nployment levels can limit the size of the market that can afford to
purchase a firrn's top-of-the-line product. At the same time, these factors may offer a
profitable opportunity to develop rental services for such products or to develop less
expensive models of the product. In addition, changes in technology can provide sig nificant threats and opportunities. For example, in the co111mu11ications industry, when
technology was developed to a level where it was possible to provide cable television
using phone lines, such a system posed a severe threat to the cable industry.
18
:
Speed of the Process. There i s the problem of either being so slow that the process seems to go on forever or so fast that there is an extreme burst o f activity to rush out a plan.
Amount of Data Collected. Sufficient data are needed t o properly estimate customer needs and competitive trends. However, the law of diminishing returns quickly sets i n on the data-collection process.
Responsibility for Developing the Plan. If planning is delegated to professional planners, valuable line management input may be ignored. If the process is left to line manag ers, planning may be relegated to secondary status.
Structure. Many executives believe the most important part of planning is not the plan itself but the structure of thought about the strategic issues facing the business. However, the structure should not take precedence over the content so that planning becomes merely filling out forms or crunching numbers.
Length of the Plan. The length of a marketing plan must be balanced between being so long that both staff and line managers ignore it and so brief that it ignores key details.
Frequency of Planning. Too frequent reevaluation of strategies can lead to erratic firm behavior. However, when plans are not revised frequently enough, the business may not adapt quickly enough to environmental changes and thus s.uffer a deterioration in its competitive position.
Number of Alternative Strategies Considered. Discussing too few alternatives raises the likelihood of failure, whereas discussing too many increases the time and cost of the planning effort.
Cross-Functional Acceptance. A common mistake is to view the plan as the proprietary possession o f marketing. Successful implementation requires a broad consensus, including other functional areas.
Using the Plan as a Sales Document. A major but often overlooked purpose of a plan and its presentation is to generate funds from either internal or external sources. Therefore, the better the plan, the better the chance of gaining desired funding.
Senior Management Leadership. Commitment from senior management is essential to the success of a marketing planning effort.
Tying Compensation to Successful Planning Efforts. Management compensation should be oriented toward the achievement of objectives stated in the plan.
Source: From Donald R. Lehmann and Russell S. Winer, Analysis for Marketing Planning 7E, McGraw-Hill/ Irwin, 2008, Chapter 1. Reprinted with permission of McGraw-Hill Education.
The Social Enviro,iment This environment inclt1des general cultural and social tradi
tions, norms, and attitudes. While these values change slowly, such changes often bring
about the need for new products and services. For example, a change i n values co11cem
ing the desirability of large families brought about an opportunity t o market better meth
ods of birth control. On the other hand, cultural and social valt1es also place constraints
on marketing activities. As a rule, business practices that are contrary to social values
become political issues, wlucl1 are often resolved b y legal constraints. For exa1nple, public
demand for a cleaner environment has caused the government to require that automobile
manufacturers' products meet certain average gas mileage and emission standards.
The Political Environme,it The political environ.ment includes the attitudes and reac
tions of the general public, social and business critics, and other organizations, such as
the Better Business Bureau. Dissatisfaction with such bt1siness and marketing practices as
unsafe products, prodt1cts that waste resources, and unethical sales procedures can l1ave
adverse effects on corporation i1nage and customer loyalty. Howe,1er, adapting business
Chapter One Strategic Planning and the Marketing Managernent Process 19
and marketing practices to these attitudes can be an opportunity. For example, these atti
tudes have brought about .markets for such products as unbreakable children's toys, high
efficiency air conditioners, and more econo1nical automobiles.
The Legal Environment This environment includes a host of federal, state, and local
legislation directed at protecting both business co1npetition and consumer rights. In past
years, legislation reflected social and political attitudes and has been pri1narily directed at
constraining business practices. Such legislation usually acts as a constraint on busu1ess
behavior, but again can be viewed as providing opportunities for marketing safer and more
efficient products. In recent years, there has been less emphasis on creating new laws
for constraining business practices. As an example, deregulation has become more com
mon, as evidenced by events in tl1e airlines, financial services, and telecom1nunicatio11s
industries.
Marketing Planning The previous sections emphasized that (1) marketing activities must be aligned with
organizational objectives and (2) marketing opportunities are often found by systematically
analyzing situational environments. Once an opportunity is recognized, the marketing exec
utive 1nust then plan an appropriate strategy for talcing advantage of the opportunity. This
process can be viewed in terms of three interrelated tasks: (1) establishing marketing objec tives, (2) selecting the target rn.arket, and (3) developing the marketing mix.
Establishing Objectives Marketing objectives usually are derived from organizational objectives; in some cases where the firm is totally marketing oriented, the two are identi
cal. In eitl1er case, objectives must be specified and performance in achieving them should
be measurable. Marketing objectives are usually stated as standards of performance (e.g.,
a certain percentage of market share or sales volume) or as tasks to be achieved by given
dates. While such objectives are useful, the marketing concept emphasizes tl1at profits
ratl1er than sales should be the overriding objective of the firm and marketing department.
In any case, these objectives provide the framework for the marketing plan.
Selecting the Target Market The success of any marketing plan hinges on how well it
can identify customer needs and organize its resot1rces to satisfy them profitably. Thus,
a crucial element of the marketing plan is selecting the groups or segments of potential
custo1ners the firm is going to serve with eacl1 of its products. Four important questions
must be answered:
1. What do custo1ners want or need?
2. What must be done to satisfy these wants or needs?
3. What is the size of the market?
4. What is its growth profile?
Present target 1narkets and potential target markets are then ranked according to (1)
profitability; (2) present and future sales volume; and (3) the match between what it takes
to appeal successfully t o the segment and the organization's capabilities. Those that appear
to offer the greatest potential are selected. One cautionary note on this process involves the
importance of not neglecting present customers when developing 1narket share and sales
strategies. Chapters 3, 4, and 5 are devoted to discussing consumer behavior, industrial
buyers, a11d 1narket segmentation.
Developing the Marketing Mix The marketing mix is the set of controllable variables
that must be managed to satisfy the target market and achieve organizational objectives.
These controllable variables are usually classified according to four major decision areas:
product, price, promotion, and place (or channels of distribution). The importance of
MARKETING INSIGHT Examples of Marketing Objectives
20
Poorly Stated Objectives
Our objective is to be a leader in the industry in terms of new product development.
Our objective is to maximize profits.
Our objective is to better serve customers.
Our objective is t o be the best that we can be.
Well-Stated Objectives
Our objective is t o spend 12 percent of sales revenue between 2013 and 2015 on research and development in an effort to introduce at least five new products in 2016.
Our objective is to achieve a 10 percent return on investment during 2013, with a payback on new investments of no longer than four years.
Our objective is to obtain customer satisfaction ratings of at least 90 percent on the 201 3 annual customer satisfaction survey, and to retain at least 85 percent of our 2013 customers as repeat purchasers in 2014.
Our objective is to increase market share from 30 percent to 40 percent in 2013 by increasing promotional expenditures by 14 percent.
Source: From Donald R. Lehmann and Russell S. Winer, Analysis for Marketing Planning lE, McGraw-Hill/ Irwin, 2008, Chapter 1. Reprinted with permission of McGraw-Hill Education.
these decision areas cannot be overstated, and in fact, the major portion of this text is
devoted to analyzing them. Chapters 6 and 7 are devoted to product and new product
strategies, Chapters 8 and 9 to promotion strategies in terms of both nonpersonal and
perso11al selling, Chapter 10 to distribution strategies, and Chapter 11 to pricing strate
gies. In addition, marketing mix variables are the focus of analysis in two chapters o n
marketing in special fields, that is, the marketing of services (Chapter 12) and global
marketing (Chapter 13). Thus, it should be clear that the marketing mix is the core of the
111arketing n1anagement process.
The output of the foregoing process is the marketing plan. It is a formal statement of
decisions that have been made on marketing activities; it is a blueprint of the objectives,
strategies, and tasks to be performed.
Implementation and Control of the Marketing Plan Implementing the n1arketing plan involves putting the plan into action and performing
marketing tasks according to the predefined schedule. Even the most carefully devel
oped plans often cannot be executed with perfect timing. Thus, the marketing executive
tnust closely monitor and coordinate implementation of the plan. In son1e cases, adjust
ments may have to be made in the basic plan because of changes in any of the situational
environments. For example, competitors may introduce a new product. In this event, it
may be desirable to speed up or delay implementation of the plan. In ahnost all cases,
some minor adj11stments or fine tuning will be necessary in implementation.
Controlling the marketing plan involves three basic steps. First, the results of the
implemented marketing plan are measured. Second, these results are compared with
objectives. Third, decisions are made on whether the plan is achieving objectives. If
serious deviations exist between actual and planned results, adjustments may have to be
1nade to redirect the plan toward achieving objectives.
Chapter One Strategic Planning and the Marketing Managernent Process 21
Marketing Information Systems and Marketing Research Throughout the marketing managetnent process, current, reliable, and valid infonnatio11 is
needed to make effective marketing decisions. Providing this information is the task of the
marketing information system and marketing research. These topics are discussed in detail
in Chapter 2.
THE St RATEGIC PLAN, THE MARKETING PLAN, AND OIHER FUNCTIONAL AREA PLANS
Strategic planning i s clearly a top-management responsibility. In recent years, however,
there has been an increasing shift toward more active participation by marketing managers in strategic analysis and planning. This is because, in reality, nearly all strategic planning
questions have marketing implications. In fact, the two major strategic planning questions
What products should we make? and What markets should we serve?-are clearly market
ing questions. Thus, marketing executives are involved in the strategic planning process in
at least two important ways: (1) They influence the process by providing important inputs
in tl1e form of information and suggestions relating to customers, products, and 1niddle1nen;
and (2) they must always be aware of what the process of stategic planning involves as well
as the results because everything they do-the marketing objectives and strategies they
develop-must be derived from the strategic plan. In fact, the planning done in all func tional areas of the organization should be derived from the strategic plan.
Marketing's Role in Cross-Functional Strategic Planning More and more organizations are rethinking the traditional role of marketing. Rather
than dividing work according to function (e.g., prodLLCtion, finance, technology, human
resources), they are bringing managers and employees together to participate in cross functional teams. These teams might have responsibility for a particular product, line of
products, or group of customers.
Because team members are responsible for all activities involving their products and/or
customers, they are responsible for strategic planning. This means that all personnel work ing i n a cross-functional tea1n will participate in creating a strategic plan to serve customers.
Rather than making decisions independently, marketing managers \.vork closely with
team members from production, finance, human resot1rces, and other areas to devise plans
that address all concerns. Thus, if a team member from production says, "That product will
be too difficult to produce," or if a team me1nber from finance says, "We'll never make a
profit at that price," the team members from marketing must help resolve the problems.
This approach requires a high degree of skill at problem solving and gaining cooperation.
Clearly the greatest advantage of strategic planning with a cross-functional team is
the ability of team members to consider a situation from a number of viewpoints. The resulting i11sigl1ts can help the team avoid costly mistakes and poor solutions. Japanese
manufacturers are noted for using cross-functional teams to figure out ways to 1nake desir
able products at given target costs. In contrast, U.S. mant1facturers traditionally have devel
oped products by having one group decide what to make, another calculate production
costs, and yet another predict whether enough of the product will sell at a high enough price.
Thus, in well-managed. organizations, a direct relationship exists between strategic
planning and the planning done by managers at all levels. The focus and time perspectives
will, of course, differ. Figure 1.6 illustrates the cross-functional perspective of strategic
planning. It indicates very clearly that all functional area plans should be derived from the
strategic plan while at the sa1ne ti1ne contributing to the achievement of it.
2l Part A Introduction
FIGURE 1.6 The Cross-Functional Perspective in Planning
Production plan
Objectives Forecast Budgets Strategies and programs Policies
I
SUMMARY
-
The strategic plan
• Mission Objectives Strategies Portfolio plan
I
'
·-
Functional area plans derived from strategic plan
Human resource - Marketing plan Finance plan Technology plan
plan
Objectives Objectives Objectives Objectives Forecast Forecast Forecast Forecast Budgets Budgets Budgets Budgets Strategies Strategies Strategies Strategies and programs and programs and programs and programs Policies Policies Policies Policies
-
If done pro_perly, strategic planning results in a clearly defined blLLeprint for manage
ment action in a11 functional areas of the organization. Figure 1.7 c1ear1y illustrates t11is
blueprint using only one organizational objective and two strategies from the strategic
plan (above the dotted line) and illustrating how these are translated into elements of the
marketing department plan and the production department plan (below the dotted line).
Note that in Figure 1.7, all objectives and strategies are related to other objectives and
strategies at higher and lower levels in tl1e organization: That is, a hierarchy of objectives
and strategies exists. We have illustrated only two possible marketing objectives and two
possible production objectives. Obviously, many others could be developed, but our pur
pose is to illustrate the cross-functional nature of strategic planning and how objectives
a11d strategies from the strategic plan 1nust be translated into objectives and strategies for
all functional areas including marketing.
This chapter has described the marketing management process in the context of the
organization's overall strategic plan. Clearly, marketers must understand their cross
functional role in joining the 1narketing vision for the organization with the financial goals
and manufacturing capabilities of the organization. The greater this ability, the better the
likelihood is that the organization will be able to achieve and sustain a competitive advan
tage, the ultimate purpose of the strategic planning process.
At tl1is point it would be useful to review Figures 1 .5, 1.6, and 1.7 as we11 as t11e book's
table of contents. This review will enable you to better relate the content and progression
of the material to follow to the marketing management process.
Chapter One Strategic Planning and the Marketing Managernent Process 23
FIGURE 1.7 A Blueprint for Management Action: Relating the Marketing Plan to the Strategic
Plan and the Production Plan
One organizational objective (the profitability objective) from Figure l . 3
Achieve an annual rate of return on investment of at least 15 percent
I
•
Two possible organizational strategies from
1 . Market penetration
Improve position of present products with present customers
- 2. Market development
find new customers for present products
-
the product-market matrix, Figure 1 .4
---------------�-------------- -------------- ------------------------
Two possible marketing objectives and two possible production objectives derived from the strategic plan
Specific course of action of the marketing and production departments designed to achieve the objective
. . .
1. Marketing department obiective
Increase rate of purchase by existing customers by l 0 percent by year-end
I
Marketing -
strategies and programs
I
-
2. Production department obiective
Design additional features into product that will induce new uses by existing buyers
I
Production strategies and programs
I
-
-
3. Marketing department obiective
Increase market share by 5 percent by attracting new market segments for existing use by year-end
I
•
Marketing -
strategies and programs
I
-
4. Production department obiective
Design additional features into product that will open additional markets with new uses
I
•
Production -
strategies and programs
I
-
Additional
Resources
Austin, Robert D., Richard L. Nolan, and Shannon O'Donnell. Harder Thlzn I Thought, Boston:
Harvard Business Review Press, 2013.
Charan, Ram. Leadership i n the Era of Economic Uncertainty. New York: McGra,1/-Hill, 2009.
Cliristensen, Clayton, M., Scott Cook, and Tandy Hall. "Marketing Malpractice: The Cause and the
Cure.'' Harvard Business Revie111, Decetnber 2005, pp. 74-75.
Dixit, Avinash, K., and Ban-y J. Noblebuff. The Art o_f Strategy. New York: W.W. Norton and Co., 2009.
Friedman, George. The Next Decade. New York: Doubleday, 2011.
Kaplan, Robert S., and David Norton. "How to Implement a New Strategy Without Disrupting
Your Organization." Harvarcl Business Review, March 2006, pp. 100-109.
Levitt, Ted. On Marketing. Boston: HBS Press, 2006.
Markower, Jack. Strategies for the Green Economy. New York: McGraw-Hill, 2009.
O'Sullivan, Don, and Andrew W. Abdela. "Marketing Performance Measurement Ability and
Performance." Jourrial of Marketing, April 2007, pp. 79-93.
Silverstein, Michael J., Abheek Singhi, Carol Liao, and David Michael. The $10 Trillion Prize:
Cctptivatin,g the Newly Affluent in Ch,ina and India. Boston: Harvard Bt1siness Review Press, 2012.
I.
I '
2• Part A Introduction
KeyTern1s
and Concepts
Distinctive competencies: Distinctive cornpetencies are thi11gs that an organization does so well
that they give it an advantage over siJnilar organizations. No matter how appealing a11 opportunity
may be, to gain advantage over con1petitors, the organization must formulate strategy based on
distinctive competencies.
Diversification: An organizational strategy that seeks growth through new products (often through
acquisitions) for customers not currently being served.
Market development: A11 organizational strategy that seeks growth througl1 seeking new custom
ers for present products.
Market penetration: An organizational strategy that seeks growtl1 through increasing the sale of
present products to present custo1ners.
Marketing: The activity, set of institutions, a11d processes for creating, corrununicating, deliver
ing, and exchanging offerings that have value for customers, clients, partners, and society at large.
Marketing concept: The 1narketing concept means that an organization should seek to make a
profit by serving the needs of customer groups. lts purpose is to 1ivet the attention of marketing
mru1agers on serving broad classes of customer needs (custo1ner orientation), rather than on the
furn's products (production orientation) or on devising 1nethods to attract custo1ners to c11rrent
products (selling orientation).
Marketing information system: Throughout the marketing management process, current, reljable, and valid information is needed to make effective marketing decisions. Providing this
inforLnation is the task of the marketing information syste1n and 01arketing research.
Marketing management: Marketing management is the process of platming and executi11g the
conception, pr.icing, promotion, and distribution of goods, services, a11d ideas to create exchanges
with target groups that satisfy customer and organizational objectives.
Marketing mix: Th.e marketing mix is the set of controllable variables that must be managed to
satisfy the target market and achieve organizational objectives. The controllable variables are
usually classified according to four major decision areas: product, price, promotion, and place
(or channels of dist1ibution).
Marketing planning: The marketing planning process produces three outputs: (1) establishing
marketing objectives, (2) selecting the target market, and (3) developing the marketing mix.
Organizational mission: The mission statement, or purpose, o f an orga11ization is the description
of its reason for existence. It is the long-run vision of what the organization strives to be, the unique
aim that differentiates the organization from similar ones and the means by which thls differentia
tion will take place. An effective 1nission state1nent will be focused on markets rather thai1 prod
ucts, achievable, 1notivating, and specific.
Organizational objectives: Organizational objectives are the end poiJ1ts of an organization's
mission and are what it seeks through the ongoing, l o n g -run operation of the organization. The
organizational mission is distilled into a finer set of specific, measurable, action commit1nents by
which the mission of the organization is to be achieved.
Organizational portfolio plan: This stage of the strategic plan involves the allocation of
resources across the organization's product lines, divisions, or businesses. I t .involves deciding
which ones to build, 1nainta.in, or elimi11ate, or which to add.
Organizational strategies: Organizational strategies are the choice of the major directions the
organization will take in pursuing its objectives. There are three major approaches: (I) strategies
based on products and n1arkets, (2) strategies based on co1npetitive advantage, and (3) strategies
based on value.
Organizational strategies based on competitive advantage: This approach to developing organi
zational strategy would develop either a cost leadership strategy which focuses on being the lower
cost company in the industry or a differentiation strategy which focuses on being t1nique in the
industry or market segment along dimensio·ns that customers value.
Orga11izational strategies based on products and markets: An approach to developing organi
zational strategies that foct1ses on the four paths an organization can grow: market penetration strat
egies, market develop1nent strategies, product development strategies, and diversification strategies.
Chapter One Strategic Planning and the Marketing Manage1nent Process (5
Organizational strategies based on value: This approach to developing organizational strategy
seeks to succeed by choosing to deliver superior custo111er value using one of three value strategies
best price, best product, or best service.
Product development: An organizational strategy that seeks growth through developing new
products pri1narily for present customers.
Situation analysis: This stage of the marketing planning process involves the analysis of the past,
present� and likely future in six major areas of concern: (1) the cooperative environ1nent, (2) the
competitive environment, (3) the economic environment, (4) the social environment, (5) the politi
cal environment, and (6) tl1e legal environment. Opportunities for and constraints on marketing
activities arise from these environments.
Strategic business units (SB Us): Strategic business units (SBUs) are product lines and divisions
that can be considered a "business" for the purpose of the organizational portfolio plan. An SBU
must have a distinct 1nission, l1ave its own competitors, be a sh1gle business or collection of related
businesses, and be able to be planned independently of the other SB Us.
Strategic planning: Strategic planning provides a blueprint for management actions for the entire
organization. It includes all the activities that lead to the development of a clear organizational
mission, organizational objectives, and appropriate stTategies to achieve the objectives for the entire
organization.
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Appendix
■
010
Portfolio models remain a valuable aid to marketing 1nanag ers in their efforts to develop effective marketing plans. The use of these 1nodels can aid managers who face situations tJ1at can best be de.<:.cribed as "more products, Jess time, and
less money." More specifically, (1) as the number of prod
ucts a fir1n produces expands, the time available for devel oping 1narketing pla11s for each product decreases; (2) at a strategic level, 1nanage1nent 1nust make resource allocation decisions across lines of products and, in diversified organi zations, across different lines of business; and (3) when resources are limited (which they usually are), the process of deciding which strategic business units (SBUs) to emphasize becornes very complex. In such situations, portfolio n1odels
can b e very useful. Portfolio analysis is not a new idea. Banks manage Ioa11
portfolios seeking to balance risks and yields. Individuals
who are serious investors usually have a portfolio of various kinds of investments (common stocks, prefe1Ted stocks, bank accounts, and the like), each with different characteristics of risk, growth, and rate of return. The investor seeks to manage the portfolio to maxi1nize whatever objectives he or she might
have. Applying this saine idea, most organizations have a wide range of products, product lines, and businesses, each with d i f ferent growth rates and returns. Sitnilar to the investor, 1nanag
ers should seek a desirable balance among alternative SBUs. Specifically, management should seek to develop a business portfolio that will ensure long-run profits and cash flow.
Portfolio models can be used to classify SBUs to deter
mine the future cash contributions that can be expected
from each SBU as well as the future resources that each will requit·e. Re1nember, dependrng on the orga1iization, an SB U
could be a single product, product line, division, or disti11ct business. While there are 1nany different types of po1tfolio models, they generally examine the competitive position of the SBU and the chances for i1nproving the SBU's contribu tion to profitability and cash flow.
There are several portfolio analysis techniques. Two of
the 1nost widely used are discussed in this appendix. To truly
appreciate the concept of portfolio analysis, however, we 1nust briet1y review the develop1nent of portfolio theory.
A REVIEW OF PORTFOLIO THEORY
The interest in developing aids for managers in the selec tion of strategy was spurred by an organization known as the Boston Consulting Group (BCG) 1nore tl1an 25 years ago. Its ideas, which will be discussed shortly, and many o f
those that followed were based on the concept of experience
curves.
Experience curves are similar iI1 concept to learning curves. Learnrng curves were developed to express the idea that the number of labor hours it takes to produce one unit of a p a r ticular product declines in a predictable 1nanner as the nu1nber of units produced increases. Hence, an accurate estimation of
how long it takes to produce the LOOth unit is possible if the production ti1nes for the Lst and 10th units are known. The
concept of experience curves was based on th.is 1nodel.
Experience curves were first widely discussed in the S t r a tegic Planning Institute' s ongoing Profit Ilnpact o f Marketing Strategies (PIMS) study. The PIMS project studies 150 firms with 1nore than 1,000 individual busrness units. Its n1ajor focus is on determining which environmental and internal firm
variables influence the firm's return on investment (ROI) and cash flow. The researchers have concluded that seven catego
ries of variables appear to influence the return on invest1nent:
(1) competitive position, (2) industry/n1arket environrnent, (3) budget allocation, (4) capital structure, (5) production pro
cesses, (6) co1npany characteristics, and (7) "change action" factors. 11
The experience curve includes all costs associated with
a product and implies that the per-unit costs of a product should fall, due to cumulative experience, as production
volu1ne increases. In a given i11dustry, therefore, the pro
ducer with the largest volume and co1Tespondit1g market share should have the lowest margrnal cost. Tltis leader in 1narket share should be able to underprice competitors, dis courage entry into the 1narket by potential competitors, and,
as a result, achieve an acceptable return o n investment. The linkage of experience to cost to price to market share to ROI
is exhibited in Figure A. I. The BCG's view of the experience
27
28 Part A Introduction
FIGURE A.1 Experience Curve and Resulting Profit
,_ Experience curve
Cost
Market share
I
curve led the members to develop what has become known
as the BCG Portfolio Model.
THE BCG MODEL
The BCG model is based on the assumption that profitability
and cash flow will be closely related to sales volume. Thus,
in this 1nodel, SB Us are classified according to their relative
market share and the growth rate of the market the SB U is
in. Using these dimensions, products are either classified as
stars, cash cows, dogs, or question marks. The BCG model is
presented i n Figure A.2.
• Stars are SBUs with a high share of a h i g h -growth mar
ket. Because high-growtl1 markets attract competition,
such SB Us are usually cash users because they are growing
FIGURE A.2
The Boston Consult
ing Group Portfolio
Model
Market
Growth
Rate
High
Low
I
-
Profit curve based on experience curve
ROI
Market share
and because the firm needs to protect their market share
position.
• Cash cows are often 1narket leaders, but the market they are
in i s not growing rapidly. Because these SB Us have a high
share of a low-growth market, they are cash generators for
tl1e fir1n.
• Dogs are SBUs that have a low share of a low-growth
market. If the SBU has a very loyal group of customers, it
1nay be a source of profits and cash. Usually, dogs are nol
large sources of cash.
• Question marks are SBUs with a low share of a high
growth market. They have great potential but require great
resources if the frrm is to successfully build market share.
As you can see, a firm with 10 SBUs will usually have a
portfolio that includes some of each of these groups. Having
Relative Market Share
High Low
Stars Question marks
Cash Dogs cows
Chapter One Strategic Planning and the Marketing Managernent Process 29
developed this analysis, 1nanagement must determine what role each SBU should assu1ne. Four basic objectives are possible:
l. Build share. This objective sacrifices immediate earnings to i1nprove market share. It is appropriate for pron1ising question marks \1/hose share l1as to grow if they are ever to become stars.
2. Hold share. This objective seeks to preserve the SBU's 1narket share. It is very appropriate for strong cash cows to ensure that they ca11 continue to yield a large cash flow.
3. Harvest. Here, the objective seeks to increase the product's short-term cash flow without concern for the long-run impact. It allo,vs market share to decline in order to maximize earnings and cash tlow. ft is an appropriate objective for weak cash co�1s, weak question 1narks, and dogs.
4. Divest. This objective involves selling or divesting the SBU because better investment opporll1mties exist else where. It is very appropriate for dogs and those question marks the firm cannot afford to finance for growth.
There have been several 1najor criticistns of the BCG Portfolio Model, revolving around its focus on market shru·e and market growth as the primary indicators of pref erence. First, the BCG 1Tiodel assumes market growth is uncontrollable. 12 As a result, n1anagers can beco1ne pre occupied with setting 1narket share objectives instead of trying to grow the 1narket. Second, assumptions regarding market share as a critical factor affecting firm performance may not hold true, especially in international markets. 13
Third, the BCG model assumes that the major source of
RGURE A.3
The General Electric
Portfolio Model
Industry Attractiveness
High
Medium
Low
SBU financing comes from internal means. Fourth, the BCG 1natrix does not take into account any interdepende11- cies that may exist between SBUs, such as shared distribu tion.14 Fifth, the BCG matrix does not take into account any 1neasures of profits and custo1ner satisfaction. 15 Sixth, and perhaps most important, the thrust of the BCG matrix is based on the underlying assumption that corporate strategy begins with an analysis of competitive position. By its very nature, a strategy developed entirely on competitive anal ysis will always be a reactive one. 16 While the preceding criticis1ns are certainly valid ones, managers (especially of large fitms) across all industries continue to find the BCG matrix useful in assessing the strategic position of SB Us. 17
THE GENERAL ELECTRIC MODEL
Although the BCG 1nodel can be useful, it does assume that market share is tl1e sole determinant of an SBU's profit ability. Also, in projecting market growth rates, a manager should carefully analyze the factors that influence sales and any opportu11ities for influencing industry sales.
Some firms have developed alternative portfolio models to incorporate more information about 1narket opportunities and competitive positions. The GE model is one of these. The GE 1nodel e1nphasizes all tl1e potential sources of strength, not just market share, and all of the factors that influence tl1e long-term attractiveness of a market, not just its growth rate. As Figure A.3 indicates, all SBUs are classified according to business strength and industry attractiveness. Figure A.4 presents a list of items that can be used to position SBUs in the matrix.
Business Strength
Strong Average Weak
A A B
A B C
B C C
30 Part A Introduction
GURE A.4
Components
of Industry
Attractiveness
and Business
Strength at GE
Industry Attractiveness
Market size
Market growth Profitability
Cyclicality Ability to recover from inflation
World scope
Industry attractiveness is a composite index made up
of such factors as those listed in Figure A.4. For exa1nple:
n1arket size-the larger the market, the more attractive it will
be; market gro�vth-high-growth markets are 1nore attractive
than low-growth markets; profitability-h i g h -profit-margin
1narkets are more attractive than low-profit-1nargin industries.
Business strength is a composite index 1nade up of such
factors as those listed in Figure A.4. Such as market shtzre
the higher the SBU's share of market, the greater its business
strength; quality leadership-the higher the SBU's quality
co1npared to competitors, the greater its business strength;
share cornpared 1vith leading co,npetitor--the closer the SB U' s
share to the 1narket leader, the greater its business strength.
Once the SBUs are classified, they are placed on the grid
(Figure A.3). Priority "A" SBUs (often called the green zone)
Business Strength
Market position Domestic market share
World market share Share growth Share compared with leading competitor
Competitive strengths Quality leadership Technology Marketing Relative profitability
are those in the three cells at the upper left, indicating that
these are SBUs high in both industry attractiveness and busi
ness strength, and that the fir,n should "build share." Priority
"B" SB Us (often called the yello1v zone) are those medium i11
both industry attractiveness and business strength. The firm
will usually decide to "hold share" on these SBUs. Priority
"C" SBUs are those in the three cells at the lower right (often called the red zone). These SBUs are low in both industry
attractiveness and business strength. The firm will usually
decide to harvest or divest these SBUs.
Whether the BCG model, the GE 1nodel, or a variation
of tl1ese 1nodels is used, so1ne analyses must be made of the
firm's current po1tfolio of SBUs as part of any strategic plan
ning effort. Marketing mt1st get its direction from the organi
zation's strategic plan.
Part
Marketing Information,
R�search, and Understanding
the Target Market
2 Marketing Research: Process and Systems for Decision Making
3 Consumer Behavior
4 Business, Government, and Institutional Buying
5 Market Segmentation
Chapter
rocess an ■ ■
ec1s1on
esearc ■
■
Marketing managers reqt1ire current, reliable, useful information to make effective decisions.
In today's highly co1npetitive global economy, 1narketers need to exploit opportu11ities and
avoid mistakes if they are to survive and be profitable. Not only is sound. marketing research
needed, but also a system that gets current, valid information to the marketing decision
maker in a timely manner.
This chapter is concerned with the 1narketing research process and information systems
for decision making. It begins by discussing tl1e marketing research process that is used t o
develop useful information for decision 1naking. Then, 1narketing information systems are
briefly discussed. The chapter is intended to provide a detailed introduction to many of the
i111portant topics in the area, but it does not provide a co1nplete explanation of the plethora
of marketi11g research topics.
THE ROLE OF MARKETING RESEARCH
32
Marketing research is the process by whicl1 inforn1ation about tl1e environment is
generated, analyzed, and interpreted for use in marketing decision 1naking. 1 It cannot
be overstated that marketing research is an aid to decision making and not a substitute
for it. In other words, marketing research does not make decisions, but it can substan
tially increase the chances that good decisions are made. Unfortunately, too 1nany mar
keting 1na11agers view research reports as tl1e final answer to their problems; whatever
the research indicates is taken as tl1e appropriate course of action. Instead, marketing
managers should recognize that (1) even the most carefully executed research can be
fraught with errors; (2) marketing researcl1 does not forecast with certainty what will
happe11 in the future; and (3) they sl1ould make decisions in light of their own kt1owledge
and experience, since no marketing research study includes all of the factors that could
influence the success of a strategy.
Altl1ough marketing research does not make decisions, it can reduce the risks associated
with 111anaging marketing strategies. For exa1nple, it can reduce the risk of introducing
new products by evaluating consumer acceptance of them prior to full-scale introduction.
Marketing research is also vital for investigating the effects of various marketing strategies
Chapter Two Marketing Research: Process and Syste,nsfor Decision Making -.3
after they have been implemented. For example, marketing research can examine the effects of a change in any element of the marketing 111ix on customer perception and behavior.
At one time, marketing researchers were primarily engaged in the technical aspects of
research, but were not heavily involved in the strategic use of research findings. Today,
however, many marketing researchers work hand-in-hand with marketing managers throughout tl1e research process and have responsibility for making strategic recommenda tions based on the research.
THE MARKETING RESEARCH PROCESS
FIGURE 2.1
The Five Ps of the Research Process
Marketing research can be viewed as systematic processes for obtainjng information to rud in decision 111aking. There are many types of 111arketing research, and the framework
illustrated in Figure 2.1 represents a general approach to the process. Each element of this
process is discussed next.
Purpose of the Research The first step in the research process is to determine explicitly why the research is needed
and what it is to accomplish. This may be much more difficult than it sounds. Quite often a situation or problem is recognized as needing research, yet the nature of the problem
is not clear or well defined nor is the appropriate type of research evident. Thus, manag
ers and researchers need to discuss and clarify the current situation and develop a clear
understanding of the problem. At the end of this stage, managers and researchers should
agree on (1) the current situation involving the problem to be researched, (2) the nature
of the problem, and (3) the specific question or questions the research is designed to
investigate. This step is crucial since it influences the type of research to be conducted
and the research design.
-
Purpose of the research --
I
'
-
Plan of the research --
I
'
-
Performance of the research -
I
'
-
Processing of research data
I
'
-
Preparation of research report --
I
34 Part B Marketing fnformation, Research, and Understanding the Target Market
Plan of the Research
Once tl1e specific research question or questions have been agreed on, a research plan
can be developed. A research plan spells out the nature of the research to be conducted
and includes an explanation of such things as the sample design, measures, and analysis
techniques to be used. Three critical issues that inf1uence the research plan are (1) whether pri111ary or secondary data are needed, (2) whether qualitative or quantitative research is
needed, and (3) wl1ether the company will do its own research or contract with a marketing
research specialist.
Primary versits Secondary, Data
Given the information needed and budget constraints, a decision 1nust be made as to
whether primary data, secondary data, or some combination of the two is needed. Primary
data are data collected specifically for tl1e researcl1 problen1 under investigation; second ary data are those that have previously been collected for other purposes but can be used
for the problem at hand. For example, if a company wanted to know why users of a com
petitive brand didn't prefer its brand, it may have to collect primary data to find out. On
th.e other hand, if a company wanted to know the population size of key global markets
tl1at it might enter, it could find this infor111ation fro111 secondary sources. Secondary infor
mation has the advantage of usually being cheaper than primary data, although it is not
always available for strategy-specific research questions.
There are many types of secondary data that could be useful for understanding a market
and for answering a partict1lar research question. There are also many sources of secondary
data. Some of these data can be found from sources inter,ial to the organization such as
sales invoices, quarterly sales reports, and marketing research done by the organization for
other purposes but useful for the problem at hand.
Other secondary data must be obtained from sources external to the organization and
include information such as the types listed in Figure 2.2. Organizations can get sucl1
infor1nation from a number of sources. One source is syndicated data providers, such as
ACNielsen (which offers sales-tracking data across grocery, drug, and mass merchan
disers among other services) and J.D. Power Associates (which offers in-depth reports
on auto111otive, travel, health, and other industries). Another external source is the vol
ume of data and information provided by the goverrunent, such as U.S. census data,
Guide to Industrial Statistics, U.S. /11,dustrial Outlook, Surve)' o_f Current Bu.siness, and
Guide to Foreig,i Trade Statistics. Finally, much useful information about competitors
can be found by analyzing their websites, other published reports about them, and their an11ual reports.
Qitalitative versus Quantitative Research
Given a research question, a decision must be made whether qualitative or quantitative
research would be a better approach. Qualitative research typically involves face-to-face
interviews with respondents designed to develop a better understanding of what they think
and feel concerning a research topic, such as a brand name, a product, a package, or an
advertise111ent. The two 111ost com1non types of qualitative researcl1 in marketing are focus
groups and long interviews. Focus groups typically involve discussions among a small
number of consumers led by an interviewer and are designed to generate insights and ideas
about products and brands. Long interviews are conducted by an interviewer with a single
respondent for several hours. They are designed to find out such things as the meanings v a r
ious products or brands have for an individual or how a product influences a person's life.
Quantitative research involves more systematic procedures designed to obtain and
analyze numerical data. Four common types of quantitative research in marketing are
observation, surveys, experiments, and mathematical modeling.
Chapter Two Marketing Research: Process and Syste,nsfor Decision Making �S
RGURE 2.2 Common Types of Information Available in a Secondary Data Search
Demographics
Population growth: actual and projected
Population density
Supply Characteristics
Number of distribution facilities
Cost of deliveries
In-migration and out-migration patterns
Population trends by age and ethnic background
Level of rail, water, air, and road transportation
Regulations Employment Characteristics
Taxes
Labor force growth Licensing
Unemployment levels Wages
Percentage of employment b y occupation categories
Employment by industry
Zoning
International Market Characteristics
Transportation and exporting requirements
Trade barriers
Economic Data
Personal income levels (per capita and median)
Type of manufacturing/service firms Business philosophies
Total housing starts Legal system
Building permits issued Social customs
Sales tax rates Political climate
Competitive Characteristics Cultural patterns Religious and moral background
Levels of retail and wholesale sales
Number and types of competing retailers
Availability of financial institutions
Source: From Joseph Hair, Jr., Robert Bush, and David Ortinau, Marketing Research 4E, p . 53. Reprinted with permission of McGraw-Hill Education.
Observational research involves watching people and recording relevant facts and
behaviors. For example, retail stores may use observational research to determine what
patterns customers use in walking through stores, how much time they spend in various
parts of the store, and how many items of merchandise they examine. This information can
be used to design store la you ts more effectively. Similarly, many retail marketers do traffic
counts at various intersection.s to help determine the best locations for stores.
Survey research, involves the collection of data by tneans of a question11aire by mail,
phone, online, or in person. Surveys are comrnonly used in marketing research to inves
tigate customer beliefs, attitudes, satisfaction, and many other issues. Mail surveys are
useful for reaching widely dispersed markets but take more time to get responses than tel ephone surveys; personal surveys involving structured questions are useful but expensive.
Experimental research involves manipulating one variable and examining its impact
on other variables. For example, the price of a product could be changed in one test store,
while left the same in other stores. Comparing sales in the test store with those in other
stores can provide evidence about t11e likely in1pact of a price change in tl1e overall market.
Experiments are useful for getting a better idea of the causal relationships among vari
a.bles, but they are often difficult to design and administer effectively i n natural settings.
Thus, many marketing research experiments are conducted i n laboratories or simulated
stores to carefully control other variables that could impact results.
Mathematical modeling often involves secondary data, such as scanner data collected
and stored in computer files from retail checkout counters. This approach involves the
development of equations to model relationships among variables and uses econometric
and statistical techniques to investigate the impact of various strategies and tactics on sales
36
Gui.deli1nes to� Using Qualitative .
.
Quamtitati:v.e Mariketi'mg: �eseancm•, 12-�-
Qualitative research is commonly used for
• Identifying a business problem or opportunity situation, or establishing information requirements.
• Obtaining preliminary insights into the motivation, emotional, attitudinal, and personal ity factors that influence marketplace behaviors.
• Building theories and models to explain marketplace behaviors or relationships between two or more marketing variables.
• Developing valid scales for investigating specific market factors, consumer qualities ( e.g., attitudes, emotional feelings, preferences, beliefs, perceptions), and behavioral outcomes.
• Determining the preliminary effectiveness of marketing strategies on actual marketplace behaviors.
• Developing new products and services, or repositioning current product or service images.
Quantitative research is commonly used for
• Validating or answering a business problem or information requirements.
• Obtaining detailed descriptions or insights into the motivation, emotional, attitudinal, and personality factors that influence marketplace behaviors.
• Testing theories and models to explain marketplace behaviors o r relationships between two or more marketing variables.
• Assessing the reliability and validity of scales for investigating market factors, consumer qualities (e.g., attitudes, emotional feelings, preferences, beliefs, perceptions) and behavioral outcomes.
• Assessing the effectiveness of marketing strategies on marketplace behaviors. • Examining new-product/service development or repositioning current products o r ser-
• •
vice images.
• Segmenting and/or comparing large or small differences in markets, new products, services, or evaluation and repositioning of current products or service images.
Source: From Joseph Hair, Jr., Robert Bush, and David Ortinau, Marketing Research 4E, p.154-155. Reprinted with permission of McGraw-Hill Education.
and brand choices. Math modeling is useful because it provides an efficient way to study problems with extremely large secondary data sets.
Which of these types of research is best for particular research questions requires
considerable knowledge of each of them. Often, qualitative research is used in early
stages of investigating a topic to get more information and insight about it. Then, quan
titative approaches are used to investigate the degree to which the insights hold across a larger sample or population. Figure 2.3 provides a comparison of a variety of qualitative
and quantitative data collection methods.
Conipany versus Contract Research
Most large consumer goods companies have marketing research departments that can
perfonn a variety of types of research. In addition many marketing research firms, advertising agencies, and consulting companies do marketing research on a contract
basis. Some marketing research suppliers have special expertise in a particular type of
research that makes them a better choice than doing the research internally. A decision
about whether the marketing research department has the ability to do a particular type of
Chapter Two Marketing Research: Process and Syste,nsfor Decision Making �7
FIGURE 2.3 A Comparison of Data Collection Methods Used in Marketing Research
Method
Focus groups
Telephone surveys
Mail surveys
Personal
(in-depth) interviews
Mall intercepts
Internet surveys
Projective techniques
Observation
Advantages
• Depth of information collected. • Flexibility in use.
• Relatively low cost. • Data collected quickly.
• Centralized control of data collection. • More cost-effective than personal interviews.
• Data collected quickly.
• Cost-effective per completed response. • Broad geographic dispersion.
• Ease of administration. • Data collected quickly.
• More depth of response than telephone
interviews. • Generate substantial number of ideas
compared with group methods.
• Flexibility in collecting data, answering
questions, probing respondents. • Data collected quickly.
• Excellent for concept tests, copy evaluations, other visuals.
• Fairly high response rates.
• Inexpensive, quickly executed. • Visual stimuli can be evaluated.
• Real-time data processing possible. • Can be answered at convenience of
respondent.
• Useful in word association tests of new brand names.
• Less threatening to respondents for sensitive topics.
• Can identify important motives underlying choices.
• Can collect sensitive data.
• Accuracy of measuring overt behaviors. • Different perspective than survey self-reports.
• Useful in studies of cross-cultural differences.
Disadvantages
• Requires expert moderator. • Questions of group size and acquaintanceships of
participants. • Potential for bias from moderator.
• Small sample size.
• Resistance in collecting income, financial data. • Limited depth of response.
• Disproportionate coverage of l o w -income segments. • Abuse of phone by solicitors.
• Perceived intrusiveness.
• Refusal and contact problems with certain segments. • Limited depth of response.
• Difficult to estimate nonresponse biases. • Resistance and bias in collecting income, financial
data. • Lack of control following mailing.
• Easy to transmit biasing cues.
• Not-at-homes. • Broad coverage often infeasible.
• Cost per contact high. • Data collection time may be excessive.
• Limited time.
• Sample composition or representativeness is suspect. • Costs depend on incidence rates.
• Interviewer supervision difficult.
• Responses must be checked for duplication, bogus responses.
• Respondent self-selection bias. • Limited ability to qualify respondents and confirm
responses. • Difficulty in generating sample frames for probability
sampling.
• Require trained interviewers. • Cost per interview high.
• Appropriate only for frequently occurring behaviors.
• Unable to assess opinions of attitudes causing behaviors.
• May be expensive in data-collection-time costs.
Source: From William Bearden, Thomas Ingram and Raymond LaForge, Marketing: Principles and Perspectives SE, 2007, p. 135. Reprinted with permission
of McGraw-Hill Education.
research itself or whether all or part of tl1e research should be contracted with a research
supplier 1nust be made. In either case, schedules for task completio11, tl1e exact responsi
bilities of all involved parties, and cost need to be considered.
Performance of the Research
Performance of the research involves preparing for data collection and actually col
lecting them. The tasks at this stage obviously depend on tl1e type of research that has
38
A. Planning
Kinds of Question� that Marketing_
�eseancm Cam Wei · /.\msvvefi
1. Segmentation: What kinds of people buy our products? Where do they live? How much do they earn? How many of them are there?
2. Demand estimation: Are the markets for our products increasing or decreasing? Are there promising markets that we have not yet reached?
3. Environmental assessment: Are the channels of distribution for our products chang ing? What should our presence on the Internet be?
8. Problem Solving 1. Product
a. In testing new products and product-line extensions, which product design is likely to be the most successful? What features do consumers value most?
b. What kind of packaging should we use? c. What are the forecasts for the product? How might we reenergize its life cycle?
2. Price a. What price should we charge for our products? b. How sensitive to price changes are our target segments? c. Given the lifetime value assessments of our segments, should we be discounting
or charging a premium to our most valued customers? d. As production costs decline, should we lower our prices or try to develop
higher-quality products? e. Do consumers use price as a cue to value or a cue to quality in our industry?
3. Place a. Where, and by whom, are our products being sold? Where, and by whom, should
our products be sold? b. What kinds of incentives should we offer the trade to push our products? c. Are our relationships with our suppliers and distributors satisfactory and
cooperative? 4. Promotion
a. How much should we spend on promotion? How should it be allocated to products and to geographic areas?
b. Which ad copy should we run in our markets? With what frequency and media expenditures?
c. What combination of media-newspapers, radio, television, magazines, Internet ad banners-should we use?
d. What is our consumer coupon redemption rate? C. Control
1. What is our market share overall? In each geographic area? By each customer type? 2. Are customers satisfied with our products? How is our record for service? Are there
many returns? Do levels of customer satisfaction vary with market? With segment? 3. Are our employees satisfied? Do they feel well trained and empowered to assist our
customers? 4. How does the public perceive our company? What is our reputation with the trade?
Source: From Dawn Iacobucci and Gilbert A. Churchill, Jr., Marketing Research: Methodological Foundations 1 OE. © 2010 South-Western, a part of Cengage Learning, Inc. Reproduced by permission. www.cengage. com/permissions.
been selected and the type of data needed. If secondary data are to be used, they must be
located, prepared for analysis, and possibly paid for. If primary data are to be collected,
then observational forms, questionnaires, or other types of measures must be designed,
pretested, and validated. Samples must be drawn and interviews must be scheduled or
preparations must be made for mailing or phoning selected individuals.
:M_A RKEtlNG'. INSJGHT � iS ... ocJ a. 1: ·.M e.d:i a; M .. o:i1:i_ .to·:ri:11 g· fo.r .M.ar.ke.:t·- • • • - -f ••• ••- • • • • -•••• • ! -• •,.• • .,•,. ••-•-•• ' • • • I • • • • • I • ' • 0
\ • ••• • • • I•• ""
I 1n s i g h1 [ s 2-3
Social media monitoring involves the observation and analysis of conversations in social media such as Facebook, Twitter, biogs, and product review sites. Such observation and analysis can provide marketing researchers with a rich source of useful information because these sites are a natural place for consumers to share information about products, brands, and organizations. The analysis looks at patterns of clicks, searches, purchases, and other variables to establish patterns and develop new insights into markets.
Intense interest in personal data about Internet users is booming, along with the prac tice of "scraping"-using sophisticated software to harvest online conversations and collect personal details from social networking sites, resume sites, and online forums where people share their lives. Tracking peoples' activities online to gather details of their behavior and personal interests has become big business. There is even software to match peoples' real names to the pseudonyms they use on biogs, social nets, and online forums.
Nielsen Buzzmetrics is a leader in social media monitoring, collecting data from 1 30 mil lion biogs, 8,000 message boards, Twitter, and social networks. Its services include Threat Tracker, which alerts a company if its brand is being discussed in a negative way.
A new tool is collecting the equivalent of fingerprints from every computer, cell phone, and lV in the world-every device will have a "reputation" based on its owner's online behavior, shopping habits, and demographics. This will be more difficult for users to block than earlier tools to monitor online behavior, such as browser cookies. Similarly, "deep packet inspection" technology provides a powerful way of reading packets of data traveling across the Internet to track not just web browsing but all online activity.
The growth of social networks like Facebook and Twitter has led to companies scram bling to decode the new data about peoples' online relationships to develop new insights. They are finding that a person is more likely to buy something if online "friends" have bought it. For example, San Francisco company Rapleaf harvests data from biogs, online forums, and social networks, following the network behavior of 480 million people, and advises companies on promotions. From "friendship" data, Rapleaf found that borrowers are a better bet if their friends have higher credit ratings.
Insurance companies are, for example, preparing to use people's Facebook profiles as a way of setting premiums based on lifestyles-online data about food purchases, activities, and social groups provide an indicator of life expectancy.
Source: From David Cravens and Nigel Piercy, Strategic Marketing 1 OE, 2013, p. 152. Reprinted with permis sion of McGraw-Hill Education.
In terms of actual data collection, a cardinal rule is to obtain and record the maximal
amount of useful information, subject to the constraints of tim.e, money, and respondent privacy. Failure to obtain and record data clearly can obviously lead to a poor research
study, while failure to consider the rights of respondents raises both practical and ethi
cal problems. Thus, both the objectives and constraints of data collection must be closely
monitored.
Processing of Research Data Processing research data includes the preparation of data for analysis and the actual analysis
of them. Preparations include such things as editing and structllling data and coding the1n for
analysis. Data sets should be clearly labeled to ensure they are not 1nisinterpreted or misplaced. The appropriate ai1alysis techniques for collected data depend on tl1e nature of the
research question and the design of the research. Qualitative research data consist of
interview records that are content analyzed for ideas or themes. Quantitative research data
may be analyzed in a variety of ways depending on the objectives of the research. 39
40 Part B Marketing fnformation, Research, and Understanding the Target Market
flGURE 2.4
Eight Criteria for
Evaluating Marketing
Research Reports
A c1itical part of this stage is interpreting and assessing the research results. Seldom, if
ever, do marketing research studies obtain findings tl1at are totally unambiguous. Usually,
relationships among variables or differences between groups are small to moderate, and
judgment and insight are needed to draw appropriate inferences and conclusions. Marketing
researchers should always double-check their analysis and avoid overstating the strength of
their findi11gs. T11e implications for developing or changing a marketing strategy should be carefully thought out and tempered with judgment about the overall quality of the study.
Preparation of the Research Report The research report is a complete statement of everything done in a research project and includes a write-up of each of the previous stages as well as t11e strategic recommendations
from the research. The limitations of the research should be carefully noted. Figure 2.4
illustrates the types of questions 1narketing researchers and managers should discuss prior
to submitting the final research report.
Research reports should be clear and unambiguous with respect to what was done and what recommendations are made. Often research reports must trade off the apparent precision
of scientific jargon for everyday language that managers can understand. Researchers should
work closely with managers to ensure that the study and its limitations are fully understood.
Limitations of the Research Process Although the foregoing discussion presented the research process as a set of simple stages,
this does not 1nean tl1at conducting quality marketing research is a simple task. Many prob
lems and difficulties must be overcome if a research study is to provide valuable informa
tion for decision 111aking.2 For exa1nple, consider the difficulties in one type of marketing
research, test marketing.
The major goal of most test marketing is to measure new product sales on a limited
basis where competitive retaliation and other factors are allowed to operate freely. In this
way, future sales potential can often be estimated reasonably well. Listed here are a num
ber of problems t11at could invalidate test marketing study results.
1 . Test market areas are not representative of the 1narket in general in terms of population
characteristics, competition, and distribution outlets.
2. Sample size and design are incorrectly formulated because of budget constraints.
3. Pretest meast1re1nents of competitive brand sales are not made or are inaccurate, limiting
tl1e meaningfulness of market share estimates.
4. Test stores do not give complete support to the study such that ce11ain package sizes
1nay not be carried or prices may not b e held constant during the test period.
1. Was the type of research appropriate for the research questions? 2. Was the research well designed?
a. Was the sample studied appropriate for the research questions? b. Were measures well developed, pretested, and validated? c. Were the data analysis techniques the best ones for the study?
3. Was there adequate supervision of data colle ction, editing, and coding? 4. Was the analysis conducted according to standards accepted in the field? 5. Do the findings make sense, given the research question and design, and were they
considered in light of previous knowledge and experience? 6. Are the limitations of the study recognized and explained in detail? 7. Are the conclusions appropriately drawn or are they over- or understated? 8. Are the recommendations for marketing strategy clear and appropriate?
.MARKETING INSIGHT Ethical. R�sp_O,Q§ibilities of .M.�_rk�_ting; ·@:esea.�cmetts· '.2-�
Marketing researchers have ethical responsibilities to the respondents who provide primary data, clients for whom they work, and subordinates who work under them. Here are a number of ethical responsibilities to these groups.
RESPONSIBILITIES TO RESPONDENTS
1. PreseNing respondent anonymity. Marketing researchers should ensure that respondents' identities are safe from invasion of privacy.
2. Avoiding mental stress for respondents. Marketing researchers should minimize the mental stress placed on respondents.
3. Avoiding questions detrimental to respondents. Marketing researchers should avoid asking questions for which the answers conflict with the self-interest of the respondents.
4. Avoiding the use of dangerous equipment or techniques. Physical or reputational harm to respondents based on their participation in marketing research should not occur. Respondents should be informed of any other than minimal risks involved in the research and be free to self-determine their participation.
5. Avoiding deception of respondents. Respondents should not be deceived about the purpose of the study in most cases. Many consider deception acceptable in research where it is needed to obtain valid results, there is minimal risk to respondents, and respondents are debriefed explaining the real purpose of the study.
6. Avoiding coercion of respondents. Marketing researchers should avoid coercing or harassing people to try to get them to agree to be interviewed or fill out questionnaires.
RESPONSIBILITIES TO CLIENTS
1 . Providing confidentiality. Marketing researchers are obliged not to reveal information about a client to competitors and should carefully consider when a company should be identified as a client.
2. Providing technical integrity. Marketing researchers are obliged to design efficient studies without undue expense or complexity and accurately report results.
3. Providing administrative integrity. Marketing researchers are obliged to price their work fairly without hidden charges.
4. Providing guidance on research usage. Marketing researchers are obliged to promote the correct usage of research and to prevent the misuse of findings.
RESPONSIBILITIES TO SUBORDINATE EMPLOYEES
1. Creating an ethical work environment. Marketing research managers are obliged to create an ethical work environment where unethical behavior is not encouraged or overlooked.
2. Avoiding opportunities for unethical behavior. Marketing research managers are obliged to avoid placing subordinates in situations where unethical behavior could be concealed but rewarded.
5. Test-market products are advertised or promoted beyond a profitable level for the
market in general.
6. Tl1e effects of factors tl1at intluence sales, such as the sales force, season, weather
conditions, competitive retaliation, shelf space, and so forth, are ignored in the research.
7. The test-tnarket period is too short to determine whether the product will be repur
chased by custo1ners.
A list of such problems could be developed for any type of marketing research.
However, careful research planning, coordination, implementation, and control can help
reduce such problems and increase tl1e value of research for decision making. 41
4l Part B Marketing fnformation, Research, and Understanding the Target Market
MARKETING INFORMATION SYSTEMS
Most marketers use computer-based systems to help them gather, sort, store, and distribute infor
mation for marketing decisions.3 A popular form of marketing information system is the m a r
keting decision support syste1n, whicl1 is a coordinated collection of data, tools, and techniques
involving both computer hardware and software by which marketers gather and interpret rel
evant information for decision making. These systems require three types of software:
1. Database management software for sorting and retrieving data from internal and
external sources.
FIGURE 2.5 Some Information Sources for Marketing Information Systems
Selected Government Sources
American Factfinder
Economics Statistics Briefing Room
EDGAR Database of Corporate Information (SEC filings)
FedStats
GPO Access
Stat-USA
U.S. Bureau of Labor Statistics
U.S. Bureau of the Census
U.S. Department of Commerce
U.S. Small Business Administration
U.S. Patent and Trademark Office
CBDNet (Commerce Business Daily)-government procurement, sales, and contract awards
Selected Proprietary Sources (with some free information)
Gallup Poll
Harris Poll
The Polling Report
Public Opinion
Public Agenda
Roper Center for Public Opinion Research
Poll Question Database
Forrester Research Reports
Roper Reports
JD Power Satisfaction Studies
Quirk's Marketing Research Review
Ad Forum
BizMiner
Selected Nonproprietary Sources
Ad* Access
Advertising World (ad industry portal)
American Demographics
Competia Express (industry portal)
Global Edge
Kerlins.net Qualitative Research Bibliography
KnowThis.com Marketing Virtual Library
Marketing and Research Library
Marketing Power.com
http://factfinder.census.gov/
http://www.whitehouse.gov/fsbr /esbr. html
http://www.sec.gov/edgar.shtml
http://www. f edstats.gov /
http://www.gpoaccess.gov/
http://www.stat-usa.gov/
http://www.bls.gov/
http://www.census.gov/
http://www.commerce.gov/
http://www.sbaonline.sba.gov/
http://www.uspto.gov/
http://www.cbdnet.access.gpo.gov
http://www.gallup.com/poll/
http://www.harrisinteractive.com/harris_poll/
http://www.pollingreport.com/
http:/ /europa.eu.int/comm./public_opinion/
http://www.publicagenda.org/
http://www.ropercenter.uconn.edu
http://www. irss. unc.edu/ data_arch ive/pollsearch .html
http://forrester.com
http://www.nopworld.com
http://www.jdpower.com
http://www.quirks.com
http://www.adforum.com
http://www.bizminer.com
http://scriptorium.lib.duke.edu/adaccess/
http:// advertising. utexas. edu/world
http://www.demographics.com
http://www.competia.com/express/
http://www.demographics.com
http://kerlins.net/bobbi/research/ qualresearch/bibliog raphy /
http://knowthis.com
http://www.mrlibrary.com/
http://ma rketingpower.com
Source: From Donald Cooper and Pamela Schindler, Marketing Research, 2006, p. 122-123. Reprinted with permission of McGraw-Hill Education.
SUMMARY
Additional
Resources
Chapter Two Marketing Research: Process and Syste,nsfor Decision Making 43
2. Model base management software that contains routines for manipulating data in ways tl1at are useful for 111arketing decision 111aking.
3. A dialog system that per111its marketers to explore databases and use models to produce
information to address their decision-making needs.
Marketing decision support systems are designed to handle information from both internal
and external sources. Internal information includes such things as sales records, which can be
divided by ten·itory, package size, brand, price, order size, or salesperson; inventory data tl1at
can it1dicate how rapidly various products are selling; or expenditure data on such things as
advertising, personal selling, or packaging. Internal information is particularly i111portant for
investigating tl1e efficiency and effectiveness of various marketing strategies.
External information is gathered from outside the organizatio11 and concerns cl1anges in the environ111e11t tl1at could influence marketing strategies. Exten1al infor111ation i s
needed concerning changes i n global econon1ies and societies, competitors, customers,
and technology. Figure 2.5 lists a sample of sources of external information that cot1ld be
monitored by a marketing information system to help marketers make better decisions. Of course, information from marketing research studies conducted by an organization is also
put into marketing information systems to improve marketing strategy development.
This chapter emphasized the importance of marketing research for making sound 1narketing
stTategy decisions. The chapter discussed marketing research as a process involving several
stages, which include dete1mining the purpose of the research, designing the plan for the
research, performing the research, processing the research data, and preparing the research
report. Then, marketing information systems were discussed and one type, the marketing
decision support system, was explained. Such systems should provide decision makers with
the right information, at the right time in the right way, to make sound marketing decisions.
Burns, Alvin C. and Ronald Bush. Marketing Research, 7th ed. Upper Saddle River, NJ: Prentic e -Hall,
2014.
01w·chill, Gilbert A., Jr.; Tom J. Brown; and Tracy A. Suter. Basic Marketing Research. 8tJ1 ed.
Mason, OH: Thomson South-Western, 2014.
Hair, Joseph F., Jr., Robert P. Busb, and David J. Ortinau. Marketing Research. 4th ed. Burr Ridge,
IL: McGraw-Hill/Irwin, 2009.
Iacobucci Dawn, and Gilbert A. Churcl1ill Jr. Marketing Research: Methodological Foundations.
10th ed. Mason, OH: Thomson Soutl1-Western, 2010.
Molhatra, Naresh K. Marketing Research. 6th ed. Upper Saddle River, NJ: Pearson Education, 2010.
Zikmund William G., and Barry J. Babin. Essentials of Marketing Research .. 5tl1 ed. Mason, OH:
Thomson South-Western, 2013.
I '
Part B Marketing Tnfor,nation, Research, and Understanding the Target Market
Key Terms
and Concepts
Experimental research: Experimental research involves manipulating one variable and examin
ing its impact on other variables.
Focus groups: A type of qualitative research that typically involves discussions ainong a small
number of consu1ners Led by an interviewer and designed to generate i11sights and ideas about
products ai1d brands.
Long interviews: A type of qualitative research conducted by an interviewer with a single
respondent for several hours and designed to find out such things as the 1neailings various
products and brands have for the person or how a product influences the person's life.
Marketing research: Marketing research is the process by wl1ich information about tl1e environ- 1uent is generated, analyzed, and interpreted for use in marketing decision making. Most often
consumers or organizational buyers are the subject of fhe research.
Mathematical modeling: Mathematical modeli11g involves developing equations to model
relationships among vaiiables to investigate tl1e impact of va1ious strategies and tactics on sales
and bra11d choices.
Observatio11al research: Observational research involves watclling people and recording relevant
facts and behaviors.
Primary data: Primary data are data collected specifically for the research problem under
investigation.
Qualitative research: Qualitative research typically involves face-to-face interviews wiili
respondents designed to develop a better understanding of what they think and feel concerning a
research topic, such as a brand na1ne, a product, a package, or an advertisement.
Quantitative research: Quantitative research involves systematic procedures designed to obtain
and analyze numerical data.
Secondary data: Secondary data are those that have previously been collected for other purposes
but call be used for the problem at haild.
Survey research: Survey reseai·cl1 involves tl1e collection of data bv means of a question11aire
either by mail, phone, online, or in perso11.
Test marketing: The major goaJ of 1nost test marketing is to 1neasure new product sales on a li1n
ited basis where competitive retaliation and other factors are allowed to operate freely. In this way,
future sales potential can often be esti1nated reasonably well.
MARKETING INSIGHT A Su,m,.ma_ry, of A_m,erican
Value
Achievement and success activity
Efficiency and practicality
Material comfort
Individualism
Freedom
External conformity
Humanitarianism
Youthfulness
Fitness and health
C'ult'u-�a,I Ma.I es·· 3-d
General Features
Hard work is good; success flows from hard work.
Keeping busy is healthy and natural.
Admiration of things that solve problems (e.g., save time and effort).
People can improve themselves; tomorrow should be better than today.
"The good life."
Being oneself (e.g., self-reliance, self-interest, self-esteem).
Freedom of choice.
Uniformity of observable behavior;
desire for acceptance.
Caring for others, particularly the underdog.
A state of mind that stresses being "young at heart" and having a youthful appearance.
Caring about one's body, including the desire to be physically fit and healthy.
Relevance to Marketing
Acts as a justification for acquisition of goods ("You deserve it").
Stimulates interest in products that are time-savers and enhance leisure time.
Stimulates purchase of products that function well and save time.
Stimulates desire for new products that fulfill unsatisfied needs; ready accept ance of products that claim to be "new" or "improved."
Fosters acceptance of convenience and luxury products that make life more enjoyable.
Stimulates acceptance of customized or unique products that enable a person to "express his or her own personality."
Fosters interest in wide product lines
and differentiated products.
Stimulates interest in products that are used or owned by others in the same social group.
Stimulates patronage of firms that compete with market leaders.
Stimulates acceptance of products that provide the illusion of maintaining or fostering youthfulness.
Stimulates acceptance of food products, activities, and equipment perceived to maintain or increase physical fitness.
Source: From Leon G. Schiffman and Leslie Lazar Kanuck, Consumer Behavior 10th edition, © 2010. Repro duced by permission of Pearson Education, Inc., Upper Saddle River, New Jersey.
SOCIAL INFLUENCES ON CONSUMER DECISION MAKING
46
Behavioral scientists have become increasingly aware of the powerful effects of the social
environment and personal interactions on human behavior. In terms of consumer behav
ior, culture, social class, and reference group influences have been related to purchase and
consumption decisions. It should be noted that these influences can have both direct and
indirect effects on the buying process. By direct effects, we mean direct communication
between the individual and other members of society concerning a particular decision. By
indirect effects, we mean the influence of society on an individual's basic values and attitudes
as well as the important role that groups play in structuring an individual's personality.
Culture and Subculture
Culture is one of the most basic influences on an individual's needs, wants, and behav
ior, since all facets of life are carried out against the background of the society in which
an individual lives. Cultural antecedents affect everyday behavior, and there is empirical
support for the notion that culture is a determinant of certain aspects of consumer behavior.
Chapter Three Consumer Behavior 47
Cultural values are transmitted through three basic organizations: the family, religious
organizations, and educational institutions; and in today's society, educational institutions
are playing ai1 increasit1gly greater role in this regard. Marketing managers should adapt
the marketing mix to cultural values and constantly monitor value changes and differences
in both domestic and global markets. To illustrate, one of the changing values in America
is the increasing e1nphasis on achievement and career success. This change in values has
been recognized by many business firms that have expanded their emphasis on time-saving,
convenience-oriented products.
In large nations such as the United States, the population is bound to lose a significant
amount of its homogeneity, and thus subcultures arise. In other words, there are subcult:l1res in
tl1e American culture where people have 111ore frequent interactions than with the population
at large and thus tend to think and act alike in some respects. Subcultures are based on such
things as geographic areas, religions, nationalities, ethnic groups, and age. Many subcultural
barriers are decreasing because of mass communication, mass transit, and a decline in the
influence of religious values. However, age groups, such as the teen market, baby boo111ers,
and the mature 1narket, have become increasingly itnportant for marketing strategy. For exain
ple, since baby boomers (those born between 1946 and 1962) make up about a third of the U.S.
population and soon will account for about half of discretionary spending, many marketers are
repositioning products to serve the1n. Snickers candy bars, for instance, used to be promoted to children as a treat but are now promoted to adults as a wholeso1ne between-1neals snack.
Social Class
Wlule many people like to tl1ink of America as a land of equality, a class snucture can be
observed. Social classes develop on the basis of such thmgs as wealth, skill, and power. The
single best indicator of social class is occupation. However, interest at this point is in the influence
of social class on the individual's behavior. What is important here is fuat different social classes tend to have different attitudinal configurations and values that influence the behavior of indi
vidual members. For marketing purposes, four different social classes have been identified.1
Upper Americans comprise 14 percent of the population and are differentiated mainly
by having high incomes. This class remains the group in which quality merchandise is most
prized and prestige brands are com111only sought. Spendii1g with good taste is a priority as
are products such as theater; books; investments in art; European travel; household help;
club memberships for tennis, golf, and swirn1ning; and prestige schooling for children.
The middle class comprises 34 percent of the population, and fuese const1mers want to do
tl1e right tiling and buy what is popular. They are co11cerned with fashion an.d buying what
experts i11 t11e media reco1nmend. Increased earnings have led to spe11ding on n1ore "worili
while experiences" for children, including winter ski trips, college education, and shopping
for better brands o f clothes at more expensive stores. Appearance of the home is important.
This group emulates fue tipper Ame1icans, which distinguishes it from the working class. The working class comprises 38 percent of the population, people who are "fa1nily
folk" who depend heavily on relatives for economic and emotional support. The emphasis
on family ties is only one sign of how much more limited and different working-class
horizons are socially, psychologically, and geographically compared to those of the middle
class. For them, "keeping up with tl1e times" focuses on the mechanical and recreational,
and thus, ease of labor and leisure are what they continue to pursue.
Lower Americans comprise 16 percent of the population and are as diverse in values and
consumption goals as are other social levels. Some members of fuis group are homeless and
penniless although 1nost work part-titne or full-time jobs at low wages. Most receive public
housing, food stamps, and M.edicaid. The p1imary demands of this group are food, clothing,
and other staples. Given that a number of people in this group l1ave little education or resources,
many people feel it is unethical to try to market alcoholic beverages or tobacco products to it.
48 Part B Marketing fnformation, Research, and Understanding the Target Market
For the marketing manager, social class offers some insights into consumer behavior and is potentially useful as a 1narket segmentation vatiable. However, there is considerable controversy
as to whether social class is superior to it1come for the purpose of market segmentation.
Reference Groups and Families Groups tl1at an individual looks to (uses as a reference) when forming attitudes and opinions
are described a5 reference groitps.2 Pritnary reference groups include family and close friends,
while secondary reference groups include fraternal organizations and professional associa
tions. A buyer may also consult a single individual about decisions, and this individual would
be considered a reference individual. A person no1111ally has several reference groups or reference individuals for various
subjects or different decisions. For exa1nple, a woman may consult one reference group
when she i s purchasing a car and a different reference group for lingerie. In other words,
the nature of the product and the role the individual is playing during the purchasing pro
cess inf luence which reference group will be consulted. Reference group influence is gen
erally considered to be stronger for products that are "public" or conspicuous-that is,
products tl1at other people see the individual using, such as clothes or automobiles.
As noted, the family is generally recognized to be an important reference group, and i t
has been suggested that the household, rather than the individual, is the relevant unit for
studying consmner behavior.3 This is because within a household the purchaser of goods
and services is not always the user of these goods and services. Thus, it is important for
marketing managers to determine not only who makes the actual purchase but also who
makes the decision to purchase. In addition, i t has been recognized that the needs, income,
assets, debts, and expenditure patterns change over the course of wl1at i s called the family
life cycle. The family life cycle can be divided into a number of stages ranging fron1 single,
to married, to married with children of different age groups, to older couples, to solitary
survivors. It may also include divorced people, both with and without children. Because
the life cycle combines trends in earning power with demands placed on income, it is a useful way of classifying and seg1nenting individuals and fatnilies.4
MARKETING INFLUENCES ON CONSUMER DECISION MAKING
Marketing strategies are often designed to influence consumer decision making and lead
to profitable exchanges. Each element of the marketing tnix (product, price, promotion, place) can affect consu1ners in various ways.
Product Influences Many attributes of a company's products, including brand name, quality, newness, and
complexity, can affect consumer be]1avior. The physical appearance of the product, pack
aging, and labeling information ca.n also mfluence wl1ether consumers notice a product
in-store, exatnine it, and purchase it. One of the key tasks of marketers i s to differentiate
their products from those of competitors and create consumer perceptions that the product
is worth purchasing.
Price Influences The price of products and services often influences whether consumers will purchase
them at all and, i f so, which competitive offering is selected. Stores, such as Walmart,
wl1ich are perceived to charge the lowest prices, attract n1any consu1ners based on tl1is
fact alone. For some offerings, higher prices 1nay not deter purchase because consumers
believe that the products or services are higher quality or are more prestigious. However,
.MARKETING INSIGHT Referenc._e Group Influence:. . . - • • I , •
• •
om P-fiod1uct ; amd· Bria:mds·
Marketers know that reference groups can influence both product and brand decisions. They also know that reference group influence varies depending on whether the good is used publicly (a car) or privately (a toothbrush) and whether i t i s a necessity (a mattress) or a luxury (a sailboat). By examining the nature of products and brands on these two dimen sions, the following matrix can be constructed. Marketers could use this matrix to judge how reference group influence should be used in advertising and personal selling efforts. For example, public luxuries could benefit from ads showing owners being admired and complimented for their product and brand selection, whereas ads for private necessities might focus more on superior functional performance.
Public
Private
Necessity
Public necessities
Reference group influence
Product: Weak
Brand: Strong
Examples: Wristwatch, automobile,
man's suit
Private necessities
Reference group influence
Product: Weak
Brand: Weak
Examples: Mattress, floor
lamp, refrigerator
Luxury
Public luxuries
Reference group influence
Product: Strong
Brand: Strong
Examples: Golf clubs, snow skis,
sailboat, health club
Private luxuries
Reference group influence
Product: Strong
Brand: Weak
Examples: Plasma TV, trash
compactor, ice maker
Source: Adapted from William 0. Bearden and Michael J. Etzel, "Reference Group Influences on Product and Brand Purchase Decisions," Journal of Consumer Research, September 1982, p. 185, as reported in J. Paul Peter and Jerry C. Olson, Consumer Behavior and Marketing Strategy, 9th ed. (Burr Ridge, IL: McGraw-Hill/ Irwin, 201 0), pp. 340-341 .
many of today's value-conscious consumers may buy products more on the basis of p1ice
tl1an other attributes.
Promotion Influences
Advertising, sales promotions, salespeople, and publicity can influence wl1at consum
ers think about products, what emotions they experience in purchasing and using them,
and what behaviors they perform, inclt1ding shopping in particular stores and purchasing
specific brands. Since consL1mers receive so much information from marketers and screen
out a good deal of it, it is in1portant for marketers to devise com111unications that (l) offer
consistent messages about their products and (2) are placed in media that consumers in the
target market are likely to t1se. Marketing communications play a critical role in informing
consumers about products and services, including where they can be purchased, and in
creating favorable i111ages and perceptions.
Place Influences
The marketer's strategy for distributing products can influence consumers in several ways.
First, products that are convenient to buy in a variety of stores increase the cl1ances o f consumers
finding and buying them. When consUJ11ers are seeking low-i nvolvement products, they are
unlikely to engage in extensive search, so ready availability is important. Second, products
sold in exclusive outlets such as Nordstrom 1nay be perceived by consumers as having higher
quality. In fact, one of the ways marketers create brand equity-that is, favorable consumer 49
50
I
The recent recession changed the behavior of consumers and marketers. According to a Gallup Poll, 55 percent of consumers said they cut household spending as a result of lower prices in the stock market and fears about the economy. They said they cut back on travel for the holidays (63 percent), eating out at restaurants (81 percent), entertainment such as going to the movies (72 percent), and household services such as housekeeping and lawn service (37 percent). Although the economy has improved, millions of people are still unemployed and many consumers continue to be frugal.
Consumers also sold old jewelry and ransacked closets to find "stuff" to put on eBay. According to eBay CEO John Donahoe, Americans typically have about $3,200 worth of goods at home they could sell to raise cash. Coupon usage to trim grocery costs also went up for the first time in 15 years. Rather than use credit cards, many consumers started sav ing money to buy something they wanted, and layaway plans in which consumers pay in advance for items weekly or monthly also made a comeback. elayaway, a start-up that handles layaway programs for 1,000 retailers, had its customer base jump from 150 to 3,000 in the fall of the year.
The number of consumers who had both a full-time and a part-time job increased 11 percent over the previous year, according to the Bureau of Labor Statistics. Many of these consumers were trying to increase their income so they could save more to help make up some of the losses in their retirement accounts. Also, sales of Blu-ray high defini tion disks more than tripled during the year as consumers found watching them at home a lot cheaper than a night at the movies. Finally, 29 percent of consumers said they were buying more store and generic brands to save money.
So what did marketers do to try to keep merchandise moving and the economy from stalling? Most retailers put products on sale at deep discounts and many companies tried to promote the idea that their products provided value to consumers. For example, Procter & Gamble promoted its new Total Care versions of Tide detergent and Downy fabric softener as products that preserved the look of new clothes. In other words, the products would keep clothes looking new longer so consumers wouldn't have to buy clothes as often and could save money. Since consumers were eating more meals at home, Campbell and Kraft banded together to promote a low-cost classic meal: tomato soup and a grilled cheese sandwich. "Warm hearts without stretching budgets" read the copy in the ad that shows a package of Kraft Singles cheese slices and a can of Campbell's tomato soup. Kraft's DiGiorno pizza aired ads that stated that a home-delivered pizza cost twice as much as a Di Giorno.
Gillette ran a series of ads to justify the $20 to $25 price for eight Fusion Power razor blades arguing that "In the world of high performance, what machine can you run for as little as a dollar a week?" Kellogg cereals played up the idea that a bowl of cereal with milk was a meal that cost only 50 cents. It also snatched up paid search terms including "cereal," "breakfast," and "value," on portals such as Google.com to drive budget-conscious con sumers to its website. When they click on the ad, consumers are linked to a site that plays up the "excellent economic value" of Kellogg's cereal and offers a dollar-off coupon to buy some. Velveeta cheese ads tell shoppers to "forget the cheddar, Velveeta is better," and claim that a package of Velveeta i s "twice the size of cheddar, for the same price."
In sum, many consumers tried to find new ways to live within their means and still live comfortably during a difficult economic time. Many marketers tried to convince consumers that their products provided good value for the money, but in a way that did not detract from their high-quality image.
Sources: Mark Jewell, "Recession Breeds Frugality," Wisconsin State Journal, April 4, 2013, p. Cl t; Jarne O'Donnell and Sandra Block, "Consumers Get Frugal, So Retailers Get Creative," USA Today, January 28, 2009, p. Bl; Mindy Fetterman, "Americans Are Digging Deep to Save Money," USA Today, November 17, 2008, p. 1 A+; Laura Petrecca, "Marketers Try to Promote Value Without Cheapening Image," USA Today, November 17, 2008, p.1 B+.
Chapter Three Consumer Behavior 51
perceptions of brands-is by selling them in prestigious outlets. Third, offering products by
nonstore methods, such as on t11e Inte111et or in catalogs, can create consumer perceptions that
ilie products are innovative, exclusive, or tailored for specific target markets.
SITUATIONAL INFLUENCES ON CONSUMER DECISION MAKING
Situational influences can be defined as all the factors particular to a time a.nd place iliat
have a demonstrable and systematic effect on current behavior. In terms of purchasing situ
ations, five grot1ps of situational inf1uences have been identified.5 These influences may be
perceived eitl1er consciously or subconsciously and may have considerable effect on product
and brand choice.
1. Physical features are ilie most readily apparent features of a situation. These features
include geographical and institutional location, decor, sounds, aromas, lighting, weather,
and visible configurations of merchandise or otl1er mate1ials.
2. Social features provide additional depth to a description of a sitL1ation. These
include other persons present, their characteristics, their apparent roles and interpersonal
interactions.
3. Time is a dimension of situations that may be specified in units ranging from time of
day to season of the year. Tin1e also may be 1neasured relative t o some past or future event for
the sitt1ational participant. This allows such conceptions as time since last purchase, time since
or until meals or paydays, and tin1e constrai11ts imposed by prior or standing commit1nents.
4. Task features of a situatio11 include a11 intent or requirement to select, shop for, or
obtain i11formation about a general or specific purcl1ase. In addition, task may reflect different
buyer and user roles anticipated by the individual. For instance, a person shopping for a small
appliance as a wedding gift for a friend is in a different situation than when shopping for a
small appliance for personal use.
5. Current conditions make up a final feature that characterizes a situation. These
are 1nomentary moods (such as acute anxiety, pleasantness, l1osti]ity, and excitation) or
momentary conditions (such as cash on hand, fatigue, and illness) rather than chronic indi
vidual traits. These conditions are considered to be immediately antecedent to the current
situation t o distinguish the states the individual brings to the situation from states of the
individual resulting from the simation. For instance, people may select a certain 1notion pic
mre because they feel depressed (an antecedent state and a part of the choice situation), but
the fact that ilie movie causes them to feel happier is a response to the consumption situa
tion. This altered state then may become antecedent for behavior in the next choice situation
encountered, such as buying a hot dog from a street vendor after leaving the theater.
PSYCHOLOGICAL INFLUENCES ON CONSUMER DECISION MAKING
Information from group, marketing, and situational influences affects what consumers think
and feel about partict1lar products and brands. However, a number of psychological factors
influence how this infor1nation is interpreted and used and how it affects the consu1ner
decision-making process. Two of the most important psychological factors are product
knowledge and product involvement.6
Product Knowledge Proditct knowledge refers to tl1e amount of information a consumer has stored in her or
his me1nory about particular product classes, product forms, brands, models, and ways
to purchase them. For example, a consumer may know a lot aboL1t coffee (product class),
5l Part B Marketing fnformation, Research, and Understanding the Target Market
groLtnd versus instant coffee (product form), Folgers versus Max well House (brand), and
various package sizes (models) and stores that sell it (ways to purchase).
Group, marketing, and situational influences detertnine the initial level of prod
uct knowledge as well as changes in it. For example, a consumer may hear about a new
Starbucks opening up from a friend (group influence), see an ad for it in the newspaper
(marketing influence), o r see the coffee shop on the way to \Vork (situational ii1fluence).
Any of these increase the a1nount of product knowledge, in tl1is case, a new source for
purchasing the product.
The initial level of product knowledge may influence how much information is sought
when deciding to 1nake a purchase. For example, if a consumer already believes that Folgers is the best-tasting coffee, knows where to buy it, and knows how tnuch it costs,
little additio11al information may be sought.
Finally, product knowledge influences how quickly a consumer goes through the
decision-making process. For example, when purchasing a new product for which the
consumer has little product knowledge, extensive information may be sought and more tin1e
1nay be devoted to the decision.
Product Involvement
Product involvement refers to a consL1mer' s perception of the importance or perso11al relevance
of an item. For exainple, Harley-Davidson motorcycle owners are generally highly involved
in the purchase and use of the product, brand, and accessories. However, a consumer buying a
new toothbrush would likely view this as a low-involvement purchase.
ProdLtCt involvement influences consumer decision making in two ways. First, if the p u r cl1ase is for a l1igl1-involve111ent product, consun1ers are likely to develop a higl1 degree of
product knowledge so that they can be confident that the item they purcl1ase is just right for
them. Second, a high degree of product involvement encourages extensive decision making by
consumers, which likely increases the time it takes to go through the decision-making process.
CONSUMER DECISION MAKING
The process by which consumers make decisio11s to purchase various products and brands
is shown in Figure 3.2. In general, consu1ners recognize a need for a product, search for
information about alternatives to meet the need, evaluate the infor1nation, 1nake purchases,
and evaluate the decision after the purchase. There are three types of decision making, which
vary in terms of how complex or expensive a product is and how involved a consumer i s in
purchasing it.
Extensive decision making requires the most time and effort since the purchase typically
involves a highly complex or expensive product that is important to the consumer. For
example, the purchase of a car, house, or computer often involves considerable time and
effort comparing alternatives and deciding on the right one. In terms of the number of
purchases a consumer makes, extensive decision making is relatively rare, but it is criti
cal for marketers of highly complex or expensive products to understand that consumers
are willing to process considerable information to make the best choice. Thus, marketers
should provide consumers with factual information that highlights competitive advantages :for such high-involvement products.
Limited decision making is 1nore 1noderate but still involves some time and effort
searching for and comparing alternatives. For example, when buying shirts or shorts,
consumers may shop several stores and compare a nu1nber of different brands and styles.
Marketers of products for which consumers usually do li1njted decision 111aking often use
eye-catching advertising and in-store displays to make consu1ners aware of their products
and encourage consumers to consider buying them.
Chapter Three Consumer Behavior S3
FIGURE 3.2 The Consumer Decision-Making Process
Need -
recognition
' -
I
Consumer decision making -
Alternative -
Alternative -
Purchase -
Postpurchase H ► ► -► search evaluation decision
-
evaluation
L I I L- -
Routirte decision making is the n1ost common type and the way consumers purchase
most packaged goods. Such products are simple, inexpensive, and familiar; and consumers
often have developed favorite brands tl1at they purchase without much deliberation. For exa1nple, consu1ners often make l1abitua1 purcl1ases of soft drinks, candy bars, or canned
soup without carefully comparing the relative merits of different brands. Marketers of such
products need to have them readily available for purchase in a variety of outlets and price
tl1em competitively if price is an important criterion to consumers. Marketers of these low
involve111ent products often use celebrity spokespeople and other non-produc t -related cues
to encourage purchases.
Need Recognition The starting point in the buying process is the consumer's recognition of an unsatisfied
need. Any number of either internal or external stimuli may activate needs or wants and
recognition of them. Internal stimuli are such things as feeling hungry and wanting some
food, feeling a headache coming on and wanting some Exced1in, or feeling bored and
looking for a movie to go to. External stimuli are sttch things as seeing a McDonald's sign and then feeling hungry or seeing a sale sign for winter parkas and remembering t11at last
year's coat is worn out.
It is the task of marketing managers to find out what needs and wants a particular product
can and does satisfy and what unsatisfied needs and wants consumers have for which a new
product could be developed. In order to do so, marketing 1nanagers should u11derstand what
types of needs consu1ners may have. A well- k11own classification of 11eeds was developed
many years ago by Abraham Maslow and includes five types.7 Maslow's view is that lower
level needs, starting with physiological and safety needs, must be attended to before higher
level needs can be satisfied. Maslow's hierarchy is described here:
Physiological needs. This category consists of the pri1nary needs of the hwnan body,
such as food, water, and sex. Physiological needs will dominate when all needs are
unsatisfied. In such a case, none of the other needs will serve as a basis for motivation.
Safety needs. With the physiological needs met, the next higher level assu1nes impor
tance. Safety needs consist of such things as protection from physical har1n, ill health,
and econo111ic disaster and avoidance of the unexpected.
Belongingness arid love needs. These needs are related to the social and gregarious
nature of hu111ans and the need for companionship. This level in the l1ierarchy is the
point of departure from the physical or quasi-physical needs of the two previous lev
els. Nonsatisfaction of this level of need may affect the mental health of the individual.
Esteem rteeds. These needs consist of both the need for awareness of importance to oth
ers (self-esteem) and actual estee1n from otl1ers. Satisfaction of these 11eeds leads to feel
ings of self-confidence and prestige.
54 Part B Marketing fnformation, Research, and Understanding the Target Market
Selj�actualizatiort needs. These can be defined as the desire to become everything one
is capable of becoming. This means that the individual will fully realize her or his
talents and capabilities.
Maslow assumed that satisfaction of these needs is only possible after the satisfaction
of all the needs lower in the hierarchy. While the l1ierarchical arrangement of Maslow pre
sents a convenient explanation, it is probably n1ore realistic to assume tl1at the various need
categories overlap. Thus, in affluent societies, many products may satisfy more than one of
these needs. For example, gourtnet foods may satisfy both the basic physiological need of
hunger as well as esteem and status needs for those who serve gourmet foods to their guests.
Alternative Search
Once a need is recognized, the individual then searches for alternatives for satisfying
the need. The individual can collect information from five basic sources for a particular
purc11ase decision.
l . Internal sources. For many purchases, consumers have had previous experience
dealing with particular needs and wants. Consumers can readily "search" throt1gh their
memories for stored information and experiences dealing with need-satisfying alterna
tives. If a previously acceptable product and brand is reme1nbered, a purchase decision
may be made with little or no additional information search or evaluation. A purchase may
be made quickly at a store or website. This is quite common for simple, inexpensive prod
ucts that are frequently ptrrchased and for brands to which the consumer is highly loyal.
2. Group sources. A common source of inf 01mation for pttrchase decisions comes
from commu11ication witl1 other people, such as family, friends, and neighbors. Tl1is infor-
1nation can be conveyed via face-to-face co11versations as well as via social media like
Facebook or Twitter. Generally, a consumer views some of these relevant others as having
particular expertise for the product class being considered. Group sources are often the
most powerful influence on p11rchase decisions.
3. Marketin.g sources. Marketing sources include such things as advertising, salespeople,
dealers, packaging, websites, and displays. For many purchases that require a high degree of
decision making, consumers first go to their search engines and look up manufacturer and
retail websites to collect information about products and brands. Marketing sources provide a
major means by which consumers learn about purchase options. However, consumers often do
not trust tl1ese sources as mt1ch as group or public sources because they are viewed as biased.
4. Public sources. Public sources of info1mation include such things as product ratings in Consumer Reports; buyer reviews on websites like A1nazon.com; and articles written
about t11e product in newspapers, in magazines, 011 independent biogs, and on other web
sites. Here, product quality and value perceptions are important marketing management
considerations because many of these sources are highly trusted by consumers. They are
111ore trusted because their purpose is to provide useful information for making purchase
decisions rather than to actually sell particular products.
5. Experiential sources. Experiential sources refer to handling, examining, and perhaps
trying on or using a product. This usually requires an actual shopping trip to a brick-a.nd
mortar store or trying out the products and brands owned by friends and relatives. Alterna
tively, consumers can order online in order to have tl1e product delivered so it can be tried
out and kept if acceptable.
The consu.mer then processes information collected from these sources. 8 However, ilie
exact nature of how individuals process i11formation to form evaluations of products is not
fully understood. In general, information processing is viewed as a four-step process i n
which the individual is (1) exposed to information, (2) becomes attentive to the information,
(3) understands the information, and (4) retains the information.9
The marketing profession has long recognized the need to uphold its integrity, honor, and dignity. Listed here are the ethical norms established by the American Marketing Associa tion to be used by marketers in dealing with consumers and other stakeholders.
A s marketers we must:
1. Do no harm. This means consciously avoiding harmful actions or omissions by embod ying high ethical standards and adhering to all applicable laws and regulations in the choices we make.
2. Foster trust in the marketing system. This means striving for good faith and fair dealing so as to contribute toward the efficacy of the exchange process as well as avoid ing deception in product design, pricing, communication, and delivery of distribution.
3. Embrace ethical values. This means building relationships and enhancing consumer confidence in the integrity of marketing by affirming these core values: honesty, respon sibility, fairness, respect, transparency, and citizenship.
Source: www.marketingpower.com, Reprinted with permission.
Alternative Evaluation
During the process of collecting information or, in some cases, after information is acquired,
tl1e consumer evaluates alternatives on the basis of what he or she has learned. One approach
to describing the evaluation process is as follows:
1. The consumer has information about a number of brands in a product class.
2. The consumer perceives that at least some of the brands in a product class are viable
alternatives for satisfying a recognized need.
3. Each of these brands has a set of attributes (color, quality, size, and so fo11h).
4. A set of these attributes is relevant to the consumer, and the consumer perceives that
different brands vary in how much of each attribute they possess.
5. The bra11d that is perceived as offering the greatest number of desired attributes in the
desired a1nounts and desired order will be the brand the consumer will like best.
6. The brand tl1e consumer likes best is the brand the consumer will intend t o purchase. 10
Purchase Decision
If no other factors intervene after the consumer has decided on the brand that is intended for
purchase, the actual purchase is a common result of search and evaluation. Actually, a pur
chase involves 1nany decisions, whicl1 include product type, brand, 1nodel, dealer selection,
and method of payment, among other factors. In addition, rather than purchasing, the con
sumer may make a decision to modify, postpone, or avoid purchase based on an inhibitor to
purchase or a perceived risk.
Traditional risk theorists believe that consumers tend to make risk-minimizing deci
sions based on their perceived definition of the particular purchase. The perception of
risk is based on the possible consequences and uncertainties involved. Consequences may
range from economic loss, to embarrassment if a new food product does not turn out well,
to actual physical harm. Perceived risk may be either functional (related to financial and perfor1nance considerations) or psychosocial (related to whether the product will further
one's self- or reference-group image). The amount of risk a consumer perceives i n a par
ticular product depends on such things as the price of the product and whether other people
will see the individual using it. 55
56 Part B Marketing fnformation, Research, and Understanding the Target Market
The perceived risk literature emphasizes that consumers generally try to reduce risk in their
decision n1aking. This can be done by eitl1er reducing t11e possible negative consequences or
by reducing the uncertainty. The possible consequences of a purchase might be minimized by
purchasing in small quantities or by lowering the individual's aspiration level to expect less i n
the way of results from the product. However, this cannot always be done. Thus, reducing risk
by attempting to increase the certainty of the purchase outcome 1nay be the more widely used
strategy. This can be done by seeking additional information regarding the proposed purchase.
In general, the more information the consumer collects prior to purchase, the less likely post
purchase dissonance is to occt1r.
Postpurchase Evaluation In general, if the individual finds that a certain response achieves a desired goal or satis
fies a need, the success of this cue-response pattern will be remembered. The probability
of responding in a like manner to the same or similar situation in tl1e future is increased.
In other words, the response has a higher probability of being repeated when the need
and cue appear together again, and thus it can be said that learning has taken place. Fre
quent reinforcement increases the habit potential of the particular response. Likewise, if a
response does not satisfy the need adequately, the probability that the sa1ne response will be repeated is reduced.
For some marketers this mear1s that i f an individual finds that a particular product
fulfills the need for which it was purchased, the probability is high that the individual
will repurchase the product the next time the need arises. The firm's pro1notiona] efforts
often act as the cue. If a11 individual repeatedly purchases a product with favorable
results, loyalty may develop toward the particular product or brand. This loyalty can
result in habitual purchases, and such habits are often extremely difficult for competing
firms to alter. A1tl1ough many studies in the area of buyer behavior center on the buyer's attitudes,
motives, and behavior before and during tl1e purchase decision, behavior after the purchase
has also been stl1died. Specifically, studies have been undertaken to investigate postpur
chase dissonance, as well as postpurchase satisfaction.
The occurrence of postdecision dissonance is related to the concept of cogn.itive disso
ru:tnce. This theory states that there is often a lack of consistency or harmony among an indi
vidual's various cognitions, or attitudes and beliefs, after a decision has been made-that is,
the individual has doubts and second thoughts about the choice made. FtLrther, it is more likely
that the intensity of the anxiety will be greater when any of tbe following conditions exist:
1. The decision i s an importa.nt one psychologically or financial! y, or botl1.
2. There are a number of forgone alten1atives.
3. The forgone alternatives have many favorable features.
These factors can relate to many buying decisions. For example, postpurchase disso
nance might be expected to be present among many pt1rchasers of such products as auto-
1nobiles, major appliances, and homes. In these cases, the decision to purchase is usually
an important one both financially and psychologically, ai1d a number of favorable alterna
tives are usually available.
These findings have much relevance for marketers. fu a bt1ying sitt1ation, when a purchaser
becomes dissonant, it is reasonable to predict st1ch a person would be highly receptive to
advertising and sales promotion tl1at support the purchase decision. Sucl1 con1munication
presents favorable aspects of the product and can be useful in reinforcing the buyer's wish to
believe that a wise purchase decision was made. For example, purchasers of major appliances
Influencing Factor
I. Market characteristics
A. Number of alternatives
B. Price range
C. Store concentration
D. Information availability
1 . Advertising
2 . Point-of-purchase
3. Sales personnel
4. Packaging
5. Experienced consumers
6. Independent sources
II. Product characteristics
A. Price
B. Differentiation
C. Positive products
Ill. Consumer characteristics
A. Learning and experience
B. Shopping orientation
C. Social status
D. Age and household life cycle
E. Product involvement
F. Perceived risk
IV. Situational characteristics
A. Time availability
B. Purchase for self
C. Pleasant surroundings
D. Social surroundings
E. Physical/mental energy
Increasing the Influencing Factor
Causes the Search to:
Increase
Increase
Increase
Increase
Increase
Increase
Increase
Decrease
Mixed
Increase
Mixed
Mixed
Increase
Increase
Decrease
Increase
Mixed
Increase
Source: From Delbert Hawkins, David Mothersbaugh and Roger Best, Consumer Behavior: Building Market ing Strategy 7 2E, 201 3, p. 528. Reprinted with permission of McGraw-Hill Education.
or automobiles might be given a phone call or sent a letter reassuring them that they have
1nade a wise purchase.
As noted, researchers have also studied postpurchase consu111er satisfaction. Much
of this work has been based on what is called the discorifirmation paradigm. Basically,
this approach views satisfaction with products and brands as a result of two other variables.
The first variable is the expectations a consumer has about a product before purchase.
These expectations c o .ncem the beliefs the consumer has about the product's perfor1nance.
The second variable is the difference between expectations and postpurchase percep
tions of how the product actually performed. If the product performed as well as expected
or better than expected, the consumer will be satisfied with the product. If the product per
formed worse than expected, the consumer will be dissatisfied with it.
One itnplication of this view for 111arketers is that care 111ust be taken not to raise
prepurchase expectations to such a level that the product cannot possibly meet them. Rather, it
is important to create positive expectations consistent with the product's likely perforinance. 11
S7
58 Part B Marketing fnformation, Research, and Understanding the Target Market
SUMMARY
Additional Resources
KeyTer,ns and Concepts
This chapter presented an overview of consumer behavior. Social, marketing, and situational
infltlences on const1mer decision making were discussed first, followed by a discussion of
two important psychological factors: product knowledge and product involvement. Con
sumer decision making, which can be extensive, limited, or routine, was viewed as a series
of stages: need recognition, alternative search, alte1native evaluation, purchase decision,
and postptu·chase evaluation. Clearly, understanding consumer behavior is a prerequisite for
developing successful marketing strategies.
Hawkins, Del T., and David L. Mothersbaugh. Consumer Behavior: Building Marketing Strategy.
12th ed. Bu1t Ridge, IL: McGraw-Hill, 2013.
Hoyer, Wayne D., and Deborah J. Maclnnis. Consumer Behavior. 6th ed. Mason, OH: South
Western, 2013.
Peter, J. Paul, and Jerry C. Olson. Consunier Behavior and Marketing Strategy. 9th ed. BmT Ridge,
IL: McGraw-Hill/Irwin, 2010.
Schiffman, Leon G., and Leslie Kanuck. Consumer Beliavior. 10th ed. Upper Saddle River,
NJ: Prentice Hall, 20 I 0.
So101non, Michael R. Consumer Behavior. I 0th ed. Upper Saddle River, NJ: Prentice Hall, 2013.
Belongingness and love needs: According to Maslow, the needs related to the socja] and
gregarious nature of humans and the need for co1npanionship.
Cognitive dissona11ce: A lack of l1armony among a perso11' s thoughts after a decision l1as been
made-tl1at is, the individual l1as doubts and second thoughts about tl1e cl1oice that was made.
Current conditions: Situational influences such as momentary 111oods and conditions that influ
ence consumer behavior.
Disconfirmation paradigm: Approach that views consu1ner satisfaction as the degree to which
the actual performai1ce of a product is consistent with expectations a conswner had before
purchase. If the product is as good as expected, then the consumer will be satisfied; if not, then
tbe consumer's expectations are disconfir1ned.
Esteem needs: According to Maslow, the needs that consist of both the need for awareness of
i1nportai1ce to others (self-esteem) and actual esteem from others.
Experiential sources of information: The information a consu111er gets fro1n handling, exrunin
ing, and perhaps trying a product wl1ile shopping.
Extensive decision making: Level of decision n1aking that requires the n1ost time and effort since
the purchase typically involves a highly complex or expensive product that is ilnportant to the
consumer.
Family life cycle: Framework that divides tl1e develop1nent of a family into a number of stages
based on the needs, assets, debts, and expenditures that change as a family begins, grows, and
,natures.
Group sources of information: A common source of information for purchase decisions that
comes from communication with other people such as family, friends, neighbors, and acquaintances.
Internal sources of i11formation: Stored information and experie11ce a consumer bas iJ.1 1ne111ory
for dealing with a particular need.
Limited decision making: Level of decision making that requires a moderate amount of time and
effort to search for and compare alternatives.
Lower Americans: Comprise 16 percent of the population and have the lowest education levels
and resources; the bottom of the social class hierarchy.
Chapter Three Consumer Behavior 9
Marketing sources of information: Include sucl1 things as advertising, salespeople, dealers, pack
aging, a11d displays offered by marketers to influence consu1ner decision making and bel1avior.
Middle class: Middle social class; comprises 34 percent of the poJ)ulation and is concerned with
doing the right thing and buying what is popular. This class tends to e1nulate Upper Americans.
Need recognition: The first step in the consumer decision 1naking process; the recognition by the
consumer of a felt need or want.
Physical features of a situation: The geographical and institutional decor, sounds, aron1as, light
ing, weather, and visible configurations of merchandise or other materials.
Physiological needs: According to Maslow, the primary needs of the human body such as food,
water, and sex.
Product knowledge: The amount of infor1nation a consu1ner has stored i11 her or his memory
about pa1ticular product classes, product forms, brands, and models, and ways to purchase thern.
Public sources of information: Publicity, sucl1 as newspaper articles about tl1e product, ai1d
independent ratings of the product, such as Consurner Reports.
Reference groups: Groups tl1at an individual looks to (uses as a refere11ce) when forming attitudes
and opinions.
Routine decision making: The most common type of decision making, involves little in tl1e way
of thinking and deliberation. It is often habitual and is the way consumers commonly purchase
packaged goods that are inexpensive, simple, and familiar.
Safety needs: According to Maslow, things such as protection from physical h,u·m, ill health, and
economic disaster and avoidance of tl1e unexpected.
Self-actualization needs: According to Maslow, the desire to become everythi11g one can become
and fully realize talents and capabilities.
Situational influences: All of the factors particular to a time and place that have a de1nonstrable
and systematic effect on current bel1avior.
Social features of a situation: Include other persons present in a situation, their characteristics,
their apparent roles and u1terpersonal interactions.
Task features of a situation: Include the intent or require1nent to select, shop for, or obtain infor-
1nation about a general or specific purchase.
Time dimension of a situation: The te1nporal di1nension of a situation such as the tin1e of day or
season of the year. It can also be relative to other life events such as the time since the last purchase
or ti1ne until payday.
Upper Americans: Social class tl1at comprises 14 percent of tl1e population and is differentiated
mainly by having high incomes. This social class remains tl1e group in wltlch quality merchandise
is most prized and prestige brands are commonly sought.
Working class: Social class that co1nprises 38 percent of the population; "family folk" who
depend heavily on relatives for economic and emotional support.
Chapter
•
us1ness, overnmen '
• •
In the previous chapter we discussed consumer behavior and the decision-making pro
cess used to purchase products and services. However, final consu1ners are not tl1e only purchasers of products and services. Rather, businesses, governn1ent agencies, and other
institutions buy products and services to maintain their organizations and achieve their
organizational objectives. These organizations are major customers for many marketers.
In this chapter we discuss the natt1re of these organizations a11d offer a general 111odel of
tl1e buying process for tl1e111. The chapter begi11s by discussing four categories of organi
zational buyers and then presents an overview of tl1e organizational buying process.
CATEGORIES OF ORGANIZATIONAL BUYERS
60
Organizational buyers can b e classified in many ways. For example, the U.S. govern
ment classifies organizatio11s in similar lines of business in t11e North American lt1dustry
Classification System (NAJCS, pronounced "knacks"). NAICS provides information about
the number of establishments, sales volume, and nt1mber of employees in each industry
broken down by geograp11ic area. Information on NAICS codes is available online at www. naics.com. In addition, a commercial source, Dun's Busi11ess Locator, provides information
on more than 10 million U.S. businesses. Both of these can provide useful information
for organizational marketers seeking organizational buyers. However, for the purpose of
this text, it is useful to classify organizational buyers into four catego1ies: These irtclude producers, intermediaries, government agen.cies, and other institutions. Taken collectively,
1narketing to these organizations is called business-to-business or B2B ,narketing. Business
to-business marketing has become a topic of increasing interest because it is the major area
where Internet marketing has been done profitably.
Producers
These organizational buyers consist of businesses that buy goods and services in order to
produce other goods and services for sale. For example, Dell Inc. buys computer chips from
Intel in order to make computers to be sold to consumers and other organizations. Producers
are engaged in many different industries, ranging from agriculture to manufacturing, from
construction to finance. Togetl1er they co11stitute tl1e largest segment of organizational buyers.
Producers of goods tend to be larger and more geograpllically concentrated than producers of .
services.
Intermediaries
Chapter Four Business, Govern,nent, and Institutional Buying 61
Marketing intermediaries or resellers purc11ase products to resell at a profit. T11is group
includes a number of types of resellers such as wholesalers (Grainger) and retailers
(Walmart) that bt1y products from manufacturers and distribute them to consumers
and other organizational buyers. Intermediaries also purcl1ase products and services to
run their own busi11esses, such as office supplies and maintenance services. Given t11eir
in1portance to marketing, intermediaries will be discussed i11 detail in Chapter 10.
Government Agencies In the United States, government agencies operate at the federal, state, and local levels;
there are more than 86,000 governmental agencies in this cot1ntry that purchase machin
ery, equipment, facilities, supplies, and services. Government age11cies account for tril
lions of dollars worth of buying, a.nd more than half of this amount represents purchases
by the federal government, making it the world's biggest customer. The gove1nments of
other countries also are huge customers for marketers. Marketing to government agencies
can be complex since such agencies often have strict purchasing policies and regulations.
Other Institutions Besides businesses and government agencies, marketers also sell products and services
to a variety of other institutions, such as hospitals, museums, universities, nursing homes,
and churches. Many of these are nonprofit organizations that purchase products and ser
vices to maintain their operations and serve their clientele.
THE ORGANIZATIONAL BUYING PROCESS
Regardless of the type of organization, a buying process is needed to ensure that prod
ucts and services are purchased and received i n a timely and efficient manner. In general,
organizations develop a bttying process to serve their pt1rchasing needs. Figure 4.1 pre
sents a 111odel of organizational buying that represents some of the co111mon influences and
stages in the process.
FIGURE 4.1 A Model of the Organizational Buying Process
Purchase-type influences -
Structural influences I-
Behavioral influences -
I I I ' ' '
Organizational buying process
n - ,_ ._
Organizational - Vendor Purchase - Postpurchase need
,
analysis ,
activities ,
evaluation
I j I L
-
6l Part B Marketing fnformation, Research, and Understanding the Target Market
PURCHASE-TYPE INFLUENCES ON ORGANIZATIONAL BUYING
A major consideration that affects the organizational buying process i s the complexity of the
purchase that is to be made. Three types of organizational purchase based on their degree
of complexity include the straight rebuy, modified rebuy, and new task purchase. 1
Straight Rebuy The simplest and 1nost common type of purchase is called a straight rebuy. This type of purchase involves routinely reordering a product from the same supplier that it had been
purchased from in the past. Organizations use a straight rebuy when they are experienced
at buying the product, have an ongoing need for it, and have regular suppliers of it. In
many cases, organizations have computer systems that automatically reorder certain com- 1nonly used products. Organizations use this simple approach to purcl1asing because it is
fast and requires relatively few employees.
Straight rebuys are common among organizations that practice just-in-tim,e inventory,
which is a system of replenishing pa1ts or goods for resale just before they are needed.
Sucl1 buyers do not have time to l1unt around for potential st1ppliers and solicit bids. Instead
they regularly place their orders witl1 a supplier whose quality a11d timely delivery can be
counted on. If a supplier delivers items that are late or of unacceptable quality, these buyers
will not have a reserve i n inventory to draw on. Therefore, organizations that use just-in
time inventory tend to favor suppliers with a strong commitment to quality.
To retain custo1ners who use straight rebuys, tl1e 1narketer 11eeds to 1naintain high
quality products and reliable service so that the customers will continue to be satisfied with
their purchases.
Modified Rebuy When some aspects of the buying situation are unfamiliar, the organization will use a modi
fied rebuy. This type of purchase involves considering a limited number of alternatives before
111aking a selection. Organizational buyers follow this approacl1 ratl1er tl1an a straight rebuy
wl1en a routine purchase changes in some way; for example, a supplier discontinues a product
or stops satisfying the customer, the price of a usual product rises, or a new product becomes
available to meet the same need.
In such situations, the organizational buyer considers the new inforrn,ation and decides what
changes to make. If the change proves satisfactory and the product is one needed routinely, tl1e
buyer may then make it a straight rebuy. Marketers seek to win new organizational custom
ers by giving them reasons to change from a straight rebL1y to a modified rebuy i n which the
marketer's products are considered.
New Task Purchase Organizations purchase some products only occasionally, especially in the case of large
investments such as machinery, equipment, and real estate. In these cases, the organiza
tion may use a new task purchase. This type of purchase involves an extensive search for
information and a fonnal decision process.
New task purchases are most often used for big-ticket items, so the cost of a mistake
is great. Therefore, a new task purchase is time consuming and involves a relatively large
number of decision makers, who 1nay consider many alternatives. This is the type of
purchase decision that is most likely to involve joint decision making because many kinds
of expertise are required to 1nake the best decision.
A new task purchase i s an opportunity for the marketer t o learn about the needs of the
organizations in its target market and to discuss ways to meet organizational needs, such
Chapter Four Business, Govern,nent, and Institutional Buying 63
FIGURE 4.2 Marketing Tactics for Reaching Organizational Buyers
Type of Purchase
Straight rebuy
Modified rebuy
New task purchase
Marketing Element
Advertising
Promotion
Selling
Advertising
Promotion
Selling
Advertising
Promotion
Selling
Promotional Approach
Use reminder advertising.
Build image for company.
Hospitality events at trade shows.
Any personal selling is designed to build relationships.
Automate the purchasing process, perhaps through EDI (electronic data exchange).
Use comparison advertising to show differences between your product and similar products.
Customer site demonstrations, hospitality events at trade shows.
Protect relationship with current customers with plant tours, special trade-in pricing, and other offers.
Anticipate or respond quickly to changes in customer needs.
Detailed, educational ads to try to get users to try product, substitute for old method.
Use demonstrations at trade shows to show how it works.
Offer free trials or demonstrations at the customer's site.
Heavy emphasis on understanding customers' needs and showing how new product satisfies needs better than old methods.
Source: Based on F. Robert Dwyer and John F. Tanner Jr., Business Marketing, 4th ed. Burr Ridge, IL: McGraw-Hill/Irwin, 2009, p. 73.
as tl1rough the use of new products and technology. Figure 4.2 offers some suggestions for
reaching organizational buyers for the three types of purchases.
STRUCTURAL INFLUENCES ON ORGANIZATIONAL BUYING
TJ1e tenn. structural influertces refers to the design of the organjzational envisonrnent and
how it affects the purchasing process. Three itnportant structural influences on organiza
tional buying are purchasing roles, organization-specific factors, and purchasing policies
and procedures.
Purchasing Roles It is common in organizational buying for purchases to be made cross-functionally with
representatives from different functional departments playing various roles in the process.
Taken collectively, these are called the buying center and include the following roles:
1. Initiators, who start the purchasing process by recognizing a need or prob]e1n in the
organizatio11. For example, an executive 1night see a need for faster co1nputers.
2. Users, who are tl1e people in the organization who actua]ly use the product, for exam
ple, an assistant who would use a 11ew word processor.
MARKETING. INSIGHT Key Ch:�rac·teris_tics .of· Organization.al.
64
. - . . • I " • " I . • • • • , , .
.
·s·u�r11rg· ,·se riraMro� ��,
Market Characteristics
• Demand for industrial products and services is derived from consumer demand. • Few customers typically exist in an industry, and their purchase orders are large.
Product or Service Characteristics
• Products or services are technical in nature and purchased on the basis of specifications. • Many of the goods purchased are raw and semifinished. • Heavy emphasis is placed on delivery time, technical assistance, and postsale service.
Buying Process Characteristics
• Technically qualified and professional buyers follow established purchasing policies and procedures. • Buying objectives and criteria are typically spelled out, as are procedures for evaluating sellers and
their products or services. • There are multiple buying influences, and multiple parties participate in purchase decisions. • There are reciprocal arrangements, and negotiation between buyers and sellers is commonplace. • Online buying over the Internet is widespread.
Marketing Mix Characteristics
• Direct selling to organizational buyers is the rule, and distribution is very important. • Advertising and other forms of promotion are technical in nature. • Price is often negotiated, evaluated as part of broader seller and product or service qualities, and
frequently affected by quantity discounts.
Source: From Roger Kerin, Steven Hartley and William Rudelius, Marketing 11 E, 2013, p. 141. Reprinted with permission of McGraw-Hill Education.
3. Injluen.cers, who affect the buying decision, usually by helping define the specifications
for what is needed. For example, an information systems manager would be a key influ
encer in the purchase o f a new computer system.
4. Buyers, who have the formal authority and responsibility to select the supplier and
negotiate the terms of the contract. For example, in the purchase of ink cartridges, the purchasi,ig age,it would likely perfo1m this role.
5. Deciders, who have the for1nal or informal power to select or approve the supplier
that receives the contract. For important technical purchases, deciders may come from
R&D, engineering, or quality control.
6. Gatekeepers, who control the flow of information in the buying center. Purchasing
personnel, technical experts, and assistants can all keep marketers and their information
from reaching people performing the other four roles.2
When several persons are involved in the organizational purchase decision, marketers may
need to use a variety of means to reach each individual or grottp. Fortunately, it is often easy to
find which individuals in organizations are involved in a purchase because such information
is provided to suppliers. Organizations do tl1is because it makes suppliers more knowled g e
able about purchasing practices, thus making the purcl1asi11g process more efficient.3 Also, a
number of firms ha.ve developed closer channel relationships that facilitate these transactions.
Organization-Specific Factors Three primary organization-specific factors influence the purchasing process: orientation,
size, and degree of centralization. First, in terms of orientation, the dominant function in an
organization may control purchasing decisions. For example, if the organization is technol ogy oriented, it is likely to be dominated by engineering personnel, who will 1nake buying
decisions. Similarly, if tl1e organization is production oriented, production personnel 1nay
dominate buying decisions.
Chapter Four Business, Govern,nent, and Institutional Buying 65
Second, the size of the organization may influence the purchasing process. If the organi
zation is large, it will likely have a high degree of joint decision making for other than
straight rebuys. Smaller organizations are likely to have more autonomot1s decision making.
Finally, the degree of centralization of an organization influences whether decisions are
n1ade individually or jointly with others. Organizations that are highly centralized are less
likely to have joint decision making. Thus, a privately owned, small company with tech
nology or production orientations will tend toward autonomous decision making, while a large-scale public corporation with considerable decentralization will tend to have greater
joint decision making.
Purchasing Policies and Procedures Organizations typically develop a number of policies and procedures for varioL1s types
of purchases. These policies and procedures are designed to ensure that the appropri
ate products a11d services are purcl1ased efficiently and that responsibility for buying
is assigned appropriately. Often a. purchasing department will be assigned the task of
centralized buying for the whole organization, and individuals within this department will
have authority to purchase particular types of products and services in a given price range.
A current trend in ma11y organizations is sole sourcing, in wl1ich all of a particular type of product is purchased from a single supplier. Sole sourcing has become more popular
because organizational buyers have become more concerned with quality and timely deliv
ery and less likely to purchase only on the basis of price. Sole sourcing is advantageous for
suppliers because it provides tl1e111 with predictable and profitable demand and allows t11em to build long-term relationships with organizational buyers. It is advantageous for organiz a
tional buyers because it not only increases timely delivery and quality of supplies but also
allows the buyers to work more closely with suppliers to develop superior products that meet
their needs and those of their customers. Tl1e use of sole sottrcing also simplifies the buying process and can make wl1at were fonnerly modified rebuys into simpler straight rebuys.
Of course, many organizational purchases are more complicated and require policies
and procedures to direct the buying process. In many cases, organizations will develop
a list of approved vendors from which buyers have authorization to purchase particular
products. The buyer's responsibi] ity is to select the vendor that wil] provide the appropri
ate levels of quality and service at the lowest cost. These policies and procedures also
specify what positions in the purchasing department or buying center have authority to
n1ake purchases of different types and dollar amounts. For large one-ti1ne projects, sucl1 as tl1e construction of a building, organizations 111ay
seek competitive bids for part or a]l of the project. The development of policies and pro
cedures for handling such purchases is usually complex and involves a number of criteria
and committees.
BEHAVIORAL INFLUENCES ON ORGANIZATIONAL BUYING
Organizational buyers are influenced by a variety of psychological and social factors. We
wil] discuss two of these, personal motivations and role perceptions.
Personal Motivations Organizational buyers are, of course, subject to the same personal motives or motivational
forces as 0th.er individuals. Although these buyers may e1nphasize nonpersonal motives i n their buying activities, i t has been found that organizational buyers often are influenced by
such personal factors as friendship, professional pride, fear and uncertainty (risk), trust,
and personal ambitions in their buying activities.
66
Code of Ethic_s for Organizatio.nal
Bu�e�s''. 4-2·
1. Avoid the intent and appearance of unethical or compromising practice i n relationships, actions, and communications.
2. Demonstrate loyalty to the employer by diligently following the lawful instructions of the employer, using reasonable care and only the authority granted.
3. Refrain from any private or professional business activity that would create a conflict between personal interests and the interests of the employer.
4. Refrain from soliciting or accepting money, loans, credits, or prejudicial discounts and the acceptance of gifts, entertainment, favors, or services from past or potential suppliers that might influence or appear to influence purchasing decisions.
5. Handle confidential or proprietary information belonging to employers or suppliers with due care and proper consideration of ethical and legal ramifications and government regulations.
6. Promote positive supplier relationships through courtesy and impartiality throughout all phases of the purchasing cycle.
7. Refrain from reciprocal agreements that restrain competition.
8. Know and obey the letter and spirit of laws governing the purchasing function and remain alert to the legal ramifications of purchasing decisions.
9. Encourage all segments of society to participate by demonstrating support for small, disadvantaged, and minority-owned businesses.
10. Discourage purchasing's involvement in employer-sponsored programs of personal purchases that are not business related.
11. Enhance the proficiency and stature of the purchasing profession by acquiring and maintaining current technical knowledge and the highest standards of ethical behavior.
12. Conduct international purchasing in accordance with the laws, customs, and practices of foreign countries, consistent with U.S. laws, your organization's policies, and these Ethical Standards and Guidelines.
Source: Institute for Supply Management as reported in F. Robert Dwyer and John F. Tanner, Business Marketing 4£, McGraw-Hill/Irwin, 2009, p. 86.
For exan1ple, professional pride often expresses itself through efforts to attain status in
the firm. One way to achieve tl1is might be to initiate or influence the purchase of goods
that will demonstrate a buyer's value to the organization. If new materials, equipment,
or components result in cost savings or increased profits, the individuals initiating the
changes have de1nonstrated their value at the same time. Fear and uncertainty are strong
motivational forces on organizational buyers, and reduction of risk is ofte11 important to
them. This can have a strong influence on purchase behavior. Marketers should under
stand the relative strength of personal gain versus risk-reducing motives and emphasize
the more important motives when dealing with bLtyers.
Thus, in examining buyer motivations, it is necessary to consider both personal and
nonpersonal 1notivational forces and to recognize that the relative i1nportance of each
is not a fixed quantity. It will vary with the nature of the product, the climate within the
organization, and the relative strength of the two forces in the particular buyer.
Role Perceptions A final factor that influences organizational buyers is their own perception of their role.
The manner in which individuals behave depends on their perception of tl1eir role, their
com1nitment to what they believe is expected of their role, the "maturity" of the role type,
and the extent to wl1ich tl1e institution is committed to tl1e role type.
.MARKETING IN�IGHT O .. rg.anization.al .Bwy,in:g on the. l·n\te.rnet:
�·-P.riocu�emne,rnt 4�3
The process of an organization purchasing online is referred to as e-procurement. E-procurement sales have grown rapidly and account for more sales dollars annually than online sales to consumers. There are a variety of methods by which organizations buy online:
• Industry purchasing sites: Industries have formed websites to streamline and standardize the e-procurement process. Steel, chemicals, paper, and automobile manufactures have created integrated websites to assist their own purchasing departments in online pur chasing and supplier selection.
• Business function sites: Certain business functions have websites to standardize purchas ing. For example, individual utilities formerly negotiated by phone to buy and sell elec tricity with each other; however, today the purchasing of electricity by utility companies is done over a website dedicated to energy management.
• Extranet to major suppliers: Many companies have set up direct links to approved sup pliers to make the purchase easier and move it closer to frontline decision makers. Office Depot, for example, has a number of direct relationships with thousands of companies.
• Company buying sites: Many large companies have created their own websites to assist vendors' requests for proposals, and other relevant supplier information as well as some contact information are accessjble for review.
There are three major reasons online buying is prominent in organizational markets. First, organizational buyers depend on timely supplier information that describes product availability, technical specifications, application uses, price, and delivery schedules. This information can be conveyed quickly online. Second, online buying substantially reduces buyer order-processing costs. Third, organizational marketers have found that the use of the Internet can reduce marketing costs, particularly sales and advertising expenses, and broaden their potential customer base for many types of products and services.
Sources: Roger A. Kerin, Steven W. Hartley, and William Rudelius, Marketing, 11th ed. (Burr Ridge, IL: McGraw-Hill, 2013), p. 151; Greg W. Marshall and Mark W. Johnston, Essentials of Marketing Management (Burr Ridge, IL: McGraw-Hill, 2011 ), p. 156.
Different buyers will have different degrees of com111itment to their bt1ying role, which
will cause variations in role behavior from one buyer to the 11ext. By commitment we mean
willingness to perform their job in the manner expected by the organization. For example,
some buyers seek to take charge in their role as buyer and have little commitment to com
pany expectations. The implication for marketers is that such buyers expect, even demand,
that they be kept constantly advised of all new developm.ents to enable them to more effec
tively shape their own role. On the other hand, other buyers may have no interest i n prescrib
ing their role activities and accept their role as given to them. Such a buyer is 1nost concerned
with merely i1nplementing prescribed company activities and bttying policies with sanctioned
products. Thus, some buyers will be highly committed to play the role the fitm dictates (i.e.,
the fo11nal organization's perception of their role), while others migl1t be extre1nely innova
tive and t1ncommitted to the expected role performance. Obviously, roles may be heavily
influenced by the organizational climate existing in the pruticular organization.4
Organizations can be divided into three groups based on differences in degree of employee
com1nitment. These groups include innovative, adaptive, and lethargic firms. In an innovative
firm, individuals approach their occupational roles with a weak commitment to expected
norms of behavior. In an adaptive organization, there is a moderate commitment. In a lethar
gic organization, individt1als express a strong commitment to traditionally accepted behavior
and behave accordingly. Thus, a buyer in a lethargic firm would probably be less innovative
in order to maintain acceptance and status within the organization and would keep conflict
within the firm to a minimum. 67
68 Part B Marketing fnformation, Research, and Understanding the Target Market
Buyers' perception of their role rnay differ from the perception of their role held by others
in the organization. This difference can result in variance in perception of the actual purchase
responsibility held by the buyer. One stL1dy involving purchasing agents revealed that, in
every firm included in the study, the purchasing agents believed they had more responsibility
and control over certain decisions than the other influential purchase decision makers in the
firm perceived them as having. The decisions were (1) designing the product, (2) setting a cost for the product, (3) deterrnining performance life, (4) naming a specific supplier, (5)
assessing the a1nount of engineering l1elp available fro1n the supplier, and (6) reducing rejects.
This variance in role perception held true regardless of the size of the firm or the significance
of the item purchased to the overall success of the firm. It is important, therefore, that the
marketer be aware that such perceptttal differences may exist and to determine as accurately
as possible the a1nount of control and responsibility over purchasing decisions held by each
purchase decision influencer in the firm.
STAGES IN THE ORGANIZATIONAL BUYING PROCESS
As with consumer buying, most organizational purchases are 1nade in response to a
particular need o r problem. Ideally, the products or services purchased will meet tl1e organizational need and improve the organization's efficiency, effectiveness, and p r o f
its. The organizational buying process can be analyzed as a series of four stages:
organizational need, vendor analysis, purchase activities, and postpurchase evalt1ation.
Organizational Need Organizations have many needs for products and services to help them sunrive and meet
their objectives. For example, a manufacturer may need to purchase new machinery to
increase its production capacity and meet demand; a retailer may need to purchase services
from a marketing research firm to better understand its market; a government agency may
need to purcl1ase faster cotnputers to keep up with growing demand for its services; a
hospital may need t o purchase more comfortable beds for its patients. Recognizing these
needs, and a willingness and ability to 1neet them, often results in organizational purchases.
For straight rebuys, the purchase process may involve little more than a phone call or a few
clicks on a computer to order products and arrange payment and delivery. For modified
rebuys or new task purchases, the process may be much more complex.
Vendor Analysis Organizational buyers must search for, locate, and evaluate vendors of products and services
to meet theii- needs. Searching for and locating vendors is often easy since tl1ey frequently
111ake sales calls on organizations that might need their products. Ve11dors also advertise
in trade magazines and have displays at industry trade shows to increase their visibility to
organizational buyers. However, most organizational purchases begin with an online search
for information and vendors. For products and services that tl1e organization l1as previously
purchased, the orga.nization may already have developed a ]jst of approved vendors.
Organizational buyers often use a vendor analysis to evaluate possible suppliers. A venclor
analysis is the process by which organizational buyers rate each potential supplier on various
performance measures such as product quality, on-time delivery, price, payment terms, and
use of modem technology. Figure 4.3 presents a sample vendor analysis fo1111 that lists a nu111-
ber of purchase crite1ia and the weight5 one organization used to compare potential suppliers.
A formal vendor analysis can be used for at least three purposes. First, it can be used
to develop a list of approved vendors, all of which provide acceptable levels of products
and services. Organizational buyers can then select any company on the list, simplifying the
FIGURE 4.3 Sample Vendor Analysis Form
Supplier Name: _ _ _ _ _ _ _ _ _ _ _ _ _
Shipping Location: ___________ _
Quality (45%)
Defect rates
Quality of sample
Conformance with quality program
Responsiveness to quality problems
Overall quality
Delivery (25%)
Avoidance of late shipments
Ability to expand production
Performance in sample delivery
Response to changes in order size
Overall delivery
Price (20%)
Price competitiveness
Payment terms
Absorption of costs
Submission of cost savings plans
Overall price
Technology (10%)
State-of-the-art components
Sharing research & development capability
Ability and willingness to help with design
Responsiveness to engineering problems
Overall technology
5
Excellent
Chapter Four Business, Govern,nent, and Institutional Buying 69
Type of Product: _ _ _ _ _ _ _ _ _ _ _ _
Annual Sales Dollars: __________ _
4
Good
3 Satisfactory
2 Fair
1 Poor
0
N/A
Buyer: __ _ _ _ _ _ _ _ Date: ________ _
Comments: -------------------------------- - - - - --
purchase process. Second, a vendor analysis could be used to compare competing vendors;
tl1e buyers t11en select the best one on the basis of the rati11gs. This could help the organiza
tion pare down vendors to a single supplier for which a long-term, sole-sourcing relationship
could be developed. Third, a vendor analysis can be done both before and after purchases to
compare performance on evaluation criteria and evaluate the process of vendor selection.
Purchase Activities
Straight rebuys may involve a quick online order to an approved vendor or s o l e -source sup
plier. However, other types of organizational purchases can involve long time periods with
extensive negotiations on price and terms and formal contracts stating quality, delivery, and
service criteria. The complexity of the product or service, tl1e number of suppliers available,
70 Part B Marketing fnformation, Research, and Understanding the Target Market
FIGURE 4.4
Functional Areas and
Their Key Concerns in
Organizational Buying
Source: From Michael H. Morris, Leyland F. Pitt and
Earl D. Honeycutt Jr.
Business-to-Business
Marketing 3E, Sage Publications, 2001, p. 66. Reproduced with permission of Sage Publications via
Copyright Clearance Center.
SUMMARY
Functional Areas
Design and development . .
engineering
Production
Sales/marketing
Maintenance
Finance/accounting
Purchasing
Quality control
Key Concerns
Name reputation of vendor; ability of vendors to meet design specifications.
Delivery and reliability of purchases such that interruption of
production schedules is minimized.
Impact of purchased items on marketability of the company's products.
Degree to which purchased items are compatible with existing
facilities and equipment; maintenance service offered by vendor; installation arrangements offered by vendor.
Effects of purchases on cash flow, balance sheet, and income statement positions; variances in costs of materials over estimates;
feasibility of make-or-buy and lease options to purchasing.
Obtaining lowest possible price at acceptable quality levels; maintaining good relations with vendors.
Assurance that purchased items meet prescribed specifica
tions and tolerances, governmental regulations, and customer requirements.
the importance of the prodt1ct to the buying organization, and pricing all influence th.e number
of purchase activities to be performed and their difficulty. For example, an airline buying a
fleet of jumbo jets or a car rental agency buying a fleet of cars may take months or years to
negotiate and make purchases. While such buyers may have considerable leverage in nego
tiating, it should be remembered that tl1ese organizations need the prodttcts just as badly as
the sellers need to sell then1. Thus, tl1ere is often more collaboration among organizational
buyers and sellers than in the consumer market.
Postpurchase Evaluation Organizational buyers must evaluate both the vendors and the products they purchase to
determine whether the products are acceptable for future purchases or whether other sources of
supply should be found. A comparison of the performance of the vendor and products with the
criteria listed on the prior vendor analysis can be useful for this purpose. If the purchase process
goes smoothly and prodt1cts meet price a11d qt1ality criteria, then the vendor may be put on the
approved list or perhaps further negotiations can be made to sole-source with the supplier.
One problem in judging the acceptability of suppliers and products is tl1at different func
tional areas may have different evaluation criteria. Figure 4.4 presents several functional
areas of a manufacturing co1npany and their common concerns i n purchasing. Clearly,
these concerns should be considered both prior to purchasing from a particular st1pplier
and after purchasing to ensure that every area's needs are being met as well as possible.
Organizational buyers include individuals involved in purchasing products and services for
businesses, government agencies, and other institutions and agencies. The organizational
buying process is int1uenced by whether the purchase is a straight rebuy, modified rebuy, or new task purchase. It is also influenced by people in various purcl1asing roles, the orien
tation, size, and degree of centralization of the organization, the organization's purchasing
policies and procedures, and individuals' motivations and perceived roles. The organiza
tional buying process can be viewed as a series of four stages ranging fro1n organizational
need, to vendor analysis, to purchase activities, to postpurchase evaluation. It is important
that co111panies marketing to organizations understand the influences and process by which
organizations buy products and services so their needs can be met fully and profitably.
Additional
Resources
Key Terms and Concepts
Chapter Four Business, Govern,nent, and Institutional Buying 71
Anderson, James C., James A. Narus, and Das Narayandas. Business Marketing Manage,nent.
3rd ed. Upper Saddle River, NJ: Prentice Hall, 2009.
Brennan, Ross, Louise E. Canning, and Raymond McDowell. Business-to-Business Marketing.
Thousand Oaks, CA: Sage, 2007.
Dwyer, F. Robert, and John F. Tanner. Business Marketing. 4tl1 ed. ButT Ridge, IL: McGraw-Hill/
Irwin, 2009.
Hutt, Michael D., and Thomas W. Speh. Busin,ess Marketing Manctgement: B2B. 11th ed. Mason,
OH: Thon1son South-Western, 2013.
Vitale Robert, Walden1ai· Pfoertsch, and Joseph Giglierano. Business to Business Marketing. Upper
Saddle River, NJ: Prentice Han, 2011.
Business-to-business (B2B) marketjng: Marketing products and services to producers, inter,ne
diaries, government agencies, and other institutions rather than to consumers.
Buyers: In buying centers, the persons who have formal autho1ity and responsibility to select the
supplier and negotiate the terms of the contract.
Buying center: An organizational group formed from different departments which has the respon
sibility to evaluate and select products for purchase. Different 1nembers of the group may play
different roles in the process.
Deciders: In a buying center, individuals who have the formal and informal power to select or
approve the supplier that receives the contract. For routinely purchased products, the decider is
likely to be the buyer but for more co1nplex products, the decider could come fro1n R&D, engineer
ing, or quaUty control.
Gatekeepers: The people who control the flow of information to a buying center.
Influencers: In buying centers, the people who affect the buying decision usually by helping
define the specifications for what is needed.
Initiators: In buying centers, the people who start the buyi11g process b y recognizing a need or a
problem in the organization.
Modified rebuy: A type of organizational purchase that involves the consideration of a limited
number of alternatives before 1naking a selection.
NAICS: The North American Industry Classification Syste,n which provides information about
the number of establishments, sales volume, and number of e1nployees in each industry broken
dow11 b y geograpl1ic area.
New task purchase: A type of organizational purchase tl1at involves an extensive search for
infor1nation ai1d a for1nal decision process.
Sole sourcing: Organizational purchasing in which all of a type of product are obtained from a
single supplier.
Straight rebuy: A type of organizational purcl1ase that involves routinely reordering a product
from the same supplier that it had been purchased from in the past.
Users: I n a buyil1g center, the people in the organization that actually use the product to be
purchased.
Vendor analysis: The process by which organizational buyers rate each potential supplier on
various performance measures such as product quality, on-ti1ne delivery, price, payment terms, and
use of 1nodern technology.
FIGURE 5.1
A Model of the
Market Segmentation
Process
Chapter Five Market Seg1nentation 73
Delineate firm's current situation -
I
1
Determine consumer needs and wants -
I
1 ,
Divide markets on relevant dimensions -
I
1 •
Develop product positioning -
I
1
Decide segmentation strategy -
I
1 ,
Design marketing mix strategy ,-
I
DETERMINE CONSUMER NEEDS AND WANTS
As emphasized throughout tllis text, successful marketing strategies depend on discove1ing and
satisfying consumer needs and wants. In so111e cases, this idea is quite operational. To illustrate,
suppose a firm has a good deal of venture capital and is seeking t o diversify its interest into
new markets. A firm in this situation may seek to discover a broad variety of unsatisfied needs.
However, in most situations, the industry in which the firm operates specifies the boundaries
of a ·finn's need satisfaction activities. For exan1ple, a fi1111 i11 the communication industry 1nay
seek more efficient methods for serving consumers' long-dista11ce telephone needs.
As a practical n1atter, new technology often brings about an investigation of consumer needs
and wants for new or modified products and services. In these situations, the firm is seeking
the groLtp of consumers whose needs could best be satisfied by the new or modified product.
Further, at a strategic level, consumer needs and wants usually are translated into more opera
tional concepts. For instance, consumer attitudes, preferences, and benefits sought, which are
determined through marketing research, are co1nmonly used for segmentation purposes.
DIVIDE MARKETS ON RELEVANT DIMENSIONS
In a narrow sense, this step is often considered to be the whole of market segmentation
(i.e., consumers are grouped on the basis of one or more similarities and treated as a
ho1nogeneous segment of a heterogeneous total 1narket). Three important questions should
be considered here:
1. Should the segmentation be a priori or post hoc?
2. How does one determine the relevant dimensions or bases to use for segmentation?
3. What are some bases for segmenting consumer and organizational buyer markets?
74
Millions of people have mobile phones and tablets with which they can gather product infor mation, find outlets for buying products, and make purchases. It is not surprising that market ers are interested in understanding this market so that they can better serve it. Here is a recent segmentation of the mobile phone market and some of the marketing implications of it.
• Mobirati (19 percent) are younger, grew up with cell phones, and the phone is central to life. T rend high on interest in services to use phone to buy in store, accepting ads if get value in return and using information to decide social activities like where to eat.
• Mobile Professionals (1 7 percent) are both younger and older and use phone for business and personal life. Phone features are critical, and the phone is thought of as an informa tion tool. Trend high on wanting features beyond just calling and on using phone in many ways to get information they need.
• Soda/ Connectors (22 percent) are younger, communication is key, and the mobile device helps them connect socially. Trend high on feeling that text messages are just as meaningful as a "real" conversation and feeling that their phone connects them to their social world.
• Pragmatic Adopters (22 percent) are older; cell phones came later i n their lives. Learning to use beyond just calling. More functional, but still quite important because they are one of the highest-income segments.
• Basic Planners (20 percent) are older, not into mobility or technology. Use cell phone for basic calling. Trend high on using cell phone only for emergencies and only for basic calling.
Clearly these segments and their characteristics are important to marketers in relation to information search and product purchasing. In particular, the Mobirati and Mobile Professionals are key users of search and buying features of cell phones, and to some degree, are open to mobile "push" marketing in the form of advertisements. Pragmatic adopters seem to be worth pursuing because of their willingness to learn new features and adopt new functionality beyond basic calling, and also because they have high incomes.
Source: From Delbert Hawkins, David Mothersbaugh and Roger Best, Consumer Behavior: Building Marketing Strategy 12E, 2013, p. 523. Reprinted with permission of McGraw-Hill Education.
A Priori versus Post Hoc Segmentation Real-world segmentation l1as followed one of two general patten1s. An a priori segmenta
tion approach is one in which the marketing manager has decided on the appropriate basis
for segmentation in advance of doing any research on a market. For example, a manager may
decide that a market should be divided on the basis of whether people are nonusers, light
users, or heavy users of a particular product. Seg1nentation research is then conducted to
determine the size of each of these groups and their demographic or psychographic profiles.
Post hoc segmentation. is an approach in which people are grouped into segments on the
basis of research findings. For example, people interviewed concerning their attitudes or
benefits sought in a particular product category are grouped according to their responses.
The size of each of these groups and their de1nographic and psychographic profiles are
then determined.
Both of these approaches are valuable, and the question of which to use depends i n part
on l1ow well the firm knows the market for a particular product class. If through previous
research and experience a marketing manager has successfully isolated a number of key
market dimensions, then an a priori approach based on them may provide n1ore useful
information. In the case of segmentation for entirely new products, a post hoc approach
may be useful for detennining key market dimensions. However, even when using a post
hoc approach, some consideration must be given to the variables to be included in t11e
research design. Thus, some consideration must be given to tl1e relevant segme11tation
dimensions regardless of which approach is used.
Chapter Five Market Seg1nentation 75
Relevance of Segmentation Dimensions Unfortunately, there is no simple solution for determining the relevant dimensions for segmenting markets. Certainly, managerial expertise and experience are needed for selecting the appropriate dimensions or bases on which to segment particular markets. In most cases, however, at least some initial dimensions can be determined from previ ous research, purchase trends, and 1nanagerial judg1nent. For instance, suppose we wish to segment the market for all-terrain vehicles. Clearly, several dimensions come to mind for initial consideration, including sex (male), age (18 to 35 years), lifestyle (outdoors man), and income level (perhaps $30,000 to $80,000). At a minimum, these variables should be included in subsequent segmentation research. Of course, tl1e 111ost market oriented approach to segmentation is on the basis of what benefits the potential conswner is seeking. Thus, consideration and research of sought benefits are a strongly recommended approach in the marketing literature. This approach will be considered in some detail in the following section.
Bases for Segmentation A number of useful bases for segmenting consumer a.nd organizational markets are presented in Figure 5.2. This is by no means a complete list of possible segmentation variables but represents some useful bases and categories. Two commonly used approaches for segmenting markets include benefit segmentation and psychographic segmentation. We will discuss these two in some detail. We will also discuss geodemographic segmen tation, a recent development with a number of advantages for marketers.
Benefit Segmentation
T11e belief underlying this segmentation approach is tl1at the benefits people are seeking in consuming a given product are the basic reasons for the existence of true market seg ments. 1 Thus, this approach attempts to measure consumer value systems and consumer perceptions of various brands in a product class. To illustrate, Russell Haley provided the classic example of a benefit segmentation in terms of the toothpaste market. Haley identi fied five basic segments, which are presented in Figure 5.3. Haley argued that this seg mentation could be very useful for selecting advertising copy, media, commercial length, packaging, and new product design. For exa1nple, colorful packages might be appropriate for the sensory seg1nent, perl1aps aqua (to indicate fluoride) for the won·ier group, and gleaming white for the social segment because of this segment's interest in white teeth.
One study t1sed a benefit segmentation approach to segment the 1narket for bank ser vices.2 Their research was concerned with the question of whether benefit segments remain stable across time. While they fou11d son1e stability in segme11ts, there were some differ ences i11 attribute i1nportance, size, and demographics at different times. Thus, they argue for ongoing benefit segmentation research to keep track of any changes in a rnarket that might affect marketing strategy.
Benefit segmentation is clearly a market-oriented approach that seeks to identify con sumer needs and wants and to satisfy tl1em by providing products and services with the desired benefits. It is clearly very consistent with the approach to marketing suggested by the marketing concept.
Psychographic Segmentation
Whereas benefit segmentation focuses on the benefits sought by the consumer, psycho graphic segmentation focuses on consumer lifestyles. Consumers are first asked a vari ety of questions about their lifestyles and then grouped on the basis of the similarity
FIGURE 5.2 Useful Segmentation Bases for Consumer and Organizational Buyer Markets
Segmentation Base
Geographic:
Continents Global regions Countries Country regions City, county, or SMSA size
Population density Climate
Demographic:
Age Gender Family size Family life cycle Income
Education
Marital status Social:
Culture Subculture
Religion Race Nationality
Social class Thoughts and feelings:
Knowledge Involvement Attitude Benefits sought Innovativeness Readiness stage Perceived risk
Behavior:
Media usage Specific media usage Payment method Loyalty status Usage rate User status Usage situation
Combined approaches:
Psychographics Person/situation Geodemography
Segmentation Base
Company size Purchase quantity Product application Organization type Location Purchase status Attribute importance
Consumer Markets
Examples of Market Segments
Africa, Asia, Europe, North America, South America Southeast Asia, Mediterranean, Caribbean China, Canada, France, United States, Brazil Pacific Northwest, Middle Atlantic, Midwest Under 5,000 people; 5,000-19,999; 20,000-49,999; 50,000-99,999; 100,000-249,999; 250,000-499,999; 500,000-999,999; or over a million Ur.ban, suburban, rural Tropical, temperate, cold
Under 6 years old, 6 -12, 13-19, 20-29, 30-39, 40-49, 50-59, 60+ Male, female 1 -2 persons, 3-4 persons, more than 4 persons Single, young married, married with children, sole survivor Under $10,000 per year, $10,000-$19,999, $20,000-$29,999, $30,000-$39,999, $40,000- $49,999, $50,000-59,999, 60,000-69,999, 70,000+
Grade school or Jess, some high school, graduated from high school, some college, graduated from college, some graduate work, graduate degree Single, married, divorced, widowed
American, Hispanic, African, Asian, European
Jewish, Catholic, Muslim, Mormon, Buddhist European American, Asian American, African American, Hispanic American French, Malaysian, Australian, Canadian, Japanese Upper class, middle class, working class, lower class
Expert, novice High, medium, low Positive, neutral, negative Convenience, economy, prestige Innovator, early adopter, early majority, late majority, laggards, nonadopter Unaware, aware, interested, desirous, plan to purchase High, moderate, low
Newspaper, magazine, lV, Internet Sports Illustrated, Cosmopolitan, Ebony
Cash, Visa, MasterCard, American Express, check None, some, total Light, medium, heavy Nonuser, ex-user, current user, potential user Work, home, vacation, commuting
Achievers, strivers, strugglers College students for lunch, executives for business dinner Money and Brains, American Dreams, Bohemian Mix
Organizational Buyer Markets
Examples of Market Segments
Small, medium, large relative to industry Small, medium, large account Production, maintenance, product component Manufacturer, retailer, government agency, hospital North, south, east, west sales territory New customer, occasional purchaser, frequent purchaser, nonpurchaser Price, service, reliability of supply
MA_RKETING,INSIGHT Want t_o Koo.w Your VALS1M -Cate_g __ ory?· ·. . -• '• ' ..
1Cmeck lit Out Omli'me 5-2
If you are a resident of the United States or Canada, a fluent English-speaker, and age 18 years of age or older, you can learn your VALS type by completing the VALS ques tionnaire on the Internet. The web address is http://www.strategicbusinessinsights.com/ vals/presurvey.shtml. The survey takes about 10 minutes t o complete, and your VALS type will take less than 10 seconds to compute. You will get a report that includes both your primary and secondary VALS type. The VALS website has a lot of information describing the program and different types of VALS segments.
RGURE 5.3 Toothpaste Market Benefit Segments
Independent Sensory Segment Sociable Segment Worrier Segment Segment
Principal benefit sought Flavor and product appearance Brightness of teeth Decay prevention Price
Demographic strengths Children Teens, young people Large families Men
Special behavioral Users of spearmint-flavored Smokers Heavy users Heavy users
characteristics toothpaste
Brands disproportionately Colgate Macleans, Ultra Brite Crest Cheapest brand favored
Lifestyle characteristics Hedonistic Active Conservative Value-oriented
of their responses. Lifestyles are measured by asking consumers about their activities
(work, hobbies, vacations), interests (family, job, co111munity), and opinions (about
social issues, politics, business). Tl1e activity, interest, and opinion (AIO) questions
are very general in some studies but in others, at least some of the questions relate to
specific products.3
The best-known psychographic segmentation is called V ALS™. Originally developed in tl1e 1970s, VA.LS was completely redesigned on a scienti
f ic footing in the late 1980s. V ALS
explains and predicts consumer be]1avior. Strategic Business Insights, a spinoff from SRI
International, currently owns and operates V ALS.
As shown in Figure 5.4, the U.S. VALS™ framework has eight psychographic groups
based on two dimensions. The vertical dimension segments people based on the degree to wl1ich they are innovative and have resources such as income, education, s e l f -confidence,
intelligence, leadership skills, and energy. The horizontal dimension of primary motiva
tions provides context about an individual's self-perception and worldview. For example,
customers driven by knowledge and principles are motivated primarily by ideals. These
co11sumers include the Thinkers and Believers. Consum.ers driven to den1onstrate success
to their peers are motivated primarily by achievement; Achievers and Strivers. Consumers
driven by a desire for social or physical activity, variety, and risk taking are motivated
primarily by self-expression; Experiencers and Makers. Innovators and Survivors operate
outside of primary motivations. Innovators because tl1ey have the most abundant resources and may express any of the three motivations. Survivors because they have few resources,
live complacently and within their means without a strong primary motivation. Figure 5.4
gives more details about each of the eight groups.4
Marketers can purchase research data that show which VALS™ grottps are the primary
buyers of specific products and services either through propriety research projects or with
a license to V ALS and GfK MRI. This information can be used to better focus elements of
the n1arketing mix, such as pron1otion, on the best target markets. 77
78 Part B Marketing fnformation, Research, and Understanding the Target Market
FIGURE 5.4 VALS ™ Framework and Segments
Source: Strategic Business Insights (SBI); www.strategicbusinessinsights.comNALS Reprinted with permission.
Innovators
Primary motivation � -- - - -�
Ideals Achievement
Thinkers Achievers
Believers Strivers
Survivors
High resources High innovation
Self-express ion
Experiencers
Makers
low resources Low innovation
Innovators. Innovators are successful, sophisticated, take-charge people with high self-esteem. Because they have such abundant resources, they exhibit all three primary motivations in varying degrees. They are change leaders and are the most receptive to new ideas and technologies. Innovators are very active consumers, and their purchases reflect cultivated tastes for upscale, niche products and services. Image is important to Innovators, not as evidence of status or power but as an expression of their taste, independence, and personality. Innovators are among the established and emerging leaders in business and government, yet they continue to seek challenges. Their lives are characterized by variety. Their possessions and recreation reflect a cultivated taste for the finer things in life.
Thinkers. Thinkers are motivated by ideals. They are mature, satisfied, comfortable, and reflective people who value order, knowledge, and responsibility. They tend to be well educated and actively seek out information in the decision-making pro cess. They are well-informed about world and national events and are alert to opportunities to broaden their knowledge. Thinkers have a moderate respect for the status quo institutions of authority and social decorum, but are open to consider new ideas. Although their incomes allow them many choices, Thinkers are conservative, practical consumers; they look for durability, functionality, and value in the products they buy.
Achievers. Motivated by the desire for achievement, Achievers have goal-oriented lifestyles and a deep commitment to career and family. Their social lives reflect this focus and are structured around family, their place of worship, and work. Achievers live conventional lives, are politically conservative, and respect authority and the status quo. They value consen sus, predictability, and stability over risk, intimacy, and self-discovery. With many wants and needs, Achievers are active in the consumer marketplace. Image is important to Achievers; they favor established, prestige products and services that
Chapter Five Market Seg1nentation 79
FIGURE 5.4 (continued)
demonstrate success to their peers. Because of their busy lives, they are often interested in a variety of time-saving devices.
Experiencers. Experiencers are motivated by self-expression. As young, enthusiastic, and impulsive consumers, Experiencers quickly become enthusiastic about new possibilities but are equally quick to cool. They seek variety and excitement, savoring the new, the offbeat, and the risky. Their energy finds an outlet in exercise, sports, outdoor recreation, and social activities. Experiencers are avid consumers and spend a comparatively high proportion of their income on fashion, entertainment, and socializing. Their purchases reflect the emphasis they place on looking good and having "cool" stuff.
Believers. Like Thinkers, Believers are motivated by ideals. They are conservative, conventional people with concrete beliefs based on traditional, established codes: family, religion, community, and the nation. Many Believers express moral codes that are deeply rooted and literally interpreted. They follow established routines, organized in large part around home, family, community, and social or religious organizations to which they belong. As consumers, Believers are predicta ble; they choose familiar products and established brands. They favor American products and are generally loyal customers.
Strivers. Strivers are trendy and fun loving. Because they are motivated by achievement, Strivers are concerned about the opinions and approval of others. Money defines success for Strivers, who don't have enough of it to meet their desires. They favor stylish products that emulate the purchases of people with greater material wealth. Many see themselves as having a job rather than a career, and a lack of skills and focus often prevents them from moving ahead. Strivers are active consum ers because shopping is both a social activity and an opportunity to demonstrate to peers their ability to buy. As consumers, they are as impulsive as their financial circumstance will allow.
Makers. Like Experiencers, Makers are motivated by self-expression. They express themselves and experience the world by working on it-building a house, raising children, fixing a car, or canning vegetables-and have enough skill and energy to carry out their projects successfully. Makers are practical people who have constructive skills and value self-sufficiency. They live within a traditional context of family, practical work, and physical recreation and have little interest in what lies outside that context. Makers are suspicious of new ideas and large institutions such as big business. They are respect- ful of government authority and organized labor, but resentful of government intrusion o n individual rights. They are unimpressed by material possessions other than those with a practical or functional purpose. Because they prefer value to luxury, they buy basic products.
Survivors. Survivors live narrowly focused lives. With few resources with which to cope, they often believe that the world is changing too quickly. They are comfortable with the familiar and are primarily concerned with safety and security. Because they must focus on meeting needs rather than fulfilling desires, Survivors do not show a strong primary motivation. Survivors are cautious consumers. They represent a very modest market for most products and services. They are loyal t o favorite brands, especially if they can purchase them at a discount.
Geodemographic Segmentation
One problem with many segmentation approacl1es i s that although they identify types or
categories of consumers, they do not identify specific individuals or l1ouseholds within
a market. Geodemographic segmentation identifies specific households in a market by
focusing on ]ocal neighborhood geography (sucl1 as zip codes) to create classifications
of actual, addressable, 1nappable neighborhoods where co11sumers live and shop. 5 One
geodemographic system, is called Nielsen PRIZM, which stands for consumers "Potential
Ranking Index of ZIP Markets." The system classifies every U.S. neighborhood into one
of 14 groups. Eacl1 of these groups is further divided into 3 to 6 segments, with a total
of 66 distinct segments in this system. Each group and segment i s based on zip codes,
demographic information from the U.S. Census, and infor1nation on product use, media
use, and lifestyle preferences. Figure 5.5 shows a sample group with five segments. The
PRIZM system includes maps of different areas that ra11k neighborhoods on tl1eir poten
tia] to purchase specific products and services. The PRIZM seg1nentation is availab]e on
major marketing databases from leading providers.
The PRIZM system is based on the assumptions that consumers in particular neighbor
hoods are similar in many respects and that the best prospects are those who actually use a
product or otl1er consun1ers like tl1em. Marketers use PRIZ.M to better understand consu1n
ers in various markets, what they are like, where they live, and how to reach them. Tl1ese
data help marketers with target market selection, direct marketing campaigns, site selec
tion, media selection, and analysis of sales potential in various areas.
80 Part B Marketing fnformation, Research, and Understanding the Target Market
FIGURE 5.5 PRIZM Social Group U1 -Urban Uptown
Source: www.mybestsegments.com, March 25, 2013.
Group U 1 - Urban Uptown
The five segments in Urban Uptown are home to the nation's wealthiest urban consumers. Members of this social group tend t o be affluent to middle class, college educated and ethnically diverse, with above-average concentrations of Asian and Hispanic Americans. Although this group is diverse in terms of housing styles and family sizes, residents share a n upscale urban perspective that's reflected in their marketplace choices. Urban Uptown consumers tend to frequent the arts, shop at exclusive retailers, drive luxury imports, travel abroad and spend heavily on computer and wireless technology.
The Urban Uptown group consists of the following segments:
• 04. Youog Dige.rati • 07. Money and Brains • 16. Bohemian Mix
26. The Cosmopolitans • 29. American Dreams
04. Young Digerati - Young Digerati are the nation's tech-savvy singles and couples living in fashionable neighborhoods on the urban fringe. Affluent, highly educated and ethnically mixed, Young Digerati communities are typically filled with trendy apartments and condos, fitness clubs and clothing boutiques, casual restaurants and all types of bars-from juice to coffee to microbrew.
07. Money and Brains - The residents of Money & Brains seem to have it all: high incomes, advanced degrees and sophisticated tastes to match their credentials. Many of these citydwellers predominantly white with a high concentration of Asian Americans-are married couples with few children who live in fashionable homes on small, manicured lots.
16. Bohemian Mix - A collection of young, mobile urbanites, Bohemian Mix represents the nation's most liberal lifestyles. Its residents are a progressive mix of young singles and couples, students and professionals, Hispanics, Asians, African Americans and whites. In their funky rowhouses and apartments, Bohemian Mixers are the early adopters who are quick to check out the latest movie, nightclub, laptop and microbrew.
26. The Cosmopolitans - These immigrants and descendants of multi cultural backgrounds in multi-racial, multi lingual neighborhoods typify the American Dream. Married couples, with and without children, as well as single parents are affluent from working hard at multiple trades and public service jobs. They have big families, which is unusual for social group U 1.
29. American Dreams - American Dreams is a living example of how ethnically diverse the nation has become: more than half the residents are Hispanic, Asian or African American. In these multilingual neighborhoods-one in ten speaks a language other than English-middle-aged immigrants and their children live in middle class comfort.
.MARKETING INSIGHT W.ant to Know Y.our PRIZM Classification?
·c IITT ec �- It: 10 LI�' o 1TI I rm e 5-3·
You can find your PRIZM classification by going to www.MyBestSegments.com and click ing o n "ZIP Code Look-Up." By putting in your zip code (and a security code) you can find out about the segments in your neighborhood. A more detailed explanation of the seg ments can be found by clicking the "Segment Explorer" tab.
DEVELOP PRODUCT POSITIONING
GURE 5.6
Positioning Map for Automobiles
By this ti.me, tl1e firm sl1ould have a good idea of the basic segtnents of the market that could potentially be satisfied with its product. The current step is concerned with positioning the product favorably in the minds of customers relative to competitive products. Several different positioning strategies can be used. First, prodLicts can be positioned by focusing on their superiority to competitive products based on one or more attributes. For exa1n ple, a car could be positioned as less expensive (Hyundai), safer (Volvo), higher quality (Toyota), or more prestigious (Lexus) than other cars. Second, products can be positioned by use or application. For example, Campbell's soup is positioned not only as a lunch item but also for use as a sauce or dip or as a11 ingredient in main dishes. Third, products can be positioned in terms of particular types of product users. For example, sales for Johnson's Baby Shampoo increased dramatically after the company positioned the product not only for babies but also for active adults who need to wash their hair frequently. Fourth, prod ucts can be positioned relative to a product class. For example, Caress soap was positioned by Lever Brothers as a bath oil product ratl1er than as a soap. Finally, products can be positioned directly against particular competitors. For example, Coke and Pepsi and McDonald's and Btlfger King commonly position directly against each other on vari ous criteria, such as taste. The classic example of positioning is of this last type: Seven-Up positioned itself as a tasty alternative to the do111ina11t soft drink, colas.
One way to investigate how to position a product is by using a positioning m.ap, which is a visual depiction of customer perceptions of competitive products, brands, or models. It is constructed by surveying customers about various product attributes and develop ing dimensions and a graph indicating the relative position of competitors. Figure 5.6
- luxurious
• Lexus •Mercedes
Cadillac•
•BMW • Porsche
Lincoln • • Chrysler
•Acura • Buick • lnfiniti
Traditional Sporty .Chevrolet
Mercury. Ford• • Nissan •Toyota
Dodge• • Saturn
•VW •Kia
Functional
I
81
Dividing markets into segments and then selecting the best ones to serve is one of the cor nerstones of sound marketing practice. However, there are situations when target market ing has been criticized as being unethical.
• R. J. Reynolds Tobacco Company planned to target African American consumers with a new brand of menthol cigarettes, Uptown. This brand was to be advertised with sugges tions of glamour, high fashion, and night life. After criticism for targeting a vulnerable population, the company canceled plans for the brand.
• RJR planned to target white, 18- to 24-year-old "virile" females with a new cigarette brand, Dakota. It was criticized for targeting young, poorly educated, blue-collar women; and although it expanded the market to include males, Dakota failed in test markets and was withdrawn.
• Heileman Brewing Company planned to market a new brand of malt liquor called PowerMaster. Malt liquor is disproportionately consumed by African Americans and in low income neighborhoods. Criticism of this strategy led the brand to be withdrawn.
• The food industry has been criticized for many years for promoting high-fat-content foods to children.
One study suggests that whether targeting a group of consumers is unethical depends on two dimensions. The first i s the degree to which the product can harm the consumers, and the second is the vulnerability of the group. Thus, to market harmful products to vulnerable target markets is likely to be considered unethical and could result in boycotts, negative word of mouth, and possibly litigation or legislation.
Source: Kevin Freking, "Marketing t o Minors," Wisconsin State Journal, July 31, 2008, p. A7; N. Craig Smith and Elizabeth Cooper-Martin, "Ethics and Target Marketing: The Role of Product Harm and Consumer Vulnerability," Journal of Marketing, July 1997, pp. 1-20.
presents a sample positioning map for automobiles that offers marketers a way of assess
ing whetl1er tl1eir brands are positioned appropriately. For example, if Chrysler or Buick
wants to be positioned in the minds of consumers as serious competitors to Lexus, then
their strategies need to be changed to move up on this dimension. After the new strate
gies are implemented, a new positioning map could be developed to see if the brands 111oved up as desired.
Some experts argue that different positioning strategies should be used depend
ing on whether the firm is a market leader or follower and that followers ust1ally should
not attempt to position directly against the industry leader.6 The main point here is that in segmenting markets, some segments 111ight have to be forgone because a market
leading competitive product already dominates in sales and in the 1ninds of custo1ners.
Thus, a smaller or less desirable target market may have to be selected since competing
with market leaders is costly and not often successful.
DECIDE SEGMENTATION STRATEGY
82
The fir1n is now ready to select its segmentation strategy. There are four basic alternatives.
First, the firm may decide not to enter the 1narket. For example, analysis to tl1is stage may
reveal there is no viable market niche for the firm's offering. Second, the firm may decide
RGURES.7
Selecting Target
Markets: Some
Questions Marketing
Managers Should
Answer
Chapter Five Market Seg1nentation 83
In order to select the best target markets, marketing managers must evaluate market segments on a number of dimensions. Here is a list of questions managers should answer before selecting target markets.
Measurability Questions
1 . What are the appropriate bases for segmenting this market and are these bases readily measurable?
2. Are secondary data available on these bases so that the market segment can be identified and measured inexpensively?
3. If primary data are needed, is there sufficient return on investment to do the research?
4. Are specific names and addresses of people in this market segment needed; or is general knowledge of their existence, number, and geographic location sufficient?
5. Can purchases of people in this market segment be readily measured and tracked?
Meaningfulness Questions
1 . How many people are in this market segment and how frequently will they purchase our product?
2. What market share can we expect in this segment?
3. What is the growth potential of this segment?
4. How strong is competition for this market segment and how is it likely to change in the future?
5. How satisfied are customers in this market segment with current product offerings?
Marketability Questions
1. Can this market segment be reached with our current channels of distribution?
2. If new channels are needed, can we establish them efficiently?
3. What specific promotion media do these people read, listen to, or watch?
4. Can we afford to promote to these people in the appropriate media to reach them?
5. Are people in this market segment willing to pay a price that is profitable for the company?
6. Can we produce a product for this market segment and do so profitably?
not to segment but to be a mass marketer. There are at least three situations when this may
be the appropriate decision for the tirm:
1. The 1narket is so small that marketing to a portion of i t is not profitable.
2. Heavy users make up such a large proportion of the sales volume that they are the only
relevant target.
3. The brand is the dominant brand in the market, and targeting to a few seg1nents would
not benefit sales and profits.
Third, the firm may decide to market to one segment. And fourth, the firm may decide
to market to more than one segment and design a separate marketing mix for each. In any
case, the firm must have some criteria on which to base its segmentation strategy deci
sions. T11ree i111portant criteria on whic11 to base such decisions are that a viable segment
must be (1) measurable, (2) meaningful, and (3) marketa.ble.
1. Measurcible. For a segme11t to b e selected, the firm must be capable of measuring its
size and characteristics. For instance, one of the difficulties witl1 segmenting on the
basis of social class is that the concept and its divisions are not clearly defined and
measured. Alternatively, income is a much easier concept to measure.
2. Meaningful. A meaningful segment is one that is large enough to have sufficient sales
and growth potential to offer long-run profits for the firm.
3. Marketable. A marketable segment is one that can be reached and served by the flfm in
an efficient manner.
Figure 5.7 offers a list of questions marketing managers should answer when deciding
whether a market segment meets these c1iteria. Segments that do so are viable target markets for the firm's offe1ing. The firm must now give further attention to completing its marketing mix.
84 Part B Marketing fnformation, Research, and Understanding the Target Market
DESIGN MARKETING MIX STRATEGY
SUMMARY
Additional
Resources
Key Terms
and Concepts
The firm is now in a position to complete its marketing plan by finalizing the marketing
mix or mixes to be used for each segment. Clearly, selection of the target market and designing the marketing mix go hand in hand, and thus many marketing mix decisions
should have already been carefully considered .. To illustrate, the target market selected
may be price sensitive, so so1ne consideration has already been given to price levels, and
clearly product positioning has many implications for promotion and channel decisions.
Thus, while we place marketing mix design at the end of the model, many of these deci
sions are 1nade in conjunction with target market selection. In the next six chapters of this
text, marketing mix decisions will be discussed in detail.
The purpose of this chapter was to provide an overview of 1narket seg1nentation. Market
segmentation was defined as the process of dividing a market into groups of similar con
sumers and selecting tl1e most appropriate group(s) for the firm to serve. Market segmenta
tion was analyzed as a six-stage process: (1) to delineate the fi1m's current situation, (2) to
detennine consumer needs and wants, (3) to divide the market on relevant dilnensions,
(4) to develop product positioning, (5) to decide segmentation strategy, and (6) to design
marketing mix strategy.
Bolton, Rutl1 N., and Mattl1ew B. Myers."Price-Based Global Market Segmentation for Services."
Journal of Marketing, July 2003, pp. 108-128.
Dickson, Peter R., and Ja1nes L. Ginter. "Market Seg1nentation, Product Differentiation, and
Marketing Strategy." Journal of Marketing, April 1987, pp. 1-10.
Myers, James H. Seg,nentation ancl Positioning for Strcitegic Marketing Decisions. Chicago:
American Marketing Association, 1996.
Yankelovich, Daniel, and David Meer. "Rediscovering Market Seg1nentation," Harvard Business
Review, Febrt1ary 2006, JJp. 122-131.
A priori segmentation: Approach in which the marketing manager has decided on the appropriate
basis for segn1entaLion in advance of doing any research on the 1narket.
Benefit segmentation: Approach that focuses on satisfying needs and wants by grouping constun
ers on the basis of the benefits they are seeking i11 a product.
Geode1nographic segmentation: Approach that identities specific households in a 1narket by
focusing on local neighborhood geography (such as zip codes) to create classifications of actual,
addressable, mappable neighborhoods where consun1ers live and shop.
Market segmentation: The process of dividing a market into groups of similar consumers and
selecting the most appropriate group(s) for the firm to serve.
Post hoc segmentation: Approach that groups people into segments on the basis of research find
ings rather than determining the basis prior to any research.
Positioning map: A visual depiction of consumer perceptions of competitive ptoducts, brands, or
models.
Psychographic segmentation: Approach that focuses on consumer lifestyles as the basis for
segme11tation. Consumers are asked a variety of questions about their lifestyles (commonly, their
activities, intei-ests, and opinions) a11d the11 grouped on the basis of the similarity of their responses.
'l'arget market: The group or segment a company selects to serve.
V ALS: A product of SRI Consulting Business Intelligence; the best known psychograpl1ic
approach; stands for "values and lifestyles."
he Marketing Mix
6 Product and Brand Strategy
7 New Product Planning and Development
8 Integrated Marketing Communications
Part
9 Personal Selling, Relationship Building, and Sales Management
1 O Distribution Strategy
11 Pricing Strategy
Chapter
ran
Product strategy is a critical element of marketing and business strategy, since it is through
the sale of products and services that companies survive and grow. This chapter discusses
four important areas of concern in developing product strategies. First, some basic issues are
discussed, including product definition, product classification, product quality and value,
product mix and product line, branding and brand equity, and packaging. Second, the product
life cycle and its implications for product strategy are explained. Third, the product audit is reviewed, and finally, three ways to organize for product manage1nent are outlined. These
include the marketing manager system, brand manager system, and cross-functional teams.
BASIC ISSUES IN PRODUCT MANAGEMENT
86
Successful marketing depends on understanding the nature of products and basic decision
areas in product manage1nent. In this section, we discuss the definition and classification
of products, the i1nportance of product quality and value, and t11e nature of a product mix
and product lines. Also considered is the role of branding and packaging.
Product Definition
The way in which the product variable is defined can have important implications for the
survival, profitability, and long-run growth of the firm. For example, the same product
can be viewed at least tliree different ways. First, it can be viewed in terms of tl1e tangi
ble product-t11e physical e11tity or service that is offered to the buyer. Second, it can be
viewed in terms of the extended product-the tangible product along with the whole clus
ter of services that accompany it. For example, a manufacturer of computer software may
offer a 24-hour hotline to answer questions users may have or to offer free or reduced-cost
software updates, free replacement of damaged software, and a subscription to a newsletter
that d.ocuments new applications of the software. Third, it can be viewed in terms of the
generic product-the essential benefits the buyer expects to receive from the product. For
example, many personal care products bring to the purchaser feelings of self-enhancement
and security in addition to the tangible benefits they offer.
From the standpoint of the 1narketing manager, to define the product solely in terms of the
tangible product is to fall into the error of "marketing myopia." Executives who are guilty of
committing this error define their company's product too narrowly, since they overemphasize
the physical object itself. The classic example of this mistake can be found in railroad passenger
1. An audit of the firm's actual and potential resources 3. Approaches to new or potential markets
a. Financial strength a. Geographical expansion of domestic sales
b. Access t o raw materials b. New socioeconomic or ethnic groups
c. Plant and equipment c. Overseas markets
d. Operating personnel d. New uses of present products
e. Management e. Complementary goods
f. Engineering and technical skills
g. Patents and licenses
f. Mergers and acquisitions
4. State of competition
2. Approaches t o current markets a. New entries into t h e industry
a. More of the same products b. Product imitation
b. Variations of present products in terms of grades, sizes, and packages
c. Competitive mergers or acquisitions
c. New products t o replace or supplement current lines
d. Product deletions
service. Although no amount of product improvement could have staved off its decline, if the
industry had defined itself as being in the transportation business, rather than the railroad busi
ness, it might still be profitable today. On the positive side, toothpaste manufacturers have been
wil1i11g to exercise flexibility in defining their product. For years toothpaste was an oral l1ygiene
product i11 which empl1asis was placed solely on fighting tooth decay and bad breath (e.g., Crest
with fluoride). More recently, many manufacturers have recognized the need to market tooth
paste as a cosmetic item (to clean teeth of stains), as a defense against gum disease (to reduce
tl1e buildup of tartar above the gumline), as an aid for denture wearers, and as a breath fresh
ener. As a result, special-purpose brands have been designed to serve tl1ese particular needs,
such as Ultra Brite, Close-Up, Aqua-Fresh, Aim, Dental Care, and the wide variety of baking
soda, tartar-control formula, and gel toothpastes offered under existing brand names.
In line with the marketing concept philosophy, a reasonable definition of product is that
it is the sum of the physical, /JSychological, arid sociological satisfactions the buyer derives
from purchase, ownersliip, and consumption. From this standpoint, products are customer
satisfying objects that include such things as accessories, packaging, and service.
Product Classification
A product classification scheme can be useful to the marketing manager as an analytical
device to assist in planning 1narketing strategy and programs. A basic assumption underlying
such classifications is that products with com111on attributes can be n1arketed in a similar
fashion. In general, products are classed according to two basic criteria: (1) end use or
market and (2) degree of processing or physical transformation.
J. Agricultural products and raw materials. These are goods grown or extracted from the land or sea, such as iron ore, wl1eat, and sand. In general, these products are fairly
homogeneous, sold in large volu1ne, and have low value per unit or in bulk weight.
2. Orga,iizational goods. Such products are purchased by business firms for the pLirpose of
producing other goods or for running the busi11ess. This category includes the following: a. Raw 1naterials a11d semifinished goods.
b. Major and minor equipment, such as basic machinery, tools, and other processing
facilities. 87
88 Part C The Marketing MLt
c. Parts or components, which become an integral element of some other finished good.
d. Supplies or items used to operate the business but that do not become part of the
final product.
3. Consumer goods. Consumer goods can be divided into three classes:
a. Convenience goods, such as food, which are purchased frequently with minimum effort. Impulse goods would also fall into this category.
b. Shopping goods, such as appliances, which are purchased after some time and
energy are spent comparing the various offerings.
c. Specialty goods, which are unique in some way so the consumer will make a special purcl1ase effort to obtain them.
In general, the buying 1notive, buying habits, and character of the market are differ
ent for organizational goods vis-a-vis consumer goods. A primary purchasing motive for
organizational goods is, of course, profit. As mentioned in a previous chapter, organiza tional goods are usually purchased as 1neans to an e11d and not as an end in themselves.
This is another way of saying that the demand for organizational goods is a derived
demand. Organizational goods are often purchased directly from the original source with
few middlemen, because many of these goods can be bought i n large quantities; they have
high unit value; technical advice on installation and use is required; and the product is ordered according to the user's specifications. Many organizational goods are subject to
multiple-purchase influence, and a long period of negotiation is often required.
The market for organizational goods has certain attributes that distinguish it fro1n the con
sumer goods market. Much of the market is concentrated geographically, as in the case of
steel, auto, or shoe manufacturing. Certain products have a limited nu1nber of buyers; this is known as a vertical ,narket, which means that ( 1) it is narrow, because customers are restricted
to a few industries; and (2) it is deep, in that a large percentage of the producers in the mar
ket use the product. Some products, such as desktop computers, have a horizontal market,
which means that the goods are purchased by all types of firms in many different industries.
In general, buyers of organizational goods are reasonably well info1med. As noted previously,
heavy reliance is often placed on price, quality control, and reliability of supply source.
In terms of consumer products, many marketing scholars have found the convenience,
shopping, and specialty classification inadequate and have attempted eitl1er to refine it or to
derive an entirely new typology. None of these atte111pts appears to have 111et with co1nplete success. Perhaps there is no best way to deal with this problem. From the standpoint of the
marketing manager, product classification is useful to the extent that it assists in providing
guidelines for developing an appropriate marketing mix. For example, convenience goods generally require broadcast promotion and long channels of distribution as opposed to shopping goods, which generally require more targeted promotio11 and somewhat shorter
channels of distribution.
Product Quality and Value Quality can be defined as the degree of excellence or superiority that an organization's
product possesses. Quality can encompass both the tangible and intangible aspects of a
firm's products or services. In a technical sense, quality can refer to physical traits such as
features, performance, reliability, durability, aesthetics, serviceability, and conformance to
specifications. Although quality can be evaluated from ma11y perspectives, tl1e customer is
the key perceiver of quality because his or her purchase decision determines the success of
the organization's product or service and often the fate of the organization itself.
Many organizations have formalized their interest in providing quality products b y u11dertaking total-quality 111anagen1ent (TQM) programs. TQM is an orga11izationwide
co1111nitn1ent to satisfying customers by conti11uously improving every business process
involved in delivering products or services. Instead of merely correcting defects when
Chapter Six Product and Brand Strategy 89
they occur, organizations that practice TQM train and commit employees to continually
look for ways to do tl1ings better so defects and problems don't arise in the first place.
The result of this process is higher-quality products being produced at a lower cost.
Indeed, the etnphasis on quality has risen to such a level that more than 70 countries
have adopted the ISO 9000 quality system of standards, a standardized approach for
evaluating a supplier's quality system, which ca11 be applied to virtually any busi11ess.1
The tenn quality is often confused with the concept of value. Value encompasses not
only quality but also price. Value can be defined as what the customer gets in excha.nge
for what the customer gives. In other words, a customer, in most cases, receives a prod
uct in exchange for having paid the supplier for the product. A customer's perception of the value associated witl1 a product is generally based both on the degree to which the
product meets his or her specifications and the price that the customer will l1ave to pay to
acquire the product. Some organizations are beginning to shift their primary foct1s from
one that solely emphasizes quality to one that also equally encompasses the customer's
viewpoint of the price/quality trade-off. Orga11izations that are successful at this process
derive their competitive advantage from the provision of custo1ner value. I n other words,
they off er goods and services that meet or exceed customer needs at a fair price. Recall that
Chapter 1 described various strategies based on value.
Product Mix and Product Line
A firm's prodi,ct m.ix is the full set of products offered for sale by the organization; A
product mix may consist of several product lines, or groups of products that share com
mon characteristics, distribution channels, customers, or uses. A firm's product mix is described by its width a11d depth. Width. of the product mix refers to tl1e number of prod
uct lines l1andled by the organization. For example, one division of General Mills has a
widespread mix consisting of five different product lines: ready-to-eat cereals, conveni
ence foods, snack foods, baking products, and dairy products. Depth refers to the average
number of products in each line. I n its ready-to-eat cereals line, General M.ills has eight
different products. It has five differe11t products in its line of convenience foods. Tl1us, the
orga.nization has a wide prod.uct mix and deep product lines.
An integral component of product line planning revolves around the question of how
many product variants shOLLld be included in the line.2 Manufacturing costs are usually
mini1nized through large-volume production 1uns, and distribution costs tend to be lower
if only one product is sold, stocked, and serviced. At a given level of sales, profits will
usually be highest if those sales have been achieved with a single product. However, many
fi1ms offer many product variants.
Organizations offer varying products within a given product line for three reasons. First,
potential customers rarely agree on a sil1gle set of specifications regarding their "ideal
product," differing greatly in the importance and value they place on specific attributes.
For example, in the laundry detergent market, there is a 1narked split between preferences
for powder versus liquid detergent. Second, customers prefer variety. For example, a p e r son 1nay like Italian food but does not want to only eat spaghetti. Therefore, an Italian
restaurant will offer the customer a wide variety of Italian dishes to choose from. Third,
the dynamics of competition lead to multiproduct lines. As competitors seek to increase
market share, they find it advantageous to introduce new products that subseg1nent an
existing market segment by offering benefits 1nore precisely tailored to the specific needs
of a portion of tl1at segment. For example, Proctor & Ga.mble offers Jif peanut butter in a
low-salt version to target a specific subsegment of the peanut butter market.
All too often, organizations pursue product line additions with little regard for conse
quences. However, in reaching a decision on product line additions, organizations need to evaluate whether (1) total profits will decrease or (2) the quality/value associated with
current products will suffer. If the answer to either of these is yes, then the organization
A. CLASSES OF CONSUMER GOODS-SOME CHARACTERISTICS AND MARKETING CONSIDERATIONS
Type of Product
Characteristics and Marketing Considerations Convenience Shopping Specialty
Characteristics
Time and effort devoted by
consumer to shopping
Very little Considerable Cannot generalize; consumer may go
to nearby store and buy with minimum effort or may have to go to distant store
and spend much time and effort
Considerable Time spent planning the purchase
How soon want is satisfied
after it arises
Are price and quality
compared?
Price
Frequency of purchase
Importance
Marketing considerations
Length of channel
Importance of retailer
Number of outlets
Stock turnover
Gross margin
Very little
Immediately
No
Usually low
Usually frequent
Unimportant
Long
Any single store is relatively
unimportant
As many as possible
High
Low
Considerable
Relatively long
time
Yes
High
Infrequent
Often very important
Short
Important
Few
Relatively long time
No
High
Infrequent
Cannot generalize
Short to very short
Very important
Few; often only one in a market
Lower
High
Responsibility for advertising
Importance of point-of-purchase display
Brand or store name
important
Producer
Very important
Brand name
Lower
High
Retailer
Less important
Store name
Joint responsibility
Less important
Both
Importance of packaging Very important Less important Less important
Source: From Michael Etzel, Bruce Walker and William Stanton, Marketing 13£, 2004, p. 211, 214. Reprinted with permission of McGraw-Hill Education.
90
should not proceed with the addition. Closely related to product line additions are issues
associated wit11 branding. These are covered next.
Branding and Brand Equity A critical focus in marketing strategy is on building ilie company's brand and brand equity.
Marketing Insight 6-3 presents some of the most valuable worldwide brands. If you exarn
ine Marketing Insight 6 -3 you will see that you are most likely familiar with each one of
the1n. Why is tl1is so? More than lik.ely it is because of some or all of the following reasons:
1. Wl1atever iliey do, iliey do it very well (e.g., Microsoft, Mercedes-Benz).
2. They tell their story often and very well (e.g., Gillette, GE).
3. Customers see the brand wherever they shop (e.g., McDonald's, Coca-Cola).
4. The brand l1as a distinct personality, in other words, they stand for something
(e.g., Disney, Louis Vuitton).
B. CLASSES OF ORGANIZATIONAL PRODUCTS-SOME CHARACTERISTICS
AND MARKETING CONSIDERATIONS
Characteristics and Marketing Considerations
Example
Characteristics
Unit price
Length of life
Quantities purchased
Frequency
of purchase
Standardization
of competitive products
Quantity of
supply
Marketing considerations
Nature of
channel
Negotiation
period
Price competition
Presale/postsale
service
Promotional activity
Brand preference
Advance buying contract
Type of Product
Fabricating Raw Parts and Accessory Operating Materials Materials Installations Equipment Supplies
Iron ore Engine blocks Blast furnaces Storage Paper clips
racks
Very low Low Very high Medium Low
Very short Depends on Very long Long Short
final product
Large Large Very small Small Small
Frequent Infrequent Very Medium Frequent
delivery; purchase, but infrequent frequency long-term frequent delivery
purchase contract
Very much; Very much Very little; Little Much
grading is custom made important
Limited; Usually no No problem Usually no Usually no
supply can problem problem problem be increased
slowly or not at all
Short; no Short; Short; no Middlemen Middlemen
middlemen middlemen for middlemen used used small buyers
Hard to Medium Long Medium Short
generalize
Important Important Not Not main Important important factor
Not important Important Very important Important Very little
Very little Moderate Sales people Important Not too very important important
None Generally low High High Low
Important; Important; Not usually Not usually Not usually long-term long-term used used used
contracts used contracts used
The brand name is perhaps the single most important element on the package, serv
ing as a unique identifier. Specifically, a brand is a name, term, design, symbol, or any
other feature tl1at identifies one seller's good or service as distinct from those of other
sellers. The legal term for brand is trademark. 3 A good brand name can evoke feelings of
trust, confidence, security, and strength. To illustrate, consider the case of Bayer aspirin.
Bayer can be sold at up t o two times the price of generic aspirin due t o the strength of its
brand iinage. 91
MARKETING INSIGHT How M.uch ls.a Bra_nd Worth: Best Global
92
. . .
. .
B 1
�amds' :-;20·tt 2· �egor.t� 6�3
2012 Country Brand Rank 2011 Rank Brand of Origin Sector Value (SM)
1 1 Coca-Cola United States Beverages 77,839
2 17 Apple United States Electronics 76,568
3 2 IBM United States Business services 75,532
4 4 Google United States Internet services 69,726
5 3 Microsoft United States Computer software 57,853
6 5 GE United States Diversified 43,682
7 6 McDonald's United States Restaurants 40,062
8 7 Intel United States Electronics 39,385
9 19 Samsung South Korea Electronics 32,893
10 11 Toyota Japan Automotive 30,280
11 12 Mercedes-Benz Germany Automotive 30,097
12 15 BMW Germany Automotive 29,052
13 9 Disney United States Media 27,438
14 14 Cisco United States Business services 27,197
15 12 HP United States Electronics 26,087
16 13 Gillette United States FMCG 24,898
17 16 Louis Vuitton France Luxury 23,527
18 20 Oracle United States Computer software 22,126
19 8 Nokia Finland Electronics 21,009
20 26 Amazon United States Retail 18,625
Source: lnterbrand's Best Global Brands 2012 Report, www.bestglobalbrands.com. Reprinted with perm1ss1on.
Many companies make use of manufacturer branding strategies in can·ying out market
and product development strategies. Tl1e line extension approach uses a brand name to
facilitate entry into a new market segment (e.g., Diet Coke and Liquid Tide). An alternative
to line extension is brand extension. In brand exte,zsion, a current brand name is used to
enter a completely different product class (e.g., Jello pudding pops, Ivory shampoo).4
A third form of branding is francliise extension or family branding, whereby a com
pany attaches the corporate name to a product to enter either a new market segment or a
different product class (e.g., Honda lawnmower, Toyota Lexus). A final type of branding
strategy that is becoming more and 1nore co1nmon is dual branding. A dual branding (also
known as joi11t or cobranding) strategy is one in which two or more branded products are
integrated (e.g., Bacardi rum and Coca-Cola, Long John Silver's and A&W Root Beer,
Archway cookies and Kellogg cereal, US Airways and Bank of America Visa). The logic
bel1ind this strategy is that if one brand nan1e on a product gives a certain signal of quality,
then the presence of a second brand name on the product should result in a signal that is at
least as powerful as, if not more powerful than, the signal in the case of the single brand
name. Each of the preceding four approaches is an attempt by companies to gain a com
petitive advantage by 1nakjng use of its or others' established reputation, or both.
Compa11ies may also choose to assign different brand na1nes to eacl1 product. This is
known as ,nultibranding strategy. By doing so, the firtn makes a conscious decision to allow
the product to succeed or fail on its own merits. Major advantages of using multiple brand
names are that (1) the firm can distance products from other offerings it markets; (2) the i1nage of one product (or set of products) is not associated with otl1er products the compa.ny
markets; (3) the product(s) can be targeted at a specific market seg1nent; and (4) should the
product(s) fail, the probability of failure impacting on other company products is minimized.
FIGURE 6.1
Elements of Brand Equity
Source: Reprinted with permission of Simon & Schuster Publishing Group from the Free Press edition
of Managing Brand equity: Capitalizing on the Value of a Brand Name by David A. Aaker. Copyright© 1991 by David A. Aaker. All rights
reserved.
Chapter Six Product and Brand Strategy 93
For example, many consumers are unaware that a number of different brands of laundry
detergent are all 1narketed by Procter & Gamble. The major disadvantage of this strategy i s tl1at because 11ew na1nes are assigned, there is 110 consumer brand aware11ess and significant amounts of money must be spent familiarizing custo1ners with new brands.
Increasingly, companies are finding that brand names are one of the most valuable assets
they possess. St1ccessful extensions of an existing brand can lead to additional loyalty and
associated profits. Conversely, a wrong extension can cause damaging associations, as perceptions linked to the brand name are transferred back from one product to the other.5
Brand equity can be viewed as the set of assets ( or liabilities) linked to the brand that add ( or
subtract) value.6 The value of these assets is dependent upon the consequences or results of
the marketplace's relationship with a brand. Figure 6.1 lists the elements of brand equity.
Brand equity is determ.ined by the consumer and is the cul1nination of the consumer's
assessment of the product, the company that manufactures a.nd markets the product, and all
other variables that impact on the product between manufacture and consumer consumption.
Before leaving the topic of manufacturer brands, it is important to note that, as with
consumer products, orgaruzational products also can possess brand equity. However, sev
eral differences do exist between tl1e two sectors. 7 First, organizatio11al products are usu
ally branded with firm names. As a result, loyalty (or disloyalty) to the brand tends to be
of a more global nature, extending across all the firm's product lines. Second, because firm
versus brand loyalty exists, attempts to position new products in a manner differing from
existing products may prove to be difficult, if not impossible. Finally, loyalty to organi
zational products enco1npasses not only the firm and its products but also the distribution
channel members employed to distribute the product. Therefore, attempts to establish or
change brand image must also take into account distributor image.
Brand loyalty
Name awareness
Provides value to customer by enhancing customer's
• Interpretation/processing o f information
• Confidence in the purchase decision
• Use satisfaction
Perceived quality
Brand equity
Name symbol
Brand associations
Other proprietary brand assets
Provides value to firm by enhancing
• Efficiency and effectiveness of marketing programs
• Brand loyalty
• Prices/margins
• Brand extensions
• T rode leverage
• Competitive advantage
MARKETING INSIGHT O.ualities of a Good Brand Nam.e
94
1. The name should suggest the product benefits. Names such as Easy Off ( oven cleaner) and PowerBook (laptop computer) clearly suggest the benefits of purchasing the product.
2. The name should be memorable, distinctive, and positive. Many automobiles such as Mustang, Eagle, Firebird, and Bronco have strong names.
3. The name should fit the company or product image. Sharp (audio and video func tions), Mustard's Last Stand (hot dogs), and Paddy O'Furniture (patio furniture) are some examples.
4. The name should have no legal restrictions. For example, the U.S. Food and Drug Administration discourages the use of word heart in food brand names. Also, since brand names often need a corresponding address on the Internet, the choice may be compli cated because millions of domain names have already been selected.
5. The name should be simple (such as Bold detergent and Sure deodorant), and emo- tional (Beautiful, Opium, and Obsession perfumes).
Source: Adapted from Roger A. Kerin, Steven W. Hartley, Eric N. Berkowitz, and William Rudelius, Marketing, 11th ed. (Burr Ridge, IL: McGraw-Hill, 2013), chap. 11. Also see Kevin Lane Keller, Strategic Brand Management, 4th ed. (Upper Saddle River, NJ: Prentice Hall, 2012), chap. 4.
As a related branding strategy, many retail firms produce or market their products under
a so-called private label. For example, Kmart has phased in its own store-brand products
to compete with the national brands. There's Nature's Classics, a line of fancy snacks and
cookies; Oral Pure, a lit1e of dental care products; Prevail house cleaners; B.E., a Gap-style
line of weekend wear; and Benchmark, a line of "made in the U.S.A." tools. Such a strat
egy is highly important in industries where middlemen have gained control over distrib1L
tion to the co11sumer. The growtJ, of the large discount and specialty stores, such as Kmart,
Walmart, Target, The Gap, Li1nited, and otl1ers, has accelerated the develop1nent of pri
vate brands. If a manufacturer refuses to supply certain middlemen with private branded
merchandise, the alternative is for these middle1nen to go into the manufacturing business,
as in the case of Kroger supermarkets.
Private label products differ 1narkedly from so-called generic products tl,at sport labels
such as "beer," "cigarettes," and "potato chips." Today's house brands are packaged in
distinctively upscale containers. The quality of the products used as house brands equals
and sometimes exceeds those offered by name brands. While generic products were posi
tio11ed as a means for consumers to struggle throt1gh recessionary times, private label
brands are being marketed as value brands, products that are equivalent to national brands
but are priced much lower. Private brands are rapidly growing in popularity. For example,
it only took JCPenney Company, Inc., five years to nurture its private-label jeans, the
Arizona brand, into a powerhouse with annual sales surpassing $500 million.
Consolidation within tl1e supermarket industry, growth of super stores, and height
ened product marketing are poised to strengthen private brands even further. However,
these gains will not come without a fight from national manufacturers who are under
taking aggressive actions to defend their brands' market share. Some l1ave significantly rolled back prices, while others have instituted increased promotional campaigns. The ulti-
1nate winner in this ongoing battle between private (store) and manufacturer (national)
brands, not surprisingly, should be the consumer who is able to play off these store brands
against national brands. By shopping at a mass merchandiser like Walmart or Walgreens,
consumers are exposed to and able to choose fro1n a wide array of botl1 national and store
brands, thus giving the1n the best of both worlds: value and variety.
MARKETING, INSIGHT A Br.and R:eport Card
Many different factors work together to make a strong brand. Brand managers often focus on only one or two of these factors. Here is a list of several characteristics shared by the world's strongest brands that can be used to assess the strengths of a brand and to identify points of improvement.
Characteristic
Delivers benefits desired by customers.
Stays relevant.
Prices are based on value.
Well-positioned relative to competitors.
Is consistent.
The brand portfolio makes sense.
Marketing activities are coordinated.
What the brand means to customers is well understood.
Is supported over the long run.
Sources of brand equity are monitored.
Examples
Starbucks offers "coffee house experience," not just coffee beans, and monitors bean selection and roasting to preserve quality.
Gillette continuously invests in major product improvements (MACH3), while using a consistent slogan: "The best a man can get."
P&G reduced operating costs and passed on savings as "everyday low pricing," thus
. .
growing margins.
Saturn competes on excellent customer service, Mercedes on product superiority. Visa stresses being "everywhere you want to be."
Michelob tried several different positionings and campaigns between 1970 and 1995, while watching sales slip.
The Gap has Gap, Banana Republic, and Old Navy stores for different market segments; BMW has the 3-, 5-, and ?-series.
Coca-Cola uses ads, promotions, catalogs, sponsorships, and interactive media.
Bic couldn't sell perfume in lighter-shaped bottles; Gillette uses different brand names such as Oral-B for toothbrushes to avoid this problem.
Coors cut back promotional support in favor of Coors Light and Zima, and lost about 50% of its sales over a four-year period.
Disney studies revealed that its characters were becoming "overexposed" and some times used inappropriately. It cut back on licensing and other promotional activity as a result.
Sources: Kevin Lane Keller, "The Brand Report Card," Harvard Business Review, January-February 2000, pp. 147-157; Merle Crawford and Anthony DiBenedetto, New Product Management, 10th ed. (Burr Ridge, IL: McGraw-Hill/Irwin, 2011 ), p. 418.
95
96
Opportunity to Add Value
Promoting
Protecting
Enhancing product
Some Decision Factors
Link product to promotion
Branding at point of purchase or consumption
Product information
For shipping and storing
From tampering
From shoplifting
From spoiling
The environment
Convenience in use
Added product functions
Examples
The bunny on the Energizer battery package is a reminder that it "keeps going and going."
Coke's logo greets almost everyone each time the refrigerator is opened.
Nabisco's nutrition label helps consumers decide which cookie to buy, and a UPC code reduces checkout time and errors.
Sony's MP3 player is kept safe by Styrofoam inserts.
Tylenol's safety seal prevents tampering.
Cardboard hang-tag on Gillette razor blades is too large to hide in hand.
Kraft's shredded cheese has a resealable zipper package to keep it fresh.
Tide detergent bottle can be recycled.
The package for Better Oats brand oatmeal includes a built-in measuring cup pouch so consumers don't need a measuring cup.
Plastic tub is useful for refrigerator leftovers after the Cool Whip is gone.
Source: From William Perreault, Jr., Joseph Cannon and E. Jerome McCarthy, Basic Marketing 7 8£, 2011, p. 241 Reprinted with permission of McGraw-Hill Education.
Packaging Distinctive or unique packaging is one method of differentiating a relatively homogeneous
_product. To illustrate, shelf-stable microwave dinners, pumps rather than tubes of tooth
paste or bars of soap, and different sizes and designs of tissue packages are atte1npts to
differentiate a product through packaging cl1anges and to satisfy consumer needs at the
san1e time.
In other cases, packaging changes have succeeded in creating new attributes of value
in a brand. A growing number of 1nanufacturers are using green labels or packaging their
products totally in green wrap to signify low- or no-fat content.
Chapter Six Product and Brand Strategy 97
Finally, packaging changes can make products urgently salable to a targeted segment. For example, tl1e products in the Gillette Series grooming line, including shave cream,
razors, aftershave, and skin conditioner, come in ribbed, rounded, metallic-gray shapes,
looking at once vaguely sexual and like precision engineering. 8
Marketing managers must consider both the consumer and costs in making packaging
decisions. On on.e hand, the package must be capable of protecting the product through the channel of distributio11 to the consumer. In addition, it is desirable for packages to have a
convenient size and be easy to open for the consumer. For example, single-serving soups
and zip-lock packaging i n cereal boxes are attempts by manufacturers to serve consumers
better. Hopefully, the package is also attractive and informative, capable of being used as a con1petitive weapon to project a product's image. However, maximizing these objectives
may increase the cost of the product to such an extent that consumers are no longer will
ing to purchase it. Thus, the 1narketing manager must determine the optimal protection, convenience, positioning, and promotional strengths of packages, subject to cost constraints.
PRODUCT LIFE CYCLE
FIGURE 6.2
The Product Life
Cycle
A firn1's product strategy must take into account the fact that products l1ave a life cycle.
Figure 6.2 illustrates this life-cycle concept. Products are introduced, grow, mature, and
decline. This cycle varies according to industry, product, technology, and market. Marketing
executives need to be a\vare of the life-cycle concept because it can be a valuable aid i n developing marketing strategies.
During the introduction phase of the cycle, there are usually l1igh production and marketing
costs, and since sales are only beginning to rnaterialize, profits are low or nonexistent. Profits
increase and are positively correlated with sales during the growth stage as the market begins trying and adopting the product. As the product matures, profits for the initiating fmn do not keep pace witl1 sales because of competition. Here the seller may be forced to "re111arket" the
Total market
New product features sales
New uses
New markets
"' I
� Total 0 Status quo -
market -
profit New product features
t New uses
New markets
Introduction
/ Growth Maturation Decline
or continued expansion
Status quo
Time
Strategy Dimension
Basic objectives
Product
Pricing
Channels
Promotion
98
Marketing Strategy .lmplicatio.ns of tl1e P.�od·ueit Litie·· C�•C:iHe· 6�1·
Life-Cycle Stage
Introduction Growth
Establish a market Build sales and
for product type; market share;
persuade early develop
adopters to buy preference for brand
Provide high quality; Provide high
select a good brand; quality; add
get patent or services to
trademark protection enhance value
Often high to recover Somewhat high
development costs; because of
sometimes low to heavy demand
build demand rapidly
Limited number of Greater number
channels of channels to meet demand
Aimed at early Aimed at wider
adopters; messages audience;
designed to educate messages focus
about product type; on brand
incentives such as benefits; for
samples and coupons consumer
to induce trial products, emphasis on
advertising
Maturity
Defend brand's
share of market; seek growth by
luring customers from competitors
Improve quality;
add features to distinguish brand
from competitors' brands
Low, reflecting
heavy competition
Greater number
of channels and more incentives
to resellers
Messages focus on differentiating
brand from its competitors'
brands; heavy use of incentives such
as coupons t o induce buyers
to switch brands
Decline
Limit costs or
seek ways to
revive sales and profits
Continue
providing high quality to maintain
brand's reputation; seek ways to make
the product new again
Low to sell off . .
rema1n1ng inventory or high
to serve a niche market
Limited number
of channels
Minimal, to keep costs down
product, which may involve making price concessions, increasing product quality, or expand
ing outlays on advertising and sales promotion just to maintain market share. At some point
sales decline, and the seller 1nust decide whetl1er to (1) drop the product, (2) a]ter the product,
(3) seek new uses for t11e product, ( 4) seek new markets, or (5) continue with more of the same.
The usefulness o f the product life-cycle concept is primarily that it forces management
to take a long-range view of marketing planning. In doing so, it should become clear that
shifts in phases of the life cycle correspond to changes in the market situation, competi
tion, a11d demand. Thus, the astute 1narketing manager should recognize the necessity of
altering the marketing mix to meet these changing conditions. It is possible for 1nanagers
to undertake strategies that, in effect, can lead to a revitalized product life cycle. For exam
_ple, past advancements in technology led to the replacement of rotary dial telepl1ones by
touch-tone, push-button phones. Today, even newer technology has enabled tl1e cordless
and cellular pl1one to replace the traditional touch-tone, push-button phone. When applied
with sound judgment, the life-cycle concept can aid in forecasting, pricing, advertising,
product planning, and other aspects of marketing management. However, the marketing
1nanager must also recognize that the life cycle is purely a tool for assisting in strategy
development and not let the life cycle dictate strategy development.9
FIGURE 8.3
Adopter Categories
Chapter Six Product and Brand Strategy 99
As useful as the product life cycle can be to managers, it does have limitations that
require it t o be used cautiously in developing strategy. For one thi11g, the length of time a
product will remain in each stage is unknown and can't be predicted with accuracy. Thus,
while each stage will likely occur for a successful product, marketers can't forecast when
one stage will end and another will begin in order to adapt their strategies at the approp1i
ate ti1ne. Also, they may 1nisjudge when a stage is ending and imp1e1nent an inappropriate
strategy. For example, 1narketers who believe their products are ending the maturity stage
may cut protnotion costs and thus push the product into decline, whereas the product might
have continued to sell if promotion had been maintained and altered.
Another limitation is that not all products go through the product life cycle in the same way.
For example, many products are failures and do not have anything approaching a complete
life cycle. Several variations of the life cycle also exist, two of which are fasluons and fads.
Fashions are accepted and popular product styles. Their life cycle involves a distinctive
ness stage in which trendsetters adopt the style, followed b y an emulation stage in which
1nore custon1ers purchase tl1e style to be the trendsetters. Next is the economic stage, in
which the style becomes widely available at m a s s -market prices. Many fashions, such as
skirt length and designer jeans, lose popularity, then regain it and repeat the fashion of
cycle. The fashion cycle is clearly visible in clothing, cosmetics, tattoos, and body piercing.
Fads are products that experience an intense but brief period o f popularity. Tl1eir life
cycle rese111bles the basic product life cycle but in a very compressed form. It is usually so
brief that competitors have no chance to capitalize on the fad. Some fads may repeat their
popularity after long lapses.
Product Adoption and Diffusion Obviously not all customers immediately purchase a product in the introductory stage of
the product life cycle. Tl1e shape of tl1e life-cycle curve indicates that 1nost sales occur
after the product has been available for awhile. The spread of a product through the popu
lation is known as the diffusion of innovation, as illustrated in Figure 6.3, which presents
five adopter categories.
Tl1e first category is innovators, tl1ose who are the first to buy a new product. When
innovators are consumers, they tend to be people who are venturesome and willing to take
risks. When innovators are organizational buyers, they tend to be organizations that seek to
remain at the cutting edge through the use of the latest technology and ideas.
Innovators (2.5%)
Early Adopters ( 13.5%)
Early Majority
(34%)
Late Majority
(34%)
Laggards (16%)
100 Part C The Marketing Mix
If the experience of innovators is favorable, early adopters begin to buy. These buy
ers, wl10 are respected social leaders and above average in education, influence the next
group. Influenced by what early adopters l1ave, the rest of the market begi.J1s to get inter
ested in the product. The biggest category of buyers is divided into groups called the early
majority and late majority. Members of the early majority tend to avoid risk and to 1nake
purchases carefully. They also have 1nany informal contacts. Members of the late majority
not only avoid risks, but are cautious and skeptical about new ideas. Eventually, the prod
uct becomes commonplace, and even laggards are ready to buy. Laggards are reluctant to
make changes and are comfortable with traditional products. They also have a fear of debt,
but may eventually purchase a well-established brand.
THE PRODUCT AUDIT
The product audit is a marketing management technique whereby tl1e company's current
product offerings are reviewed to ascertain whether each product should be continued as
is, improved, modified, or deleted. The audit is a task that should be carried out at regular
intervals as a matter of policy. Product aL1dits are the responsibility of the prodL1ct manager
unless specifically delegated to someo11e else.
Deletions
In today's environment, a growing number of products are being introduced each year that
are co1npeting for limited shelf space. This growth is primarily due to (1) new knowl
edge being applied faster, and (2) the decrease in time between product introductions (by
a given organization). 10 In addition, companies are not consistently removing products
from tl1e market at tl1e sam.e time tl1ey are introducing new products. Tl1e result is a situ ation in which too n1any products are fighting for too little shelf space. 011e of the main
purposes of the product audit is to detect sick products and then bury them. Rather than let
the retailer or distributor decide which products should remain, organizations themselves
should take the lead in developing criteria for deciding which products should stay and
which should be deleted. Some of the more obvious factors to be considered are
Sales trends. How have sales moved over time? What has happened to market share?
Why have sales declined? What changes in sales have occt1rred in competitive products
both in our line and in those of other manufacturers?
Profit contribution. What has been the profit contribution of this product to the com
pany? If profits have declined, how are these tied to price? Have selling, promotion,
a11d distribution costs risen out of proportion to sales? Does t11e product require exces
sive management tune and effort?
Product life cycle. Has the product reached a level of maturity and saturation in the
market? Has new technology been developed that poses a threat to the product? Are
more effective substitutes on the market? Has the product outgrown its usefulness?
Can tl1e resources used on this product be put to better use?
Customer migratio11 patterns. If the product is deleted, will custo1ners of this product
switch to other substitute products 111arketed by our firm? In total, will profits associ
ated with our line increase due to favorable switching patterns?
The preceding factors should be used as guidelines for making the final decision to
delete a product. Deletion decisions are very difficult to make because of their poten
tial impact on customers and the firm. For example, elirninating a product may force a
company to lay off s01ne employees. There are other factors to consider as well, such as
keeping consumers supplied with replacement parts and repair service and maintaining the
goodwill of distributors who have an inventory of the product. The deletion plan should
also provide for clearing out of stock in question.
Product Improvement
Chapter Six Product and Brand Strategy 101
One of the other important objectives of the audit i s to ascertain whether to alter the prod
uct in some way or to leave things as they are. Altering the product means changing one or
more of its attributes or marketing dimensions. Attributes refer mainly to product features,
design, package, and so forth. Marketing dimerisions refer to such things as price, promo
tion strategy, and channels of distribution.
It is possible to look at the product audit as a management device for controlling the
product strategy. Here, control means feedback on product performance and co1Tective action
in the fonn of product improvement. Product improvement is a top-level 1nanagement deci
sion, but the irlformation needed to make the improvement decision may come from the
const1mer or the middlemen. Advertising agencies or consultants often make sugges
tions. Reports by the sales force should b e structured i n a way to provide management
with certain types of product infonnation; in fact, these reports can b e the fir1u's most
valuable product-improvement tool. Implementing a product improvement decision will
often require the coordinated efforts of several specialists, plus some research. For exa1n
ple, product design improvement decisions involve engineering, manufacturing, account
ing, and marketing. Wl1en a fim1 becomes aware that a product's design can be improved,
it is not always clear how consu1ners will react to the various alterations. To illustrate, in
blind taste tests, the Coca-Cola Company found tl1at consumers overwhelnungly preferred
tl1e taste of a refor1nulated, sweeter new Coke over old Coke. However, when placed on
the market in labeled containers, new Coke turned out to be a failure due to consumers'
emotional attach1nents to the classic Coke. Consequently, it is advisable to conduct some
market tests in realistic settings.
A discussion of product improve1nent would not be complete without taking into account
the benefits associated with benchmarking, especially as they relate to the notion of the
extended product, tl1e tangible product along with the whole cluster of services that accom
pany it. 11 T11e formal definition of benchmarking is the continuous process of measuring
products, services, and practices against those of the tougl1est competitors or companies
renowned as leaders. In other words, benchmarking involves learning about best practices
fro1n best-performing companies-how they are achieving strong performance. It is an effective tool organizations use to itnprove on existing products, activities, functions, or pro
cesses. Major corporations such as IBM, AT&T, DuPont, Ford, Eastman Kodak, Miliken,
Motorola, and Xerox all have numerous benchmarking studies i n progress. Benchmarking
can assist co1npanies in many product improvement efforts, including (1) boosting prod
uct quality, (2) developing more user-friendly products, (3) improving customer order processing activities, and ( 4) sl1ortening delivery lead times. In the case of benchmarking,
companies can achieve great success by copying others. Thus, by its very nature, bench
marking becomes an essential element in the ongoing prodt1ct auditing process.
ORGANIZING FOR PRODUCT MANAGEMENT
Whether managing existing products or developing new products (the subject of the 11ext
chapter), organizations that are successful have one factor in common: They actively man
age both types. Obviously, i f a firm has only one product, it gets everyone's attention. But
as the number of products grow and the 11eed to develop 11ew products becomes evide11t,
some rational 1nanage1nent system is necessary.
Under a marketirig-man.ager system, one person is responsible for overseeing an entire
product line with all of the ft1nctional areas of marketing such as research, adve1tising, sales
promotion, sales, and prodttct planning. This type of system is popular in organizations with a line or lines of similar products or one do1ninant product line. Sometimes referred
102 Part C The Marketing Mix
AGURE&.4
Some Requirements for the Effective Use of Cross-Functional T earns in Product Management and New Product Development
to as category management, the marketing manager system is seen as being superior to a
brand m.anager system because one manager oversees all bra11ds within a particular line,
thus avoiding brand competition. Organizations such as PepsiCo, Purex, Eastlnan Kodak,
and Levi Strauss use some form of marketing-manager system.
Under a brand-manager system, a 1nanager focuses on a single product or a very small
groLtp of new and existing products. Typically, this person is responsible for everything from
marketing research and package design to advertising. Often called a product-management
syste1n, the brand-1nanager system has been criticized on several dimensions. First, brand
managers often have difficulty because they do not have authority commenst1rate with
their responsibilities. Second, they often pay inadequate attention to new products. Finally,
they are often more concerned with their own brand's profitability than with the profitabil
ity of all of the organization's brands. These criticisms are not aimed at people but at the
systern itself, which may force brand managers into the preceding behaviors. Despite its
drawbacks, organizations such as RJR Nabisco and Black & Decker have used this system.
Successful riew products often come from organizatio11s that try to bring all the capabil
ities of the organization to bear on the problems of customers. Obviously, this requires tl1e
cooperation of all the various functional departments in the organization (see Figure 6.4).
Thus, the use of cross-functional teams has become an important way to manage the
development of new products. A venture team is a popular 1netl1od used in such organiza
tions as Xerox, Polaroid, Exxon, IBM, Monsanto, and Motorola. A venture tea1n is a cross
functional team responsible for all the tasks involved in the development of a new product.
Once the new product is already launched, the team may turn over responsibility for
managing the product to a brand 1nanager or product manager or it may manage the new
product as a separate busi11ess.
T11e use of cross-functional tean1s in product management and new product devel
opment is increasing for a very simple reason: Organizations need the contributions of
all functions and therefore require their cooperation. Cross-functional teams operate
independently of the organization's functional departtnen ts bt1t inc 1 ude members from each
function. A tea1n might include a member fro1n engineering, 1narketi11g, finance, senrice,
and designers. Some organizations even include important outsiders (e.g., parts suppliers)
on cross-functional teams. Finally, a global virtual team is a cross-functional tea1n that
A growing number of organizations have begun using cross-functional teams for product management and new product development. Having representatives from various departments clearly has its advantages, but most important, effective teams must have the nurture and support o f management. Some requirements for effective teams are
1. Commitment of top management and provision of clear goals. Organizations that successfully use cross-functional teams in product management or development have managers who are deeply committed to the team concept. As a result, high-performance teams have a clear understand ing of the product management and development goals of the organization. The importance of these goals encourages individuals to defer their own functional or departmental concerns to team goals.
2. Trust among members. For cross-functional teams to work, a high level of trust must exist among members. The climate of trust within a team seems to be highly dependent on mem bers' perception of management's trust of the group as a whole.
3. Cross-functional cooperation. If a team is to take responsibility and assume the risk of product development, its members will need detailed information about the overall operation of the organization. It often requires that functional units be willing to share information that previ ously was not shared with other departments.
4. Time and training. Effective cross-functional teams need time to mature. They require massive planning and intense and prompt access to resources, financial and other. Because members have to put aside functional and departmental loyalties and concerns, training is usually necessary.
SUMMARY
Additional Resources
Key Terms and Concepts
Chapter Six Product and Brand Strategy 103
operates across time, geographic distance, organizational boundaries, and cultures, whose
members com1nunicate mainly through electronic technology (e.g., s1nartphone, laptop,
texting, e-mail, video conferencing, etc.). With infrequent fac e -to-face contact, these teams
are faced with the challenge of building and maintaining trust as they work toward accom
plishing the team's objectives. In particular, miscommunication between team members
fro1n diverse cultures and backgrounds can create a roadblock to the development of trust
and ultimately, effective functioning. Figure 6.4 presents some prerequisites for the use of
cross-functional teams in managing existing products and developing new products.
This chapter has been concerned with a central element of marketing management
product strategy. Tl1e :first part of the chapter discussed so1ne basic issues in product strat
egy, i11cluding product definitio11 and classification, product quality a11d value, product 1nix
and product lines, branding and brand equity, and packaging. The product life cycle was
discussed as well as the product audit. Finally, three methods of organizing for product
management were prese11ted. Although product considerations are extremely importa11t,
re1nember that the product is only one ele1nent of the tnarketing mix. Focusing on product
decisions alone, without consideration of the other marketing n1ix variables, would be an
ineffective approach to marketing strategy.
Calkins, Ti1n. Defending Your Brand. New York: Palgrave Mac1niUan, 2012.
Gladwell, Malcolm. The TipJJing Point. New York: Book Bag Books, 2006.
Keough, Donald R. The Ten Commandnients oj"Business Failure. New York: Portfolio
Books, 2008.
Knapp, Duane. The Brand Proniise. New York: McGraw-Hill, 2008.
Pullig, Chris, Carolyn J. Si1n1nons, and Richard G. Netemeyer. "Brand Dilution: Whe11 Do New
Brands Hutt Existing Brands?" Journal of Marketing, April 2006, pp. 52-64.
Rust, Roland, Debra Viana Tho,upson, and Rebecca Tho,npson. "Defeating Feature Fatigue."
Harvard Business Review, February 2006, pp. 98-109.
Van Praet, Douglas. Unconscious Branding. New York: Palgrave Macmillan, 20 L2.
Brand: A name, term, desig11, sy1nbol, or any other feature that identifies one seller's good or s e r
vice as distinct from those of other sellers. The legal term for brand is traden-iark.
Brand equity: The set of assets (or liabilities) linked to the brand that add (or subtract) value. The
value of tl1ese assets is dependent upon tl1e consequences o r results of the market place's relation
ship with the brand.
Brand extension: A strategy that uses a current brand name to enter a con1pletely different prod
uct class.
Brand-manager system: Type of product 111anagemenl syste111 in which a manager focuses on a
single product or a very sn1all group of new and existing products. The brand manager is responsi
ble for everything from marketing research and package design to adve1tising.
Cross-fu11ctional teams: Teams requiring the membershi1J and cooperatio11 of all tl1e various
functional departments in the organization to create successful new products.
Dual branding: A strategy in whicl1 two or more branded products are integrated. This strategy is
sometimes called joint or cobranding.
Extended product: The tangible product along with the whole cluster of services that accompany
it; one of the three ways a product can be viewed.
10• Part C The Marketing Mix
Fads: A product that experiences an intense but often very brief period of popularity. The faster it
becomes popular, the faster it will beco1ne unpopular. A few fads may repeat their popularity after
long absences.
Family branding: Someti1nes called franchise extension; an organization's attachment of the
corporate nrune to a product to enter either a new market segment or a different product class.
Fashions: Accepted and popular products that go through a repetitive cycle of popularity, lost
popularity, and regained popularity, repeating the cycle again.
Generic product: Product that includes the essential benefits the buyer expects to receive; one of
the tbree ways a product can be viewed.
Global virtual team: A cross-functional team that operates across time, geographic distance,
organizational boundaries, and cultures, whose members co1nmunicate mainly through electronic
technology (e.g., srnartpl1one, laptop, texting, e-mail, video conferencing, etc.)
Ho1izo11tal marketing: Market that exists for an organizational product when it is purchased by
all types o f fir1ns in many different industries.
Marketing-manager system: Type of product management syste1n populru· in organizations with
a line or lines of similar products or one dominant line. One person is responsible for overseeing an
entire product line with all of the functional areas of mru·keting such as research, advertising, sales
promotio11, sales, and product planning.
Multibranding: A strategy that assigns different brand names to each product. The organization
makes a conscious decision to allow the products to succeed or fail on their own merits.
Product: The su1n of the pl1ysical, psychological, and sociological satisfactions the buyer derives
from purchase, ownershlp, and consumption. This definition is consistent with the marketing concept.
Product adoption and diffusion: The spread of a product tl1rough the populatio11; enco1npasses
five stages of adopters: innovators, early adopters, early majority, late majority, and laggards.
Product life cycle: The concept that many products go through a cycle; that is, they are intro
duced, grow, mature, and decline. While the cycle varies according to ind11stry, product, technology
and market, it is a valuable aid in developing product and 1narketing strategies.
Product li11e: A group of products that share co1nmon characteristics, distribution channels,
customers, or uses.
Product line extension: A strategy of line extension that uses a well-kl1own brand na1ne to enter into a new 1nru·ket seg1nent.
Product mix: The full set of prodt1cts offered for sale by an organization; described by its widtl1
and depth.
Product mix depth: The average nu1nber of products in each product li11e.
Product mix width: The number of individual product lines offered by the organization.
Quality: The degree of excellence or superiority that an organization's product or service
possesses. It can encompass both the tangible and intangible aspects of a 1:>roduct or service. Although quality can be evaluated from 1nany perspectives, the customer's perceptio11 of quality
is crucial.
Tangible product: The physical entity or service that is offered to the buyer; one of the three ways
a product can be viewed.
Value: Encompasses not only quality but also price. Value is what the customer gets for wl1at the
custo1ner gives.
Venture team: A cross-functional team responsible for all of the tasks involved in the develop
ment of a new product. When the new product is launched, the tean1 usually turns over responsibi l
ity for managing the product to a brand manager or product manager or it may manage the new product as a separate business.
Vertical market: Market for organizational products that have a li1nited number of buyers. A ver
tical market is narrow because customers are restricted to a few industries and is deep in that a large
percentage of the 1:>roducers in the rnarket use the product.
Chapter
I
ann1n
eveo men
New products are a vita] part of a firm's competitive growth strategy. Leaders of successful firms know that it is not enough to develop new products on a sporadic basis. What counts is a climate of product development that leads to one triumph after another. It is co1nmon place for major companies to have 50 percent or more of their current sales in products introduced within tl1e last 1 0 years.
Some additional facts about new products are important to reme1nber:
• Many new products are failt1res. Estimates of new prodt1ct failures range from 33 percent to 90 percent, depending on industry.
• New product sales grow far more rapidly than sales of current products, potentially providing a surprisingly large boost to a company's growth rate.
• Companies vary widely in the effectiveness of their new product programs. • A major obstacle to effectively predicting new product demand is limited vision. • Common elements appear in the management practices that generally distinguish the
relative degree of efficiency and success between companies.
In one recent year, almost 22,000 products were introduced in supermarkets, drug stores, mass merchandisers, and health food stores. Of these, only a small percentage (less than 20 percent) met sales goals. The cost of introducing a new brand in some consumer markets ca11 range from $50 1ni11ion to hundreds of millions of dollars. In. addition to the outlay cost of product failures, there are also opportunity costs. These opportunity costs refer not only to the alternative uses of funds spent on product failures but also to the time spent in unprofitable product development.
Product develop1nent can take many years. For example, Hills Brothers (now owned by Nestle) spent 22 years in developing its instant coffee, while it took General Foods (now owned by Altria) 10 years to develop Maxim. However, the success of one new product is no guarantee that additional low-cost brand extensions will be successful. For example, on the positive side, Gillette was able to leverage tl1e research and monies spent on the original Sensor to successfully develop and launch the Sensor razor for women and the Sensor Excel razor. On the negative side, Maxwell House (Altria), Folgers (Procter & Gamble), and Nestle are still struggling to develop commercially successful lines of fresh whole bean coffee, hav ing been beaten to the punch by smaller companies such as Starbucks, Millstone Coffee Inc., and Brothers Gourmet Coffees. 1
105
106 Part C The Marketing Mix
Good management, with heavy emphasis on planning, organization, and interaction a1nong the various functional units (e.g., m,arketing, manufacturing, engineering, R&D),
seems to be the key factor contributing to a fir1n's success in launching new products. The
primary reason found for new product failure is an inability on the part of the selling com
pany to match its offerings to the needs of the customer. This inability to satisfy customer
needs can be attributed to three main sources: inadequacy of upfront intelligence efforts,
failure on the part of the company to stick close to what the company does best, and tl1e
inability to provide better value than competing products and technologies.
NEW PRODUCT STRATEGY
When developing new products, tl1e first question 111ust be, In l1ow many ways can a prod
uct be new? Authors C. Merle Crawford and Anthony DiBenedetto have developed a use
ful definition of new products based on the following categories.2
1. New-to-the-world products. Products that are inventions and create a whole new market.
For exa1nple, So11y Walkinan, Polaroid camera, the Pabn Pilot, tl1e laser p1inter, i 1 1 -line skates.
2. New-to-the-firm proditcts. Products that take the fir1n into a category new to it but
not to the world. Examples are Ca.non' s laser printer, AT&T' s Universal Credit Card,
Hallmark gift items, P&G's first shampoo.
3. Aclditions to existing product lines. These are products that extend existing product
lines to current markets such as Bud Light, Apple's iMac, and Tide' s liquid detergent.
4. Improvements and revisions of existing products. These are current products that are
made better. Virtually every product on the market has been improved, often many times.
5. Repositionirigs. Products that are retargeted for a new use or application. Arm & Hammer
baking soda is a classic exan1ple, being repositioned as a drain deodorant, ref1igerator
freshener, toothpaste, deodorant, and so on. Aspirin has been repositioned as a safeguard
against heart attacks.
6. Cost reductions. These are new products that simply replace existing products in a line,
providing the customer similar performance bt1t at a lower cost.
The new product categories listed here raise the issue of imitation products, strictly me-too
or improved versions of existii1g products. If a finn introduces a fo1m of dry beer that is new to
them but is identical o r similar to other beers on the market, is it a new product? The answer is
yes, because it is new to the firm. Managers should not get the idea that to imitate i s bad and to
innovate is good, for most of the best-selling products on the market today are improvements
over another company's original i11vention. The best strategy is the one that will maxi1nize
company goals. It should be noted that Crawford and DiBenedetto's categories don't encom
pass variations such as new to a country, new channel of distribution, packaging improvement,
and different resources or method of manufacture, which they consider to be variations of the
six categories, especially as these variations relate to additions to product lines. A second broader approach to the new product question is the one developed by H.
Igor Ansoff in the form of growth vectors.3 This i s the matrix first introduced i n Chapter 1
that indicates the direction in which the organization is moving with respect to its current
products and markets. It is shown again in Figure 7 .1.
Market penetration denotes a growth direction through the increase in 1narket share for
present product 1narkets. Product development refers to creating new products to replace
existing ones. Firms using either market penetration or product development strategies are
attempting to capitalize on existing markets and co1nbat competitive entry and/or further
FIGURE 7.1
Organizational
Growth Strategies Products
Markets
Present
New
Present
Chapter Seven Nev.1 Product Planning and Development 107
New
Market penetration Product development
Market development Diversification
market incursions. Marlcet development refers to finding new customers for existing
products. Diversification refers to developing new products and cultivating new markets. Firms using market develop1nent and diversification strategies are seeking to establish
footholds in new markets or preempt competition in emerging market segments.
As shown in Figure 7 .1, market penetration and market development strategies use present
products. A goal of these types of strategies is to either increase frequency of consumption or
increase tl1e nu1nber of customers using tl1e fi11n's product(s). A strategic focus is placed on
altering the breadtl1 and depth of the firm's existing product lines. Produ.ct develop1nent and
diversification can be characterized as product mix strategies. New products, as defined i n
the growth vector matrix, usually require the frrrn to make significant investments in research
and development and may reqLtire major changes in its organizational structure. Firms are not confined to pursuing a single direction. For example, Miller Brewing Co. decided four
key strategies would dictate its activities, including (1) building its premiu.m-brand fran
chises through investment spending, (2) continuing to develop value-added new products
witl1 clear consumer benefits, (3) leveraging local markets to build its brand franchise, and (4) building business globally.4 Success for Miller depends on pursuing strategies that
enco1npass all areas of the growth vector matrix.
It has already been stated that new products are the lifeblood of successful business firms.
ThLLS, the critical product policy question is not whether to develop new products but in what
direction to move. One way of dealing with this problem is to formulate standards or norms tllat new products 1nust meet if tlley are to be considered candidates for launching. In oilier
words, as part of its new product policy, management must ask itself the basic question,
What is the potential contribution of each anticipated new product to the company?
Each company must answer this q11estion in accordance with its long-term goals, corpo rate mission, resources, and so forth. Unfortunately, so1ne of the reasons com111only given
to justify the launching of new products are so general that they become meaningless.
Phrases such as additional pro.fits, increased growth, or cyclical stability must be trans
lated into more specific objectives. For example, one objective may be to reduce manufac
turing overhead costs by using plant capacity better. This may be accomplisl1ed by using the new product as an off-season filler. Naturally, the new product proposal would also
have to include production and accounting data to back up this cost argument.
In every new product proposal some attention must be given to the ultimate economic
contribution of each new product candidate. If t11e argument is that a certain type of product
is needed to keep up witll competition or to establish leadership in the market, it is fair to ask,
Why? To put the question another way, top management can ask: What will be the effect on
tlle firm's long-run profit picture if we do not develop and launch this or that new product?
Policy-making criteria on new products should specify (1) a working defmition of the profit concept acceptable to top manage1nent, (2) a n1inimum level or floor of profits, (3) the avail
ability and cost of capital to develop a new product, and ( 4) a specified time period in which
the new product must recoup its operating costs and begin contributing to profits.
MARKETING INSIGHT Facto·rs_ Associated wi.th .New. Prod_uc-t· • •
I • '
S'uccess :�-d-;
1. A superior differentiated product that is unique by virtue of features, benefits, quality, and value.
2. A market-driven and customer focused new product development process.
3. Predevelopment work prior to beginning the development process.
4. Clear and early product definition.
5. Appropriate internal organizational structure.
6. A product that is familiar to the company's current products and markets.
7. A new product development process that uses profiles of previous product successes.
8. Controls on the new product development process that ensure sound execution.
9. Sound execution rather than speed.
1 0. Support for the new product through friendly, courteous, prompt, and efficient customer service.
Sources: Based on Robert G. Cooper, "What Distinguishes the Top Performing New Products in Financial Services," Journal of Product Innovation Management, September 1994, pp. 281-299; and "The New Product System: The Industry Experience," journal of Product Innovation Management, June 1992, pp. 113-127; William 0. Bearden, Thomas N. Ingram, and Raymond W. LaForge, Marketing: Principles and Perspectives, 5th ed. (Burr Ridge, IL: McGraw-Hill/Irwin, 2007), p. 219.
It is critical that firms not become solely preoccupied with a short-term focus on earn
ings associated with new products. For example, in some industrial markets, a 20-year
spread has been found between the development and wide-spread adoption of products,
on average. Indeed, an advantage that some Japanese firms appear to possess is that
their 1nanagement is free from the pressure of steady improvement in earnings per share
that plagues American managers who empl1asize short-term profits. Japanese managers
believe that market share will lead to customer loyalty, which in turn will lead to prof
its generated from repeat purchases. Tlrrough a continual introduction of new products,
firms will succeed in bLtilding share. This share growth will then ultimately result in earnings growtl1 and profitability that tl1e stock market will support through higher share
prices over the long term.
NEW PRODUCT PLANNING AND DEVELOPMENT PROCESS
108
Ideally, prodt1cts that generate a maximum dollar profit with a minimum amoL1nt of risk
should be developed and marketed. However, it is very difficult for planners to implement this idea because of the number and nature of the variables involved. What is needed is a
systematic, formalized process for new product planning. Although such a process does
not provide management with any magic answers, it can increase the probability of new
product success. Initially, the firm 1nust establish some new product policy guidelines that
include tl1e product fields of pri111ary interest, organizational responsibilities for ma11aging
the various stages i.t1 new product development, and. criteria for making go-ahead deci
sions. After these guidelines are established, a process such as the one shown in Figure 7 .2
should be useful in new product development.
Idea Generation
Every product starts as an idea. But all new product ideas do not have equal merit or
potential for economic or commercial success. Some estimates indicate that as many as
60 or 70 ideas are necessary to yield one successful product. T11is is an average figure,
FIGURE 7.2
The New Product
Development Process
Idea generation
I ' ,
Idea screening
I
' •
Proiect planning
I
' •
Product development
I
' •
Test marketing
L ' •
Commercialization
I
Chapter Seven Nev.1 Product Planning and Development 109
-
-
-
-
but it serves to illustrate tl1at new product ideas have a high mortality rate. In terms of money, aln1ost three-fourths of all the dollars of new product expense go to unsuccessft1l
products.
The problem at this stage is to ensure that all new prodt1ct ideas available to the com
pany at least have a chance to be heard and evaluated. Ideas are the raw materials for
product development, and the whole planning process depends on the quality of the idea
generation and screening process. Since idea generation is the least costly stage in the
new product development process (in terms of investment i n funds, time, personnel, and
escalation of commitment), it makes sense that an emphasis be placed first on recognizing
available sources of new product ideas and then 011 funneling these ideas to appropriate
decision makers for screening.
Top-manage1nent support is critical to providing an atmosphere that stimulates new
product activity. Many times, great ideas come from some very t1nusual sources. A top
management structure that is unwilling to take risks will avoid radical new product and
other innovation activities and instead concentrate solely on 111inor areas of improvement
such as line extensions. T o facilitate top-manage1nent support, it is essential that new prod
uct development be focused on meeting market needs.
Both technology push and market pull research activities play an important role in
new product ideas and development. By tak.jng a broad view of customer needs and wants,
basic and applied research (technology push) can lead t o ideas that will yield high profits
to the firm. For example, Compaq bet millions (and won) on PC network servers in the
early 1990s even though business customers said they would never abandon their main
frames. In a similar vein, Cl1rysler forged ahead with the 01iginal minivan despite research
MARKETING INSIGHT How Google De,velops' New ld.e,a$ - . - ' . . - . .
110
Marissa Mayer joined Google in early 1999 as a programmer when the workforce totaled 20. By 2007 Google had 5,700 employees and expected sales of $16 billion. As Director of Consumer Web Products Marissa is a champion of innovatjon, and she
favors new product launches that are early and often.
HOW GOOGLE INNOVATES
The search leader has earned a reputation as one of the most innovative companies in the world of technology. These are illustrative of the ways Google hatches new ideas:
FREE (THINKING) TIME
Google gives all engineers one day a week to develop their own pet projects, no matter how far these projects are from the company's central mission. If work gets in the way of free days for a few weeks, they accumulate. Google News came out of this process.
THE IDEA LIST
Anyone at Google can post thoughts for new technologies o f businesses on an ideas mailing list, available companywide for input and vetting. But beware: Newbies who suggest familiar or poorly thought-out ideas can face an intellectual pummeling.
OPEN OFFICE HOURS
Think back to your professors' office hours in college. That's pretty much what key man agers, including Mayer, do two or three times a week, to discuss new ideas. One success born of this approach was Google's personalized home page.
BIG BRAINSTORMS
As it has grown, Google has cut back on brainstorming sessions. Mayer still holds them eight times a year, but limits hers to 100 engineers. Six concepts are pitched and dis cussed for ten minutes each. The goal: To build on the initial idea with at least one complementary idea per minute.
ACQUIRE GOOD IDEAS
Although Google strongly prefers to develop technology in-house, it has also been will ing to snap u p small companies with interesting initiatives. In 2004 it bought Keyhole, including the technology that let Google offer sophisticated maps with satellite imagery.
Sources: "Managing Googles's Idea Factory," BusinessWeek, October 3, 2005, pp. 88-90; David Cravens and Nigel F. Piercy, Strategic Marketing, 10th ed. (Burr Ridge, IL: McGraw-Hill, 201 3), p. 220.
showing people disliked the odd-looking vehicle.5 Marketing, on the other hand, i s more
responsible for gathering and disseminating informatio11 gained from customers and other
contacts. Tbjs information relates mainly to specific features and functio.ns of tl1e product
that can be improved upon or market needs that current products are not satisfying (market
pull). For example, product ideas at Rubbermaid often come from employees roaming the
aisles at hard\.vare stores and conversations with fa1nily and friends. Both technology push
and market pull approaches are essential to the generation of n.ew product ideas.
Idea Screening The primary function of the idea screening process is twofold: first, to eliminate ideas for
new products that could not be profitably marketed by the firm, and second, to expand
viable ideas into full product concepts. New product ideas may be eliminated either because
they are outside the fields of the fir1n's interest or because the firm does not have the nec
essary resources or technology to produce the product at a profit. Generally speaking, tl1e
Chapter Seven Nev.1 Product Planning and Development 111
organization has to consider three categories of risk (and its associated risk tolerance) in
the idea screening phase prior to reacl1ing a decision:6
1. Strategic risk. Strategic risk involves the risk of not matching the role or purpose of
a new prodt1ct with a specific strategic need or issue of the organization. If an organization feels it necessary to develop certain types of radical innovations or products new to the
company in order to carry out long-term strategies, then management must be willing to
dedicate necessary resources and time to pursue these type projects.
2. Market risk. Market risk is the risk that a new product won't meet a market need in a value-added, differentiated way. As products are being developed, customer requirements
change and new technologies evolve. Management must be willing and able to shift its
new product efforts to keep pace with change.
3. Internal risk. Internal risk is the risk that a new product won't be developed within
the desired ti111e and budget. Up front, 111anagement must decide the level of commitment
it will extend i n terms of time and budgetary expenditures to adequately ensure the com
pletion of specific projects. Concurrently, progress goals must be established so that "pro
ceed" or "do not proceed" decisions can be reached regarding continuation of projects.
In evaluating these risks, firms should not act too hastily in discounting new product
ideas solely because of a lack of resources or expertise. Instead, firms should consider
forming joint or strategic alliances with other firms. A strategic alliance is a long-term partnership between two organizations designed to accomplish tl1e strategic goals of both
parties. Potential benefits to be gained from alliances include (1) increased access to tech
nology, funding, and information; (2) market expansion and greater penetration of current
markets; and (3) de-escalated competitive rivalries.
Jdeas that appear to have adequate profit potential and offer the fi1111 a competitive
adva11tage in the market should be accepted for further study.
Project Planning T11is stage of the process invo]ves several steps. Jt is here t11at the new product pro
posal is evaluated further and responsibility for the project is assigned to a project
team. The proposal is analyzed in terms of production, marketing, financial, and com
petitive factors. A development budget i s established, and some preliminary market ing and technica] research is undertaken. The product is actually designed in a rough form. Alternative product features and co111ponent specifications are outlined. Finally, a
project plan is written up, which includes estimates of future developtnent, production,
and marketing costs along with capital requirements and manpower needs. A schedule
or timetable is also included. Finally, the project proposal is given to top management
for a go or no-go decision.
Various alternatives exist for creating and managing the project teams. Two of the
better-known methods are the establishment of a skunkworlcs, whereby a project team can
work in relati ve privacy away from the rest of the organization, and a rugby or relay approach,
whereby groups in different areas of the con1pany are simultaneously working on the
project. The co1nmo11 tie that binds these and other successful approaches together is the
degree of i11teraction that develops among the marketing, engineering, production, and other
critical staff. The earlier in the process that interactive, cooperative efforts begin, the higher
is the likelihood that development efforts will be successful. A key component contributing
to the su.ccess of many companies' product development efforts relates to the em.pl1asis
placed on creating cross�functional teams early in the development process. Both of tl1e
preceding methods use cross-functional teams. Members from many different departments
112
1 . Customers
a. Customer requests
b. Customer complaints/compliments
c. Market surveys
d. Focus groups
2. Competitors
a. Monitoring competitors' developments
b. Monitoring testing of competitors'
products
c. Monitoring industry movements
3. Distribution channels
a. Suppliers
b. Distributors
c. Retailers
d. Trade shows
4. Research and engineering
a. Product testing
b. Product endorsement
c. Brainstorming meetings
d. Accidental discovery
5. Other internal sources
a. Management
b. Sales force
c. Employee suggestions
d. Innovation group meetings
e. Stockholders
6. Other external sources
a. Consultants
b. Academic journals
c. Periodicals and other press
come together to jointly establish new product development goals and p1iorities and to
develop new product development schedules.
Product Development At this juncture, tl1e product idea has been evaluated from tl1e standpoint of engineering,
1nanufacturing, finance, and marketing. If it l1as met all expectations, it is considered a
candidate for further research and testing. In the laboratory, the product is converted into
a finished good and tested. A development report to management is prepared that spells
out in fine detail: (1) results of the studies by the engineering department, (2) required plan design, (3) production facilities design, (4) tooling requirements, (5) marketing test plan,
(6) financial program survey, and (7) estimated release date.7
Test Marketing Up until now the product has been a company secret. Now management goes outside
the company and submits the product candidate for customer approval. Test-market
programs are conducted in line with the general plans for launching the product. Test
marketing is a controlled experiment in a limited geographical area to test the new
product or in some cases certain aspects of the marketing strategy, such as packaging
or advertising.
The main goal of a test market is to evaluate and adjust, as necessary, the general
marketing strategy to be used and the appropriate marketing mix. Additionally, pro
ducers can use the early interaction with buyers, occu1Ting in test markets, to begin
exploration of issues related to the next generation of product development. Especially
in cases where new technologies and markets are e1nerging, firms can benefit greatly
from knowledge gained i n test markets. Throughout the test market process, findings
are being analyzed and forecasts of volume developed. In summary, a well-done test
111arket procedure can reduce the risks that include not only lost marketing and sales
dollars but also capital-the expense of installing production lines or building a new
CaQitalizing on· _C.orporate $t_rength$ in. New ' • . • • •
I
�rLoduc1 Dev.elo 1ru1em1i · Somne Exarffilgles: �-�
Here are some examples of actual corporate strengths that the managements have asked b e used to differentiate the firm's new products. These strengths can be used in the sentence: New products of
this firm will:
Herman Miller:
Braun:
Otis Elevator:
Coca-Cola:
Gerber:
Nike:
IBM:
Technologies
Utilize our fine furniture designs.
Utilize innovative design in every product.
Build in new levels of service as key benefit.
Gain value by being bottled in our bottling system.
Markets
Be for babies and only babies.
Be for all sports and not just shoes.
Be for all people in computers, not just techie types.
Budd: Be specially created to meet the needs of Ford engineers.
Source: Adapted from Merle Crawford and Anthony DiBenedetto, New Products Management, 10th ed. (Burr Ridge, IL: McGraw-Hill, 2011 ), p. 62.
factory. Upon completion of a successful test market phase, the marketing plan can be
finalized and the product prepared for launch.
Commercialization This is the launching step in whicl1 the firm commits to introducing the product into the
marketplace. During this stage, heavy emphasis is placed on the organization structure and
management talent needed to implement the marketing strategy. Emphasis is also given to
following up on such things as bugs in the design, production costs, quality control, and
inventory requirements. Procedures and responsibility for evaluating the success of the
new product by comparison with projections are also finalized.
The Importance of Time Over the course of the last five years, co1npanies have placed an increasing emphasis on
shortening their products' time to market. Time to mctrket can be defined as the elapsed
time between product definition and product availability. It has been well doct1mented
that companies that are first in bringing their products to market enjoy a competitive
advantage botl1 in terms of profits and 1narket share. 8 Successful ti1ne-based innova
tions can be attributed to the use of sl1ort production runs, wl1ereby products can be
improved on an incremental basis, and the use of cross-functional teams, decentralized
work scheduling and monitoring, and a responsive system for gathering and analyzing
custo1ner feedback.
Several U.S. companies, including Procter & Gamble, have taken steps to speed up
the new product development cycle by giving managers, at the product class and brand
fa1nily level, more decision-making power. Increasingly, companies are bypassing time
consu1ning regional test markets, when feasible, in favor of national launches. It is
beco1ning in1portant, more tha11 ever, tl1at finns do a successful job of developi11g new
products right the first time. To accomplisl1 this, companies must have the right people
with the right skills and talents in key positions within the new product framework.
113
MARKETING INSIGHT Some: Me.as.ure_& .of New Produ.ct . - - .
P. e �mo n filil am1c e ,.
· �-5
Customer Acceptance Measures
Customer acceptance (use)
Customer satisfaction
Revenue (dollar sales)
Market share
Unit volume
Financial Performance
Time to break even Margins
Profitability (I RR, ROI)
Product Level Performance
Product cost
Time to launch
Product performance
Quality guidelines
Other
Nonfinancial measures peculiar to the new product being launched.
Example: competitive effect, image change, morale change.
Source: From Merle C. Crawford and C. Anthony Di Benedetto, New Products management 1 OE, 2011, p. 396. Reprinted with permission of McGraw-Hill Education.
SOME IMPORTANT NEW PRODUCT DECISIONS
FIGURE 7.3
Some Criteria for Determining
Perceptions of Quality
Source: Adopted from David A. Garvin, "Competing on the Eight Dimensions of Quality," Harvard Business Review,
Novembe r -December 1987. For a discussion of some determinants o f quality for service businesses, see chap. 12, "The Marketing of Services."
114
In the development of new products, marketers have several important decisions to make
about the characteristics of the product itself. These include quality level, product features,
product design, and product safety levels.
Quality Level Both consumers and organizational buyers consider the level of product quality when mak
ing purchase decisions for both new and existing products. At a minimum, buyers want
products that will perfor1n the functions they are supposed to and do so reasonably well. Some customers are willi11g to accept lower quality if product use is not dema11di11g and
the price is lower. Some homeowners migl1t prefer Sears brand hand tools over the l1igl1er
quality Craftsman brand since they are lower priced and may be used only occasionally.
Industrial buyers of nuts and bolts for automobiles seldom use the highest quality used in
aircraft since cars are used in less demanding situations.
In designing new products, marketers must consider what criteria potential customers
use to determine their perceptions of quality. While these will vary by product, Figure 7.3
presents eight general criteria.
1 . Performance-How well does the product do what it is supposed to do?
2. Features-Does the product have any unique features that are desirable?
3. Reliability-ls the product likely to function well and not break down over a reasonable time period?
4. Conformance-Does the product conform to established standards for such things as safety?
5. Durability-How long will the product last before it will be worn out and have to b e replaced?
6. Serviceability-How quickly and easily can any problems be corrected?
7. Aesthetics-How appealing is the product to the appropriate senses of sight, taste, smell, feel, and/or sound?
8. Overall Evaluation-Considering everything about the product, including its physical character istics, manufacturer, brand image, packaging, and price, how good is this product?
When specialized knowledge is needed to satisfy the needs of customers, cross-functional teams can greatly improve product development success. Such teams bring together com plementary skills in one of three areas: technical or functional expertise, problem-solving and decision-making skills, and interpersonal skills.
1. Technical or functional skills. It would make little sense for a marketer to design technical specifications for a new type of cellular phone. Likewise, it would make little sense for an engineer to try to guess what features consumers find most important in choosing what type of phone to purchase. In this case, a product development group that consists solely of marketers or engineers would be less likely to succeed than a cross-functional team using the complementary skills of both.
2. Problem-solving and decision-making skills. Cross-functional teams possess the ability to identify problems and opportunities the entire organization faces, identify feasible new product alternatives, and make the necessary choices quicker. Most industrial functional units are not able to perform all of these tasks effectively. However, it is likely that the necessary skills are present in a well-chosen cross-functional team and that these skills can be used in the organization's best interests.
3. Interpersonal skills. Common understanding and knowledge of problems faced and deci sions needed for effective product development cannot arise without effective com munication and constructive conflict. What is needed is risk-taking, helpful criticism, objectivity, active listening, support, and recognition of the interests and achievements of others. An effective, cross-functional team is made up of members who, in total, pos sess all of these skills. Individual members, at various times, will be called on to use their interpersonal skill to move the team forward. The use of the complementary interper sonal skills of team members can lead to extraordinary results for organizations.
An important indicator of a number of the criteria listed in FigLire 7 .3 is tl1e presence
and extent of a new product warranty. A warranty is the producer's staten1ent of what
it will do to compensate the buyer if the product is defective or does not work prop
erly. In rnany instances, the courts also hold that businesses have implied warranties or
unstated promises to compensate bt1yers if their products fail to perform up to the basic
standards of the indt1stry or to the level promised. Certainly an organization that wants to empl1asize high quality will offer custo1ners 1nore than i1nplied warranties enforced by
the courts.
Finally, many marketers offer a guarantee instead of or in addition to a warranty on new
products. A guarantee is an assurance that the product is as represented and will perform
properly. Typically if the product fails to perform, the organization making the guarantee
replaces the product or refunds the custo1ner' s 1noney. Guarantees imply to some buyers
that the manufacturer is confident of the new products' quality.
Product Features
A product feature is a fact or particular specification about a product (e.g., "less calories
than all other soft drinks," "more vitamin C than any other multiple vitamin"). Marketers
select new product features by determining what it is that customers want their products
to offer. Effective marketers attempt not only to ask potential customers what they
want, but to learn what these customers are likely t o need. Such marketers may identify
a need for new features that target 1narkets have not yet thought of and may not yet even
understand.
115
116 Part C The Marketing Mix
Product Design Many well-designed products are easy to use as intended and pleasing to the senses.
Designing new produ.cts with both ease of use and aesthetic appeal can be difficult, but
it can clearly differentiate a new product from competitors. Good design can add great
value to a new product. A well-designed product can please customers without neces
sarily costing more to 1nake. This is especially likely to happen wl1en the organization
uses cross-functional teams to develop its products. If en1ployees fro1n engineering,
marketing, and mant1facturing work together on what the product will look like and
how it will operate, they are more likely to create a design that is easy and economical
to make a s well as use.
Product Safety Clearly, new products must l1ave a reasonable level of safety. Safety i s both an ethical and
practical issue. Ethically, customers should not be harmed by using a product as intended.
The practical issue is that when users get harmed by a product, they n1ay stop buying, tell
others about their experience, or sue the co1npany that 1nade or sold it.
Some products are inhere11tly dangerous and can result in injury to users. However, i t
may be so expensive to make them safer that buyers could not afford to buy them. Such
products include aLLtomobiles, farm equipment and other machinery, and guns. Other prod
ucts such as patented 1nedicines can harm a small portion of users. Hopefully, the benefits
sucl1 products offer outweigh their risks.
CAUSES OF NEW PRODUCT FAILURE
Many new products with satisfactory potential have failed to make the grade for reasons
related to execution and control problems. What follows is a brief list of some of the more
i1nportant marketing causes of new product failures after the products have been carefully
screened, developed, and marketed.9
1. No competitive point of difference, unexpected reactions fro1n competitors, or both.
2. Poor positioning.
3. Poor quality of product.
4. Nondelivery of pro111ised benefits of product.
5. Too little 1narketing support.
6. Poor perceived price/quality (value) relationship.
7. Faulty estimates of 1narket potential and other marketing research mistakes.
8. Faulty estimates of production and marketing costs.
9. Improper channels of distribution selected.
10. Rapid change in the market (economy) after the product was introduced.
Some of these problems are beyond tl1e control of 111anagement, but it is clear that suc
cessful new product planning requires large amounts of reliable infonnation in diverse
areas. Each department assigned functional responsibility for product development
automatically becomes an input to the information system that the new product decision
1naker needs. For example, wl1en a firm is developing a new product, it is wise for both engineers and 111arketers t o consider both the kind of market to be entered (e.g., conswner,
organizational, international) and specific target segments. These decisions will be of para
mount influence on the design and cost of the finished good, which will, of cot1rse, directly
influence price, sales, and profits.
1. Not listening to the "voice of the customer." Product managers assume they know more than customers or that doing marketing research will not be worth the cost or time.
2. Skipping steps in the new- product process. (See Figure 7-2.)
3. Trying to generate quick revenue by releasing a poorly conceived product to market.
4. "Groupthink" in product development committees. This popular problem occurs in groups when members "go along" to "get along" rather than be seen as nay sayers or non-team players.
5. Not identifying the lessons from previous failures.
Sources: Adapted from Pierre Loewe and Jennifer Domeniquini, "Overcoming the Barriers to Effective Innovation," Strategy and Leadership 34, no. 1 (2006), pp. 24-31; Dan P. Lovallo and Oliver Sibony, "Distortions and Deceptions in Strategic Decisions," The McKinsey Quarterly, no. 1 (2006), pp. 19-29; Eyal Biyalogorsky, William Boulding, and Richard Staelin, "Stuck in The Past: Why Managers Persist with New Product Failures," Journal of Marketing, April 2006, pp. 1 08-121; Jena MacGregor, "How Failure Breeds Svccess," Business Week, July 10, 2006, pp. 42-52; Roger A. Kerin, Steven W. Hartley, and William Rudelius, Marketing, 11th ed. (Burr Ridge, IL: McGraw-Hill, 2013), p. 253.
Need for Research
In many respects it can be argued that the keystone activity of a11y new product plan
ning system is research-not just marketing researcl1, but technical research as well.
Regardless of the way the new product planning function is organized in the company,
top management's new product development decisions require data that provide a base for
making more intelligent choices. New product project reports ougl1t to be more than a col
lection of "expert" opinions. Top ma11agement has a responsibility to ask certain questions,
and the new product planning team has an obligation to generate answers to these ques
tions based on research that provides marketing, economic, engineering, and production
information. This need will be more clearly understood if some of the specific questions
co1nmonJy raised in evaluati11g product ideas are examined:
1. What is the anticipated market demand over time? Are the potential applications for tl1e
prod11ct restricted?
2. Can the item be patented? Are there any antitrust problems?
3. Can the product be sold through present channels and the current sales force? What
number of new salespersons will be needed? Wl1at additional sales training will be
required?
4. At different volume levels, what will be the unit manLLfacturing costs?
5. What is the most appropriate package to use in terms of color, material, design, and
so forth?
6. What is the estimated return on investment?
7. What is the appropriate p1icing strategy?
While this list is not intended to be exl1austive, it serves to illustrate the serious
need for reliable information. Note also that some of the essential facts required to
answer these questions can be obtained only through time-consuming a11d expensive
marketing research studies. Other data can be generated in the engineering laboratories
or pulled from accounting records. Certain types of information must be based on
assumptions, which may or may not hold true, and on expectations about what will
happen i n the future, as in the case of anticipated competitive reaction or the projected
level of sales. 117
118 Part C The Marketing Mix
SUMMARY
Additional Resources
Key Terms
and Concepts
This chapter has focused on the nature of new product planning and development.
Attention has been given to the management process reqL1ired to have an effective program
for new product development. It should be obvious that this is one of the most i1nportant
and difficult aspects of marketing managetnent. The problem is so complex that, unless
management develops a plan for dealing with the problem, it is likely to operate at a severe
competitive disadvantage in the marketplace.
Adatnson, Allen P. The Edge: Fifty Tips from Brands That Lead. New York: Palgrave Macmillan,
2013.
Bender, Michael. A Manager's Guide to Project Management. Upper Saddle River, NJ: FI Press,
2010.
Biyalogorsky, Eyal, William Boulding, and Richard Staelin. "Stuck In The Past: Why Managers
Persist in New Product Failures." Journal of . Marketing, April 2006, pp. 108-122.
Est1in, Judy. Closing the Innovation Gap. New York: McGraw-Hill, 2009.
Knight, Joe, Roger Thomas, and Brad Angus. ProjectManlzgementfor Profit. Boston: Harvard Business R.eview Press, 2012.
Macintosh, J11lie. Dethroning the King. New York: John Wiley and Sons, 2011.
Mack, Ben. Think T1vo Products Ah.ead. New York: John Wiley, 2007.
Siegel, Eric. Predictive Analytics. Hoboken, NJ: John Wiley and Sons, 2013.
Commercialization: Stage of the new product development process that involves the actual
launch of the product and the implementation of the marketing strategy.
Cross-functional teams: Men1bers from many different depamnents coming together to jointly
establisl1 new prodt1ct develop1ne11t goals and priorities and to develop schedules.
Diversificatio11: A strategy that seeks to develop 11ew products ru1d cultivate new custo1ners. It
often leads the organization into new businesses, so1netimes through acquisition.
Guarantee: An assurance by the producer that the product is as represented and will perform
properly. If not, the organization making the guarantee replaces the product or refunds the cus
tomer's 1noney.
Idea generation: Stage of the new product development process at which the goal is to e11sure that
all new product ideas considered by the organization have the opportunity to be heard and evalu
ated because the success of the process will depend greatly on the qt1aJity of the ideas generated.
Idea screening: Evaluation of an idea based on strategic 1isk, market risk, and internal risk for the
purpose of eliminating ideas that could not be profitably marketed and expanding viable ideas into
full product concepts.
Market development: A strategy tl1at seeks to find new customers for existing products. An
organization pursuing this strategy seeks to establisl1 footholds in new markets or preempt competi
tion in emerging market segn1ents.
Market penetration: A strategy that denotes a growth direction tlu·ough the increase in market
share of present products in present markets. An organization pursuing this strategy hopes to
capitalize on existing 1narkets and combat competitive entry or incursions.
New product development process: Stages include idea generation, idea screening, project
planning, product develop1nent, test marketing, co1runercialization.
Product development: A strategy tl1at seeks to create new products to replace existing ones. An
organization pursuing this strategy hopes to capitalize on existing rnarkets and co1nbat co1npetitive
entry or incursions.
Chapter Seven Ne�, Product Planning and Develop1nent 19
Product developme11t stage: Stage of tl1e new product development process at which the product
idea l1as 1net all expectations a11d is considered a candidate for further research and testing. In the
laboratory, the product is converted into a finished good and tested.
Project planning: Stage of the new product develop1nent process at which the idea is evaluated
further and responsibility for the project is assigned to a project terun. The idea is evaluated in
terms of production, marketing, financial, and competitive factors. A development budget is estab
lished, and preliminary n1arketing and tecbnical research is undertaken.
Rugby or relay: An approach to creating and 1nanaging product develop1nent teams that involves
groups i n different areas of the organization working si1nu]taneously on tl1e project.
Skunk,vorks: An approach to creating and 1nanaging product develop1nent teams that involves
team members working in relative privacy, away from the rest of the organization.
Test marketing: Stage of new product development process at w]rich the product is no longer a
co1npany secret. Test 1nru·keting is a controlled experiment in a limited geographical area to test the
new product as well as ele1nents of the mru·keting mix.
Time to market: The elapsed time between product definition and product availability. It is
important because history has shown that organizations that are first in bringing their product to
market often gain a competitive advantage in terms of profits and market share.
Warranty: The state1nent of the producer of what it will do to compensate the buyer if the product
is defective or does not pe1form properly.
Chapter
I I
ommun1ca ions
Communicating with customers will be the broad subject of the next two chapters that
focus on variot1s elements of pro111otion. To simplify our disct1ssion, the topic bas been
divided into two basic categories: nonpersonal com1nunication (Chapter 8) and personal
coffiJnunication (Chapter 9). This chapter also discusses the necessity to integrate the
various elements of marketing communication.
STRATEGIC GOALS OF MARKETING COMMUNICATION
120
Marketers seek to communicate with target customers for the obvious goal of increased
sales and profits. Accordingly, they seek to accomplish several strategic goals with their
111arketing commu11ications efforts.
Create Awareness Obviously, we cannot pt1rchase a product if we are not aware of it. An important strategic goal must be to generate awareness of the furn as well as its products. Marketing com
munications designed to create awareness are especially important for new products and
brands in order to stimulate trial purchases. As an organization expands globally, creating
awareness must be a critical goal of marketing communications.
Build Positive Images When prodt1cts or brands have distinct images in the minds of customers, the customers
better understand the value that i s being offered. Positive images can even create value
for custo111ers by adding meaning to products. Retail stores and other organizations also use communications to build positive i1nages. A 1najor way marketers create positive and
distinct images is through marketing communications.
Identify Prospects Identifying prospects is beco111ing an increasi11gly important goal of 1nark.eting co111rnu
nications because modern tecl1nology makes information gathering much 1nore practical,
even in large consumer markets. Marketers can maintain records of consumers who have
Rank Brazil (31.9 million visitors) Portugal (3.8 million visitors) South Korea (28.1 million visitors)
1 Google sites 26.2 Google sites 3.6 NHN Corporation 22.7 2 Microsoft sites 25.2 Microsoft sites 3.4 Daum 20.5 3 UOL 20.6 Portugal Telecom 2.4 SK Group 20.2 4 Yahoo! sites 17.4 Hi5.com 2.3 gretech 14.7 5 Terra-Telefonica 16.8 Yahoo! sites 1.4 Yahoo! sites 12.2 6 Organizacoes Globo 16.7 UOL 1 .3 KT Group 11.8
7 Grupo Brasil Telecom 16.6 Grupo lmpresa 1.2 Microsoft sites 11.4 8 Wikimedia sites 10.8 Wikimedia sites 1 .1 Google sites 10.4 9 Word Press 10.1 Grupo Brasil Telecom 1 .1 eBay 10
10 BuscaPe.com Inc. 8 Word Press 1 .1 JMnet 10
Sources: comScore Media Metrix, 2012; Philip R. Cateora, Mary C. Gilly, and John I. Graham, International Marketing, 16th ed. (Burr Ridge, IL: McGraw-Hill, 2013), p. 484.
expressed an interest in a product, then more efficiently direct future communications.
Technology now enables rnarketers to stay very close to their custorners. Websites are
used to gather information about prospects, and st1permarkets use point-o f -sale terminals to dispense coupons selected on the basis of a customer's past purchases.
Build Channel Relationships An important goal of marketing communications is to build a relationship with the organi
zation's channel 1nembers. When producers use marketing communications to generate
awareness, they are also helping the retailers who carry tl1e product. Producers 1nay also
arrange with retailers to distribute coupons, set up special displays, or hold promotional
events in their stores, all of which benefit retailers and wholesalers. Retailers support man
ufacturers when they feature brands in their ads to attract buyers. Because of such efforts,
all n1e1nbers of the channel benefit. Cooperating in these marketing communication efforts
can build stronger channel relationships.
Retain Customers Loyal customers are a major asset for every business. It costs far in.ore to attract a new
customer tl1an to retain an existing custo111er. Marketing com111unications can support
efforts to create value for existing customers. Interactive 1nodes of comn1unication
including salespeople and websites-can play an important role i n retaining customers.
They can serve as sources of information about product usage and new products being
developed. They can also gather information frotn customers about wl1at they value, as
well as their experiences using the products. This two-way communication can assist
marketers in increasing the value of what they offer to existing customers, which will
influence retention.
111E PROMOTION MIX
T11e pro1notio11 111ix concept refers to the combination a11d types of nonpersonal and
personal communication the organization pt1ts fortl1 during a specified period. 1 There
are five elements of the promotion mix, four of which are nonpersonal forms of com
ffillnication (advertising, sales promotion, pLLblic relations, and direct marketing), and
121
122 Part C The Marketing Mix
one, personal selling, which is a personal form of communication. Let's briefly examine
each one.
1. Advertising is a paid form of nonpersonal communications about an organization, its
products, or its activities that is transmitted through a mass medit1m to a target audi
ence. The mass medium might be television, radio, newspapers, Internet, magazines,
outdoor displays, car cards, or directories.
2. Sales promotic>n is an activity or 1nateria] that offers custo111ers, sales personnel, or
resellers a direct inducement for purchasing a product. This jnduce1nent, which adds
value t o or incentive for the product, might take the form of a coupon, sweepstakes,
refund, or display.
3. Public relations is a nonpersonal form of communication that seeks to influence the
attitudes, feelings, and opiruons of customers, noncustomers, stockholders, suppliers,
employees, and political bodies about the organization. A popular form is publicity,
which is a nonpaid form of nonpersonal communication about the organization and
its products that is transmitted through a mass medium i n the form of a news story.
Obvious! y, marketers seek positive publicity.
4. Direct ,narketing uses direct forms of commurucation with customers. It can take the
form of direct n1ail, online and mobile marketing, catalogs, telemarketi11g, and direct
response advertising. Similar to personal selling, it 1nay consist of a11 interactive dialog
between the marketer and the customer. Its objective is to generate orders, visits to
retail outlets, or requests for further information. Obviously, personal selling is a form
of direct marketing, but because it is a very personal form of communication, we place
it in its own category.
5 .. Personal selling is :face-to-face communication with potential buyers to inform the1n.
about and persuade the1n to buy an organization's product. It will b e examined i11 detail
in the next chapter.
Obviously, marketers strive for the 1ight mix of promotional elements to ensure that
tl1eir product is well received. For example, if tl1e product is a new soft drin.k, promotional
effort is likely to rely more on advertising, sales promotion, and public relations (public
ity) in order to (1) make potential buyers aware of the product, (2) inform these buyers
about the benefits of the product, (3) convince buyers of the product's valt1e, and (4) entice
buyers to purchase the product. If the product is more established but the objective is to
stabilize sales during a nonpeak season, the promotion mix will likely contain short-run
incentives (sales promotions) for people to buy the product immediately. Finally, if the
product is a new complex technology that requires a great deal of explanation, the promo
tional mix will likely focus heavily on personal selling so that potential buyers can have
their questions answered.
As seen by the previous examples, a firm's promotion 1nix is likely to change over
time. The mix must be continually adapted to reflect changes in the market, competi
tion, the product's life cycle, and the adoption of new strategies. In essence, the firm
should take into account tl1ree basic factors when devising its promotion rnix: (1) the
role of promotion i11 the overall marketing 1nix, (2) the 11atui-e of the product, and (3) the
nature of the market.
INTEGRATED MARKETING COMMUNICATIONS
In many organizations, elements of the promotion mix are often managed by specialists
in different parts of the organization or, in some cases, outside the organization when an
advertising agency is used. For example, advertising plans might be developed jointly
FIGURE 8.1
How Various Promotion
Tools Might Contribute
to the Purchase of a
Hypothetical Product
To produce:
Personal selling
Advertising
Sales promotion
Public relations
Chapter Eight Integrated Marketing Co111munications 123
Awareness Comprehension Conviction
000000000 000000000 000000000 000000000 000000000 000000000 000000000 000000000 000000000 000000000 000000000 000000000
1- - - - - --1000000000
1- - - - - --1000000000 ___ _ _ _ _ _,000000000 f-- - - - --1000000000
f-- - - - --1000000000
Ordering
1-------1000000000._ _ _ _ _ ___ _ _ _ _ _ _ __ __ _ _ _ _,000000000 000000000 000000000 -- - - - --1000000000 000000000 000000000 >-- - - - --1000000000 000000000 000000000 __ __ _ _ _ _,000000000 000000000 000000000
by the advertising department and the adve1iising agency; plans for the sales force might
be developed by tnanagers of the sales force; and sales promotions might be developed
independently of the advertising and sales plans. Tl1us, it is not surprising that the concept
of integrated ,narketing co,nmunication.s has evolved in recent years.
The idea of integrated marketing communications is easy to understand and cer
tainly has a great deal of commonsense validity. But like so many concepts in market
ing, it is difficult to in1plement. The goal of integrated marketing communications is
to develop marketing communications programs that coordinate and integrate all ele
ments of promotion-advertising, sales promotion, personal selling, and publicity-so
that the organization presents a consistent message. Integrated marketing communica
tion seeks to manage all sources of brand or company contacts with existing and poten
tial custo1ners.
The concept of integrated marketing communication is illustrated in Figure 8.1. It is
generally agreed that potential buyers usually go through a process of (1) awareness of the
product or service, (2) co,nprehension of what it can do and its important features, (3) coriviction that it l1as value for the111, and (4) ordering. Consequently, the firm's 1narketing
comn1unication tools must encourage and allow the potential buyer to experience the vari
ous stages. Figure 8.1 illustrates the role of various marketing communication tools for a
hypothetical product.
T11e goal of integrated 1narketing communication is an important one, and 1nany believe
it is critical for success in today's crowded 1narketplace. As with many management con
cepts, implementation is slower than many would like to see. Internal "turf' battles within
organizations and the reluctance of some advertising agencies to willingly broaden their
role beyond advertising are two factors that are hindering the successful implen1entation of
integrated marketing com1nunication.
As we know, the Internet continues to change the nature of interpersonal communication. New avenues are rapidly evolving, and the rewards can be huge for companies who can harvest the speed and ease of interconnectivity that the Internet allows. Here are a few examples:
1. Viral marketing is an online "pass-it-along" strategy. It uses electronic media to generate brand messages throughout a wide network of buyers. Viral marketing comes in many forms but often involves e-mail. It is hoped that the viral aspect kicks in when people are "wowed" by the advertisement and e-mail i t to friends and acquaintances around the world. Obviously, the initial group must be carefully selected. Honda, Volvo, and Gillette use viral marketing.
2. Biogs are personalized journals where people and organizations can keep a running dia logue. People can read, comment on, and connect t o your blog, creating a powerful network that also includes other topical and news biogs. Biogs can be used in several ways by marketers. First, organizations can place banner ads in biogs and package ads with blog feeds. Second, they can use product sampling by getting their products in the hands of well-known bloggers in the category with the idea that they will create buzz about them on their biogs. A third way marketers can use biogs is by observing impor tant blog sites for marketing intelligence. A fourth way is for a company to create its own blog and put a company representative in charge of blogging. Finally, a company can create biogs and recruit consumer evangelists to run them.
3. Twitter is a microblogging tool. It limits posts to 140 characters. It has evolved quickly into one of the largest social media outlets. U.S. consumers spend more than two hours a month on Twitter, and that is likely to grow. For marketers, there are a number of uses for Twitter. First, consumers can post complaints or information requests to a brand's Twitter account, to which companies can respond. Second, companies can utilize a Twitter feature called Promoted Tweets. This is an advertising program whereby com panies tweet their followers and then promote the Tweet. The promotion indicator (like an advertisement) shows up on the Tweet, and then the Tweet itself comes up on the search for results even of those who aren't the brand's followers on Twitter. There are also other uses of Twitter for generating buzz and word-of-mouth advertising.
Source: From Delbert Hawkins, David Mothersbaugh and Roger Best, Consumer Behavior: Building Marketing Strategy 12E, 2013, p. 240-241. Reprinted with permission of McGraw-Hill Education.
ADVERTISING: PLANNING AND STRATEGY
124
Advertising seeks to promote the seller's product by means of printed and electronic
media. This is justified on the grounds that messages can reach large numbers of people and make them aware and persL1ade and re1nind them about the f:i1m' s offerings.
From a marketing 1nanagement perspective, advertising is an important strategic device for maintaining a competitive advantage in the marketplace. Advertising budgets represent a large
and growing element in the cost of goods and services. In a year i t is possible for large multi
_product firms to spend $1.5 to $2 billion advertising their products, and it is common to spend $74 to $100 million on one individual brand. Clearly, advertising 1nust be carefully plan11ed.
Objectives of Advertising There are at least three different viewpoints about the contribution of advertising to the economic health of the firm. The generalist viewpoint is primarily concerned witl1 sales, profits, return on investment, and s o forth. At the otl1er extreme, the specialist viewpoint is
represented by advertising experts who are primarily concerned with measuring the effects
MARKETIN.G INSIGHT � : . . -. . ..
. . '
Element
Advertising
Public relations
Sales promotion
Personal selling
E.thi_cal :and .Legal l:ss_ue,� i11 Marketi·ng • • • ' • • • . • • •
I
c O'·rmt rili1 u Jil i cat io· m s · 8=3
Ethical and Legal Concerns
• Using deceptive advertising
• Reinforcing unfavorable ethnic/racial/sex stereotypes
• Encouraging materialism and excessive consumption
• Lack of sincerity (paying lip service to worthwhile causes)
• Using economic power to gain favorable publicity
• Orchestrating news events to present a false appearance of widespread support for the company position
• Offering misleading consumer promotions
• Paying slotting allowances t o gain retail shelf space
• Using unauthorized mailing lists to reach consumers
• Using high-pressure selling
• Failing to disclose product limitations/safety concerns
• Misrepresenting product health
Direct marketing communications • Invading privacy with telemarketing
• Using consumer database information without consumers' authorization
• Creating economic waste with unwanted direct mail
Sources: From William Bearden, Thomas Ingram and Raymond LaForge, Marketing: Principles and Perspectives 5£, 2007, p. 383. Reprinted with permission of McGraw-Hill Education.
of specific ads or campaigns; here primary attention is given to organizations that offer
services that measure different aspects of the effects of advertising such as the Nielsen
Index, Starch Reports, Arbitron Index, and Simmons Reports. A middle view, one that
might b e classified as 1nore of a marketing 1nanagement approach, understands and appre
ciates the other two viewpoints but, in addition, sees advertising as a co1npetitive weapon.
Emphasis in this approach is given to the strategic aspects of the advertising function. 2
Building on what was said earlier, objectives for adve1tising can be assigned that focus
on creating awareness, aiding co,nprehension, developing coriviction, a11d encouraging
ordering. Within eacl1 category, more specific objectives can be developed that take into
account time and degree of success desired. Obviously, compared to the large number
of people that advertising makes aware of the product or service, the number actually
1notivated to purchase is usually quite small.
In the long run and often in the short run, advertising is justified on the basis of the
revenue it produces. Revenue in this case may refer to either sales or profits. Econo1nic
theory assumes that firms are profit maxin1izers, and the advertising outlays should be
increased in every market and medium up to the point where the additional cost of gaining
more business equals the incremental profits. Since most business firms do not have the data
required to use the marginal analysis approach, they usually employ less-sophisticated
decision-1naking models. Evidence also shows that many managers advertise to maximize
sales on the assumption that lligher sales mean more profits (which may or may not be true).
Tl1e point to be made here is tl1at the ultimate objective of the business advertiser is
to 1nake sales and profits. To achieve this objective, customers must purchase and repur
chase the advertised product. Toward this end, an approach to advertising is needed that
provides for intelligent decision making. This approach must recognize the need for meas
uring the resttlts of advertising, and these measurements must be as valid and reliable as
possible. Marketing ma11agers 1nust also be aware that advertising not only complements
other forms of com1nunication but is subject to the law of din1inishing returns. This means
that for any advertised product, it can be assumed a point is eventually reached at which
additional advertising produces little or no additional sales. 125
126 Part C The Marketing Mix
ADVERTISING DECISIONS
In line with what has just been said, the marketing manager must make two key decisions.
The first decision deals with determining the size of the advertising budget, and the sec- 011d deals with how the advertising budget should be allocated. Altl1ougl1 these decisions
are highly interrelated, we deal with them separately to achieve a better understanding of
the problems involved. Today's most successful brands of consumer goods were built by
heavy advertising and marketing investment long ago. Many marketers have lost sight of the connection between advertising spending and market share. They practice tl1e art
of discounting: cutting a.d budgets to fund price promotions or fatten quarterly earnings.
Companies ernploying these tactics may benefit in the short term but may be at a severe
competitive disadvantage in the long term.
Marketers at some companies, however, know that brand equity and consumer pref erence for brands drive market sl1are. They understand tl1e balance of advertising
and promotion expenditures needed to build brands and gain share, market by market,
regardless of growth trends i n the product categories where they compete. For example,
Procter & Gamble has bt1ilt its Jif and Folger's brands from single-digit shares to being
a1nong category leaders. In peanut butter and coffee, P&G invests more in advertising and
less in discounting than its major competitors. Wl1at P&G and other smart marketers such
as Kellogg, General Mills, Coke, and PepsiCo hold in common i s an awareness of a key
factor in advertising: consistent investment spending. They do not raid their ad budgets to
increase ea.n1ings for a few quarters, nor do tl1ey view advertising as a discretionary cost.
The Expenditure Question Most firms determine how much to spend on advertising by one of the following methods.
Percent of Sales
This is one of the most popular rule-of-thumb methods, and its appeal i s found i n its sim
plicity. The firm simply takes a percentage figure and applies it to either past or future
sales. For example, suppose next year's sales are estimated to be $1 million. Using the
criterion of 2 percent of sales, the ad budget would be $20,000. This approach is usually
justified by its advocates i n terms of the following argument: (1) Advertising i s needed to
generate sales; (2) a number of cents (i.e., the percentage used) out of each dollar of sales
should be devoted to advertising in order to generate needed sales; and (3) the percentage
is easily adjusted and can be readily understood by other executives. The percent-of-sales
approach is popular in retailing.
P e r -Unit Expenditure
Closely related to the preceding technique is one in which a fixed monetary amount is spent
on advertising for each unit of the product expected to be sold. This method is popular with
higher-priced merchandise, such as auto1nobiJes or appliances. For instance, i f a company is 1narketing color televisions priced at $500, it may decide that it should spend $30 per set on
advertising. Since this $30 is a fixed a.mount for each unit, this method amounts to the same
thing as the percent-of-sales method. The big difference is in the rationale used to justify each
of the methods. The per-unit expenditure method attempts to determine the retail p1ice by
using production costs as a base. Here tl1e seller realizes that a reasonably competitive price
must be establisl1ed for tl1e product in question and therefore attempts to cost out the gross
margin. All this means is that, if the suggested retail price is to be $500 and manufacturing
costs are $250, a gross margin of $250 is available to cover certain expenses, such as trans
portation, personal selling, advertising, and dealer profit. Some of these expense iten1s are
flexible, such as advertising, while others are nearly fixed, as in the case of transportation.
Chapter Eight Integrated Marketing Co111munications 127
The basic problem with this method and the percentage-of-sales method is that they view
advertising as a function of sales, rather than sales as a fu11ction of advertising.
All You Can Afford
Here the advertising budget i s established as a predetermined share of profits or financial
resources. The availability of current revenues sets the upper limit of the ad budget. The
only advantage to this approach is tl1at it sets reasonable limits on the expenditttres for
advertising. However, from the standpoint of sound 1narketing practice, this 1nethod is
undesirable because there is no necessary connection between liquidity and advertising
opportunity. Any firm that limits its advertising outlays to the amount of available funds
will probably miss opportunities for increasing sales and profits.
Competitive Parity
T11is approach is often used in conjunction with other approaches, such as the percent
of-sales method. The basic philosophy underlying this approach is that advertising i s
defensive. Advertising budgets are based on those of competitors or other members of
the industry. From a strategy standpoint, this is a "followership" technique that assumes
that the other firms in the industry know what they are doing and l1ave si1nilar goals.
Competitive parity is not a preferred metl1od, although some executives feel it is a safe
approach. This may or may not be true depending i n part on the relative market share of
competing firms and their growth objectives.
The Research Approach
Here the advertising budget is argued for and presented on the basis of researcl1 fi11d
ings. Advertising media are studied in terms of their productivity by the use of 1nedia
reports and research studies. Costs are also estimated and compared with study results.
A typical experiment is one in which three or more test markets are selected. The first test market is used as a control, either with no advertising or with normal levels of adver
tising. Advertising with various levels of intensity is used in the other 1narkets, and
comparisons are made t o see what effect different levels of intensity have. The market
ing manager then evaluates the costs and benefits of the different approaches and inten
sity levels to determine the overall budget. Although the research approach is generally
more expensive than so111e otl1er models, it is a more rational approach t o the expenditure
decision.
The Task Approach
Well-planned advertising programs usually make u.se of the task approach, which initially
formulates the advertising goals and defines the tasks to accomplish these goals. Once this
is done, management determines how much it will cost to accomplish each task and adds up the total. This approach is often in conjt1nction with the research approach.
The Allocation Question
This question deals with the proble1n of deciding on the most effective way of spend
ing advertising dollars. A general answer to the question is that management's choice of
strategies and objectives determines the media and appeals to be used. In other words, the fi11n's or product division's overall 1narketing plan will function as a general guideline for
answering the allocation question.
From a practical standpoint, however, the allocation question ca.n be framed i n terms of
message and media decisions. A successful ad campaign has two related tasks: (1) say the
right things in the ads themselves, and (2) use the appropriate media in the right amounts at the right ti1ne to reach the target market.
.MARKETING INSIGHT Pr.e:p_aring the Adve:rtis.i n_g Cam'p_aign :.
128
. . . . '
• • . ' • • • • I . ' • • '
ililhe' �-i'g'lil t·- M F.o �lftl·u !'a ·a:a
Effective advertising should follow a plan. There is no one best way to go about planning an advertising campaign, but in general, marketers should have good answers to the following eight questions:
1. The management question: Who will manage the advertising program?
2. The money question: How much should be spent on advertising as opposed to other forms of communication?
3. The market question: To whom should the advertising be directed?
4. The message question: What should the ads say about the product?
5. The media question: What types and combinations of media should be used?
6. The macroscheduling question: How long should the advertising campaign be in effect before changing ads or themes?
7. The microscheduling question: At what times and dates would it be best for ads to appear during the course of the campaign?
8. The measurement question: How will the effectiveness o f the advertising campaign be measured and how will the campaign be evaluated and controlled?
Message Strategy
The advertising process involves creating messages with words, ideas, sounds, and other
forms of audiovisual stimuli that are designed to affect consumer (or distribLLtor) behav
ior. It follows that much of advertising is a communication process. To be effective, t11e
advertising message should meet two general criteria: (1) I t should take into account the
basic principles of communication, and (2) it should be predicated upon a good theory of
consumer motivation and behavior.
The basic com1nunication process involves three elements: (1) the sender or source
of the communication, (2) the communication or message, and (3) the receiver or audi
ence. Advertising agencies are considered experts in the communications field and are
employed by most large firms to create meaningful messages and assist in their dissemi
nation. Translating the product idea or marketing message into an effective ad is termed
encodirig. In advertising, the goal of encoding is to generate ads that tl1e audience under
stands. For this to occur, the audience must be able to decode the 1nessage in the ad so that
the perceived content of the message is the same as the intended content of the message.
From a practical standpoint, all this means is that advertising messages must be sent to
consumers in an understandable and meaningful way.
Advertising messages, of course, must be transmitted and carried by particular co1nmu
nication channels co1nmonly known as advertising rnedia. These media or channels vary in
efficiency, selectivity, and cost. So1ne channels are preferred to others because they have less
"noise," and thus messages are more easily received and tmderstood. For example, a particular newspaper ad must compete with other ads, pictures, or stories on the same page. In the case
of radio or TV, while only one frrm' s message is usually broadcast at a time, other distractions
(noise) can hamper clear communications, such as driving while listening to the radio.
The relationship between advertising and consumer behavior is quite obvious. For many
products and services, advertising is a11 influe11ce that 111ay affect the consu111er' s decision
to purchase a particular product or brand. It is clear that consumers are subjected to many
selling influences, and the question arises about how important advertising is or can be. In
this case, the advertising expert must operate on some theory of const11ner behavior. The
reader will recall from the discussion of consu1ner behavior tl1at the buyer was viewed
as progressing th.rough various stages fro1n ai1 unsatisfied need th.roug]1 and beyond a
Newspapers
Advantages
1. Flexible and timely.
2. Intense coverage of local markets.
3. Broad acceptance and use.
4. High believability of printed word.
Disadvantages
1. Short life.
2. Read hastily.
3. Small "pass-along" audience.
Radio
Advantages
1. Mass use (over 25 million radios sold annually).
2. Audience selectivity via station format.
3. Low cost (per unit of time).
4. Geographic flexibility.
Disadvantages
1. Audio presentation only.
2. Less attention than TV.
3. Chaotic buying (nonstandardized rate structures).
4. Short life.
Outdoor
Advantages
1. Flexible.
2. Relative absence of competing advertisements.
3. Repeat exposure.
4. Relatively inexpensive.
Disadvantages
1. Creative limitations.
2. Many distractions for viewer.
3. Public attack (ecological implications).
4. No selectivity of audience.
Television
Advantages
1. Combination of sight, sound, and motion.
2. Appeals to senses.
3. Mass audience coverage.
4. Psychology of attention.
Disadvantages
1. Nonselectivity of audience.
2. Fleeting impressions.
3. Short life.
4. Expensive.
Magazines
Advantages
1. High geogra-phic and demographic selectivity.
2. Psychology of attention.
3. Quality of reproduction.
4. Pass-along readership.
Disadvantages
1 . long closing periods (six to eight weeks prior to publication).
2. Some waste circulation.
3. No guarantee of position (unless premium is paid).
Direct Mail
Advantages
1 . Audience selectivity.
2. Flexible.
3. No competition from competing advertisements.
4. Personalized.
Disadvantages
1. Relatively high cost.
2. Consumers often pay little attention and throw it away.
Internet
Advantages
1. Interactive.
2. low cost per exposure.
3. Ads can be placed in interest sections.
4. Timely.
5. High information content possible.
6. New favorable medium.
Disadvantages
1. Low attention getting.
2. Short message life.
3. Reader selects exposure.
4. May be perceived as intruding.
5. Subject to download speeds.
129
MARKETING INSIGHT Some l1111ovative Nontra.ditional Media . - .
-
-
Advertising can be found everywhere these days-even places where we least expect it.
Aerial Banners and Lights
Banners carrying ad messages can be pulled by low-flying planes. After dark, traveling aerial lights can display messages of up to 90 characters. Slow-flying helicopters can carry 40- b y 80-foot signs lit by thousands
of bulbs.
Blimps
In addition to Goodyear, blimps now carry ads for many companies, including Citibank, Coca-Cola, and Fuji Film, among others. Computer operated lighting systems allow the blimps to advertise at night.
In-Flight Ads
Many airlines' in-flight audio and video entertainment runs ads. The travel industry and advertisers that want to reach business fliers are the primary users.
Newspaper Bags
The protective bags of newspapers are used for full-color advertising and can be enhanced by adding product samples. This method is desirable because it does not have to compete with other advertisers.
Transit Terminal Domination
The latest version of saturation bomb ing has come to large transit hubs around the country. One advertiser buys up all or most of the message space i n one confined site banishing all competition. This greatly increases the chances of being seen even by the most harried passers by.
Electronic Billboards
Most modern sports stadiums and arenas sell ad space on giant electronic displays.
Inflatables
Giant inflatable beer cans, mascots, and even cereal boxes are used for advertising purposes.
Painted Vehicles
Buses, trucks, and cars are completely deco rated with larger than life illustrations and
'8=6
messages to attract attention. Some vehicles are "wrapped" with a material that covers the entire vehicle to present the greatest visual impact.
Reactrix Brand Play
In small theaters and other spaces, Reactrix creates highly entertaining branding dis plays that respond to the physical move ment of the audience.
Trash Receptacles
Uniquely designed and decorated trash bins, boxes, and baskets bear advertising logos and messages. Some major cities now offer advertising space on concrete litter recepta cles at major commercial intersections.
Kiosks
Stand-alone kiosks can be painted with eye catching designs and messages. Unique con structions can be attached to the top and sides to draw attention. Electronic displays running presentation software can show colorful fast-action video clips, slide images, and interactive text. These systems can also play synchronized sounds and music.
Lavatory Advertising
Numerous venues allow advertising in lava tories. Print ads can be found o n the inner side of stalls and above urinals in some men's restrooms.
Cobo/Cookie Advertising
The gobo (or cookie) is a piece of metal stenciled with a logo through which light is projected against a wall or other suitable background. This is ideal for huge outdoor or indoor events.
Train Cars
Train cars are wrapped with advertisements instead of graffiti these days. In Chicago an eight-car commuter train was wrapped with Illinois lottery ads.
Grocery Receipts
Today most major supermarket chains print coupons on the back of grocery receipts. The coupons feature discounts at local retailers.
Source: From William Arens, Michael Weigold and Christian Arens, Contemporary Advertising 7 3£, 2011, p. 275. Reprinted with permission of McGraw-Hill Education.
131
132 Part C The Marketing Mix
FIGURE 8.2 Example of Sales Promotion Activities
Source: From William Perreault, Jr., Joseph Cannon and E. Jerome McCarthy, Basic Marketing 1 BE, 2011, Chapter 14. Reprinted with
permission of McGraw-Hill Education.
Aimed at final - -
Aimed at company's -
consumers or users Aimed at middlemen own sales force
Contests Price deals Contests Coupons Promotion allowances Bonuses Aisle displays Sales contests Meetings Samples Calendars Portfolios Trade shows Gifts Displays Point-of-purchasing Trade shows Sales aids
materials Meetings Training materials Banners and streamers Catalogs Frequent buyer programs Merchandising aids Sponsored events
I
Videos
I I
associated with any or all of the categories of advertising objectives (the prospect becomes
aware of the product, takes action, etc.) covered earlier in the chapter.
SALES PROMOTION
Over tl1e past two decades, tl1e popularity of sales pron1otion has been increasing. Two
reasons for this increased popularity are undoubtedly the increased pressure on manage
ment for short-term results and the emergence of new purchase tracking technology. For
example, many supermarket cash registers are now eqLLipped with a device that dispenses
coupons to a custo1ner at the point of purcl1ase. Tl1e type, variety, and cash amount of
the coupon will vary from customer to customer based on their purchases. In essence, it
is now possible for the Coca-Cola Company to dispense coupons only to those custom
ers who purchase Pepsi Cola, thus avoiding spending promotional dollars on already
loyal Coke drinkers. Figure 8.2 presents some popular targets of sales pro1notion and tl1e
1nethods used.
Push versus Pull Marketing Push and pul] marketing strategies co1nprise the two options available to marketers interested in getti11g tl1eir product i11to the hands of custo1ners. They are illustrated in Figure 8.3. Push
strategies involve aiming promotional efforts at distributors, retailers, and sales personnel
to gain their cooperation in ordering, stocking, and accelerating the sales of a product. For
example, a local rock band 1nay visit local DJs seeking air play for their record, offer dis tributors special prices to carry the CD, and offer retailers special allowances for putting
up posters or special counter displays. These activities, which are usually in the fonn of
price allowances, distribt1tion allowances, and advertising dollar allowances, are designed to
"push" the CD toward the customer.4
Pull strategies involve aiming pro1notional efforts directly at customers to encourage
them to ask the retailer for the product. In the past few years drug manufacturers have begun
to advertise prescription drugs directly to consumers. Custo1ners are encouraged to "Ask
Your Doctor'' about Viagra or Paxil. These activities, which can include advertising and sales
pro1notion, are designed to "ptill" a product through the channel from manufacturer to buyer.
Chapter Eight Integrated Marketing Co111munications 133
FIGURE 8.3 Push versus Pull St rategies in Marketing Communications
Push Strategy
- Producer
I
Pull Strategy
Producer
Marketing Communications
Resellers
I
, _ Marketing
Communications
Marketing Communications
Request Products
I
Resellers
Trade Sales Promotions
- Request Products
- End Users
I
End Users
Trade prcJnwtions are those promotions aimed at distributors an.d retailers of products who
make up the distribution channel. T11e 1najor objectives of trade pro111otions are to (l) convince
retailers to carry tl1e manufacturer's products, (2) reduce the manufacturer's inventories and
increase the distributor's or retailer's inventories, (3) support advertising and consumer sales
promotions, (4) encourage retailers either to give the product more favorable shelf space or to
place more emphasis on selling tl1e product, and (5) serve as a reward for past sales efforts.
Pro1notions built around price discounts and advertising or other allowances are likely
to have higher distributor/retailer participation levels than other type promotions because
a direct economic incentive is attached to the promotion.5 The importance attached to
individual types of pro1notions may vary by the size of distributor/retailer. For exa1nple, small retailers do not consider contests, sweepstakes, and sales quotas as being i1nportant
to tl1eir decision to participate in promotions; getting the full benefit of such promotions i s
difficult due t o their size. Marketers must keep in mind that not all distribt1tors or retailers
will have the sa1ne reaction to promotions offered. The manufacturer must carefully con sider differences in attitudes wl1en desig11ing and i1nplementing trade promotio11 progra1ns.
Consumer Promotions
Consumer pronwtions can fulfill several distinct objectives for the manufacturer. Some of
the 1nore commonly sought-after objectives include (1) inducing the consumer to try the
product, (2) rewarding the consumer for brand loyalty, (3) encouraging the conswner to
trade up or purchase larger sizes of a product, (4) stimulating the consumer to make repeat
purchases of the product, (5) reacting to competitor efforts, and (6) reinforcing and serving
as a complement to advertising and personal selling efforts.
134
Evaluating Advertising Efife.c.tive:11.e.s_s:: _S"o,m:e: M,e.th_o,ds-. 8-7· amd �Malilaole SeriM·ices
Evaluating Specific Advertisements
1. Recognition tests. Estimate the percentage of people claiming to have read a magazine who recognize the ad when it is shown to them (e.g., Starch Message Report Service).
2. Recall tests. Estimate the percentage of people claiming to have read a magazine who can (unaided) recall the ad and its contents (e.g., Gallup and Robinson Impact Service, various services for lV ads as well).
3. Opinion tests. Potential audience members are asked to rank alternative advertisements as most interesting, most believable, best liked.
4. Theater tests. Theater audience is asked for brand preference before and after an ad is shown in context of a lV show (e.g., Schwerin lV Testing Service).
Evaluating Specific Advertising Objectives
1. Awareness. Potential buyers are asked to indicate brands that come to mind in a product category. A message used in an ad campaign is given and buyers are asked to identify the brand that was advertised using that message.
2. Attitude. Potential buyers are asked to rate competing or individual brands on determi nant attributes, benefits, and characterizations using rating scales.
Evaluating Motivational Impact
1. Intention to buy. Potential buyers are asked to indicate the likelihood they will buy a brand (on a scale from "definitely will not" to "definitely will").
2. Market test. Sales changes in different markets are monitored to compare the effects of different messages, budget levels.
Sources: Evaluating the effectiveness o f advertising is a difficult task. For discussions, see Joseph Guiltinan and Gordon Paul, Marketing Management, 6th ed. (Burr Ridge, IL: McGraw-Hill/Irwin, 1997), p. 274; and George E. Belch and Michael A. Belch, Advertising and Promotion, 9th ed. (Burr Ridge, IL: McGraw-Hill, 2012), chap. 18.
Figure 8.4 presents a brief description of some of the most conunonly used forms of consumer promotion activities.
What Sales Promotion Can and Can't Do
Advocates of sales pro1notion often point to its growing popularity as a justification for the argument that we don't need advertising; sales promotion itself will suffice. Marketers should bear in mind that sales promotion is only one part of a well-constructed inte grated marketing communications program. While sales promotion is proven to be effective in acl1ieving the objectives listed in the previous sections, there are several co1npelling reaso11s wl1y it should not be used as the sole promotional tool. These reasons include sales promotion's inability (1) to generate long-term buyer commitment to a brand i n many cases; (2) to change, except on a temporary basis, declining sales of a product; (3) t o convince buyers to purchase an otherwise unacceptable product; and (4) to make up for a lack of advertising or sales support for a product. 111 addition, promotions can often fuel the flames of competitive retaliation far more than other mar keting activities. When the competition gets drawn into the promotion war, the effect can be a significant slowing of the sharp sales increases predicted by the initiator of the promotion. Worse yet, promotions can often devalue the image of the promoted bra11d in the consumer's eyes.
FIGU E 8.4
Some Commonly Used
Forms of Consumer
Promotions
• Sampling
• Price deals
• Bonus packs
• Rebates and refunds
• Sweepstakes and contests
• Premiums
• Coupons
Chapter Eight Integrated Marketing Co111munications 135
Customers are offered regular trial sizes of the product either free or at a nominal price.
Customers are offered discounts from the product's regular price.
Additional amounts of the product are given to buyers when they purchase the product.
Customers are given reimbursements for purchasing the product either on the spot or through the mail.
Prizes are available either through chance selection or games of skill.
A reward or gift can come from purchasing a product.
Probably the most familiar and widely used of all consumer pro motions, now often available at point of purchase.
The dilemma marketers face is how to cut back on sales promotions without losing
market share to cornpetitors. I n an effort to overcome this problem, some consurner prod
ucts companies are instituting new pricing policies to try to CLLt back on the amount of
sales promotions used. For example, Procter & Gatnble and General Mills have instituted
everyday l o w -price strategies for many of their products. The intent of this type of policy
is to give retailers a lower list price in exchange for cutting trade promotions. While the
net cost of the product to retailers remains unchanged, retailers are losing promotional
dollars that they controlled. In many situations, although trade allowances are supposed to
be used for encouraging retail sales, it is not unco111mon for retailers to take a portion of
the trade allowance money as profit. The rationale behind companies' (such as Procter &
Gan1ble and General Mills) efforts to cut back on trade and other promotions is (1) not to
force brand-loyal customers to pay unustLally high prices when a product isn't on special;
(2) to allow consumers to benefit from a lower average sl1elf price, since retailers will no
longer have discretion over the use of allowance dollars; and (3) to i1nprove efficiencies
i n manufacturing and distribution systems because retailers will lose tl1e incentive to do
heavy forward buying of discounted items.
In addition to developing pricing policies to cut back on short-term promotions, some
consumer products companies are starting to institute.frequency 1riarketing programs in
which they reward consumers for purchases of products or services over a sustained
period of time. These programs are not technically considered sales promotions due to
their ongoing nature. Frequency marketing originated in 1981 when American Airlines launched its frequent-flyer program with the intention of securing the loyalty of busi
ness travelers.
PUBLIC RELATIONS
As noted earlier in the chapter, public relations is a nonpersonal form of commt1nication
that tries to influence the overall image of tl1e organization and its products and services
among its various stakeholder groups. Public relations managers prefer to focus on co1nmu
nicating positive news about the organization, but they must also be available to minimize
the negative impacts of a crisis or problem. We have already noted that the most popular
and frequently used public relations tool is publicity. There are several forms of pLLblicity:
1. News release. An announcetnent regarding changes i11 the organization or the product
line, sometimes called a press release. The objective is to inform members of the media
of a newsworthy event i n the hope that they will convert it into a story.
Consumer Database
1 2 3 4
5 6 7 8 9
10
11 12 13
14
15 16
Name Address/zip code Telephone number Length of residence Age Gender Marital status Family data (number of children, etc.) Education Income Occupation Transaction history Promotion history Inquiring history Unique identifiers
Business-to-Business Database
Name of company/contact/decision maker(s) Title of contact Telephone number Source of order/inquiry or referral Credit history Industrial classification Size of business Revenues Number of employees Time in business Headquarters location Multiple locations Purchase history Promotion history Inquiring history Unique identifier
Source: From George E. Belch and Michael A. Belch, Advertising and Promotion: An Integrated Marketing Communications Perspective 9E, 2012, p. 497. Reprinted with permission of McGraw-Hill Education.
2. News conference. A meeting held for representatives of the media s o that the organi
zation can announce major news events such as new products, tecl1nologies, mergers,
acquisitions, and special events, or, in the case of a crisis or problem, present its posi
tion and plans for dealing with the situation.
3. Spon.sorship. Providing support for and associating the organization's name with
events, programs, or even people such as amateur athletes or teams. Besides publicity,
sponsorship can also include advertising and sales promotion activities. Many organi
zations sponsor sporting events, art festivals, and public radio and television programs.
4. Public service annoi,ncernents. Many nonprofit organizations rely 011 tl1e 111edia to donate time for advertising for contributions and donors. Many nonprofit organizations
cannot afford the cost of advertising or in some cases are prohibited from doing so.
DIRECT MARKE fl NG
136
We already know tl1at direct 1narketing allows the organization to communicate with custom
ers through direct 1nai1, e -1nai1, 1nobile marketi11g, catalogs, telemarketing, and direct response
advertising. The Internet has had a tremendous impact on every aspect of direct mail.
Direct marketing metl1ods are certainly not new. In fact, several of them will be dis
cussed later in the book as methods of nonstore retailing. What is new is the ability to
design and use them n1ore efficiently and effectively because of tl1e Internet and the abil
ity to develop and compile comprehensive databases (see Marketing Insight 8 -7). Tl1e
databases have positively affected traditional direct marketing met.hods such as direct mail
and catalogs but have enabled the development of targeted e-mail marketing and mobile
marketing.
Marketers can now customize com1nunication efforts and literally create one-to-one
connect.ions and dialogues with customers, which can include special promotions and tar
geted special promotions in addition to shipping data and confirmation of orders. All of the
information provided by the customers is incorporated into the seller's database. In a kind
SUMMARY
Additional
Resources
Key Terms
and Concepts
Chapter Eight Integrated Marketing Co111munications 137
of irony, the more info1mation the customer provides tl1e marketer, the more effectively the marketer can target tl1at custo1ner.
Finally, cellular technology such as a smartphone enable the customer t o purcl1ase
wherever they happen to be. Marketing by way of these handheld devices has become
known as mobile marketing. 6 This technology also allows these devices to function as a
medium of payment. Marketers see a great future for mobile marketing as they and their
customers capitalize on its potential.
For the American consumer facing a "poverty of time," direct 1narketing offers many
benefits. In addition to saving time, consumers often save money, get better service, and enjoy
increased privacy; many even find it entertaining. For the marketer, sales revenL1es are the
obvious benefit but not the only one. Direct marketing activities are often very effective
in generating sales leads when a customer asks for more information about a product or
service and can also increase store traffic when potential buyers are encouraged to visit a
dealership or retail store.
T11is chapter has been concerned with integrated marketing co1nn1u11ications. Remember
that advertising and sales promotion are only two of the ways by which sellers can
affect the demand for their product. Advertising and sales promotion are only part of the
firm's promotion mix, and in turn, the promotion mix is only part of the overall marketing
1nix. Thus, advertising and sales promotion begin with the marketing plan and not with
the advertising and sales promotion plans. Ignoring this point can produce ineffective and
expensive promotional programs because of a lack of coordination with other elements of
the marketing mix.
Burns, Briru1 C., and Tom U. Snyder. Selling in a New Market Space. Ne�1 York: McGraw-Hill,
2010.
Seitel, Fraser, and John Doorley. Rethinking ReJJutation. New York: Palgrave Macmillan, 2012.
Mullin, Jeanniery, and David Daniels. Email Marketing. Indianapolis: Wiley Publishers, 2009.
Percival, Sean. My Space Marketing: Creating a Social Network to Booni Your Business.
Indianapolis: Que Books, 2009.
Postn1an, Joel. SocialCorp: Social Media Goes Corporate. Berkeley, CA: New Riders, 2009.
Reich, B1ian, and Don Soloman. Metiia Rules: Mastering Today's Technology to Connect With and
Keep Your Audience. Hoboken, NJ: John Wiley and Sons, 2008.
Fox, Vanessa. Marketing in the Age of Google. Hoboken, NJ: John Wiley and Sons, 2012.
Advertising: A paid forrn of nonpersonal co1ru11u1lications about an organization, its product, or its
activities that is u·ans1nitted through a mass meditun to a target audience.
Average frequency: Tl1e number of times customers, on average, are exposed to an advertisement
within a given time period.
Consumer promotions: Promotions directed at consumers designed to induce the customer to
try the product, rev,1ard brru1d loyalty, encourage the consumer to trade-up o r purchase larger sizes,
stimulate repeat purchases, and reinforce other advertising or personal selling efforts.
Cost per thousand: A common measure of efficiency or productivity in advertising, cost per
thousand (CPM) refers to the doUar cost of reaching 1,000 prospects.
Direct marketing: Direct co1n1nunication with custon1ers through direct 1nail, e-1nail, 1nobile
1nru·keting, catalogs, telemarketing, and direct respo11se advertising.
13i Part C The Marketing Mix
Expenditure question: The 1nethods used to decide bow 1nuch to spend on advertising, ranging
from si1nple (a percent of sales), to 1nore co1nplex (the task approach which deter1nines goals and
how much it will cost to accomplisl1 each goal).
Frequency marketing programs: Programs designed to reward custo1ners for ptu·chases of a
product or service over a sustained period of time.
Integrated marketing communications: Marketing communications programs that coordinate
and integrate all elements of the promotion mix so that the organization presents a consistent
message. lt seeks to manage all sources of brand or co1npany contacts with existing and potential
customers.
Mobile n1arketing: Marketing by way of handl1eld devices (e.g., smartphones).
Objectives of advertising: Creating awareness, aiding comprehension, developing conviction, at1d
encouraging ordering. Within eacl1 category more specific objectives can be developed that take
into account time and degree of success desired.
Personal selling: Face-to-face comn1unication with potential buyers to inform the1n about and
persuade them to purchase an organization's product.
Promotion mix: The combi11ation and types of nonpersonal and personal commu11ication an
organization puts forth during a specified period. There are five elements of the promotion mix,
four of which are nonpersonal forms of communication (advertising, sales promotion, public rela
tio11s, and direct marketing), and one, personal selling, which is a personal form of communication.
Public relations: Efforts directed at influencing the attitudes, feeli11gs, and opinions of customers,
noncusto1ners, stockholders, suppliers, e1nployees, and political bodies about the orgai1ization.
A popular form is publicity.
Pull strategy: Promotional efforts directed at custo1ners to encourage them to ask the retailer for
the product. They are designed to "pull" a product through the distribution channel from manufac
turer to buyer.
Push strategy: Promotional efforts directed at distributors, retailers, and sales personnel to gain
their cooperation i n ordering, stocking, and supporting the sales of a product. As such they "push"
the product toward the customer.
Reach: The number of targeted audience members exposed at least once to an advertiser's 1nes
sage within a predeter1nined ti.tne frame.
Sales promotion: An activity or material that offers customers, sales personnel, or resellers a
direct inducement for purchasing a product.
Trade promotions: Promotions aimed at distributors and retailers of products who make up the
distribution channel.
Appendix
■ ■
a or enc1es ■
nvove 1n
Agency
Federal Trade Commission
Food and Drug Administration
Federal Communications Commission
Postal Service
Alcohol and Tobacco Tax Division
Grain Division
Securities and Exchange Commission
Information Source
Patent Office
Library of Congress
Department of Justice
■ ■
1s1n
Function
Regulates commerce between states; controls unfair business practices; takes action on false and deceptive advertising; most important agency in regulation of advertising and promotion.
Regulatory division of the Department of Health, Education, and Welfare; controls marketing of food, drugs, cosmetics, medical devices, and potentially hazardous consumer products.
Regulates advertising indirectly, primarily through the power to grant or withdraw broadcasting licenses.
Regulates material that goes through the mails, primarily in areas of obscen ity, lottery, and fraud.
Part of the Treasury Department; has broad powers to regulate deceptive and misleading advertising of liquor and tobacco.
Unit of the Department of Agriculture responsible for policing seed advertising.
Regulates advertising of securities.
Description
Regulates registration of trademarks.
Controls protection of copyrights.
Enforces all federal laws through prosecuting cases referred to it by other government agencies.
139
Chapter
•
ersona e 1n '
• •
'
aes ana emen
Personal selling, unlike advertising or sales promotion, involves direct relationships
between the seller and the prospect or ct1stomer. In a formal sense, personal selling can be
defined as a two-way tlow o f communication between a potential buyer and a salesperson
that is designed to accomplish at least three tasks: (1) identify the potential buyer's 11eeds;
(2) matcl1 those needs to one or more of the firm's products or services; and (3) on the
basis of this match, convince the buyer to purchase the product. Tl1e personal selling ele
ment of tl1e pron1otion mix can encompass diverse forms of direct interaction between a
salesperson and a potential buyer, including face-to-face, telephone, written, and computer
communication. The behavioral scientist would 1nost likely characterize personal selling
as a type of personal influence. Operationally, it is a complex cornmunication process, one
still not fully understood by marketers.
IMPORTANCE OF PERSONAL SELLING
140
The importance of the personal selling function depends partially on the nature of the prod
LLCt. As a general 1ule, goods that are new and different, technically complex, or expensive
require more personal selling effort. The salesperson plays a key role in providing the con sun1er with information about such products to reduce the risks involved in purchase a.nd
use. Insurance, for example, is a complex and technical product that often needs significant
amounts of personal selling. In addition, many organizational products cannot be presold, and
the salesperson has a key role to play in :finalizing the sale.
It is important to re111ember that, for ma11y companies, the salesperson represents tl1e
customer's main link to the firm. In fact, to some, the salesperson is the company.
Therefore, it is imperative that the company take advantage of this unique link. Through the
efforts of the successful salesperson, a company can build relationships with customers
that continue long beyond the initial sale. It is the salesperson who serves as the conduit
througl1 which information regarding product flaws, i1nprovements, applications, or new
uses ca.n pass from the customer to the marketing department. To illustrate the impo1tance
of using salespeople as an information resource, consider this fact: In some industries,
customer infonnation serves as a major source for up to 90 percent of new product and
Chapter Nine Personal Selling, Relationship Building, and Sales Management 141
process ideas. Along with techniques described in the previous chapter, personal selling
provides the push needed to get middle111en to carry new products, increase theis an1ount of
goods purchased, and devote more effort in merchandising a product or brand.
In sum1nary, personal selling is an integral part of the n1arketing system, fulfilling two
vital duties (in addition to the core sales task itself): one for customers and one for compa nies.1 First, the salesperson dispenses knowledge to buyers. Lacking relevant information,
customers are likely to make poor buying decisions. For exan1ple, co1nputer users would
not learn about new equipment and new programming techniques without the assistance
of computer sales representatives. Doctors would have difficulty finding out about new
drugs and procedures were it not for pharmaceutical salespeople. Second, salespeople
act as a source of 111arketing intelligence for management. Marketing success depends on
satisfying customer needs. If present products don't fulfill customer needs, then profit
able opportunities may exist for new or in1proved products. If problems with a company's
product exist, then 1nanagement must be quickly apprised of the fact. In either situation,
salespeople are in the best position to act as the intermediary through which valuable
information can be passed back and forth between product providers and buyers.
THE SALES PROCESS
Personal selling is as n1uch an art as it is a science. The word art is used to describe that p o r
tion of the selling process tl1at is highly creative in nature and difficult to explain. This does
not mean there is little control over the personal selling element in the promotion mix. It
does imply that, all other things equal, the trained salesperson can outsell the untrained one.
Before management selects and trains salespeople, it should have an t1nderstanding
of the sales process. Obviot1sly, the sales process will differ according to the size of tl1e
company, the nature of the product, the 1narket, and so forth, but some elements are com
mon to almost all selling situations. For the purposes of this text, the term sales process
refers to two basic factors: (1) the objectives the salesperson is trying to achieve while
engaged in selling activities and (2) the seqt1ence of stages or steps the salesperson should
follow in trying to achieve the specific objectives (the relationship-bujlding process).
Objectives of the Sales Force Much like the concepts covered in the previous chapter, personal selling can be viewed as a stra
tegic means to gain competitive advantage in the marketplace. For example, most organizations
include service representatives as part of their sales team to ensure that customer concerns with
present products are addressed and remedied at the saine time new business is being solicited.
In a siJrular manner, marketing management understands that whlle, ultimately, per
sonal selling must be justified on the basis of the revenue and profits it produces, other
categories of objectives are generally assigned to the personal selling function as part of
the overall promotion 1mx.2 These objectives are
l. Information provision. Especially in the case of new products or customers, the sales
person needs to fully explain all attributes of the product or service, answer any ques
tions, and probe for additional questions.
2. Persuasion. Once the initial product or service information is provided, the salesperson
needs to focus on tl1e following objectives:
• Clearly distinguish attributes of the fi11n' s products or services fro1n those of competitors.
• Maximize t]1e 11umber of sales as a percent of prese11tations. • Convert undecided customers into fir s t -time buyers.
• Convert first-time customers into repeat purchasers.
142
1 . Creates new customers.
2. Sells more to present customers.
3. Builds long-term relationships with customers.
4. Provides solutions to customer problems.
5. Provides service to customers.
6. Helps customers resell products to their customers.
7. Helps customers use products after purchase.
8. Builds goodwill with customers.
9. Provides company with market information.
Source: From Charles Futrell, Fundamentals of Selling 13E, 2014, p. 24. Reprinted with permission of McGraw-Hill Education.
• Sell additional or complementary items to repeat customers.
• Tend to the needs of dissatisfied customers.
3 . After-sale service. Whether tl1e sale represents a first-time or repeat purchase, the sales
person needs to ensure the following objectives are met:
• Delivery or i11stallation of the product or service that meets or exceeds customer
expectations. • Im1nediate follow-up calls and visits to address unresolved or new concerns.
• Reassurance of product or service superiority through demonstrable actions.
• Build relationships.
The Sales Relationship-Building Process For many years, the traditional approach to se11ing emphasized the first-time sale of a prod
uct or service as the culmination of the sales process. As emphasized in Chapter 1 , the
marketing concept and accon1panying approach to personal selling view the initial sale
as merely the first step in a long-term relationship-building process, not as the end goal.
As we shall see later in tl1is chapter, long-tenn relationships between the bt1yer and seller
can be considered partnerslups because the buyer and seller have an ongoing, 1nutually
beneficial affiliation, with each party having concern for the other party's well-being.3 The
relationship-building process, which is designed to meet the objectives listed in the previ
ous section, co11tains six sequential stages (Figure 9.1). These stages are (1) prospecting,
(2) planning the sales call, (3) presentation, (4) responding to objections, (5) obtaining com
mitment/closing the sale, and (6) building a long-term relationship. What follows is a brief
description of each of the stages.
Prospecting
The process of locating potential customers is called prospecting. The prospecting activ
ity is critical to the success of organizations in maintaining or increasing sales volume.
Continual prospecting is necessary for several reasons, including the fact that customers
(1) switch to other suppliers, (2) move out of the organization's market area, (3) go out of
business because of bankruptcy, ( 4) are acquired by another firm, or (5) have only a one tin1e need for the product or service. JJ1 addition, the orga11ization's buying contracts with
present customers may be replaced and organizations that wisl1 to grow must increase their
customer base. Prospecting in some fields is 1nore important than in others. For example, a
FIGURE 9.1
The Sales
Relationship-Building
Process
Source: Adapted from m a t e rial discussed in Stephen B. Castleberry and John F. Tanner, Selling: Building Partnerships, 8th ed. (Burr Ridge, IL: McGraw-Hill, 2011 ), p. 206.
I
I
I
I
I
I
Chapter Nine Personal Selling, Relationship Building, and Sales Management 143
Prospecting
'
Planning the sales call
'
Presenting
'
Responding to objections
'
Obtaining commitment
'
Building a long-term relationship
stockbroker, real estate agent, or partner in an accounting firm with no effective prospect
ing plan usually doesn't last long in the business. In these positions, it may take as many as
l 00 contacts to gain IO prospects who will listen to presentations fro1n which one to two
sales may result. 011 tl1e other hand, a Procter & Gamble sales representative in a certain
geographic area would likely know all the potential retailers for Crest toothpaste.
The prospecting process usually involves two major activities that are undertaken on a
continual, concurrent basis. First, prospects must be located. When names and addresses of
prospects are not available, as is usually tl1e case when firms enter new 1narkets or a 11ew
salesperson is hired, they can be generated by rando1nly calling on businesses or households
or by employing mass appeals (through advertising). This process, called random lecid gener
ation, ust1ally requires a high nLtmber of contacts to gain a sale. A lead is a potential prospect
tl1at 1nay or 1nay not have the potential to be a true prospect, a candidate, to wl1om a sale could
be made.
For most professional, experienced salespeople, a more systernatic approach to generating
leads from predetermined target markets is used. This approach, aptly named selected-leacl
generation, uses existing contacts and knowledge to generate new prospects. In general, the
best source of prospects is refen·als from satisfied customers. The more satisfied one's custom
ers are, the higher tl1e quality of leads a salesperson will receive from them.
The second step in the prospecting process involves screening. Once leads are gener
ated, the salesperson must determine whether the prospect is a true prospect. This qualify
ing process usually entails gathering information, which leads to answering five questions:
1. Does the lead have a want or need that can be satisfied by the purchase of the firm's
prodt1cts or services?
2. Does the lead have the ability to pay?
MARKETING: INSIGHT - • . . ,. - . .- -• . . • i' • • ·- - ' -"- S.om_e .Co.m_mo.n: ;S_; ou:rces;
144
- .. --·--· .. .. - -
Source
Satisfied customers
Endless chain
Networking
Center of influence
The Internet
· -·-..: .• _ -·_ .. ·- � -;:_- . ·1. , -. - . -� •. : · -_ . _ --;.,: .·. ---. .. - --
;m� - _,
o�· Sal'es Leads
How Used
Current and previous customers are contacted for additional business and leads.
Salesperson attempts to secure at least one additional lead from each person he or she interviews.
Salesperson uses personal relationships with those who are connected and cooperative to secure leads.
Salesperson cultivates well-known, influential people in the territory who are willing to supply lead information.
Salesperson uses websites, e-mail, Listservs, bulletin boards, forums, round tables, and newsgroups to secure leads.
Ads, direct mail, catalogs, and publicity
Salespeople use these forms of promotional activities to generate leads.
Shows, fairs, and merchandise markets
Seminars
Lists and directories
Data mining and CRM systems
Cold calling
Spotters
Telemarketing
Sales letters
Other sources
Salespeople use trade shows, conventions, fairs, and merchandise markets for lead generation.
Salespeople use seminars for prospects to generate leads.
Salesperson uses secondary data sources, which can be free or fee-based.
Salespeople use sophisticated data analysis software and the company's CRM system to generate leads.
Salesperson tries to generate leads by calling on totally unfamiliar organizations.
Salesperson pays someone for lead information.
Salesperson uses phone and/or telemarketing staff to generate leads.
Salesperson writes personal letters to potential leads.
Salesperson uses noncompeting salespeople, people in his or her own firm, friends, and so on, to secure information.
Source: From Stephen Castleberry and John Tanner, uifding Partnerships BE, 2011, p. 155. Reprinted with permission of McGraw-Hill Education.
3. Does the Jead have t11e authority to pay?
4. Can the Jead be approached favorably?
5. ls the lead eligible to buy?
Depending on the analysis of answers to these questions, the determination of whether
a lead is a true prospect can be made. In seeking and qualifying leads, it is important to
recognize that responsibility for these activities should not be totally assumed by indi vidual salespeople. Rather, companies shou]d develop a consiste11t, organized program,
recognizing that the job of developing prospects belongs to tl1e entire company, not just
the sales force.
Planning the Sales Call
Salespeople will readily admit that their number one problem is getting through the door
for an appoint1nent with a prospect. Customers l1ave become sophisticated in their buying
strategies. Consequently, salespeople have to be equally sophisticated in developing their
selling strategies.
W11i]e a full discussion 011 the topic of planning sales calls is beyond tl1e scope of this
text, what follows are brief descriptions of some key areas of knowledge salespeople
should possess prior to embarking on sales calls.
Chapter Nine Personal Selling, Relationship Building, and Sales Management 145
1. They should have thorough knowledge of the company they represent, including its
past history. This includes the philosophy of 1nanagement as well as the fitm's basic
operating policies.
2. They should have thorough knowledge of their products and/or product lines. This is
particularly trL1e when selling organizational products. When selling very technical
products, 1na11y firms require their salespeople to have training as engineers.
3. They should have good working knowledge of competitors' products. This is a vital
requirement because the successful salesperson will have to know the strengths and
weaknesses of those products that are in competition for market share.
4. They sl1ould have in-depth knowledge of the 1narket for their merchandise. The market
here refers not only t o a particular sales ten·itory but also to the general market, includ
ing the economic factors that affect the demand for their goods.
5. They should have accurate knowledge of the buyer or the prospect to who1n they are
selling. Under the marketing concept, knowledge of the customer is a vital requirement.
Presenting
Successful salespeople have learned the importance of making a good impression. One of
the 1nost important ways of improving the buyer's impression is for the salesperson to be
well prepared in the knowledge areas just discussed. Some salespeople actually develop a
checklist of things to take to the presentation so that nothing is forgotten. Just as important
is the development of good interpersonal skills; they are a key ingredient of effective sell
ing. Salespeople who can adapt their selling style to individual buyer needs and styles have
a mucl1 stronger overall performance than less-t1exible counterparts.
Responding to Objections
To assu1ne the buyer will passively listen a.nd positively respond to a sales presentation b y
placing an immediate order would be unrealistic. Salespeople can expect to hear objections
(issues or concerns raised by the buyer) at any time during the presentation and subsequent
relatio11ship. Objections can be raised wl1en the salesperson attempts to secure appoint ments, during the presentation, when the salesperson attempts to obtain con1111jttnent, or
during the after-sale follow-up.
When sales prospects rruse an objection, it is a sign that they are not ready to buy and
need an acceptable response to the objection before the bLLying decision can be made. In
response to an objection, tl1e salesperson sho11ld not challenge tl1e respondent. Rather, the
salesperson's objective should be to present the necessary information so tl1at the prospect
is able to make intelligent decisions based on that information.
Obtaining Commitment
At some point, if all objections have been resolved, the salesperson must ask for com1nit
n1ent. It's a rare moment when a customer will ask to buy. Consequently, knowing how
and wl1en to close a sale is 011e of a salesperson's most i11ilispensable skills.
It should be noted that not all sales calls end jn co1nlllitn1ent, a successful closing.
If commitment is not obtamed, salespeople should analyze the reasons and deterrine
whether ( l) more sales calls are necessary to obtain comritment, or (2) currently, there
just does not exist a good match between customer needs and seller offerings. If the sales person determines that 1nore calls are necessary, tl1en h e or she sl1ould leave the meeting
with a clear action plan, which is agreeable to the customer, for the next visit.
Building a Long-Term Relationship
Focusing on building and maintruning long-te1m relationships with customers has become
an important goal for salespeople. As marketers realize that it can cost five ti1nes as much
146 Part C The Marketing Mix
to acquire a new customer than to service an existing one, the importance of CLLStomer
retention and relationship building has beco1ne very clear.4 Terry Vavra focuses on t11e
value of current customers to the organization a.nd has developed the concept of aftermar
keting, which focuses the organization's attention on providing continuing satisfaction and
reinforcement to i11dividuals or organizations that are past or current customers. The goal
of aftermarketing is to build lasting relationships with customers.5 Successful aftermarket ing efforts require that many specific activities be undertaken by the salesperson and oth
ers in the organization. These activities include
1. Establishing and maintaining a customer information file.
2. Monitoring order processing.
3. Ensuring initial proper use of the purchased product or service.
4. Providing ongoing guidance and suggestions.
5. Analyzing customer feedback and responding quickly to customer questions and
complaints.
6. Continually conducting customer satisfaction research and responding to it.
As seen by tl1e preceding discussio11, tl1ere are n.o 1nagic secrets of successful selljng. The
differe11ce between good salespeople and mediocre ones is often the result of training plus
experience. Training is no substitute for experience; the two complement eacl1 other. The
difficulty with trying to discuss the selling job in ter1ns of basic principles is that experienced,
successfL1l salespeo_ple will always be able to fmd exceptions to these principles.
Relationships Can Lead to Partnerships
When the interaction between a salesperson and a cL1stomer does not end with the sale, the
beginnings of a relationship are present. Many salespeople are finding that building rela
tionships and even partnering with customers is becoming increasingly important.
When a buyer and a salesperson have a close personal relationship, they both begin to rely
on each other and co1nmunicate l1onestly. When each has a problem, they work together to
solve it. Such market relationships are known as junction.al relationships. An important trust
begins to exist between the parties. As with any relationship, each often gives and takes when
the situation calls for it in order to keep the relationship intact. The reader may have sucl1 a
relationship with a long-term medical or dental practitioner or hair cutter.
When organizations move beyond functional relationships, they develop strategic part
nerships, or strategic alliances. These are long-term, formal relationships in which both
parties make significant com1nitments and investments in each other in order to pursue
mutual goals and to improve the profitability of each other. Wl1ile a functional relationship
is based on trust, a strategic partnership or alliance moves beyond trust. The partners i n
the relationship actually invest in each other. Obviously, the reasons for forming strategic
partnersl1ips vary. So1ne do it to create joint opportunities (ban_ks, insurance companies,
a11d brokerage firms), to gain access to new markets [United Parcel Service of Atnerica
(UPS) and Mail Boxes Etc.], to develop new technology or exploit joint opportunities
(IBM and Apple), or to gain a marketing advantage over competitors (United Airlines and
Starbucks Coffee, A1nerican Airlines and Career Track).
People Who Support the Sales Force In many instances, sales personnel will require some assistance at various stages of the
sales process. These support personnel do not seek tl1e order. Their purpose i s to focus on
the long-term relationship and increase the likelihood of sales in the long run.
Missionary salespeople are used in certain ind.ustries such as pl1armaceuticals t o
focus solely on promotion of existing products and introduction of new products. They
1. Improved sales productivity. When the product or system being purchased is for the whole organization, different specialists handle different parts of the job. This usually results in a more effective and efficient sales process.
2. More flexibility and quicker decisions. To thrive in today's increasingly competitive mar kets, buying organizations often require selling organizations to produce small runs of tailored products on a very tight schedule. Cross-functional sales teams enable sellers to be more flexible because all functional units are involved in the sales process, which also enables the seller to make quicker decisions in response to buyer demands.
3. Better decisions. In most cases, the use of cross-functional teams composed of individuals with varied backgrounds in the company will lead to more innovative forms of thought and superior decisions than would be the case of an individual acting alone. Improved decisions would benefit both the buyer and the seller.
4. Increased customer satisfaction. The ultimate measure of the success of cross-functional sales teams comes with increased customer satisfaction, cemented relationships, and repeat business. The energy, flexibility, and commitment associated with cross functional sales teams have led many organizations to adopt the approach.
may call on physicians to convince them to prescribe a new drug or on pharmacies to
convince them to promote a new cold remedy witl1 a large display during the cold and t1u
season.
A tech,nical sales specialist supports the sales staff by providing training or other tech
nical assistance to the prospect. This individual may follow up an expression of interest to
tl1e salesperson from a prospect, especially when the product is to be used to solve certain
technical problem.s of the buyer. Some organizations will provide training to the front-line
staff of the buying organization who will be expected to sell the product to their customers.
Finally, whe11 the product is extremely high priced and is being sold to tl1e whole
organization, cross-functional sales teams are often used. Since prodt1cts increase in
technical complexity, and units of the buying organization reqt1ire specialized knowl
edge before a buying decision can be tnade, team selling has increased in popularity. For
example, a manufacturer's sales team might be made up of people from sales, engineering,
ct1stomer service, and finance, depending on the needs of the customer. A bank's sales
team might consist of people from the commercial lending, investments, small business,
and trust departments.
MANAGING THE SALES AND RELATIONSHIP-BUILDING PROCESS
Every personal sale can be divided into two parts: the part done b y the salespeople and
the part done for the salespeople by the compariy. For example, from the standpoint of the
product, the company should provide the salesperson with a product skillfully designed,
thoroughly tested, attractively packaged, adequately advertised, and priced to com
pare favorably with co1npetitive products. Salespeople have the responsibility of being
thoroughly acquainted with the product, its selling features, arid points of superiority and
possess a sincere belief in the value of the product. From a sales mariagement standpoint,
the company's part of the sale involves the following:
1. Efficient arid effective sales tools, including continuous sales training, promotional
literature, samples, trade shows, product information, and adequate advertising. 147
MARKETING INSIGHT Ten Traits. of Effective: Salespeople
148
1. Ego strength: A healthy self-esteem that allows one to bounce back from rejection.
2. A sense of urgency: Wanting to get it done now.
3. Ego drive: A combination of competitiveness and self-esteem.
4. Assertiveness: The ability to be firm, lead the sales process, and get one's point across confidently.
5. Willingness to take risk: Willingness to innovate and take a chance.
6. Sociable: Outgoing, talkative, friendly, and interested in others.
7. Abstract reasoning: Ability to understand concepts and ideas.
8. Skepticism: A slight lack of trust and suspicion of others.
9. Creativity: The ability to think differently.
10. Empathy: The ability to place oneself in someone else's shoes.
Sources: From George E. Belch and Michael A. Belch, Advertising and Promotion: A n Integrated Marketing Communications Perspective BE, 2009, p. 600. Reprinted with permission of McGraw-Hill Education.
2. An efficient delivery and reorder system to ensure that customers will receive the
merchandise as promised.
3. An equitable co1npensation plan that rewards perfor1nance, motivates the salesperson,
and promotes company loyalty. It should also reimburse the salesperson for all reason
able expenses incurred while doing the job.
4. Adequate supervision and evaluation of performance as a means of helping salespeople
do a better job not only for the company but for tl1emse]ves as well.
The Sales Management Task Marketing 1nanagers and sales managers must make some very important decisions
regarding how the sales force should be organized. Most companies organize their sales
efforts either by geography, product, or customer. These are illustrated in Figure 9.2.
In a geograph.ic structure, individual salespeople are assigned geographic territories t o
cover. A salesperson calls on all prospects in the territory and ust1ally represents all of the
company's products. A geographic str11cture provides the practical benefit of limiting the distance each salesperson must travel to see customers and prospects.
In a product structure, each salesperson is assigned to prospects and customers for a
particular product or product line. A product structure is useful when the sales force must
have specific technical knowledge abot1t products in order to sell effectively. However,
tl1is structure can result in a duplication of sales efforts because 1110.re than one salesperson
can call on t11e same customer. Consequently, it tends to be expe11sive.
A customer structure assigns a salesperson or selling team to serve a single customer
or single type of customer. This structure works best when different types of buyers have
large or significantly different needs. When this structure involves devoting all of a sales
person's time to a single customer, it is expensive but can result in large sales and satisfied
customers.
In a variation of the customer structure, a co1npany may employ n-iajor account man
agemerit, or the use of team selling to focus on major customers to establish long-term
relationships.6 Procter & Gamble, whose sales force used to be organized by product, has
shifted to major account management. Assigning resources to particular customers has
proved to be more flexible and customer focused for the company.
FIGURE 9.2
Organizing the
Sales Force
Chapter Nine Personal Selling, Relationship Building, and Sales Management 149
Geographic Structure
Asia
Product Structure
Office Furniture
Customer Structure
Sch o o ls
Wor .
e Sa es -WI Id d
I
North America Europe
Wor .
WI Id d e Saes -
I
Sales Computers
ation a a es N I S I -
I
Law Firms Hospitals
Latin America
F ax Machines
Government
A newer va1iation of the customer structure is the global account ,nanager who may be in c11arge of a single custo111er and all of its global needs. The custo1ner' s needs, schedules,
and interests are the top priority of the 1nanager. Microsoft started using global account
1nanagers around 2000. Today, their global account managers focus on multi-billion-dollar
global customers that rely heavily on information technology.
Controlling the Sales Force There are two obvious reasons why it is critical that the sales force be properly controlled.
First, personal selling can be the largest marketing expense component in the final price of
the product. Second, unless the sales force is somehow directed, motivated, and audited on
a co11tinual basis, it is likely to be less efficient tl1an it is capable of being. Controlling the
sales force involves four key functions: (1) forecasting sales, (2) establishing sales territories
and quotas, (3) analyzing expenses, and (4) motivating and compensating performance.
Forecasting Sales
Sales planning begins with a forecast of sales for some future pe1iod or periods. From
a practical standpoint, these forecasts are made on a short-term basis of a year or less,
although long-range forecasts of one to five years are made for purposes other than man aging the sales force, such as financing, production, and developtnent. Generally speak
ing, forecasting is the marketing manager's responsibility. In large firms, because of the
complexity of the task, it is usually delegated to a specialized unit, such as the marketing
150 Part C The Marketing Mix
research department. Forecast data should be integrated into the film's marketing informa
tion system for use by sales managers and other executives. For ma11y companies, the sales
forecast i s the key instrument in the planning and control of operations.
The sales.forecast i s an estimate of how much of the company's output, either i n dollars
or in units, can be sold during a specified future period under a proposed marketing plan
and under an assu1ned set of economic conditions. A sales forecast has several important
uses: (1) It is used to establish sales quotas; (2) it is used to plan personal selling efforts as
well as other types of promotional activities in the marketing rnix; (3) it is used to budget
selling expenses; and ( 4) it is used to plan and coordinate production, logistics, invento
ries, personnel, and so fortl1.
Sales forecasting has becon1e very sophisticated in rece11t years, especially with the
increased availability of computer software. It should be mentioned, however, that a fore
cast is never a substitt1te for sound business judgment. At the present time no single method.
of sales forecasting gives uniformly accurate results with infallible precision. Outlined
next are some commonly used sales forecasting methods.7
l . Jury o..f executive opiniori ,neth.od. This combines and averages the views of top man
agement representing marketing, production, finance, purchasing, and administration.
2. Sales force composite method. This is similar to tl1e first method in that it obtains the
combined views of the sales force about the future outlook for sales. In some companies
all salespeople, or district managers, submit estimates of the future sales i n their terri
tory or district.
3. Customer expectations method. This approach involves asking custo1ners or product
users about the quantity they expect to purchase.
4. Tinie-series analysis. This approach involves analyzing past sales data and the impact
of factors that influence sales (long-ter1n growth trends, cyclical fluctuations, seasonal
variations).
5. Correlatio,i analysis. This involves measuring the relationship between the dependent
variable, sales, a11d one or more independent variables that can explain increases or
decreases in sales volumes.
6. 0th.er quantitative techniques. Numerous statistical and mathematical techniques can
be used to predict or estimate future sales. Two of the more important techniques are
(a) growth functions, wl1ich are mathematical expressions specifying the relationship
between den1a11d and time; and (b) simulation models, in which a statistical model of
the industiy is developed and programmed to compute values for the key parameters of
the model.
Establishing Sales Territories and Quotas
The establishment of sales tenito1ies and sales quotas represents management's need to
111atch personal selling effort with sales potential (or opportunity). Soundly designed sales
territories can improve how the 1narket is served. It is much easier to pinpoint customers
and prospects and to determine who should call on them when the market is geographi
cally divided than when the market is considered a large aggregate of potential accounts.
The geographic segments should represent small clusters of customers or prospects within
some physical proximity. Implied here is the notion that there are some distinct econo1nic
advantages to dividing the market into s1naller segrnents. Salespeople restricted to a geo
graphic area are likely to get more sales in the territory. Instead of simply servicing the
"easy" and larger accounts, they are prone to develop small accounts. Of course, there are
criteria other tl1an geography for establishing territories. One important criterion is prod
uct specialization. In this case, salespeople are specialists relative to particular product or
customer situations.
Planning a profitable customer-oriented sales team • Objectives, goals • Forecasts • Budgets • Define roles, activities, markets • Establish design and structure
Staffing the right - people to sell and lead
Training sales personnel to satisfy customers
-
• People planning • Employment
planning
I
• Methods • Where, when, who
I
Evaluating the past - to guide the future • Performance criteria • Conducting sessions
I
Directing average ,_ people to perform at above-average levels • Motivation • Compensation • Leadership
I
Source: From Charles Futrell, Fundamentals of Selling 13£, 2014, p. 472. Reprinted with permission of McGraw-Hill Education.
The question of managing sales territories cannot be discussed meaningfully with
Oltt saying something about sales quotas. In general, quotas represent goals assigned to salespeople. As such, quotas provide t11ree n1ain benefits. First, they provide incentives
for salespeople. For example, the definite objective of selling $500,000 \.vorth of computer
equipment is more motivating to most salespeople than the indefinite charge to go out
and sell computer equipment. Sales bonuses and commissions based on quotas can also
be 111otivational. Second, quotas provide a quantitative standard against wl1ich the perfor-
1nance of individual sales representatives or other marketing units ca.n be measured. They
allow management to pinpoint individuals and units that are performing above average and
those experiencing difficulty. Third, quotas can be used not only to evaluate salespersons'
performances but also to evaluate and control their efforts. As part of their job, salespeople are expected to engage in various activities besides calling on established accounts. These
activities might include calling on new accounts, collecting past-due accounts, and plan
ning and developing sales presentations. Activity quotas allow the company to monitor
whether salespeople are engaging in these activities to the extent desired.
Sales quotas represent specific sales goals assigned to eacl1 territory or unit over a des
ignated time period. The most common method. of establishing quotas for territories is to
relate sales to forecasted sales potential. For example, if the Ajax Drug Company's terri
tory M has an estimated industry sales potential for a particular product of $400,000 for
tl1e year, the quota might be set at 25 percent of that potential, or $100,000. The 25 percent
figure represents tl1e market share Ajax estimates to be a reasonable target. This $100,000 151
152 Part C The Marketing Mix
FIGURE 9.J
Medi-Test Company
Sales Activity
Evaluation
quota may represent an increase of $20,000 in sales over last year (assuming constant prices) that is expected from new business.
It1 establishing sales quotas for its individual territories or sales personnel, tnanagement needs to take into accot1nt three key factors. First, all territories will not have equal potential and, therefore, compensation must be adjusted accordingly. Second, all salespeople will not have equal ability and assignments may have to be made accordingly. Third, the sales task in each territory 1nay differ from titne period to time period. For instance, tl1e nature of some territories 1nay require that salespeople spend more time seeking new accounts, rather than servicing established accounts, especially in the case of so-called new territories. The point to be made here i s that quotas can vary, not only by territory but also by assigned tasks. The effective sales manager should assign quotas not only for do]lar sales but also for eacl1 major selling function. Figure 9.3 is an example of how this is done for tl1e Medi Test Company, where each activity is assigned a quota and a weight reflecting its relative importance.
Analyzing Expenses
Sales forecasts should include a sales expense budget. In some companies, sales expense budgets are developed from the bottom up. Each territorial or district manager submits estin1ates of expenses and forecasted sales quotas. These estimates are usually prepared for a period of a year and tl1en broken down into quarters and months. The sales manager then reviews the budget requests from the field offices and from staff departments.
Motivating and Compensating Performance An important task for tl1e sales manager is motivating and compensating the sales force. These two tasks are major determinants of sales force productivity. Managing people is always a challenge and involves persona] interaction with 1nembers of tl1e sales force, ti1ne in the field visiting customers, free-flowing communication with the sales force, either by e-mail or telephone, and providing feedback on a regular basis as well as coaching and developing incentive programs through which job promotions or increased earnings can be achieved.
There are two basic types of compensation: salary and commission. Salary usually refers to a specific amount of monetary compensation at an agreed rate for definite time periods. Com,nission is usually monetary compensation provided for each unit of sales
Territory: Southern
Salesperson: Marsha Smith
(1) (2) (3) (4) (5) Percent Score
Functions Quota Actual (2 + 1) Weight (3 X 4)
Sales volume
Old business $380,000 $300,000 79 0.7 55.3
New business $ 20,000 $ 20,000 100 0.5 50.0
Calls on prospects
Doctors 20 15 75 0.2 15.0
Druggists 80 60 75 0.2 15.0
Wholesalers 15 15 100 0.2 20.0
Hospitals 10 10 100 0.2 20.0 -
2.0 175.3 - -
Performance index = 1 75.3
MARKETIN.G INSIGHT Effort- ,and Res.ults-.Oriented Me.asures
RGURE9.4
Types of Sales Force Incentives and Some Possible Performance Outcomes
Source: Some of the material was adapted from Gilbert A. Churchill Jr., Neil M. Ford, and Orville C. Walker, Sales Force Management, 5th ed. (Burr Ridge, IL: Irwin/McGraw-Hill, 1997), p. 490.
1fiori ��al u ati'mig Sa,I es geo· P.r'e· 9-6 !
EFFORT-ORI ENT ED MEASURES
1. Number of sales calls made.
2. Number of maintenance-repairs-operations (MRO) calls made.
3. Number of complaints handled.
4. Number of checks on reseller stocks.
5. Uncontrollable lost job time.
6. Number of inquiries followed up.
7. Number of demonstrations completed.
RES UL TS-ORIENTED MEASURES
1. Sales volume (total or by product or model).
2. Sales volume as a percentage of quota.
3. Sales profitability (dollar gross margin or contribution).
4. Number of new accounts.
5. Number of stockouts.
6. Number of distributors participating in programs.
7. Number of lost accounts.
8. Percentage volume increase in key accounts.
9. Number of customer complaints.
10. Distributor sales-inventory ratios.
Sources: Adapted from Thomas N. Ingram, Raymond W. LaForge, and Charles H. Schwepker Jr., Sales Management: Analysis and Decision Making, 10th ed. (Mason, OH: Thomson South-Western, 2012), chap. 15; Thayer C. Taylor, "SFA: The Newest Orthodoxy," Sales and Marketing Management, February 1993, pp. 26-28.
and expressed as a percentage of sales. The base on which commissions are computed may
be volume of sales in units of product, gross sales in dollars, net sales after returns, sales
volume in excess of a quota, or 11et profits. Very often, several compensation approaches
are co1nbined. For exa1nple, a salesperson might be paid a base salary, a commission on
sales exceeding a volume figure, and a percentage share of the company's profits for that
year.
In addition to straigl1t dollar compensatio11, there are numerous otl1er forms of incen
tives that ca11 be used to n1otivate the sales force. Some of these types of incentives and
their potential performance outco1nes are listed in Figure 9.4.
Types of Incentives
• Positive evaluation feedback. • Company-wide recognition. • Bonus. • Salary increases. • Pay for new product idea. • Education allowance. • Time off. • Fringe benefits. • Stock options. • Retirement plan. • Profit sharing.
Some Possible Outcomes
• Increase in sales volume. • Sale of more profitable products. • Attention on selling new products. • Achieving greater market penetration. • Increased number of sales calls. • Larger average orders. • Attracting new customers. • Improved service of existing customers. • Reduction in customer turnover. • Reduction in selling costs. • Full-line balanced selling.
153
154 Part C The Marketing Mix
SUMMARY
Additional
Resources
Key Terms
and Concepts
This chapter has attempted to outline and explain the personal selling aspect of the pro
motion mix. An e1nphasis was placed on describing the importance of the relationship
building aspect of the personal selling process. For organizations that wish to continue
to grow and prosper, personal selling plays an integral part in the marketing of products
and services. As long as production contint1es to expand through the development of new
and highly technical products, personal selling will continue to be an important part of
1narketing strategy.
Ash, Mary Kay. The Mt11y Kay Way: Ti,neless Princi/Jlesfroni AmericcL's Greatest Wonia,i Entrepreneur. Hoboken, NJ: John Wiley and Sons, 2008.
Jantsch, John. The Referral En.gine. New York: Portfolio, 2010.
Gonzalez, Gabriel R., K. Douglas Hoffman, and Thomas N. Ingram. "Improving Relationsl1ip Selling through Failure A11alysis and Recovery Efforts: A Framework and Call to Action." Journal of Personal Selling and Sales Managernent. Spring 2005, pp. 24-32.
Hunter, Gary K., and William D. Perreault. "Making Sales Technology Effective.'' Journ,al o.f McLrketing, January 2007, pp. 16-34.
Goldon, John. Winning the Battle.for Sales. New York: McGraw-Hill, 2013.
Schroder, Richard M., From a Good Sales Call to a Great Sales Call. New York: McGraw-Hill, 2011.
Aftermarketing: A concept that focuses attention on the value of current custo1ners to the
organization and on providing continuing satisfaction and reinforce1nent to the1n as well as past customers. The goal is to build lasting relationships with custorners.
Correlation analysis: A method used in sales forecasting that involves measurir1g the relationship between the dependent variable, sales, and one or more independent variables that can explain increases or decreases in sales volume.
Cross-functional sales teams: A teatn that might include people from sales, engit1eering, cus tomer service, and finance, depending on the needs of the customer. When the product is extremely high priced and is being sold to the whole organization, cross-functional sales tea1ns are often used.
Customer organization structure: A structure that assigns a salesperson or team to serve a single
customer or type of customer that has large or significant needs.
Geographic organization structure: St1ucture in which i11dividual salespeople are assig11ed geographic te1ritories. The salesperson calls on all prospects in the territory and usually represents all of the company's products.
Global accou.nt manager: A variation of the custo1ner structure where one person is in charge of a single customer and all of its global needs.
Lead: A prospect that may o r may not have the potential to be a true prospect, a candidate, to whom a sale could b e made.
Major account organization structure: A variation of the custo1ner organizaLion structure, in which a co1npany 1nay assign a salesperson or a team to focus on major customers to foster long
term relationships.
Missionary salesperson: Used in rnany industries to focus solely on the pro1notion of existing products and introduction of new products.
Objectives of the sales force: Ultimately, revenue and sales. Other objectives include infor1nation provision, persuasion, and after-sale service.
Chapter Nine Personal Selling, Relationship Building, and Sales Manage,nent 55
Product organization structure: Structure in which each salesperson is assigned customers and
prospects for a paiticular product or product line. This structuJe is useft1l wl1en tl1e sales force 1nust
have specific teclmical knowledge about products i n order to sell effectively.
Prospecting: Tl1e process of locating potential customers. The process usually involves random
lead generation that usually requires a high number of contacts to gait1 a sale or selected lead gen
eration that uses existing contacts and knowledge to generate new prospects.
Sales forecast: An estimate of how much of the organization's output, either in dollars or in units,
can be sold during a specific period under a proposed marketing plan and under an assun1ed set of
economic conditions. It has many important uses in sales 1na11agement, 1narketing planning, and
strategic planning.
Sales relationship-building process: Process that views the initial sale as the first step i n a
long-term relationship-building process, not as the end goal. It contains six sequential stages:
(1) prospecting, (2) planning tl1e sales call, (3) presenting, (4) responding to objections, (5) obtain
ing co1nmit1nent/closing the sale, and (6) building a long-term relationship.
Strategic alliance: Also called strategic partnership, long-term, for1nal relationships i n which
both parties 1nake significant commianents and i11vesanents in each other in order to pursue 1nutual
goals and to improve the profitability of each other. The partners in a strategic alliance actually
invest in each other.
Technical sales specialist: Often used when the product is to be used to solve technical problems
of the buyer. They support the salesperson by providing training or other technical assistance to the
prospect.
Time series analyses: A 1nethod used i n forecasting sales that involves analyzing past sales data
and tl1e impact of factors that influence sales (long-ter1n growth trends, cyclical fluctuations,
seasonal variations).
Chapter
Channel of distribution decisions involve numerous interrelated variables that must be
integrated into the total marketing mix. Because of the time and money required to set up
an efficient c11anne1, and since channels are often hard to change 011ce they are set up, these
decisions are critical to the success of the firm.
This chapter is concerned with the development and management of channels of distri
bution and the process of goods distribution in complex, highly competitive, and special
ized economies. It s11ould be noted at the outset that channels of distribution provide tl1e
ultiinate consumer or organizational buyer with time, place, and possession utility. Thus,
an efficient channel is one tl1at delivers the product when and wl1ere it is wanted at a mini
mum total cost.
THE NEED FOR MARKETING INTERMEDIARIES
A chan.nel o.f distribution is the combination of institutions through which a seller markets
products to organizational bLLyers or ultimate consumers. The need for other institutions
or intermediaries in the de}jvery of goods is sometimes questioned, particularly since the profits they make are viewed as adding to the cost of the product. However, this reaso1ung is
generally fallacious, since producers use marketing intermediaries because the intermediary
can perform functions more cheaply and more efficiently than the producer can. This notion
of efficiency is critical when the characteristics of advanced econo1nies are considered. For exan1p1e, the U.S. econon1y is characterized by heterogeneity in ter111s of botl1
supply and demand. In terms of numbers alone, there are more than 7 million establish
ments with employees co1nprising the supply segment of the economy, and there are nearly
110 million households making up the de1nand side. Clearly, if each of these units had to
deal on a one-to-one basis to obtain needed goods and services, and there were no inter- 1nediaries to collect and disperse assortments of goods, the system would be totally inef
ficient. Thus, the primary role of intermediaries is to bring supply and demand together in
an efficient and orderly fashion.
CLASSIFICATION OF MARKETING INTERMEDIARIES AND FUNCTIONS
1S6
There are a great many types of marketing intermediaries, many of which are so spe
cialized by function and industry that they need not be discussed here. Figure IO.I pre
sents the major types of marketing intermediaries common to many industries. Although
there is some overlap in tl1is classification, these categories are based on the n1arketing
FIGURE 10.1
Major Types
of Marketing
Intermediaries
Source: Based on Peter D. Bennett, ed., Dictionary of Marketing Terms, 2nd ed. {Chicago: American Marketing Association, 1995).
FIGURE 10.2
Major Functions
Performed in
Channels o f
Distribution
Source: From Roger Kerin, Steven Hartley and William Rudelius, Marketing 11 E, 2013, p. 379. Reprinted with permission of McGraw-Hill Education.
Chapter Ten Distribution Strategy 157
Middleman-an independent business concern that operates as a link between producers and
ultimate consumers or organizational buyers.
Merchant middleman-a middleman who buys the goods outright and takes title to them.
Agent-a business unit that negotiates purchases, sales, or both but does not take title to the goods in which it deals.
Wholesaler-a merchant establishment operated by a concern that is primarily engaged in buying, taking title to, usually storing and physically handling goods in large quantities, and reselling the
goods (usually in smaller quantities) to retailers or to organizational buyers.
Retailer-a merchant middleman who is engaged primarily in selling to ultimate consumers.
Broker-a middleman who serves as a go-between for the buyer or seller. The broker assumes no title risks, does not usually have physical custody of products, and is not looked upon as a perma
nent representative of either the buyer or the seller.
Manufacturers' agent-an agent who generally operates on an extended contractual basis, often sells within an exclusive territory, handles noncompeting but related lines of goods, and possesses
limited authority with regard to prices and terms of sale.
Distributor-a wholesale middleman especially in lines where selective or exclusive distribution is common at the wholesaler level in which the manufacturer expects strong promotional support;
often a synonym for wholesaler.
Jobber-a middleman who buys from manufacturers and sells to retailers; a wholesaler.
Facilitating agent-a business firm that assists in the performance of distribution tasks other than
buying, selling, and transferring title (i.e., transportation companies, warehouses, etc.)
functions performed; that is, various intermediaries perform different marketing functions and
to different degrees. Figure 10.2 is a listing of the more common marketing functions
performed in the channel.
It should be remembered that whether or not a manufacturer uses intermediaries to p e r
form these fu11ctions, the fu.nctions have to be performed by someone. In other words, the
managerial question is not whether to perform the functions, but who will perform them
and to what degree.
Transactional Function
Buying: Purchasing products for resale or as an agent for supply of a product.
Selling: Contacting potential customers, promoting products, and soliciting orders.
Risk taking: Assuming business risks in the ownership of inventory that can become obsolete or
deteriorate.
Logistical Function
Assorting: Creating product assortments from several sources to serve customers.
Storing: Assembling and protecting products at a convenient location to offer better customer
service.
Sorting: Purchasing in large quantities and breaking into smaller amounts desired by customers.
Transporting: Physically moving products to customers.
Facilitating Function
Financing: Extending credit to customers.
Grading: Inspecting, testing, or judging products, and assigning them quality grades.
Marketing information and research: Providing information to customers and suppliers, includ ing competitive conditions and trends.
158 Part C The Marketing Mix
CHANNELS OF DISTRIBUTION
As previously noted, a channel of distribution is the combination of institutions through
which a seller markets products to the user or ultimate consumer. Some of these links assume the risks of ownersl1ip; others do not. The conventional channel of distribution
patterns for consumer goods markets are shown in Figure 10.3.
So1ne manufacturers use direct channels, selling directly t o a market. For example,
Gateway sold compttters through the mail without the use of other intermediaries. Using a direct channel, called direct marketing, increased in popularity as marketers found that
products could be sold directly using a variety of methods. These include direct mail,
telemarketing, direct-action advertising, catalog selling, cable selling, online selling, and
direct selling through demonstrations at home or place of work. These will be discussed in
more detail later in this chapter.
In other cases, one or more intermediaries may be used in tl1e distribution process.
For example, Hewlett-Packard sells its co1nputers and printers through retailers such as
Best Buy and Office Max. A common channel for consumer goods is one in which the
manufacturer sells through wholesalers and retailers. For instance, a cold remedy man�t
facturer 1nay sell to drug wholesalers who, in turn, sell a vast array of drug products t o
various retail outlets. Small manufacturers may also use agents, since they d o not have
sufficient capital for their own sales forces. Agents are commonly used intermediaries
in the jewelry industry. The final channel in Figure 10.3 is used primarily when small
wholesalers and retailers are involved. Channels with one or more intern1ediaries are
referred to as in.direct channels.
In contrast to consumer products, the direct channel is often used in the distribution of
organizational goods. The reason for this stems from the structure of most organizational
1narkets, which ofte11 have relatively few but extremely large customers. Also, many orga
nizational products, such as computer syste1ns, need a great deal of presale and postsale ser
vice. Distributors are used in organizational markets when there is a large number of buyers
but each purchases a small amount of a product. As in the consumer market, agents are used
FIGURE 10.3 Conventional Channels of Distribution of Consumer Goods
..... - Manufacturer - Consumers
I I
- �
- Manufacturer Retailers Consumers
I I I
- �
- - Manufacturer • Wholesaler Retailers Consumers '
I I I I
..... �
-, -Manufacturer . Agent Retailers Consumers -
I I I I
Manufacturer � Agent � Wholesaler t-i
Retailers -,_ Consumers - -
I I I I I
Chapter Ten Distribution Strategy 159
FIGURE 10.4 Conventional Channels of Distribution for Organizational Goods
I
I
I
-
I
- -
Manufacturer Organizational users
I
- ,_ -
Manufacturer - Organizational Organizational . distributors
- users
I I
- - Organizational
-
Manufacturer Agents , users
I I
- - ,_ Organizational
-
Manufacturer Agents Organizational
. . distributors
. users
-
I I I
i11 organizational markets in cases where manufacturers do not wish to have tl1eir own sales
forces. Such an arrangement may be used by small manufacturers or when the market i s
geographically dispersed. The fmal channel arrangement in Figure 10.4 may also be used
by a small manufactw·er or when the market consists of many small customers. Under such
conditions, it may not b e econo1nical for sellers to have their own sales organization.
SELECTING CHANNELS OF DISTRIBUTION
Given the numerous types of channel intermediaries and functions that must be performed,
the task of selecting and designing a channel of distribution may at first appear to be over
whelming. However, in many industries, channels of distribution have developed over
many years and have become somewhat traditional. In such cases, the producer may be
limited to this type of channel to operate in the industry. This is not to say tl1at a traditional
channel is always the most efficient and that there are no opportunities for innovation. But
the fact that such a channel is widely accepted in the industry suggests it is highly efficient.
A primary constraint in these cases and in cases where no traditional channel exists is that
of availability of the various types of middle1nen. All too often in the early stages of chan
nel design, executives map out elaborate channel networks only to find out later that no
such independent intermediaries exist for the firm's product in selected geographic areas.
Even if they do exist, they may not be willing to accept the seller's products. In general,
there are six basic considerations in the initial developme11t of cl1annel strategy. These are
outlined in Figure 10.5.
It should be noted that for a particular product any one of these characteristics greatly
influences choice of channels. To illustrate, higllly perishable products generally require
direct cl1annels, or a fi11n with little financial strengtl1 111ay require inte1media1ies to
perform almost all of the 1narketing functions.
Specific Considerations Tl1e preceding characteristics play an important part i11 fra1ning the cl1a11nel selection
decision. Based on them, the choice of cha11nels can be further refined in terms of
160 Part C The Marketing Mix
FIGURE 10.5 General Considerations in Channel Planning
l. Customer characteristics.
a. Number.
b. Geographic dispersion.
c. Preferred channels and outlets for purchase.
d. Purchasing patterns.
e. Use of new channels (e.g., online purchasing).
2. Product characteristics.
a. Unit value.
b. Perishability.
c. Bulkiness.
d . Degree of standardization.
e. Installation and maintenance services required.
3. Intermediary characteristics.
a. Availability.
b. Willingness to accept product or product line.
c . Geographic market served.
d. Marketing functions performed.
e. Potential for conflict.
f. Potential for long-term relationship.
g. Competitive products sold.
h. Financial condition.
i . Other strengths and weaknesses.
4. Competitor characteristics.
a. Number.
b. Relative size and market share.
c. Distribution channels and strategy.
d . Financial condition and estimated marketing budget.
e. Size of product mix and product lines.
f. Overall marketing strategy employed.
g. Other strengths and weaknesses.
5. Company characteristics.
a . Relative size and market share.
b. Financial condition and marketing budget.
c. Size of product mix and product lines.
d. Marketing strategy employed.
e. Marketing objectives.
f. Past channel experience.
g. Marketing functions willing to perform.
h. Other strengths and weaknesses.
6. Environmental characteristics.
a. Economic conditions.
b. Legal regulations and restrictions.
c. Political issues.
d. Global and domestic cultural differences and changes.
e. Technological changes.
f. Other opportunities and threats.
(1) distribution coverage required, (2) degree of control desired, (3) total distribution cost, and (4) channel flexibility.
Distribution Coverage Required
Because of the characteristics of the product, the environment needed. to sell the product,
and the needs and expectations of the potential buyer, prodt1cts will vary in the intensity of
distribution coverage they require. Distribution coverage can be viewed along a continuL1m
ranging from intensive to selective to exclusive distribution.
Intensive Distribution Here the manufacturer attempts to gain exposure througl1 as many wholesalers and retailers as possible. Most convenience goods require intensive distribu
tion based on tl1e characteristics of tl1e product (low unit value) and the needs and expecta
tions of the buyer (high frequency of pt1rchase and convenience).
Selective Distribution Here the manufacturer limits the use of intermedia:iies to the 011es
believed to be the best available in a geographic area. This may be based on the service
organization available, tl1e sales organization, or the reputation of the intermediary. Thus,
appliances, home furnishings, and better clothing are usually distributed selectively. For
appliances, the intermedia:i-y' s service organization could be a key factor, while for better cloth
ing and home fLunislrings, the intennediary' s reputation would be an important consideration.
Exclusive Distribution Here the manufacturer severely limits distribution, and interme
diaries are provided exclusive rights within a particular territory. The characteristics of the product are a detennining factor here. Where the product requires certain specialized
selling effort or investment in unique facilities or large inventories, tl1is arrangement is
usually selected. Retail paint stores are an example of such a distribution arrangement.
MARKETIN.G INSIGHT Manufacturers a11d I nterme.dJ.a.rLes: . .
. .- . - .. - . - . . . - . - . .- . . -
� P. '.
erifiee� WoflkPrng ,�;ela,tro'ms11n�rg � 0--d j
THE PERFECT INTERMEDIARY
1. Has access to the market that the manufacturer wants to reach.
2. Carries adequate stocks of the manufacturer's products and a satisfactory assortment of other products.
3. Has an effective promotional program-advertising, personal selling, and product displays. Promotional demands placed on the manufacturer are in line with what the manufacturer intends to do.
4. Provides services to customers-credit, delivery, installation, and product repair-and honors the product warranty conditions.
5. Pays its bills on time and has capable management.
THE PERFECT MANUFACTURER
1. Provides a desirable assortment of products-well designed, properly priced, attractively packaged, and delivered on time and in adequate quantities.
2. Builds product demand for these products by advertising them.
3. Furnishes promotional assistance to its middlemen.
4. Provides managerial assistance for its middlemen.
5. Honors product warranties and provides repair and installation service.
THE PERFECT COMBINATION
1. Probably doesn't exist.
Degree of· Coritrol Desired
In selecting channels of distribution, the seller must make decisions concerning the degree
of control desired over the n1arketing of the finn 's products. Some 1nanufacturers prefer
to keep as much control over their products as possible. Ordinarily, the degree of control
achieved by the seller is proportionate to the directness of the channel. One Eastern brew
ery, for instance, owns its own fleet of trucks and operates a wholly owned delivery system
direct to grocery a11d liquor stores. Its n1arket is very concentrated geographically, with many small buyers, so such a syste1n is eco11omically feasible. However, all other brewers
in the area sell through distributors.
When more indirect channels are used, the manufacturer must surrender some control
over the marketing of the firm's product. However, attempts are commonly made to maintain a degree of control through some other indirect means, such as sharing promo
tional expenditures, providing sales training, or other operational aids, such as accounting
systems, inventory systems, or marketing research data on the dealer's trading area.
Total Distribution Cost
The total distribution cost concept has developed out of the more general topic of systems
theory. The concept suggests that a channel of distribution shottld be viewed as a total system co1nposed of interdependent subsyste1ns, and that the objective of tl1e system (chan
nel) manager should be to opti1nize total system performance. In terms of distribution
costs, it generally is assumed that the total system should be designed to minimize costs
for a given level of service. The following is a representative list of the major distribution
costs to be mini1nized:
1. Transportation.
2. Order processing. 161
162 Part C The Marketing Mix
3. Cost of lost business (an opportunity cost due to inability to meet customer demand).
4. Inventory carrying costs, including:
a. Storage-space charges.
b. Cost of capital invested.
c. Taxes.
d. Insurance. e. Obsolescence and deterioration.
5. Packaging.
6. Materials handling.
The important qualification to the total-cost concept is the statement "other tl1ings
being equal." The purpose of the total-cost concept is to emphasize total syste1n perfor
mance to avoid subopti1nization. However, other important factors must be considered,
not the least of which are level of customer service, sales, profits, and interface with the
total marketing Inix.
Channel Flexibility
A final consideration relates to the ability of tl1e manufacturer to adapt to changing condi
tions. To illustrate, much of the population has moved from inner cities to suburbs, and
thus buyers make most of their purchases in shopping centers and malls. If a manufacturer
had long-term exclusive dealership with retailers in the inner city, the ability to adapt to
this population shift could l1ave been severely limited.
MANAGING A CHANNEL OF DISTRIBUTION
Once the seller has decided on the type of channel structure to use and selected the
individual 1nembers, the entire coalition sl1ould operate as a total syste111. Fro1n a behav
ioral perspective, the system can be viewed as a social system since each member interacts
with the others, each rnember plays a role vis-a-vis the others, and each has certain expec
tations of the other. Thus, the behavioral perspective views a channel of distribution as 1nore than a series of markets or participants extending from production to consumption.
Relationship Marketing in Channels For many years in theory and practice, marketing has taken a competitive view of channels
of distribution. In other words, since channel members had different goals and strategies, it was believed that the major focus should be on concepts such as power and conflict.
Research interests focused on issues concerning bases of power, antecedents and conse
quences of conflict, and conflict resolution.
More recently, l1owever, a new view of channels has developed. Perhaps because of the
success of Japanese co111panies in the 1980s, it was recognized that much could be gained
by developing long-term coffilnitments and harmony a1nong channel 1nembers. This view
is called relation.ship marketing, which can be defined as "marketing with the conscious
aim to develop and manage long-term and/or trt1sting relationships with customers, dis
tributors, suppliers, or other parties in the marketing environment."1
It is well documented in the marketing literature that long-term relationships through
out the channel often lead to higher-quality products with lower costs. These benefits may
account for the increased use of vertical marketing systems.2
Vertical Marketing Systems To this point in the chapter, the discussion has focused primarily on conventional channels
of distribution. In conventional channels, each firm is relatively independent of the other
RGURE 10.6
Major Types of
Vertical Marketing
Systems
Chapter Ten Distribution Strategy 163
,_ Vertical marketing systems
I
- - - Administered Contractual Corporate systems systems systems
I I I
members in the channel. However, one of the important develop1nents in channel manage
ment in recent years is the increasing use of vertical marketing systems.
Vertical marketing systems are channels in which members are more dependent on one
another and develop long-term working relationships i n order to improve the efficiency
and effectiveness of the system. FigtLre 10.6 shows the major types of vertical marketing
systems, wl1ich include administered, contractual, and corporate systems.3
Administered Systems
Administered vertical marketing systems are the most similar t o conventional channels.
However, i n these systems there is a higher degree of interorganizational planning and
management than in a conventional channel. The dependence in these systems can result
from the existence of a strong cha11nel leader such tl1at other channel members work
closely with this company in order to mai11tain a long-term relationship. While any level
of channel member may be the leader of an administered system, Walmart, Kmart, and
Sears are excellent examples of retailers that have established administered systems with many of tl1eir suppliers.
Contractual Systems
Contractual vertical marketing systems involve independent production and distribution
companies entering into for1nal contracts to perform designated marketing functions. Three
major types of contractual vertical marketing systems are the retail cooperative organiza
tion, wholesal e r -sponsored voluntary cl1ain, and various franchising programs.
In a retail cooperative organizatio11, a group of independent retailers unite and
agree to pool buying and managerial resources to improve competitive position. In a
wholesaler-sponsored voluntary chain, a wholesaler contracts with a number of retailers
and performs channel functions : f
or them. Usually, retailers agree to concentrate a major
portio11 of tl1eir purchasing with the sponsoring wholesaler and to sell advertised products
at the same p1ice. The most visible type of contractual vertical marketing systems involves
a va1iety of franchise programs. Franchises involve a parent company (the franchisor)
and an independent firm (the franchisee) ente1ing into a contractual relationship to set up
and operate a business in a particular way. Many products and services reach consu1n
ers through franchise systems, including automobiles (Ford), gasoline (Mobil), hotels a.nd
motels (Holiday Inn), restaurants (McDonald's), car rentals (Avis), and soft drinks (Pepsi).
In fact, some analysts predict that within the next 10 years, franchises will account for
50 percent of all retail sales.
Corporate Systems
Corporate vertical marketing systems involve single ownership of two or more levels
of a channel. A manufacturer's purchasing wholesalers or retailers is called .forwarcl
MARKETING INSIGHT Advantages and Disadvantages
oif Ena!ncbisi. g .. ,0-2,' l1 I., ·
WHOLESALING
164
A franchise is a means by which a producer of products or services achieves a direct channel of distribution without wholly owning or managing the physical facilities in the market. In effect, the franchisor provides the franchisee with the marketing, management, operations, financial, and accounting know-how and skills to run a business in exchange for a financial return. Usually, the franchisee pays an initial fee plus a percentage of sales to the franchisor. Some of the top franchises are Hampton Hotels, Subway, 7-Eleven, Servpro, Days Inn, McDonald's, Denny's, H&R Block, Pizza Hut, and Dunkin Donuts.
This form of contractual vertical marketing system has a number of advantages for the franchisor compared with a company-owned chain:
• It allows rapid expansion requiring less capital resulting in faster market penetration and higher profits.
• It requires fewer company managers and employees, thus lowering costs. • Franchisees may have greater motivation to make the business a success than employees
of a company-owned store.
• It is easier to penetrate global markets as local franchisees should better understand the culture and the market.
• Opportunities exist for additional profits on supplies sold to franchisees.
However, there are also some disadvantages:
• Brand equity of the whole franchise could be damaged if even a few of the franchisees provide poor service or mistreat customers.
• There i s dependence o n franchisees for financial success without full control of them. • There may be resistance from existing franchisees to expanding the number of new
outlets in a market because their sales could be lowered. • There may be difficulty managing unhappy franchisees if sales are low or slowing, which
can discourage new franchisee applicants.
• There may be possible legal exposure from illegal or unsafe activities by franchisees, such as contaminated food or poor auto repair service resulting in an accident.
Sources: Dhruv Grewal and Michael Levy, Marketing, 4th ed. (Burr Ridge, IL: McGraw-Hill, 2014), pp. 492- 493; Julian Dent, Distribution Channels, 2nd ed. (London: Kogan Page, 2011 ), pp. 330-331.
integration. Wholesalers or retailers' purchasing channel 1nembers above them is called
backward in.tegration. Firms may choose to develop corporate vertical marketing systems
in order to compete more effectively with other marketing systems, to obtain scale econo
mies, and to increase channel cooperation and avoid channel conflict.
As noted, wholesalers are merchants that are primarily engaged in buying, taking title
to, usually storing and physically handling goods in large quantities, and reselling
the goods (usually in smaller quantities) to retailers or to industrial or business users.4
Wholesalers are also called distributors in some industries, particularly when they have
exclusive distribution rights, such as in the beer industry. Other wholesalers that do not
take title to goods are called agents, brokers, or manufacturers' representatives in va1i
ous industries. There are more tl1an 890,000 wholesalers in the United States.
W11olesalers create value for suppliers, retailers, and users of goods by performing
distribution functions efficiently and effectively. They may transport and warehouse
goods, exhibit thern at trade shows, and offer advice to retailers concerning which lines of
Chapter Ten Distribution Strategy 165
products are selling best in otl1er areas. Producers use wholesalers to reacl1 large markets
and extend geographic coverage for their goods. Wholesalers may lower the costs for other
channel members by efficiently carrying out such activities as physically moving goods to
convenient locations, assuming the 1isk of managing large inventories of diverse _products, and delivering products as needed to replenish retail shelves.
While producers may actively seek out ,vholesalers for their goods, wholesalers also try
to attract producers to use their services. To do so, they may offer to perform all the distri
bution functions or tailor their services to inclttde only the functions that producers do not
have tl1e ability to perform effectively. Naturally, wholesalers especially seek producers of
major brands for which sales and profit potential are likely to be the greatest. Wholesalers
may compete with other wholesalers to attract producers by offering lower costs for the
functions they perform. Wholesalers with excellent track records that do not carry directly
competing products and brands, that have appropriate locations and facilities, and that have
relationsl1ips with major retail customers can 1nore easily attract 1nanufacturers of successfuJ
products. Also, wholesalers that serve large markets may be more attractive since producers
may be able to reduce the number of wholesalers they deal with and thereby lower their
costs. Long-term profitable producer-wholesaler relationships are enhanced by trust, doing a
good job for one another, and open communication about problems and opportunities.
Wholesalers also need t o attract retailers and organizational customers to buy from
them. In many cases, wholesalers have exclusive contracts to distribute products i n a par
ticular trading area. For popular products and brands with large market shares, the whole
saler's task is si1nplified because retailers want to ca1Ty them. For example, distributors of
Coke and. Pepsi can attract retailers easily because the products sell so well and co11su1ners
expect to find them in many retail outlets. Retail supermarkets and convenience stores
would be at a competitive disadvantage withot1t these brands.
However, for new or small market-share products and brands, particularly those of less well-known manufacturers, wl1olesalers 111ay l1ave to do considerable 1narketing
to get retailers to stock thetn. Wholesalers may get placement for such products and
brands i n retail stores because they have previously developed strong long-term work
ing relationships with them. Alternatively, wholesalers may have t o carefully explain
the marketing plan for the product, why it should be successful, and why carrying the product will benefit the retailer.
While there are still many successful wholesalers, the share of products they sell is
likely to continue to decrease. This is because large retail chains such as Walmart have
gained such n1arket power tl1at they can buy directly from ma11ufacturers and bypass wholesalers altogetl1er. The survival of wholesalers depends on their ability to meet the
needs of both manufacturers and retailers by performing distribution functions more effi
ciently and effectively than a channel designed without them.
STORE AND NONSTORE RETAILING
As noted, retailers are merchants who are primarily engaged in selling to ultimate con
sumers. The 1nore than 1.9 million retailers in tl1e United States can be classified in many
ways. For example, tl1ey are broken down in the North American Industry Classification
System (NAICS) codes into eight general categories and a number of subcategories based
on the types of merchandise they sell. 5
Marketers have a number of decisions to make to dete1mine the best way to retail their
products. For exa111ple, decisions have to be made about whether to use stores to sell m e r
chandise, and if so, whether to sell tlrrough cotnpany-owned stores, franchised outlets, or
independent stores or chains. Decisions have to be made about whether t o sell through
MARKETING INSIGHT So.me Benefit� of Who.les.alers f.or
166
- - . -
'Ma�rous C 1
lnarn,rne•:1 Memn1 betts � 0=3
BENEFITS FOR MANUFACTURERS
• Provide the ability to reach diverse geographic markets cost effectively. • Provide information about retailers and end users in various markets. • Reduce costs through greater efficiency and effectiveness in distribution functions
performed. • Reduce potential losses by assuming risks and offering expertise.
BENEFITS FOR RETAILERS
• Provide potentially profitable products otherwise unavailable for resale in retail area. • Provide information about industries, manufacturers, and other retailers. • Reduce costs by providing an assortment of goods from different manufacturers. • Reduce costs through greater efficiency in distribution functions performed.
BENEFITS FOR END USERS
• Increase the product alternatives available in local markets. • Reduce retail prices by the efficiency and effectiveness contributed to the channel. • Improve product selection by providing information to retailers about the best products
to offer end users.
nonstore 1nethods, such as the Inten1et, and if so, which m.ethods of nonstore retailing
should be used. Each of these decisions brings about a number of others such as what types
of stores to use, how many of them, what locations shot1ld be selected, and what specific
types of nonstore retailing to use.
Store Retailing About 90 percent of retail purchases are made through stores. This makes them an
appropriate retail method for 1nost types of products and services. Retailers vary not
only in the types of merchandise they carry but also in the breadth and depth of tl1eir prod
uct assortments and the amount of service they provide. In general, mass merchandisers
carry broad product assortments and compete on two bases. Supermarkets (Kroger) and
department stores (Macy's) co111pete with other retailers on the basis of offering a good selection it1 a number of different catego1ies, whereas supercenters (Walmart Supercenters),
warehouse clubs (Costco), discount stores (Walmart), a.nd off-price retailers (T.J. Ma.xx)
compete more on the basis of offering lower prices on products in their large assortments.
Manufacturers of many types of consumer goods must get distTibution m one or more
types of mass mercl1andisers to be successful.
Specialty stores handle deep assortments i n a limited number of product categories.
Specialty stores include limited-line stores that offer a large assortment of a few related
product lines (The Gap), single-line stores that emphasize a single product (Batteries Plus),
a11d category killers (Best Buy), which are large, low-priced li1nited-line retail chains
that atte1npt t o dominate a particular product category. If a product type is sold pritnarily
through specialty stores and sales are concentrated in category killer chains, manufacturers
may have to sell th.rough them to reach ct1stomers.
Convenience stores (7-Eleven) are retailers whose pri1nary advantages to consu1ners
are location convenience, close-i11 parking, and easy entry a11d exit. They stock products
tl1at consumers want to buy i n a hurry, such as milk or soft drinks, and charge higher
prices for the purchase convenience. They are an important retail outlet for many types of
convenience goods.
Chapter Ten Distribution Strategy 167
In selecting the types of stores and specific stores and chains to resell their products,
ma11ufacturers (and wholesalers) have a variety of factors to consider. Tl1ey want stores
and chai11s that reacl1 their target market ai1d have good reputations with consumers. They
want stores and chains that handle distribution functions efficiently and effectively, order
large quantities, pay invoices quickly, display their merchandise well, and allow them
to make good profits. Selling products in tl1e right stores and chains increases sales, and
selling in prestigious stores can increase the equity of a brand and the price that can be
charged. The locations of retail stores, the types of people who shop at them, and the
professionalism of the salespeople and clerks who work i n them all affect the st1ccess of
the stores and the products they sell. In addition to the merchandise offered, store adver
tising, and price levels, tl1e characteristics of the store itself-including layout, colors,
smells, noises, lights, signs, and shelf space and displays-influence the success of both
the stores and the products they offer.
Nonstore Retailing Although stores dominate sales for 1nost products, there are still opportunities to
market products successfully in other ways. Five nonstore methods of retailing include
catalogs and direct mail, vending machines, television home shopping, direct sales, and
electronic exchanges.6
Catalogs and Direct Mail
Catalogs and direct mail dominate nonstore retailing. The advantages of this type of non
store retailing for marketers are that consumers can be targeted effectively a.nd reached in
their homes or at work, overhead costs are decreased, and assortments of specialty mer
chandise can be presented with attractive pictures and in-depth descriptions of f eatttres and
benefits. Catalogs can also remain in l1omes or offices for a lengtl1y time period, 1naking
available potential sales. Catalogs can offer specialty products for u11ique markets that are
geographically dispersed in a cost-effective manner. Although consumers cannot experi
ence products directly as they can in stores, catalog retailers with reputations for quality
and generous return policies can redttce consumers' risks. For exa1nple, Levenger, w11ich
sells pens, desks, and "other tools for serious readers," sends consu1ners a postage-paid
label to return unwanted merchandise. Many consumers enjoy the time savings of catalog
shopping and are willing to pay higher prices to use it.
Vending Machines
Vending machines are a relatively limited method of retail merchandising, and most
vending machine sales are for beverages, food, and candy. The advantages for marketers
include the following: They are available for sales 24 hours a day, they can be placed in
a variety of high-traffic locations, and marketers can charge higher prices. While uses of
vending machines for such things as airline insurance and concert ai1d game tickets are not
unusual, this method has limited potential for most products.
Television Home Shopping
Television ho1ne shopping includes cable channels dedicated to shopping, i11fo1nerciaJs,
and direct-response advertising shown on cable and broadcast networks. Horne Shopping
Network and QVC are the leaders in this market, and the major products sold are inex
pensive jewelry, apparel, cosmetics, and exercise equipment. While this method allows
better visual display than catalogs, potential custo1ners 1nust be watching at the time
the merchandise is offered� if not, they l1ave no way of knowing about the product or
pt1rchasing it.
168 Part C The Marketing Mix
AGURE 10.7
Online Retailing:
Advantages and
Disadvantages for
Marketers
Direct Sales
Direct sales are made by salespeople to consumers in their homes or offices or b y telephone.
The most common products purchased tl1is way are cosmetics, fragrances, decorative
accessories, vacuu1n cleaners, home appliances, cooking utensils, kitchenware, jewelry,
food and nutritional products, and educational materials. Avon, Mary Kay, a.nd Tupperware
are probably the best-known retail users of this channel. Salespeople can demonstrate prod
ucts effectively and provide detailed feature and benefit information. A limitation of this 111ethod is that consun1ers are often too busy to spend their time this way and do 11ot want to
pay the higher prices needed to cover the high costs of this method of retailing.
Online and Mobile Retailing
Online retailing is the marketing of products and services directly to consumers via the
Internet. Some of the products and services are digital in that they are delivered directly
to consumers' computers, s1nartphones, and tablets. Tl1ese include music and software
downloads, information services, insurance and other fmancial services, e-books, com
puter games, and movie rentals, among others. Other products are tangible, such as cloth
ing or computers, that require physical delivery to consumers. Online retaili11g is the fastest-growing type of retailing, and in some years, on line sales
have grown 20 to 25 percent. The percentage of total retail sales that are on the Internet is
expected to grow to more than 12 percent in the near future. Some of the growth in online
sales is the result of online-only stores like Amazon.com and Priceline.com developing
successful strategies to serve consu1ners effectively. However, 1nuch of the growth has come about because established retailers have set up virtual stores as an additional channel
to their brick-and-mortar stores. For example, Eddie Bauer, Lands' End, Bass Pro Sl1ops,
and Cabela's all offer products for sale in stores, in catalogs, and on the Internet.
Figtire 10.7 lists some of the advantages and disadvantages of online retailing for 111arketers. In exa111ining this figure, it is important t o recognize that there are some
Advantages for Marketers
Reduces the need for stores, paper catalogs, and salespeople; can be cost efficient.
Allows good visual presentation and full description of product features and benefits.
Allows vast assortments of products to be offered efficiently.
Allows strategic elements, such as product offerings, prices, and promotion appeals, to be changed quickly.
Allows products to be offered globally in an efficient manner.
Allows products to be offered 24 hours a day, 365 days a year.
Fosters the development of one-on-one, interactive relationships with customers.
Provides an efficient means for developing a customer database and doing online marketing research.
Disadvantages for Marketers
Strong price competition online often squeezes profit margins.
Low entry barriers lead some e-marketers to overemphasize order-taking and not develop sufficient infrastructure for order fulfillment.
Customers must go to the website rather than having marketers seek them out via salespeople and advertising; advertising their websites is prohibitively expensive for many small e-marketers.
Limits the market to customers who are willing and able to purchase electronically; many countries still have a small population of computer-literate people.
Not as good for selling touch-and-feel products as opposed to look-and-buy products unless there is strong brand/store/site equity (Dell computers/Walmart/Amazon.com) or the products are homogeneous (books, CDs, plane tickets, etc.).
Often less effective and efficient in business-to-consumer markets than in business-to-business markets.
MARKETING INSIGHT . . .
o:u.estions to Ask Whe.n .D.evelo.ping: . - . . . . .
.
'Successfiu1-cormrrnnericial �ebs·i-tes d 0=4
When developing commercial websites, it is important to consider what customers expe rience when searching for information, evaluating alternative products, and purchasing them. Here are some basic questions that website designers should consider.
INFORMATION SEARCH
1. Ease of navigation-is it easy to move throughout the website?
2. Speed of page downloads-does each page load quickly enough?
3. Effectiveness of search features-are search features returning the information users are looking for?
4. Frequency of product updates-is product information updated often enough to meet user needs?
EVALUATION OF ALTERNATIVES
1. Ease of product comparisons-is it easy to compare different products offered on the website?
2. Product descriptions-are product descriptions accurate, clear, and comprehensive enough to allow customers to make informed decisions?
3. Contacting customer service representatives-are customer service phone numbers easy to locate?
4. In-stock status-are out-of-stock products flagged before the customer proceeds to the checkout process?
PURCHASE
1. Security and privacy issues-do users feel comfortable transmitting personal information? 2. Checkout process-are users able to move through the checkout process in a reasonable
amount of time? 3. Payment options-are payment options offered that nonbuyers desire? 4. Delivery options-are delivery options offered that nonbuyers desire? 5. Ordering instructions-are ordering instructions easy to understand?
Source: Based on K. Douglas Hoffman and John E. G. Bateson, Services Marketing: Concepts, Strategies, and Cases, 3rd ed. (Mason, OH: Thomson South-Western, 2006), p. 86.
differences i n advantages and disadvantages depending on whetl1er the marketer is a
small, entrepreneurial venture or a large, established company. Beca11se online retailing
offers low-entry barriers, this is an advantage for a small company that wants to get into
a market and compete for business witl1 less capital. However, for large, established
companies, this is less of an advantage because they have the capital to invest: Low
entry barriers create more competition for them from smaller companies.
Similarly, large companies with established names and brand equity can more eas
ily market products that customers would ordinarily want to examine before purchase (touch-and-feel products) than can smaller co111panies with less brand equity. Tl1is does
not mean that virtual-only companies cannot compete for business. Companies like
Amazon.com and Priceline.com have created well-known and well-respected websites
and have generated considerable sales and profits.
One of the recent developments in online retailing is mobile retailirig in which prod
ucts and services are 1narketed to consumers via smartphones and tablets. Consumers
can be standing in a retail store and search for information about products and competi
tive prices with their smartphone. Consumers can collect information in a brick-and-
1nortar store and then order the product online using a tablet. Smartphones and tablets are co1nmonly used to look for coupons, read product reviews, get product information,
and look for lower prices. 169
170 Part C The Marketing Mix
SUMMARY
Additional
Resources
Key Terms
and Concepts
Multichannel Marketing
As noted, a number of companies offer products and services in stores, in catalogs, and
onljne. This is called mzlltichannel marketing, and it has been found that sales usually
increase with this strategy over that of a single channel. However, there are some prob
lems in implementing this strategy that marketers have not fully overcome. While it is
easy to argue that all channels should provide a consistent marketing mix, some market
ers have had difficulty generating such a mix. For example, some marketers have bad
difficulty in pricing because tl1eir in-store prices are too 11igh to compete effectively
in online retailing, where lower prices are the norm. Thus, they may have to offer the
same product at a lower price online than in their stores in order t o compete with sites
like Amazon.coin: Barnes & Noble does so, for example. Similarly, while marketers
can provide abundant information and i1nagery on a full-screen computer, smartphones
cannot easily handle such complexity. This, combined with concerns about transaction
speed and security, may explain why relatively few purchases are actually made o n
smartphones, compared with tablets and desktop computers.7 Also, unique skills and
resources are needed for different channels. For exa111ple, different types of managers,
salespeople, distribution centers, and delivery systems are needed for store-based retail
chains versus online retailing.
While marketers are still working on these issues, one thing that can help provide
consistency is a customer relationship management system. This involves a centralized
customer data warehouse that houses a complete history of eacl1 customer's interactions
with tl1e company-regardless of whether it occu.rred in a store, on the Internet, on tl1e
telephone, or by mail. Such an information storehouse allows marketers to efficiently
handle complaints, expedite returns, target promotions, and provide a near-seamless
experience for customers. 8
This cl1apter introduced the distribution of goods and services in a complex, highly competi
tive, highly specialized economy. It emphasized the vital need for marketing intermediaries
to bring abot1t exchanges between buyers and sellers in a reasonably efficient manner. The
cl1apter examined various types of intermediaries ai1d the distribution functions they p e r
form as well as topics in the selection and management of distribution channels. Finally,
both wholesaling and store and nonstore retailing were discussed.
Coughlin, Anne T., Erin Anderson, Louis W. Stern, and Adel I. El-Ansary. Marketing Channels.
7th ed. Upper Saddle River, NJ: Prentice Hall, 2006.
Levy, Michael, and Barton A. Weitz. Retailing Management. 8th ed. Burr Ridge, IL: McGraw-Hill,
2012.
Pasqua, Rachel, and Noah Elkin. Mobile Marketing. Indianapolis: John Wiley and Sons, 2013.
Rosenbloon1, Bert. Mltrketing Channels: A Managenient View. 8th ed. Mason, OH: Tho1nson
South-Western, 2012.
Simchi-Levi, David, Philip Kaminsky, and Edith Simchi-Levi. Designirig ancl Managing the Supply
Chain. 3rd ed. Burr Ridge, IL: McGraw-Hill, 2008.
Note: For definitions of the major types of marketing iI1ter1nediaries, see Figure 10.1 and for the
major functions performed in channels of distribution, see Figure 10.2 at the beginning of Lhis
chapter.
Administered system: A vertical marketing system with a higher degree of interorganizational
planning than a conventional channel often brought about by having a strong channel leader.
Chapter Ten Distribution Strategy 71
Backward integration: The purchase b y wholesalers or retailers of channel members above tl1em.
Channel of distribution: The co1nbination of institutions through which a seller 1narkets products
to organizational buyers or t1lti1nate consu1ners.
Contractual system: A ve1tical marketing system that involves independent production a11d
distribution con1panies entering into fonnal contracts to perform designated marketing functions.
Convenience stores: Retailers whose primary advantages to consumers are location convenience,
close-in parking, and easy entry and exit. They typically stock a limited number of items that
consu1ners want to buy in a hurry, such as milk or soft drinks and include stores like 7-Eleven
and PDQ.
Corporate system: A vertical marketing system involving single ownership of two or more levels
of a channel such as a manufacturer owning a wholesale operation.
Direct chan11els: Channels in which the 1nanufacturer sells directly to a market witl1out the use of
intermediaries.
Direct n1arketing: A direct cha11nel in which the seller uses direct 1nail, telemarketing, direct
action advertising, catalog selling, cable selling, online selling, or direct selling tbrougl1 demonstra
tions at home or place of work to reach buyers.
Exclusive distribution: An approach to distribution that involves the manufacturer providing
exclusive rights to intermediaries in particular territories.
Forward integration: A 1nanufacturer's purchase of wholesalers or retailers who distribute its
lJroducts.
Indirect channels: Distributio11 channels witl1 one or mose inter1nediaries.
Intensive distribution: An approach to distribution that involves using as many wholesalers and
retailers as possible to get broad distribution. It is commonly used with convenience goods.
Mass merchandisers: Large retailers that carry broad product assortments and co1npete on the
basis of a good selection i11 a number of different categories (e.g., Macy's, Kroger) or on the basis
of lower prices on products in fueir large assortment (e.g., Walmart, Costco).
Mobile retailing: The marketing of products and services directly to consumers via smartphones
and tablets.
Multichannel marketing: Offering products and services in multiple channels such as in stores, in
catalogs, and online.
Online retaili11g: The 1nru:keti11g of products and services directly to consumers via the Internet.
Consumers can searcl1, order, and pay for products on their computers, tablets, or smartphones
using this channel.
Relationship marketing: Marketing with the conscious airn to develop and 1nanage long-terrn and/
or trusting relationships with customers, distributors, suppliers, o r other parties in the marketing
environment.
Selective distribution: An approach to distribution in which the manufacturer limits the use of
intermediaries to the best available in a geographic area. The inter1nediaries are commonly selected
on the basis of the service or sales organization available or Teputation.
Specialty stores: Stores that handle deep assortments in a limited number of product categories,
such as The Gap, Batteries Plus, or Best Buy.
Total distribution costs: Concept that suggests that a chan11el of distribution sl1ould be viewed
as a total system composed of i11terdependent subsystems and that the objective of the syste1n
(charu1el) manager should be to optimize total system performance. This typically means fue total
system should mini1nize costs for a given level of service.
Vertical marketing systems: Channels in which members are more dependent on one another and
develop long-ter1n working relationships in order to i1nprove the efficiency and effectiveness of the
system.
Chapter
• •
r1c1n
One of the 1nost important a11d complex decisions a fitm has to make relates to pricing its
products or services. If consumers or organizational buyers perceive a price to be too high,
they may purchase competitive brands or substitute products, leading to a loss of sales
and profits for the firm. If the price is too low, sales might increase, but profitability may suffer. Thus, pricing decisions must be given careful consideration when a firm is intro
ducing a new product or planning a short- or long-term price change.
This chapter discusses demand, supply, and environmental influences that affect pricing
decisions and emphasizes that all three must be considered for effective pricing. However,
as will be discussed in the chapter, 1nany fi11ns price their products without explicitly con
sidering all of these influences.
DEMAND INFLUENCES ON PRICING DECISIONS
172
Demand influences on pricing decisions concern primarily tl1e nature of the target mar ket and expected reactions of consumers to a given price or change in price. Tl1ere are three
primary considerations here: demographic factors, psychological factors, and price elasticity.
Demographic Factors In the initial selection of the target market tl1at a firm intends to serve, a number of demo
graphic factors are usually considered. Demographic factors that are particularly important
for pricing decisions include the following:
1. Number of potential buyers.
2. Location of potential buyers.
3. Position of potential buyers (organizational buyers or final consumers).
4. Expected consumption rates of potential buyers.
5. Economic strength of potential buyers.
These factors help determine market potential and are useful for estimating expected sales
at various price levels.
Psychological Factors Psychological factors related to pricing concern primarily how const1mers will perceive
various prices or price cha11ges. For exa1nple, marketing managers should be concerned
with such questions as these:
1. Will potential buyers use price as an indicator of product quality?
2. Will potential buyers be favorably attracted by odd pricing (e.g., 99¢, $3,999)?
Most analyses of the price of a product focus on the amount of money a buyer must pay to purchase. However, there are other costs involved that can strongly influence purchase decisions. Here are three types of costs marketing analysts should consider when making pricing decisions.
Time Costs. Time is valuable to most people. Time involved in purchasing products often could be used for more pleasant activities. Waiting in a long checkout line or waiting for a pizza to be delivered can be considered a waste of time too. Many people are willing to pay more money to reduce the time they have to wait to get a product. Vending machine sales often depend on buyers who will pay more money to get a product sooner and with less hassle. People who want a product immediately are often willing to finance the purchase on a credit card to reduce the time waiting to get it.
Psychological Costs. The mental energy and stress in making important purchases and accepting the risks of products not performing as expected can make buyers uncomfort able. Purchasing complex or expensive products can involve investigating and evaluating lots of information and worrying about making the right choices. Car dealers that offer "no haggle" sales do so in order to lower buyers' psychological costs of negotiating.
Behavioral Costs. Buying products and services usually requires some level of physical activity. These costs can increase if buyers have to drive a long way to make a purchase, park far away in a large mall parking lot and have to walk to the store, hunt through many aisles looking for products, and stand for long periods waiting to check out. One way buy ers reduce this cost is by shopping and buying from catalogs or the Internet even if they have to pay more money because of shipping charges.
If buyers in a target market are sensitive to these costs, it is possible for marketers to get a competitive advantage by reducing them. These strategies include such things as sell ing through multiple channels, free shipping, fast delivery, in-store credit, no-hassle return policies, and money-back quarantees. Another strategy is to reduce the monetary price of products in order to compensate for higher time, psychological, or behavioral costs. For example, Walmart's lower monetary prices help offset the additional costs to buyers of hav ing to drive longer distances to get to the stores that are located on the outskirts of most markets.
3. Will potential buyers perceive t11e price as too 11igl1 relative to tl1e service the product
gives them or relative to co1npetition?
4. Are potential buyers prestige oriented and therefore willing to pay higher prices to
fulfill this need?
5. How much will potential buyers be willing to pay for the product?
While psychological factors have a significant effect on the success of a pricing strategy
and ultimately on marketing strategy, answers to the preceding questions 1nay require con
siderable marketing researcl1. In fact, a review of buyers' subjective perceptions of price
concluded that very little is known about how price affects buyers' perceptions of alterna
tive purchase offers and how tl1ese perceptions affect purchase response. 1 However, some
tentative generalizatio11s about how buyers perceive price have been formulated. For exam
ple, research has found that persons who choose high-priced ite1ns usually perceive large
quality variations within product categories and see the consequences of a poor choice as
being undesirable. They believe that quality is related to price and see themselves as good
judges of product quality. In general, the reverse i s true for persons who select low-priced
items in t11e same product catego1ies. Thus, although infor111ation on psychological factors
involved in purchasing may be difficult to obtain, marketing managers must at least con
sider the effects of such factors on their desired target market and marketing strategy.2
173
174 Part C The Marketing Mix
There are three types of psychological pricing strategies. First there is prestige pricing, in
which a higl1 price is charged to create a signal that the product is exceptionally fine. Prestige
pricing is cormnonly used for some brands of cars, clothing, perfume, jewehy, cosmetics,
wine and liquor, and crystal and china. Second, there is odd pricing, or odd-even pricing, in
which prices are set a few dollars or a few cents below a round number. For example, Frito
Lay's potato chips are priced at 69 cents a bag rather than 70 cents to encourage consumers
to think of them as less expensive (60 so1ne-odd cents rather than 70 cents). Hertz economy
cars are rented for $129 rather than $130 to appear less expensive. Third, there is bundle
pricing, in which several products are sold together at a single price to suggest a good value.
For example, travel agencies offer vacation packages that include travel, accommodations, a11d entertainment at a single price to connote value and convenience for custom.ers.
Price Elasticity Both de1nographic and psychological factors affect price elasticity. Price elasticity is a
1neasure of consumers' price sensitivity, which is estimated by dividing relative changes in
the quantity sold by the relative changes in price:
e = Percent change in quantity demanded
Percent change in price
Although price elasticity is difficult to measure, two basic methods are commonly used
to estimate it. First, price elasticity can be estimated from historical data or from price/
quantity data across different sales districts. Second, price elasticity can be estimated by sainpling a group of consu1ners from the target market and polling them concerning various
price/quantity relationships. Both of these approaches provide estimates of price elasticity;
but the former approach is limited to the consideration of price changes, whereas the lat
ter is often expensive and tl1ere is some question as to the validity of subjects' responses.
However, even a crude estimate of price elasticity is a useful input to pricing decisions. 3
SUPPLY INFLUENCES ON PRICING DECISIONS
For the purpose of this text, supply influences on pricing decisions can be discussed in terms
of three basic factors. These factors relate to the objectives, costs, and nature of the product.
Pricing Objectives Pricing objectives should be derived from overall marketing objectives, which in turn
should be derived frotn corporate objectives. Since it is traditio11ally assumed that busi
ness firms operate to maximize profits in the long run, it is often thought that the basic
pricing objective is solely concerned with long-run profits. However, the profit maximiza
tion norm does not provide the operating marketing manager with a single, unequivocal
guideline for selecting p1ices. In addition, the marketing ma11ager does not have perfect
cost, revenue, and market infor1nation to be able to evaluate whether or not this objec
tive is being reached. In practice, then, many other objectives are employed as guidelines
for pricing decisions. In some cases, these objectives may be considered as operational approac]1es t o ac]1ieve long-run profit maxi1nization.
Research has found that the most common pricing objectives are (1) pricing to achieve
a target return on investment, (2) stabilization of price and 1nargin, (3) pricing t o achieve a
target market share, and (4) pricing to meet or prevent competition.
Cost Considerations in Pricing The price of a product usually must cover costs of production, promotion, and distribt1tion,
plus a profit, for the offering to be of value to the firm. In addition, when products are
�eta_il Pr.ic·ing: Strateg:i_es: E.DLP or hi i g lil/4Low8
i
n-,.� -2·
There are two common pnc1ng strategies at the retail level: EDLP, which stands for "everyday low pricing," and high/low, which means that the retailer charges prices that are someti:mes above competitors' but promotes frequent sales that lower prices below them. Four successful U.S. retailers-Home Depot, Walmart, Office Depot, and Toys 'R' Us-have adopted EDLP, while many fashion, grocery, and drug stores use high/low. The following is a list of the advantages of each of these pricing strategies.
ADVANTAGES OF EDLP
• Assures customers of low prices. Many customers are skeptical about initial retail prices. They have become conditioned to buying only on sale the main characteristic of a high/low pricing strategy. The EDLP strategy lets customers know that they will get the same low prices every time they patronize the EDLP retailer. Customers do not have to read the ads and wait for items they want to go on sale.
• Reduces advertising and operating expenses. The stable prices caused by EDLP limit the need for the weekly sale advertising used in the high/low strategy. In addition, EDLP retailers do not have to incur the labor costs of changing price tags and signs and putting up sale signs.
• Reduces stockouts and improves inventory management. The EDLP approach reduces the large variations in demand caused by frequent sales with large markdowns. As a result, retailers can manage their inventories with more certainty. Fewer stockouts mean more satisfied customers, resulting in higher sales. In addition, a more predictable customer demand pattern enables the retailer to improve inventory turnover by reducing the average inventory needed for special promotions and backup stock.
ADVANTAGES OF HIGH/LOW
• Increases profits. High/low pricing allows retailers to charge higher prices to customers who are not price-sensitive and will pay the "high" price and to charge lower prices to price-sensitive customers who will wait for the "low" sale price.
• Creates exc itement. A "get them while they last" atmosphere often occurs during a sale. Sales draw a lot of customers, and a lot of customers create excitement. Some retailers augment low prices and advertising with special in-store activities, such as product dem onstrations, giveaways, and celebrity appearances.
• Sells merchandise. Sales allow retailers to get rid of slow-selling merchandise.
Source: Based on Michael Levy and Barton A. Weitz, Retailing Management, 8th ed. (Burr Ridge, IL: McGraw-Hill/Irwin, 2012), p. 373.
priced on the basis of costs plus a fair profit, there is an implicit assumption that t11is sum
represents the economic value of the product in the marketplace.
Cost-oriented pricing is the most common approach in practice, and there are at least
three basic variations: markup pricing, cost-plus pricing, and rate-of-retu1n pricing.
Markup JJricing is co1nmonly used in retailing: A percentage is added to tl1e retailer's
invoice price t o determine the final selling price. Closely related to 1narkup pricing is cost
plus pricing, in which the costs of producing a product or co1npleting a project are totaled
and a profit amount or percentage is added on. Cost-plus pricing is most often used to
describe the pricing of jobs that are nonroutine and difficult to "cost" in adva11ce, such as
construction and military weapon develop1nent.
Rate-o.f-return pricirig is commonly used by manufacturers. With this method, price is
determined by adding a desired rate of return on invest1nent to total costs. Generally, a
breakeven analysis is performed for expected production and sales levels and a rate of return
is added on. For example, suppose a finn esti1nated productio11 and sales to be 75,000 units
at a total cost of $300,000. If the firm desired a before-tax return of 20 percent, the selling
price would be (300,000 + 0.20 X 300,000) ..,... 75,000 = $4.80. 175
MARKETING· INSIGHT Basic Breakeven .Form.u.las
116
. - .
.
The following formulas are used to calculate breakeven points in units and in dollars:
where
FC = Fixed cost
VC = Variable cost
SP = Selling price
BEP (in units) =
FC
(SP - VC)
FC BEP = - - --
(in dollars) 1 - ( VC/ SP)
If, as is generally the case, a firm wants to know how many units or sales dollars are necessary to generate a given amount of profit, profit (P) is simply added to fixed costs in the formulas. In addition, if the firm has estimates of expected sales and fixed and variable costs, the selling price can be solved for. (A more detailed discussion of breakeven analysis is provided i n the financial analysis section of this book.)
Cost-oriented approaches to pricing have the advantage of simplicity, and many practi
tioners believe that they generally yield a good price decision. However, such approaches have been criticized for two basic reasons. First, cost approacl1es give little or no con
sideration to demand factors. For example, the price determined by markup or cost-plus
methods has no necessary relationship to what people will be willing to pay for the product.
In the case of rate-of-return pricing, little emphasis is placed on estimating sales volume.
Even if it were, rate-of-return pricing involves circular reasoning, since unit cost depends
011 sales volu1ne but sales volume depends on selling price. Second, cost approaches fail
to reflect competition adequately. Only i n industries where all firms use this approach and
have similar costs and markups can this approach yield similar prices and minimize price
competition. Thus, in many industries, cost-oriented pricing could lead to severe price competition, wl1ich could eli1ninate smaller firms. Therefore, although costs are a highly
important consideration in price decisions, numerous other factors need to be examined.
Product Considerations in Pricing Altho11gh numerous product characteristics can affect pricing, three of tl1e most important
are (1) perishability, (2) distinctiveness, and (3) stage in the product life cycle.
Pe rishability
Some products, such as fresh meat, bakery goods, and some raw materials are physically pe1ishable and must be priced to sell before they spoil. Typically, this involves discou11ting
the products as they approach being no longer fit for sale. Products can also be perishable in
the sense that demand for them is confined to a specific ti1ne period. For example, high fash
ion and fad products lose most of their value when they go out of style and marketers have
the difficult task of forecasting demand at specific prices and judging the time period of cus
tomer interest. While the tin1e period of interest for otl1er seasonal products, such as wi11ter
coats or Cl1ristn1as trees, is easier to estimate, marketers must still determine tl1e appropriate
price and discount strt1cture to maximize profits and avoid inventory losses or carrying costs.
Distinc·tiveness
Marketers try to distinguish their products from those of competitors and if successful, can
often charge l1igher prices for them. While such things as styling, features, ingredients, and
service can be used to try to make a product distinctive, competitors can copy such physical
Chapter Eleven Pricing Strategy 177
changes. Thus, it is through branding and brand equity that products are commonly made
distinctive in customers' minds. For example, prestigious brands like Rolex, Tiffany's, and Lexus can be priced higher in large measure because of brand equity. Of course, higher
prices also help create and reinforce the brand equity of prestigious products.
Life Cycle
Tl1e stage of the life cycle tl1at a product is in can have important pricing implications.
With regard to the life cycle, two approaches to pricing are skim1ning and penetration price
policies. A skimm.ing policy is 011e in which the seller charges a relatively high price on a
new product. Generally, this policy is used when the firm has a temporary monopoly and
when demand for the prodL1ct is price inelastic. In later stages of the life cycle, as competi
tion 1noves in and other market fact<.)rs change, the price may then be lowered. Flat screen
TV's ai1d cell phones are examples of this. A penetrc1tion policy is one in wluch tl1e seller
charges a relatively low price on a new product. Generally, tl1is policy is used when the
firm expects competition to move in rapidly and when demand for the product is, at least in
the short run, price elastic. This policy is also used to obtain large econonues of scale and as a major instrument for rapid creation of a mass market. A low price and profit margin
may also discourage competition. In later stages of the life cycle, the price may have to be
altered to 1neet changes in the market.
ENVIRONMENTAL INFLUENCES ON PRICING DECISIONS
Environmental int1uences on pricing include variables that the marketing manager cannot
control. Tl1ree of tl1e 1nost in1portant of these are the Internet, competition and government regulation.
The Internet One of the biggest influences on pricing decisions has been the development of the I11temet. Prior to its development, it was difficult for consumers to compare prices effec
tively. Consumers would have to travel from store to store or call each store and try to find
identical brands and models to compare prices. For many products, like televisions and
appliances, this was difficult to do because competitors seldom carried the same brands
and models. However, consumers now can simply go from store to store online and com
pare prices, or go to websites tl1at do price comparisons for them ai1d find the best deals
(e.g., kayak.com and expeclia.com). Consumers can go to Google, put in the product and
brand they are looking for, hit the Shopping tab, and let the web browser find it for them
at a variety of sites and prices. Consu1ners can go to Edmunds.com and find out bow much
a dealer has paid for an auto111obile or truck as well as how mucl1 customers in their area
have been paying for a particular model. In sum, tl1e Internet has made prices much easier
for consumers and organizational buyers to compare and has forced marketers to be much
1nore transparent in their pricing strategies.
Competition In setting or changing prices, the firm 1nust consider its competition and l1ow compe
tition will react to the price of the product. Initially, consideration must be given to such
factors as
1. Number of competitors.
2. Market shares, growth, and profitability of competitors.
3. Strengths and weaknesses of competitors.
4. Likely entry of new firms into the industry.
178 Part C The Marketing Mix
5. Degree of vertical integration of competitors.
6. Number of products sold by competitors.
7. Cost structure of competitors.
8. Historical reaction of co1npetitors to price changes.
These factors help determine whether the firm's selling price should be at, below, or above competition. Pricing a product at co1npetition (i.e., the average price charged b y tl1e
industry) i s called going-rate pricing and is popular for homogeneous products, since this
approach represents the collective wisdom of the industry and is not disruptive of industry
harmony. An example of pricing below competition can be found in sealed-bid pricing, in
which the fir1n is bidding directly against competition for project contracts. Although cost
and profits are initially calculated, the firm attempts to bid below competitors to obtain
the job contract. A firm may price above competition because it has a superior product or
because the firm is the price leader in the industry.
Government Regulations Prices of certain goods and services are regulated by state and federal governments. Public
utilities are examples of state regulation of prices. However, for most marketing managers,
federal laws that make certain pricing practices illegal are of primary consideration in pric
ing decisions. The following list is a summary of some of tl1e more important legal con
straints on pricing. Of course, since most marketing ma11agers are not trained as lawyers,
they usually seek legal counsel when developing pricing strategies to ensure conformity to
state and federal legislation.
1. Price fixing is illegal per se. Sellers must not make any agreements with competitors or
distributors concerning the final price of the goods. The Sherman Antit1ust Act is tl1e
primary device used to outlaw horizontal p1ice fixing. Section 5 of the Federal Trade
Commission Act has been used to outlaw price fixing as an unfair business practice.
2. Deceptive pricing practices are outlawed under Section 5 of the Federal Trade
Commission Act. An example of deceptive pricing would be to mark merchandise with
a11 exceptionally l1igl1 price and then clai111 that tl1e lower selling price actually used
represents a legitimate price reduction.
3. Price discrimination (the practice of charging different prices to different buyers for
goods of like grade and quality) that lessens competition or is deemed injurious to it
is outlawed by the Robinson-Patman Act. Price discrimination is not illegal per se,
but sellers cannot charge competing buyers different prices for essentially the same
products if the effect of such sales is injurious to competition. P1ice differentials can be
legally justified on certain grounds, especially if the price differences reflect cost differ
ences. This is particularly true of quantity discounts.
4. Predatory pricing involves charging a very low price for a product with the intent of
driving competitors out of business. It is illegal under the Sherman Act and Federal
Trade Commission Act.4
A GENERAL PRICING MODEL
It should be clear that effective pricing decisions involve considerations of many factors,
and different industries may have different p1icing practices. Although no single model
will fit all pricing decisions, Figure 11.1 presents a general 1nodel for developing prices for
products and services.5 While all pricing decisions cannot be made strictly on the basis of
this model, it does break pricing strategy into a set of manageable stages that are integrated into the overall marketing strategy.
FIGU E 1
A General Pricing Model
Chapter Eleven Pricing Strategy 179
-
Set pricing obiectives
I
Evaluate product-price relationships
I
,
-
Estimate costs and other price limitations
I
,
-
Anal-y%e profit potential
I
'
Set initial price structure
I
Change price as needed
I
Set Pricing Objectives Given a product or service designed for a specific target market, the pricing process begins
with a clear statement of the pricing objectives. These objectives guide the pricing strategy
and should be designed to support the overall marketing strategy. Because pricing strategy
has a direct bearing on demand for a product and the profit obtained, efforts to set prices
must be coordinated with other functional areas. For example, production will l1ave to be
able to meet demand at a given price, and finance will have to manage funds flowing in
and out of the organization at predicted levels of production.
Evaluate Product-Price Relationships As noted, the distinctiveness, perishability, and stage of the life cycle a product i s in all
affect prici11g. In addition, n1arketers need to consider what value tl1e product has for
customers and how price will influence product positioning. There are tl1ree basic value
180
iliem iliiP.s for Managing
P. � i 6 i mg � [ � a,t e g Yi· �- d -a
1. The more that competitors and customers know about your pricing, the better off you are. In an information age, it is necessary to be transparent about prices and the value of a firm's offerings.
2. In highly competitive markets, the focus should be on those market segments that provide opportunities to gain competitive advantage. Such a focus leads to a value oriented pricing approach.
3. Pricing decisions should be made within the context of an overall marketing strategy that is embedded within a business or corporate strategy.
4. Successful pricing decisions are profit oriented, not sales volume or market share oriented.
5. Prices should b e set according to customers' perceptions of value.
6. Pricing for new products should start as soon as product development begins.
7. The relevant costs for pricing are the incremental avoidable, costs.
8. A price may be profitable when it provides for incremental revenues in excess of incre mental costs.
9. A central organizing unit should administer the pricing function. Generally, it is better to avoid letting salespeople set price, especially without access to profitability informa tion and specific training in pricing and revenue management.
10. Pricing management should be viewed as a process and price setting as a daily man agement activity, not a once-a-year activity.
Source: From David Cravens and Nigel Piercy, Strategic Marketing 1 OE, 2013, p. 342. Reprinted with permission of McGraw-Hill Education.
positions. First, a product could be priced relatively high for a product class because it offers
value in the form of high quality, special features, or prestige. Second, a product could be
priced at about average for the product class because it offers value in the form of good
quality for a reasonable price. Third, a product could be p1iced relatively low for a product
class because it offers value in the form of acceptable quality at a low price. A Porsche
or Nike Air Max are examples of the first type of value; a Honda Accord or Keels tennis
shoes are examples of the second; and Hyundai cars and private label cai1vas shoes are
examples of the third. Setting prices so that targeted customers will perceive products to
offer greater value than competitive offerings is called vali/e pricing.
In addition, research is needed to estimate how much of a particular product the tar
get market will purchase at various price levels-price elasticity. This estimate provides
valuable information about what the target market thinks about the product and what it is
worth to them.
Estimate Costs and Other Price Limitations
The costs to produce and market products provide a lower bound for pricing decisions and
a baseline from which to compute profit potential. If a product cannot be produced and
marketed at a price to cover its costs and provide reasonable profits in the long run, then
it sl1ould not be produced in its designed fonn. One possibility is to redesign the product
so that its costs are lower. In fact, some companies first deter1nine the price customers are
willing to pay for a product and then design it so that it can be produced and marketed at a
cost that allows targeted profits.
Other price li1nitations that need to be considered are govem1nent regulations and tl1e
prices that co1npetitors charge for similar a.nd substitute products. Also, likely competitive
SUMMARY
Additional Resources
Chapter Eleven Pricing Strategy 181
reactions that could influence the price of a new product or a price change in an existing
one need to be considered.
Analyze Profit Potential Analysis in the preceding stages should result in a range of prices that could be charged.
Marketers must then estimate the likely profit in pricing at levels in this range. At this
stage, it is important to recognize that it 1nay be necessary to offer channel members quan
tity discounts, pro111otional allowances, an.ct slotting allowances to encourage the111 to
actively market the product. Quantity discounts are discou11ts for purchasing a large num
ber of units. Promotionctl allowances are often in the form of price reductions in exchange
for the channel member performing various promotional activities, such as featuring the
product in store advertising or on in-store displays. Slc,tting allowances are payments to
retailers to get them to stock ite111s on their shelves. All of these can increase sales but also
add marketing cost to the manufacturer and affect profits.
Set Initial Price Structure Since all of the supply, demand, and environmental factors have been considered, a m a r
keter can now set the initial price structure. The price structure takes into account the
price t o various cl1annel me111bers, such as wholesalers and retailers, as well as the recom
mended price to final consumers or organizational buyers.
Change Price as Needed T11ere are n1any reasons why a11 initial price structure may need to be changed. Channel
members may bargain for greater margins, competitors may lower their prices, or costs
may increase with inflation. In the short term, discounts and allowances may have to be
larger or more frequent than planned to get greater marketing effort to increase demand
to profitable levels. In the long ter111, price structures tend to increase for most products as
production and marketing costs increase.
Pricing decisions that integrate the firm's costs with marketing strategy, business con
ditions, com.petition, demand, prodLLCt variables, channels of distribution, and general
resources can dete1111ine the success or failure of a business. This places a very heavy
burden on the price maker. Modern-day marketing managers cannot ignore the com
plexity or the importance of price management. Pricing strategies must be continually
reviewed and must take into account that the firm is a dyna1nic entity operating in a
very competitive environment. There are 1nany ways for money to flow out of a firm jn
the for1n of costs, but often tl1ere is only one way to bring i n revenues and that is by the
price-product mechanism.
Macdivitt, Harry, and Mike Wilkinson. Value-Based Pricing. New York: McGraw-Hill, 2012.
Mazu111dar, Tridib, S. P. Raj, and lndrajit Sinha. ''Reference Price Research: Review and
Propositions." Journal of Marketirig, October 2005, pp. 84-102.
Monroe, Kent B. Pricing: Making Profitable Decisions. 3rd ed. New York: McGraw-Hill, 2003.
Nagle, Thomas T., John Hogan, and Joseph Zale. The Strategy and Tactics of Pricing. 5th ed.
Englewood Cliffs, NJ: Prentice Hall, 2011.
Smith, Ti1n. Pricing Strategy. Mason, OH: Thomson South-Western, 2012.
Winer, Russell S. Pricing. Cambridge, MA: Marketing Science Institute, 2005.
18, Part C The Marketing Mix
Ke.yTerms
and Concepts
Bundle pricing: A form of psychological pricing that involves selling several products together at a single price iI1 order to suggest a good value.
Cost-plus pricing: A cost-oriented pricing approach that involves totaling u p the costs of producing a product or co1npleting a project and then adding on a percentage or fixed profit amount. This approach is used when costs are difficult to esti1nate in advance such as military weapon development.
Deceptive pricing: Illegal under the Federal Trade Commission Act, an approach that involves price deals that mislead the consumer. For exa1nple, putting a fake price on a product much higher than the product sells for in the n1arket, crossing it out, and then offering the product at the market price and clairnmg a price reduction could easily 1nislead consumers.
Going-rate pricing: Pricing a product at the average charged in the industry.
Markup pricing: A cost-oriented pricing approach that involves adding a percentage to the invoice price in order to determine the filial selling price . For exa1nple, if a retailer used a 50 percent markup on a product tl1at was bought from a wholesaler for $1, the selling price to the consumer would be $1.50.
Odd pricing: Also called odd-even pricing, a form of psychological pricing in which the prices are set at one or a few cents o r dollars below a round number i n order to create the perception that the price is low, for example, 99 cents or $129 rather than $ I or $130.
Penetration pricing policy: Approach to p1icing in which the seller charges a relatively low p1ice on a 11ew product initially in order to grow a market, gain 1narket share, and discourage competition from entering the market.
Prestige pricing: A form of psychological prici11g that involves charging a l1igh price to create a signal that the product is exceptionally fine.
Predatory pricing: Practice that involves charging a very low price for a product with the intent of driving competitors out of business. It is illegal under the Sherman Act and Federal Trade Co1nmission Act.
Price discrimination: The practice of charging different prices to different buyers for goods of like gra<le and quality which is illegal under the Robinson-Patman Act if it lessens or is deemed injurious to competition.
Price elasticity: A 1neasure of consumers' price sensitivity that is estimated by dividrng relative cha11ges in the quantity sold by relative changes in price. If demand is elastic, a slight lowering of p1ice will result in a relatively large increase in quantity den1anded.
Price fixing: A n u11fair business practice outlawed by the She1n1an Antitrust Act and the Federal Trade Commission Act that involves competitors in a market colluding to set the final price of a product.
Promotional allowance: Price reduction offered to channel members in exchange for performing various pro,notiona] activities SLtch as featuring the product in store advertising or on in-store displays.
Quantity discounts: Discounts offered for purchasing a large nu1nber of units.
Rate-of-return pricing: Cost-oriented approach to pricing that involves adding a desired rate of return on invest1nent to total costs. Generally, a breakeven analysis is performed for expected production and sales levels and a rate of return is added on.
Sealed-bid pricing: Bidding process in wltlch each seller submits a sealed bid and atten1pts to p1ice below competition in order to get the contract. Many large construction and military projects are bid this way.
Skimming pricing policy: Approach to pricing in which the seller charges a relatively high price on a new product in.itially in order to recover costs and make profits rapidly and then lowers the price at a later date to make sales to 1nore p1ice-sensitive buyers.
Slotting allowances: Payments to retailers to get them to stock items on their shelves, a common tactic for getting new products into stores.
Value pricing: Setting prices so that targeted customers will perceive products to offer greater value tl1an co1npetitive offerings. For existing products, this can be accomplished by offering more product or service while maintaining or decreasing the dollar price.
Marketing in Special
F1=lds
12 The Marketing of Services
13 Global Marketing
Part
Chapter
184
■
erv1ces
Over the course of the past 40 years, the fastest-growing segment of the American econ
omy has not been the production of tangibles but the perfon11ance of services. Spending
on services has increased to such an extent that today it captures n1ore than 50 cents of the
consumer's dollar. In addition, the service sector in the United States produces a balance-of
trade st1rplus and i s expected to be responsible for all net job growth in the forseeable future.1
The dominance of the service sector is not limited to the United States. The service sector
accounts for more tl1an half the GNP and ernploys more than half the labor force in most
Latin American and Caribbean countries. Over the course of the next decade, tl1e service
sector will spawn whole new legions of doctors, nurses, medical technologists, physical
therapists, home health aids, and social workers to administer to the needs of an aging poptL
lation, along with armies of food servers, child care providers, and cleaning people to cater
to the wants of two-income faniilies. Also risi11g to the forefront will be a swelling class of
technical workers, including computer engineers, systems analysts, and paralegals.
Many marketing textbooks still devote little attention to program development for the
marketing of services, especially those in the rapidly changing areas of health care, finance,
a11d travel. This omission i s usually based on tl1e assumption that the marketing of products
and services is basically the same, and, therefore, the techniques discussed under products
apply as well to the marketing of services. Basically, this assumption i s true. Whether sell
ing goods or services, the marketer must be concerned with developing a marketing strategy centered on the four controllable decision va1iables that comprise the marketing mix: tl1e product (or service), the price, the distribution syste1n, and promotion. In addition, the
use of marketing research is as valuable to service marketers as it is to product marketers.
However, because services possess certain distinguishing characteristics, the task of deter
mining tl1e marketing 1nix ingredients for a service marketing strategy may raise different
and more difficult problems tl1an tl1ose encountered in marketi11g products.
The purpose of this chapter is fourfold. First, the reader will become acquainted with
the special characteristics of services and their strategy implications. Second, key con
cepts associated with providing quality services will be discussed. Third, obstacles will be
described that in tl1e past impeded and still continue to impede development of services
marketing. Finally, current trends and strategies of innovation in services marketing \vill
be explored. With this approach, the material in the other chapters of the book can be inte
grated to give a better understanding of the marketing of services.
Before proceeding, some attention must be given to what we refer to when using the
term services. Probably the most frustrating aspect of the available literature on services is
FIGURE 12.1
The Goods-Service
Continuum
Chapter Twelve The Marketing o.f Services 185
that the definition of what constitutes a service remains unclear. The fact is that no com
mon definition and boundaries l1ave been developed to delimit the field of services. The
American Marketing Associatio11 has defined services as follovvs: 2
l . Service products, such as a bank loan or home security, that are intangible, or at least
substantially so. If totally intangible, they are exchanged directly from producer to user,
cannot be transported or stored, and are almost instantly perishable. Service products
are often difficult to identify, since they come into existence at the sa1ne time they are
bought and consumed. They are composed of intangible elements that are inseparable;
they usually involve customer participation in some important way, cannot be sold in
the sense of ownership transfer, and have no title. Today, however, most products are partly tangible and partly i11tangible, and the dominant form is used to classify them as
either goods or services (all are products). These common, hybrid forms, whatever they
are called, may or may not have the attributes just given for totally intangible services.
2. Services, as a term, is also used to describe activities performed by sellers and others
that accompany the sale of a product and that aid in its exchange or its utilization (e.g.,
shoe fitting, financing, an 800 number). Sucl1 services are either presale or postsale and
supplement the product but do not cotnprise it.
The first definition includes what can be considered almost pure services, such as
insLLrance, banking, entertainment, airlines, health care, telecommunications, and hotels; the second definition includes such services as wrapping, financing an auto1nobile, pro
viding vvarranties on computer equipment, and the like because these services exist in
connection with the sale of a product or another service. This suggests that marketers of
goods are also marketers of services. For example, one could argue that McDonald's is not in the hamburger business. Its J1amburgers are actually not very different from those of the competition. McDonald's is in the service business.
More and more manufacturers are also exploiting their service capabilities as stand
alone revenue producers. For example, General Motors, Ford, and Chrysler all offer
financing services. Ford and General Motors have extended their financial services offer ings to include a MasterCard, which offers discounts on purchases of their auton1obi]es.
The reader can imagine from l1is or her own experience that some purchases are very
tangible (a coffeemaker) while others are very much intangible (a course in marketing).
Others have elements of both (lunch on a tlight from New York to Chicago). In other words, in reality there is a goods-service continuum, witl1 1nany purchases including both
tangible goods and intangible services. Figure 12.1 illustrates such a continuum. On the
goods side of the continuum, the buyer owns an object after the purchase. On the ser
vices side of the continuum, when the transaction is over, the buyer leaves with an experi ence and a feeling. When the course in 1narketing is over or the flight from New York to Chicago is co1npleted, the student or passenger leaves with a feeling.
The examples of services on the right side of Figure 12.1 are mostly or entire! y intangi
ble. They do not exist i n the physical realm. They cannot appeal to the five senses.
Tangible
Golf clubs Car Suit Airplane
�----- Mixed -----�
Green fees with sleeve of balls included Oil change Suit with alterations Air flight with lunch
Intangible
Green fees Taxi ride Alterations Air flight
186 Part D Marketing in Special Fields
IMPORTANT CHARACTERISTICS OF SERVICES
Services possess several unique characteristics that often have a significant impact on
marketing program development. These special features of services may cause unique problems a11d ofte11 result in marketing mix decisions that are substa11tially different
from those found in connection with the marketing of goods. Some of the more impor
tant of these characteristics are intangibility, inseparability, perishability and fluctuating
demand, a client relationship, customer effort, and uniformity. They are presented in
Figure 12.2.
Intangibility The obvious basic difference between goods and services is the intangibility of services,
and many of the problems encountered in the marketing of services are due to intangibility. To illustrate, how does an airline make tangible a trip from Philadelphia to San Francisco?
These problems are unique to service marketing.
The fact that many services cannot appeal to a buyer's sense of touch, taste, smell, sight,
or hearing before purcl1ase places a burden on the marketing organization. For exan1ple,
hotels that promise a good night's sleep to their customers cannot actually show this s e r
vice in a tangible way. Obviously, this burden is most heavily felt in a fum's promotional
program, but, as will be discussed later, it may affect other areas. Depending on the type
of service, the intangibility factor may dictate use of direct channels because of the need for personal contact between the buyer and seller. Since a service fir111 is actually selling
a11 idea or experience, not a product, it 1nust tell the buyer \.vhat the service will do because
it is often difficult to illustrate, demonstrate, or display the service in use. For example,
the hotel must somehow describe to the consumer how a stay at the hotel will leave the
custo1ner feeling well rested and ready to begin a new day.
The preceding discussion alludes to two strategy ele1nents firms should e1nploy
when trying to overcome the problems associated with service intangibility. First, tangi
ble aspects associated with the service should be stressed. For example, advertisements
for airlines should emphasize (through text and visuals) the newness of the aircraft, the
AGURE 12.2 Unique Characteristics Distinguishing Services from Goods
Characteristic Services
Intangibility The customer owns only memories, out comes, or feelings such as an airline flight, greater knowledge, or styled hair.
Inseparability Services often cannot b e separated from the person providing them. They are often pro duced and consumed at the same time.
Perishability Services can be used only at the time they are
offered. They cannot be inventoried, stored, or transported.
Client Relationship Services often involve a long-term personal relationship between buyer and seller.
Customer Effort Customers are often heavily involved in the
production.
Uniformity Because of inseparability and high involve ment on the part of the buyer, each service
may be unique, with the quality likely to vary.
Goods
The customer owns objects that can be used, resold, or given to others.
Goods are usually produced and sold by different people.
Goods can be placed in inventory for use at another time.
Goods often involve an impersonal short-term relation ship although in many instances relationship strength and duration are increasing.
Customer's involvement may be limited to buying the
completed product and using it.
Variations in quality and variance from standards can be corrected before customers purchase products.
•
IS a (an)
Service
Business process
available •
Application Via
Information technology resource
The Net that
Conducts transactions
Completes tasks
Solves problems
Telcos
and is hosted by
ISPs/ ASPs
Companies
Source: Copyright© Hewlett Packard Company. All rights reserved.
roominess of the cabin, and the friendliness of the flight attendants. Second, end benefits
resulting from completion. of tl1e service e11counter should be accentuated. In the case of
air travel, an individual's ability to 1nake an i1nportant meeting or arrive home in ti1ne for
a special occasion could be the derived benefit.
Inseparability 111 1nany cases, a service cannot be separated fron1 the person of tl1e seller. In other words,
the service must often be produced and marketed simultaneously. Because of the simultane
ous production and rnarketing of most services, the main concern of the marketer is usually
the creation of time and place utility. For example, the bank teller produces the service of
receiving a deposit and markets other appropriate bank services at the same time. Many ser
vices, therefore, are tailored and not mass produced. Often, because a company's employees
are "the company" at the point of contact, they must be given wide latitude and assistance i n
detennining how best to tailor a specific service to meet customer needs.
The implication of inseparability on issues dealing with tbe selection of channels of dis
tribution and service quality is quite important. Inseparable services cannot be inventoried,
and tl1us direct sale is the only feasible channel of distribution. Service quality cannot some
times be completely standardized due to the inability to completely mechanize the service
encounter. However, some industries, through innovative uses of technology, have been able
to overcome or, at least, alleviate challenges associated with the inseparability cl1aracte1istic.
For exa1nple, in the financial services industry, automated teller machiJ1es (ATMs)
and home banking, throt1gh use of computers and telephones, have contributed greatly to
eliminating the need for the customer to directly interact with a bank teller. Further, many
banks are developing computer applications to allow tellers and other service representa
tives to think like expert problem solvers. These applications allow for platform banking,
a means of enabling bank representatives in any location to bring up on a screen all the
information the bank has about the customer. Every face-to-face contact with a customer
can mean an opportunity to m ake a sale and, more importantly, further tl1e relationship
with the customer. Of course, the bank representative is still of critical importance as the
one who might recognize by the customer's expression or words that this visit is not the
appropriate time to be marketing additional services. 187
188 Part D Marketing in Special Fields
In addition to technology, tangible representations of the service can serve to overcome
tl1e inseparability problem. For exa111ple, in the insurance industry, a contract serves as
the tangible representation of the service. The service itself remains inseparable from the
seller (insurance provider), but the buyer has a tangible representation of the service in the
form of a policy. This enables the use of intermediaries (agents) in the marketing of insur
ance. Another example is in the use of a credit card-the card itself is a tangible represen
tation of the service that is being produced and consumed each time the card is being used.
Perishability and Fluctuating Demand Services are perishable and markets for most services fluctt1ate either by season (tourism),
days (airlines), or time of day (movie theaters). Unused telephone capacity and electrical
power; va.cant seats on planes, trains, buses, and in stadiums; and time spent by catalog service
representatives waiting for customers to reach them all represent business that i s lost forever.
The combination of perishability and tluctt1ating demand has created many problems for
111arketers of services. Specifically, in the areas of staf f ing and distribution, avenues must be
found to have the services available for peak periods, and new strategies need to be developed
to make use of the service during slack periods. Some organizations are attempting to cope
with these problems through the use of pricing strategy. Ojj�peak pricing consists of charg
ing different prices during different times or days in order to stimulate demand during slow periods. Discounts given for weekend calling, Saturday night stay-overs, early-bird dinners,
or winter cruises are all examples of efforts service providers make to redistribute demand.
Other organizations are dealing with issues related to peak period demand through the
use of technology. To illustrate, a well-designed voice mail system allows companies and callers to cut down on 111issed phone calls, eliminates long waits on hold, and delivers
clear, consistent messages. In the catalog industry, automated call routing (ACR) is u.sed
to route incoming calls t o available ser,,ice representatives in the order in which they were
received. Finally, in the Lttilities industry, many electric utilities n o longer have to generate
capacity that will meet peak electrical de1nand. Instead, they rely on bt1ying unused power
from other utilities in other regions of the country.
Client Relationship In the marketing of a great many services, a client relationship, as opposed to a customer
relationsl1ip, exists between the buyer and the seller. In ot11er words, the buyer views the se11er
as someone who has knowledge that is of value. Exainples of this type of relationship are tl1e
physician-patient, college professor-student, accountant-small business owner, and broker
investor. The buyer, many times, abides by the advice offered or suggestions provided by the
seller, and these relationships 111ay be of an ongoing nature. Also, since many service firms
are clie11t-serving organizations, they 1nay approach tl1e marketing function in a more profes
sional manner, as seen in health care, finance, legal, governmental, and educational services.
Professionals face at least two marketing challenges. First, in many cases, fear or hostil
ity is brought to the transaction because the customer is uncertain abot1t how genui11e tl1e professional's concern for l1is or her satisfaction is. For example, 111any unpleasant reasons
exist for consulting doctors, lawyers, bankers, or even visiting a college professor. These
could include having surgery, being sued, having to take ot1t a loart, or doing poorly on an
exam. Second, even high-quality service delivery by the professional can lead to dissatis
fied customers. For a physician, the ability to provide higl1-qua]ity n1edical care 111ay be
overshadowed by a brusque, unfriendly personality. For a college professor, the demand
on students to contact or visit l1im or her only during office hours, coupled with students'
own hectic work schedules, cart diminish the impact of the professor's classroom presenta
tions. It is vitally important that the professional service provider strive to build long-term
positive relationships with clients.
Type of Service
Automobile repair
Automobile insurance
Hotel
Property and casualty insurance
Equipment repair
Truck and tractor rental/leasing
Type of Customer
Consumers
Consumers
Consumers
Business customers
Business customers
Business customers
Principal Expectations
Be competent. Fix it right the first time.
Explain things. Explain why the customer needs the suggested repairs-provide an itemized list.
Be respectful. "Don't treat me like an idiot."
Keep me informed. "I shouldn't have to learn about insurance law changes from the newspaper."
Be on my side. "I don't want them to treat me like I am a criminal just because I have a claim."
Play fair. "Don't drop me when something goes wrong."
Protect me from catastrophe. "Make sure my estate is covered in the event of a major accident."
Provide prompt service. "I want a fast settlement of my claims."
Provide a clean room. "Don't have a deep-pile car pet that can't be completely cleaned ... You can literally see germs down there."
Provide a secure room. Good deadbolts and a peep hole o n the door.
Treat me like a guest. "It is almost like they're looking you over to decide whether or not they're going to let you have a room."
Keep your promise. "They said the room would be ready at the promised time, but it wasn't."
Fulfill obligations. Pay up.
Learn my business and work with me. "I expect them to know me and my company."
Protect me from catastrophe. Cover risk exposure so there is no single big loss.
Provide prompt service. Fast claim service.
Share my sense of urgency. Speed of response. "One time I had to buy a second piece of equipment because of the huge downtime with the first piece."
Be prepared. Have all the parts ready.
Keep the equipment running. Have equipment working all the time-that is the key.
Be flexible. ''The leasing company should have the leasing flexibility to rent us equipment when we need it."
Provide full service. Get rid of all the paperwork and headaches.
Source: A. Parasuraman, Leonard L. Berry, and Valarie A. Zeithaml, "Understanding Customer Expectations of Service," Sloan Management Review, Spring 1991, pp. 39-48.
Customer Effort
Customers are often involved to a relatively great degree in the production of many types
of service. In some restaurants you clean your table. You may carry your luggage to a cart
parked next to a baggage compartment of the plane. If you wish to enjoy an exllibit at a
local art museum, you must walk arot1nd the facility and pay careful attention to what is on 189
190 Part D Marketing in Special Fields
display. If an organization purchases the services of an advertising agency, employees will
have to work with the age11cy, review its ideas, and make the final selections.
Obviously, not every service requires the same degree of customer effort. Your effort
with a credit card service may be little beyond taking it from your wallet to make a pur
chase and writing a check once a month to pay the bill.
Uniformity The quality of services can vary more tha.n the quality of goods. Producers of goods have
procedures to prevent, identify, and correct defects. If these procedures are \.vorking, cus
tomers are unlikely to purchase defective products. This is not the case with most services.
Because t11ey are ofte11 l1u1nan performances and often customized to the needs of the buyer,
quality can vary. Each trip to the bank or airline flight or university course can be a different
experience. Many service jobs such as nursing, teaching, and career counseling require a
positive attitude; how employees feel influences their performance.
PROVIDING QUALITY SERVICES
In today's increasingly competitive environment, quality service is critical to organiza
tional success. Unlike products in which quality is often measured against standards, s e r
vice quality is n1easured against pe1fonnance.3 Since services are frequently produced in
the presence of a custo1ner, are labor intensive, and are not able to be stored or objectively
examined, the definition of what constitutes good service quality can be difficult and, in
fact, continually changes in the face of choices.4 Customers determine the value of service
quality in relation to available alternatives and their particular needs. In general, problems in the determination of good service quality are attributable to differences i11 tl1e expecta
tions, perceptions, and experiences regarding the encounter between the service provider
and consumer. These gaps can be classified as follows:
1. The gap between cons11mer expectations and management perceptions of consumer
expectations.
2. The gap between management perceptions of consumer expectations and the fi11n's
service quality specifications.
3. The gap between service quality specifications and actual service quality.
4. The gap between actual service delivery a11d external co1nmunications about tl1e service.
In essence, the customer perceives the level of service quality as being a function of
the magnitude and direction of the gap between expected service and perceived service.
Ma11ageme11t of a company 1nay not even realize that tl1ey are delivering poor-quality s e r vice due to differences in the way mai1agers and consumers view acceptable quality levels.
To overcome this problem and to avoid losing customers, firms must be aware of tl1e deter
minants of service quality. A brief description of these determinants follows.
1. Tangibles include the physical evidence of tl1e service. For example, employees are
always visible in a l1otel lobby dusting or otl1erwise cleaning up. Likewise, clean, shiny,
up-to-date medical equipment or aircraft are examples of tangible elements.
2. Reliability involves the consistency and dependability of the service performance. For
example, does a bank or phone company always send out accurate customer statements?
Likewise, does the plumber al ways fix the problem on his or her first visit?
3. Responsiveness concerns the willingness or readiness of employees or professionals to
provide service. For example, will a physician see patients on the same day they call in
to say iliey are ill? Will a college professor return a student's call tl1e sa1ne day?
:M_ARKEIING:. INSIGHT. :R e.tat.i::b.:.n:.$.Jh:i:p; ,M.a_r_k�t i'n g.· tn S.er,v:i c e._ •- " • • • • . • I • •, • - - " ' � - , • I I • • • • , • • _ ----------o·�gamizatl·oms �12-3
Throughout this book we have stressed the importance of building long-term relationships in which the initial sale is viewed as a beginning step in a process, not an end or goal. For marketers of ser
vices, relationship marketing can present a special set of challenges which require a different new view of the business and a change in strategy.
For decades, most service marketers were concerned with attracting new customers. Promotion programs and convenient locations focused on the acquisition of new customers. During the last two decades, however, service marketers are beginning t o think about marketing in a fundamen tally new way. The idea is that marketing is about having customers, not merely acquiring customers. Service marketers now understand that attracting new customers is only the first step in the process, that making existing customers better customers is marketing too. In other words, service marketers understand the importance of relationship marketing. It is fundamentally different from the tradi tional view of marketing in service organizations.
Traditional Service Marketing
1 . Marketing focuses o n attracting new "customers."
2. Emphasis on selling the service the customer requests.
3. Need satisfaction is approached from the standpoint of the "part." For example,
haircut, checking account, airline ticket.
4. Primary sales contact is through process driven providers. For example, airline ticket agent, bank teller.
5. Profitability is assessed on individual services. For example, individual haircut.
Relationship Service Marketing
1. Marketing focuses on "clients." Customer attraction is a beginning step.
2. Emphasis on establishing and building a long-term relationship.
3. Need satisfaction is approached from the standpoint of the "whole." For example, total
hair care, day spa, personal banker, travel management.
4. Primary sales contact is through a trained marketing professional.
For example, travel agent, personal banker. 5. Profitability is assessed on the total
relationship. For example, haircut plus shampoos, conditioners, brushes, combs, dryers, etc.
Source: Based on the work of James H. Donnelly Jr., Leonard L. Berry, and Thomas W. Thompson.
4. Assurance refers to the knowledge and competence of service providers and the ability
to convey trust and confidence. This dete11ninant encompasses the provider's name and
reputation; possession of necessary skills; and trustworthiness, believability, and hon
esty. For example, a bank will guarantee same-day loan processing; a doctor is highly
trained in a particular specialty.
5. Empathy refers to the service provider's efforts to understand the customer's needs and
then to provide, as best as possible, individualized service delivery. For example, f1ight attendants on a customer's regular route lea.n1 what type of beverages tl1e custo1ner
drinks and what magazines the customer reads.
Each of these dete1minants plays an important role in how the customer views the service
qttality of a firm. Turning service quality i11to a powerful competitive weapon requires con
tinuously striving for service superiority--consistently performing above the adequate ser
vice level and capitalizing on opportunities for exceeding the desired service level. Relentless
efforts to continually improve service performance may well be rewarded by improvements
in customer attitudes toward the film: from custo1ner frustration to customer preference to
custom.er loyalty. Wl1at should be obvious is tl1at to be successful, a service firm must have
both an effective means to measure customer satisfaction ru1d dedicated employees to pro
vide high-quality service. 191
192 Part D Marketing in Special Fields
Customer Satisfaction Measurement As 1ne11tioned earlier, satisfied customers can become loyal customers. Service quality
and customer satisfaction are of growing concern to business organizations throughout the
world, and research on these topics generally focuses on two key issues: (1) understanding
the expectations and requirements of the customer, and (2) determining how well a company
and its 1najor con1petitors are succeedi11g in satisfying these expectations and requirements.5
As such, an organization's approach to measuring service quality through customer
satisfaction measurement (CSM) and effectively implementing programs derived from
results of such studies can spell the difference between success and failure. Research on
1narket leaders' CSMs found they l1ad the following aspects in common:
1. Marketing and sales employees were primarily responsible (with customer input) for
designing CSM programs and questionnaires.
2. Top management and the marketing function championed the programs.
3. Measurement involved a combination of qualitative and quantitative research methods
that primarily included mail questionnaires, telephone surveys, and focus groups.
4. Evaluations included both the company's and competitors' satisfaction performance.
5. Results of all research were made available to ernployees, but not necessarily to customers.
6. Research was performed on a continual basis.
7. Customer satisfaction was incorporated into the strategic focus of the company via the
mission statement.
8. Tl1ere was a commitment to increasing service quality and customer satisfaction from
employees at all levels within the organization.
The Importance of Internal Marketing Properly pe1formed customer satisfaction research can yield a wealth of strategic informa
tion about customers, the sponsoring company, and competitors. However, service quality goes beyond tl1e relationship between a customer and a company. Rather, as shown by the last aspect listed, it is the personal relationslup between a customer and the particular
employee that the customer happens to be dealing with at the time of the service encounter
that ultimately determines service quality. The importance of having customer-oriented,
frontline people cannot be overstated.6 If frontline service personnel are ttnfriendly,
unhelpful, u11cooperative, or uninterested in the custo1ner, the customer will tend to project
that same attitude to the company as a whole. The character and personality of an organi
zation reflects the character and personality of its top management. Management must
develop programs that will stimtllate employee commitment to customer service. To be
successful, these programs must contain five critical co1nponents:
1. A careful selectio,i process in hiring_frontline employees. To do this, management has to
clearly define the skills the service person must bring to the job.
2. A clear, concrete message that conveys a particular service strategy that front
line people can begin to act on. People delivering service need to know how their
work fits in tl1e broader scheme of business operations. 7 They need to have a cause
because servicing otl1ers is just too demanding and frustrating to be done well eacl1
day without one. 8
3. Sign(ficant mocleling by managers, that is, managers demonstrating the behavior that
they intend to reward employees for performing. For example, some airline executives
regt1larly travel economy class t o talk to customers and solicit ideas for improvement.9
Practicing relationship marketing is a challenge for service organizations because there are important differences between "customers" and "clients." The notion of "client" is critical for relationship marketing to succeed in a service organization.
Customers
1 . Customers may be nameless.
2. Customers are served as part of a large mass of people.
3. Customers are statistics; their needs are reflected in market summaries. For example, the most popular ice cream for people over 50 in 2012 was vanilla.
4. Customers are served by the first available person. For example, airline ticket agent, bank teller.
5. Customers have no strong reason to feel any loyalty or allegience to the service provider.
Clients
1 . Clients must have names.
2. Clients are served o n an individual basis.
3. Clients are individual entities. Specific information about them is stored in a database. For example, Mr. Smith wants only morning flights, first class seats, vegetarian meals, aisle seats, airport motels, and mid-size rental cars.
4. Clients are served by a trained professional who has been assigned to them. For example, travel agent, personal banker.
5. Clients often have a strong relationship with the service provider.
Source: Based on the work of James H. Donnelly Jr., Leonard L. Berry, and Thomas W. Thompson.
4. An energetic follorv-through JJrocess, in which managers provide the training, support, and incentives necessary to give the employees the capability and willingness to pro vide quality service.
5. An e,nphasis on, teachirig employees to have good attitudes. This type of training usu ally focuses on specific social techniques, such as eye contact, smiling, tone of voice, and standards of dress.
However, organizing and implementing such programs will only lead to temporary results unless managers practice a strategy of internal marketing. We define internal mar keting as the continual process by which managers actively encoLLrage, stimulate, and sup port employee committnent to the company, the company's goods and services, and the co1npany' s customers. E1nphasis should be placed on the word continual. Managers who consistently pitch in to help when needed, constantly provide encouragement and words of praise to employees, st1ive to help employees t1nderstand the benefits of performing tl1eir jobs well, and emphasize the importance of employee actions on both company and employee results are practitioners of internal marketing. In service 1narketing, successful internal marketing efforts, leading to employee commitment to service quality, are a key to success.
Federal Express serves as a prime example of the benefits accruing to a company that successfully practices internal marketing.1° Federal Express is the first service orga11i zation to wi11 the Malcolm Baldrige National Quality Award. The company's 1notto is "people, service, and profits." Behind its purple, white, and orange planes and uniforms
19.3
194 Part D Marketing in Special Fields
are self-managing work teams, gainsharing plans, and empowered employees seemingly
consumed with providing flexible and creatjve services to custo1ners with varying needs.
Federal Express is a high-involvement, horizontally coordinated organization that encour
ages employees to use their judgment above and beyond the rulebook.
OVERCOMING THE OBSTACLES IN SERVICE MARKETING
The factors of intangibility and inseparability, as well as difficulties in coming up with
objective definitions of acceptable service quality, make comprehension of service marketing
difficult. However, in view of the size and importance of services in our economy, con
siderable innovation and ingenuity are needed to make high-quality services available at
convenient locations for consumers as well as businesspeople. In fact, the area of service
marketing probably offers more opportunities for imagination and creative innovation than
does goods marketing. Unfortunately, many service finns still lag in the area of creative
1narketing. Even today, those service firms tl1at have done a relatively good job have been
slow in recognizing opportunities i n all aspects of their marketing programs. Four reasons,
connected to past practices, can be given for the lack of innovative marketing on the part of
service marketers: (1) a limited view of marketing, (2) a lack of strong competition in the past, (3) a lack of creative 1nanagement, and (4) no obsolescence.
Limited View of Marketing Because of the nature of their service, many firms depended to a great degree on popula tion growth to expand sales. A classic example here is the te]epl1one company, which did
not establisl1 a marketing depart1nent until 1955. It was then tl1at the company realized it
had to be concerned not only with population growth but also with meeting the needs of a
growing population. Increases in educational levels and the standard of living also bring
about the need for new and diversified services. Service firms 1nust 1neet these changing needs by developing new services and new
channels and altering existing channels to meet the changi11g composition and needs of
the population. For many service industries, growth has come as a result of finding new
channels of distribution. For example, some banks and health care companies were able to grow and tap into new 1narkets b y establisl1ing li1nited-service kiosks in malls and super
markets. Airlines successfully brought in a whole new class of travelers when they began
offering advance-purchase discounted fares. Traditionally, users of these fares either drove
or used otl1er means of transportation to reach their destination.
While many service fir1ns have succeeded in adopting a marketing perspective,
otl1ers have been slow to respond. It was not until deregulation of the telecom1nunications
industry took place in 1984 that the telephone companies began taking a broadened
view of marketing. Even today, critics point to the obsession with inventing new tech
nology versus using current technology in meeting customer needs as a weakness of
these companies.
Limited Competition A second major cause of the lack of innovative marketing in many service industries was
the historical lack of competition. Many service industries st1ch as banking, railroads,
and public utilities have, tl1rot1ghout most of their histories, faced very little competition;
some have even been regulated monopolies. Obviously, in an environment characterized
by little competition, there was not likely to be a great deal of innovative marketing.
However, two major forces have changed this situation. First, in the past four decades the
banking, financial services, railroad, cable, airline, telecommunications industries, and
_M_ARKETING. INSI.G.�T Ow?lit_y S_ervice ctn the .lnt�·rn_et_
On the Internet, you cannot have a more convenient location than your competition. Everyone is just a click away. It is critical that it is easy to do business with your company in order to attract and retain customers. Following are some ways to improve e-service.
1. A customer should be able to buy something in seven clicks o r less beginning from the home page. Many experts believe the ideal should be four clicks.
2. Images should load quickly. Research shows that eight seconds is the longest people will wait before they move on to another site.
3. From a product section of your site, customers should be able to get from your home page to a product page in that section in one click.
4. Shopping should be easy. Searching, browsing, checking out, returning items, and get ting assistance from a live person must be simple.
5. Customers should have the choice to register their personal information (e.g., address and credit card information) or to enter this information each time they purchase.
6. A customer should be able to check out in no more than three steps.
7. Delivery should be on time.
Source: From Ron Zemke, £-Service: 24 Ways to Keep Your Customers-When the Competition Is Just a Click Away, AMACOM; 1st edition (October 20, 2000). Reproduced with permission of AMACOM via Copyright Clearance Center.
utilities have all been deregulated in varying degrees. With deregtLlation has come a need
to be able to compete effectively. Second, service 1narketing l1as taken on an interna
tional focus. Today, many foreign cotnpa.nies are competing in domestic service markets.
Foreign interests own several banks, many hotels, and shares in major airlines. Likewise,
American companies are expanding overseas as markets open LLp.
Noncreative Management For many years, the ma11agements of service industries have been criticized for not being
progressive and creative. Railroad management l1as long been criticized for being slow
to innovate. More recently, however, railroads have become leading innovators in the field
of freight transportation, introducing such innovations as piggyback service and containeri
zation, and in passenger service, introducing luxLrry overnight accommodations on trains
with exotic names such as the Zephyr. Some other service industries, however, have been
slow to develop new services or to innovate in the marketi11g of tl1eir existing services.
No Obsolescence A great advantage for many service industries is the fact that many services, because of
their intangibility, are less subject to obsolescence than goods. While this is an obvious
a.dvantage, it has also led some service fir1ns to be sluggish in their approach to marketing.
Manufacturers of goods 1nay constantly change their marketing plans and seek new and
more efficient ways to produce and distribLtte tl1eir products. Since service fi1ms are often
not faced with obsolescence, tl1ey often failed to recognize the need for change. This failure
has led to wholesale changes in 1nany industries as new operators who possessed marketing
skills revolutionized the manner in which the service is performed and provided. Many bar
bershops and hair dressers have gone out of business due to an inability to compete against
hairstyling salons. Many accountants have lost clients to tax preparation services, such as
H&R Block, that specialize in doing one task well and have used technology, including
Internet filing services, to their advantage. Likewise, the old, big movie house has become
a relic of the past as entrepreneurs realized the advantages to be gained from building and
operating tl1eater complexes that contain several mini theaters in or near suburban malls. 195
MARKETING .INSIGHT Nice .. C.Ll$tor17e:rs . . . .
"I'm a nice customer. You all know me. I'm the one who never complains, no matter what kind of service I get.
"I'll go into a restaurant, and I'll sit while the waitress gossips with a friend and never bothers to look to see if my hamburger is ready to go. Sometimes a party who came in after I did gets my hamburger, but I don't say a word in complaint when the waitress tells me, 'Oh, I'm sorry. I'll order another for you.' I just wait.
"It's the same when I go to a bank. I don't throw my weight around. I try to be thought ful of the other person. If I get poor service I'm as polite as can be. I don't believe rudeness in return is the answer.
"The other day I stopped in at the neighborhood gas station. I waited for almost five minutes before the attendant took care of me. And when he did, he spilled gas and wiped the car windows with an oily rag. I didn't expect him to thank me for stopping by-and he didn't. Naturally, I didn't complain about the service.
"I never kick. I never nag. I never criticize. And I wouldn't dream of making a scene, as I've seen some people do in public places. I think that's uncalled for. No, I'm the nice cus tomer. And I'll tell you what else I am.
"I'm the customer who never comes back! "In fact, a nice customer like me, multiplied b y others of my kind, can just about ruin a
business. There are a lot of nice people in the world, just like me. When we get pushed far enough, we go on down the street to another store, another bank, where they're smart enough to hire help who have been trained to appreciate nice customers.
"He laughs loudest, they say, who laughs last. I laugh when I see you frantically spend ing your money on expensive advertising to get me back, when you could have had me in the first place for a few kind words and a smile and some good services.
"I don't care what business you're in. Maybe you live in a different town; maybe I've never heard of you. But if you're going broke o r your business is bad, maybe there are enough people like me, who do know you. I'm your customer who never comes back."
Source: Unknown.
IMPLICATIONS FOR SERVICE MARKETERS
196
It is important for service firms to utilize all of the components of the marketing mix.
Many service firms have been criticized for an overdependence on advertising. The over
dependence on one or two elements of the marketing mix is a mistake that service market
ers cannot afford. The sum total of the marketing mix elements represents the total impact
of the firm's marketing strategy. The slack created by restricting one ele1nent ca.nnot be
compensated by heavier emphasis on another because each element in the marketing mix
is designed to address specific problems and achieve specific objectives.
Just like tangible products, services must also be made available to prospective users,
which implies distribution in the marketing sense of the word. Service 1narketers must
distinguish conceptually between the production and distribution of services. The problem
of making services more widely available must not be ignored.
Finally, service marketers must stress the role of new service development. Tl1e devel
opment of new services paves the way for finns to expand and segment their markets.
With the use of varying service bundles, new technology, and alternative means of distrib
uting the service, service firms are now able to practice targeted marketing.
The preceding sections also pointed out the critical role of new service development. In
several of tl1e examples described, indirect distribution of the service was made possible
because "products" were developed that included a tangible representation of the service.
19i Part D Marketing in SJJecial Fields
Quality service: Customers' perception of quality as a function of (I) tangibles, which include
p11ysical evidence of the service; (2) reliability, which involves the consistency and dependability
of the service performance; (3) responsiveness, which is the willingness or readiness of employees
or professionals to provide service; (4) assurance, wlrich refers to the knowledge and competence
of service providers and the ability to convey trust and confidence; and (5) empathy, which is the
service provider's efforts to understand the customer's needs.
Services: Activities perfor1ned by sellers and others that accompany the sale of a product and thal
aid in its exchange or its utilization (e.g., financing, an 800 tn:nnber).
Service products: Products that are intangible, or at least substantially so. If totally intangible,
tl1ey are exchanged directly frorn producer to user (e.g., l1air cut, medical service), cannot be trans
ported or stored, and are alrnost instantly perishable. Service products are ofte11 difficult to identify
since they co1ne into existence at the same tirne they are bought and constuned.
Uniformity: An irnportant characteristic of services is tl1at their quality can vary more than the
quality of goods. Because they are often human performances and often customized to the 11eeds of
the buyer, (e.g., haircut), uniformity is difficult to achieve and quality can vary.
Chapter
A growing number of U.S. corporations have transversed geographical boundaries and
become truly multinational in natttre. For m.ost otl1er domestic companies, the qt1estion
is no longer, ShouJd we go inter11ational? Instead, the questions relate to when, how, and
where the companies should enter the international marketplace. The past 35 years have
seen the reality of a truly world market unfold.
Firms invest in foreign countries for the same basic reasons they invest in their own
country. Tl1ese reasons vary from finn to firm but fall under the categories of ac11ieving
offensive or defensive goals. Offensive goals are to (1) increase long-term growtl1 and
profit prospects, (2) maximize total sales revenue, (3) take advantage of economies of
scale, and (4) improve overall market position. As many American markets reach satura
tion, American firms look t o foreign n1arkets as outlets for surplus productio11 capacity,
sources of new customers, increased profit 1nargins, and i1nproved returns on investment.
For example, the ability to expand the number of locations of McDonald's restaurants i n
tl1e United States is becoming severely limited. Yet, on any given day, only 0.5 percent
of the world's population visits McDonald's. Indeed, in tl1e recent past, of the 50 most profitable McDonald's outlets, 25 were located in Hong Kong. For PepsiCo, the results
are similar. Its restaurant division operates more than 10,000 Kentucky Fried Chicken,
Pizza Hut, and Taco Bell outlets abroad.
Multinational firms also invest in other countries to achieve defensive goals. Chief
among tl1ese goals are the desire to (1) compete witl1 foreign companies on their own turf
instead of in the United States, (2) gain access to technological innovations that are devel
oped i n other countries, (3) take advantage of significant differences in operating costs
between countries, (4) preempt competitors' global moves, and (5) avoid being locked out
of future markets by arriving too late.
Such well-known co1npanies as Zenitl1, Pillsbury, Shell Oil, CBS Records, and Firestone
Tire & Rubber are now owned by non-U.S. interests. Since 1980, the share of the U.S.
high-tech market held by foreign products has grown from less than 8 percent to more than
50 percent. In such diverse indust1ies as power tools, tractors, television, and banking, U.S.
companies have lost the domi11a11t position they once held. By investing solely in don1estic
operations or not being willing to adapt products to foreign markets, U.S. companies are
more st1sceptible to foreign incursions. For example, there has been a great uproar over
Japan's practice of not opening up its domestic automobile market to U.S. companies.
However, not too many years ago, a great majority of the American cars shipped t o Japan
still had the steering wheel located on the left side of the vehicle-the opposite of where it
should be for the Japanese market.
In many ways, marketing globally is the same as marketing at home. Regardless of
which part of the world the firm sells in, the marketing program must still be bttilt around 199
MARKETING INSIGHT Selected U.S Companies
Company
Walmart Ford General Electric Citigroup Hewlett-Packard Boeing Intel Coca-Cola Apple Starbucks
aimd· ili'me,•i ! �- l'@1te�matiomal isa,res �-3-�
Global Revenues (billions)
$446.9 136.3 147.3
64.6 127.3
68.7 54.0 46.5
108.3 11. 7
Percent Revenues from Outside the United States
26.1 45.4 52.6 64.2 65.3 50.0 84.4 59.8 61.0 22.1
Source: From Philip Cateora, John Graham and Mary Gilly, International Marketing 16£, 2013, p. 10 Reprinted with permission of McGraw-Hill Education.
a sound product or service that is properly priced, pro1noted, and distributed to a carefully analyzed target market. In ot11er words, the marketing manager 11as the same contro11ab1e
decision variables in both do1nestic and nondomestic markets.
Although the development of a marketing program may be the same in either domestic
or nondomestic markets, special problems may be involved in the implementation of mar
keting programs in nondomestic 1narkets. These problems often arise because of the envi
ronmental differences that exist ainong various countries that marketing managers 1nay be
unfamiliar with.
In this chapter, marketing management in a global context will be examined. Methods
of organizing global versLtS domestic markets, global market research tasks, methods of
entry strategies into global 1narkets, and potentia1 1narketing strategies for a multinational
firm will be discussed. In exainining each of these areas, the reader will find a co1nmon
thread-knowledge of the local cultural environment-that appears to be a major prereq
uisite for success in each area.
With the proper adaptations, many co1npanies l1ave the capabilities and resources
needed to compete successfully in the global marketplace. To illustrate, compailies as
diverse as Kellogg's, Avon, Eli Lilly, and Sun Microsystems all generate a large percent
age of their sales from foreign operations. Smaller companies can also be successful.
THE COMPEIIIIVE ADVANTAGE OF NATIONS
200
As each year passes, i t becomes more and more clear that some industries and companies
succeed on a global scale while others do not. Harvard Business School professor Michael
Porter introduced what he calls the "diamond'' of national advantage to explain a nation's
competitive advantage a.nd why some companies and industries become global business
leaders. Figure 13.1 presents Porter's n1odel. The diamond presents four factors that deter
mine the competitive advantage or disadvantage of a nation.
1 . Factor conditions. Tl1e nation's ability to turn its natural resources, skilled labor, and
infrastructure into a competitive advantage.
FIGURE 13.1
Porter's Diamond of
National Advantage
Source: Reprinted with the permission of Simon & Schuster Publishing Group from the Free Press edi tion of The Competitive Advantage of Nations by Michael E. Porter. Copyright © 1990, 1998 by Michael E. Porter. All rights reserved.
I
,
, ,
Factor conditions
;tf
Chapter Thirteen Global Marketing 201
Company - strategy, structure �
and rivalry , 1
'
----.,-- - '' I
l ---_:_ ----► I
Demand conditions
-
I
I
I
l '--.oi,.11.'-----..1
,
Related and supporting industries
A,
-
2. Demarid conditioris. Tl1e nature of domestic demand and the sophistication of domestic
customers for the industry's product or service.
3. Related and supportin.g industries. The existence or absence in the country of supplier
and related industries that are also inte1nationally competitive.
4. Company strategy, structure, and rivalry. The conditions in the nation that govern
how companies are created, organized, and managed, and how intensely they compete
domestically.
Before Porter developed l1is model, he studied companies in more than 100 industries.
While the most successful companies differed in many ways and employed different strat
egies, a very important corrunon theme emerged: A company that succeeds on a global
scale, first succeeded in intense domestic co111petition. His model is a dyna1nic model and
illustrates how over time, a nation can build up and maintain its competitive advantage in
any industry.
ORGANIZING FOR GLOBAL MARKETING
When compared with the tasks it faces at home, a firm attempting to establish a global
marketing organization faces a much higher degree of risk and uncertainty. In a foreign
market, management is often less familiar with tl1e cultt1ral, political, and economic situa
tion. Many of these problems arise as a result of conditions specific to the foreign country.
Managers are also faced with the decisions concerning how to organize the 1nultinational
company.
Problems with Entering Foreign Markets While nu1nerous problems could be cited, attention here will focus 011 those tl1at firms
most often face when entering foreign n1arkets.
Cultural Misunderstanding
Most of us are familiar with our American culture. It consists of the customs, laws, and
morals that influence our behavior and that most of us share. Otl1er countries have their
202 Part D Marketing in Special Fields
own cultures, and some aspects may be very different from ours. It is generally agreed that tl1ese differences occur in four areas: com111unicatio11, spatial boundaries, perception of time, and behavior. For example:
l. Communication. Standing with your hands on your hips is a gesture of defiance in Indonesia, and having your hands in your pockets during a conversation is frowned upon in Belgium, France, Sweden, and Finland.
2. Spatial boundaries. In some Asian countries, toucl,ing anotl1er person is thought of as an invasion of privacy, while in southern European and Arabic countries, it is an indica tion of warmth and friendship.
3. Perception. of time. Being on time is very important in Denmark and China, while in Latin countries it is much less important.
4. Beh.avior. In Spain, there is a negative attitude toward life insurance. By receiving the benefits, a wife feels she is profiting from l1er husband's death. In Western Europe, many people are very reluctant to buy anything on credit other tl1an a house.
Marketing managers 1nust make the necessary efforts to learn, understa.nd, and adapt t o the cultural norms of customers as well as company managers and sales team members i n countries in which they do business.
Many American companies have made some very costly and unnecessary mistakes in product development, pricing, distribution, and pro1notion because they failed to be sensi tive to cultural differences. 1
Political Uncertainty
Governments are unstable in many countries, and social unrest and even armed conflict 1nust so111eti1nes be reckoned with. Otl1er nations are newly e1nerging and anxious to seek their independence. These and similar problems can greatly hinder a firm seeking to establish its position in foreign markets. For example, at the turn of the century, firms scaled back their investment plans in Russia due to, among other reasons, (1) a business environment plagued by 111obsters, (2) politics badly corrupted by the botched invasion of Chechnya, and (3) an econo1ny troubled by runaway inflation and a plununeting ruble. 2
This is not to say investment in Russia is a poor choice. Rather, in situations like this, cau tion must be used and companies mLLSt have a keen understanding of the risks involved i n undertaking sizable investments.
Import Restrictions
Tariffs, import quotas, and other types of import restrictions hinder global business. These are usually established to promote self-sufficiency and can be a huge roadblock for the multinational firm. For example, a number of countries, including South Korea, Taiwan, Thailand, and Japan, have placed import restrictions on a variety of goods produced in America, i11cluding telecommunications equipment, rice, wood products, automobiles, and produce. In other cases, governments may not impose restrictions that are commonly adhered to in the United States. For example, Chrysler pulled out of a proposed investment deal in China, wortl1 billions of dollars, because the Chinese government refused to protect its right to limit access to technological information.
Exchange Controls and Ownership Restrictions
Some nations establish limits on the amount of earned and invested funds that can be withdrawn from it. These exchange controls are usually established by nations that are experiencing balance-o f -payment prob]e1ns. In addition, 111any nations have a requirement
.MARKETING INSIGHT Le�rning: abow.t Differ.ent Cultures:
The following i s an initial list of resources to assist in building cross-cultural knowledge and skills
1. The U.S. Central Intelligence Agency's World Factbook. This online reference provides information on the history, people, government, economy, geography, communica tions, transportation, and transnational issues for 266 world entities. (See www.cia.gov/ I ibrary /pu bl ications/the-worldfactbook/.)
2. lntercultural Press (Nicholas Brealey Publishing Company). A publisher of books about the principles and practices for improving cross-cultural communication. It offers resources for working and living around the world. For businesspeople, the company has a selec tion of DVDs, simulations, and books that promote cultural awareness and sensitivity. (See www.interculturalpress.com/store/pc/home.asp.)
3. Berlitz. With more than 1 30 years of experience and 470 offices in 700 countries, Berlitz has an established record in providing language instruction and cross-cultural train ing for businesspeople. The company also has total immersion language programs that deliver conversational proficiency in as little as two to six weeks' time. (See www .berlitz.com.)
4. Expatica.com. A large number of websites are available for individuals, partners, and fam ilies, who have decided to accept an overseas assignment. One such resource, Expatica. com, provides local news and information for English-speakers living in several countries in Europe. Information covers diverse areas including employment, housing, health, education, family, and children. (See www.expatica.com.)
Source: Adapted from James L. Gibson, John M. lvancevich, James H. Donnelly Jr., and Robert Konopaske, Organizations, 14th ed. (Burr Ridge, IL: McGraw-Hill, 2012), p. 438.
that the majority ownership of a company operating there be held by nationals. These and other types of currency and ownership regulations are important considerations in the decision to expand into a foreign market. For example, up until a few years ago, foreign holdings in business ventuses in India were limited to a maximum of 40 percent. Once this ban was lifted, numerous global companies such as Sony, Whirlpool, JVC, Grundig, Panasonic, Kellogg's, Levi Strauss, Pizza Hut, and Domino's rushed to invest in this market.3
Econ.omic Conditions
As noted earlier, nations' economies are becoming increasingly intertwined, and business
cycles tend to follow similar patterns. However, there are differences, mainly due to political upheaval or social changes, and these may be significant. In determining whether to invest, marketers need to perfon11 in-depth analyses of a country's stage of economic develop111ent, the buying power of its populace, and the strength of its currency. For example, when the North American Free Trade Agreement (NAFTA) was signed, many American companies 1ushed to invest in Mexico, building production facilities and retail outlets. These companies assumed that signing the agreement would stabilize Mexico's economy. In the Jong tenn, tl1ese investments 1nay pay off. However, tnany co1npanies lost 1nillions of dollars tl1ere due to the devaluation of the peso. Indeed, the crash of the peso caused the retail gia.nt Walmart to scale back a $1 billion investment project to open stores throughout Mexico.
20.3
204 Part D Marketing in Special Fields
Organizing the Multinational Company There are two kinds of global compai1ies-the 1nultidom.estic corporation and tl1e global
corporation. The m.ulticlo,nestic compariy pursues different strategies in each of its foreign
markets. It could have as many different product variations, brand names, and advertis
ing campaigns as countries in which it operates. Each overseas subsidiary is aLLtonomous.
Local mai1agers are given the authority to n1ake the necessary decisions and are held
accountable for results. In effect, the company co1npetes on a market-by-market basis.
Honeywell and G·eneral Foods are U.S. firms that have operated this way.
The global company, on the other hand, views the world as one market and pits its
reso11rces against the competition in an integrated fashion. It emphasizes c11ltural simi
larities across countries and universal consumer needs and wants rather than differe11ces.
It standardizes marketing activities when there are cultural similarities and adapts them
when the cultures are different. Since there is no one clear-cut way to organize a global
company, three alternative structures are normally LLSed: (1) worldwide product divi
sions, each responsible for selling its own products tl1rougl1out the world; (2) divisions
responsible for all products sold within a geographic region; and (3) a matrix system that
combines elements of both of these arrangements. Many organizations, such as IBM,
Caterpillar, Timex, General Electric, Siemens, and Mitsubishi, are structured in a global
fashion.
Most companies are realizing the 11eed to take a global approach to 1nanaging their busi
nesses. However, recognizing the need and actually implementing a truly global approach
are two different tasks. For some companies, industry conditions dictate that they take
a global perspective. The ability to actually implement a global approach to managing
international operations, l1owever, largely depends on factors unique to the company.
Globalization, as a competitive strategy, is inl1erently more vulnerable to risk than a mul
tidomestic or domestic strategy, due to the relative permanence of the organizational
structure once established.
In detennining whether or 11ot to globalize a particular business, managers should look
first at their ind.ustry. Market, economic, environ1nental, and competitive factors all influ
ence the potential gains to be realized by following a global strategy. Factors constituting
the external environment that are conducive to a global strategy are:
1. Market factors. Homogeneous market needs, global customers, shorter product life cycles,
transferable brands and adve1tising, and the ability to globalize distribution channels.
2. Economic factors. Worldwide economies of scale in manufacturing and distribution,
steep learning curves, worldwide sourcing efficiencies, rising product development
costs, and significant differences in host-country costs.
3. Environmental factors. Improving communications, favorable government policies,
and the increasing speed of technological change.
4. Competitive factors. Con1petitive interdependencies among countries, global moves of
co1npetitors, and opportunities to preempt a co1npetitor's global 111oves.
Many of the reasons given in the first part of the cl1apter about why a domestic company
should become a multinational company can also be LLsed to support the argument that a
fi1m should take a global perspective. This is beca11se the integration of 111arkets is forcing
companies that wish to remain successful not only to become multinationals but also to
take a global perspective in doing so. In the past, companies had the option of remaining
domestic or going mL1ltinational due to the separation of markets. This is no longer the case.
Growth in global markets has created opportunities for building global brands. The advan tages are many and so are the pitfalls. Here are 10 commandments that marketers can use when planning a global branding campaign.
1. Understand similarities and differences in the global branding landscape. The best brands retain consistency of theme and alter specific elements to suit each country.
2. Don't take shortcuts in brand building. Build brands in new markets from the "bottom up."
3. Establish marketing infrastructure. Most often, firms adopt or invest in foreign partners for manufacturing and distribution.
4. Embrace integrated marketing communications. Because advertising opportunities may be more limited, marketers must use other forms of communication such as sponsor ship and public relations.
5. Establish brand partnerships. Most global brands have marketing partners ranging from joint venture partners to franchisees and distributors who provide access to distribution.
6. Balance standardization and customization. Know what to standardize and what to customize.
7. Balance global and local control. This is very important in the following areas: organization structure, entry strategies, coordination processes, and mechanisms.
8. Establish operable guidelines. Set the rules about how the brand will be positioned and marketed.
9. Implement a global brand equity measurement system. The ideal measurement system provides complete, up-to-date information on the brand and on all its competitors to the appropriate decision makers.
10. Leverage brand elements. If the meanings of the brand name and all related trademarked identifiers are clear, they can be an invaluable source of brand equity worldwide.
Sources: Kevin Lane Keller, "The Ten Commandments of Global Branding," MBA Bullet Point, October 3-16, 2000, p. 3; Kevin Lane Keller, Strategic Brand Management, 4th ed. (Upper Saddle River, NJ: Prentice-Hall, 2013), chap. 14.
Several internal factors can eitl1er facilitate or impede a company's efforts to under
take a global approach to marketing strategies. These factors and their t1nderlying
di111ensions are
1. Structure. The ease of installing a centralized global authority and the absence of rifts
between present domestic and international divisions or operating units.
2. Management processes. The capabilities and resources available to perform global
plan_ning, budgeting, and coordination activities, coupled with the ability to conduct
global perfonnance reviews and implement global compensation plans.
3. Culture. The ability to project a global versus 11ational identity, a worldwide versus
domestic commitment t o employees, and a willingness to tolerate interdependence
among business units.
4. People. The availability of employable foreign nationals and the willingness of current
employees to commit to multicountry careers, frequent travel, and having foreign superiors.
Overall, whether a company should undertake a multidomestic or global approach to
organizing its international operations will largely depend on the nature of the company
and its products, how different foreign cultures are from the domestic market, and the com
pany's ability to i111plement a global perspective. Many large brands have failed in their
205
206 Part D Marketing in Special Fields
quest to go global. The p1i1nary reason for this failure is rushing the process. Successful
global brands carefully stake out their markets, allowing plenty of tim.e to develop their
overseas marketing efforts ai1d evolve into global brands.
Indeed, i n many cases, firms do not undertake either purely multidomestic or global
approaches t o marketing. Instead, they develop a hybrid approach whereby these
global brands carry with them the same visual identity, the sa1ne strategic positioning, and the same advertising. In addition, local characteristics are factored in. Regardless
of the approach underta.ken, management and organizational skills that emphasize the
need to handle diversity are the critical factors that determine the long-term success of
any company's endeavors i n the global marketplace.
PROGRAMMING FOR GLOBAL MARKETING
In this section of the chapter, the major areas in developing a global marketing program
will be examined. As mentioned at the outset, marketing managers must organize the saine
controllable decision variables that exist i n domestic markets. However, n1any firms that
have been extremely successful in marketing in the United States have not been able to
duplicate tl1eir success in foreign 1narkets.
Global Marketing Research Because the risks and uncertainties are so high, marketing research is equally important i n
foreig11 markets and in domestic markets a11d probably more so. Many companies encoun
ter losing situations abroad because they do not know enough about t11e market.4 They
don't know how to get the information or find the cost of collecting the information too
high. To be successful, organizations must collect and analyze pertinent information to
support the basic go/no-go decision before getting to the issues addressed by conventional
1narket research. Toward this end, in attempting to analyze foreign consumers and m a r
kets, at least four organizational issues 1nust be considered.
Popiilation Characteristics
Population characteristics are one of the 1najor co1npo11ents of a market, and significant
differences exist between and within foreign countries. If data are available, the marketing
manager should be familiar with the total population and witl1 the regional, urban, rural,
and interurban distribution. Other demographic variables, such that the number and size of
fanulies, education, occupation, and religion, are also important. In many markets, these
variables can have a significant i111pact on the success of a finn's marketing progra1n. For
example, in the United States, a cosmetics firm can be reasonably sure that the desire to
use cosmetics is common a1nong women of all income classes. However, i n Latin America
the same firm may be forced to segment its market by upper-, middle-, and lower-income
groups, as well as by urban and rural areas. This is because upper-incon1e women wa11t high-quality cos1netics pro1noted in prestige media and sold tl1rough exclusive outlets. In
sorne rural and less prosperous areas, cosmetics must be inexpensive; in other rural areas,
women do not accept cosmetics.
Ability to Bity
To assess the ability of consumers i n a foreign market to buy, four broad measures should
be examined: (1) gross national product or per capita national income, (2) distribution of
inco1ne, (3) rate of growtl1 in buying power, and ( 4) extent of available fi11ancing. Since
each of these vary in different areas of the world, the marketing opportunities available
must be examined closely.
Many consumer goods companies have sought growth by expanding into global markets. For U.S. companies, this is sound strategy since 95 percent of the world's population and two-thirds of its purchasing power are located outside their country. The potential for suc cess in global markets is enhanced when companies carefully research and analyze con sumers in foreign countries, just as it is in domestic markets. Here are some suggestions for companies seeking to successfully market to global consumers.
• Research the cultural nuances and customs of the market. Be sure that the company and brand name translate favorably in the language of the target country, and if not, consider using an abbreviation or entirely different brand name for the market. Consider using marketing research firms or ad agencies that have detailed knowledge of the culture.
• Determine whether the product can be exported to the foreign country as is or whether it has to be modified to be useful and appealing to targeted consumers. Also, determine what changes need to be made to packaging and labeling to make the product appeal ing to the market.
• Research the prices of similar products in the target country or region. Determine the necessary retail price to make marketing it profitable in the country, and research whether a sufficient number of consumers would be willing to pay that price. Also, determine what the product has to offer that would make consumers willing to pay a higher price.
• On the basis of research, decide whether the targeted country or region will require a unique marketing strategy or whether the same general strategy can be used in all geographic areas.
• Research the ways consumers purchase similar products in the targeted country or region and whether the company's product can be sold effectively using this method of distribution. Also, determine if a method of distribution not currently being used in the country could create a competitive advantage for the product.
• Pretest integrated marketing communication efforts in the targeted country to ensure not only that messages are translated accurately but also that subtle differences in meaning are not problematic. Also, research the effectiveness of planned communica tion efforts.
Marketing consumer goods successfully in global markets requires a long-term com mitment because it may take time to establish an identity in new markets. However, with improving technology and the evolution of a global economy, both large and small companies have found global marketing both feasible and profitable.
Source: From Dom Del Prete, "Winning Strategies Lead to Global Marketing Success," Marketing News, August 18, 1997, pp 1, 2. Reproduced with permission of American Marketing Association via Copyright Clearance Center.
Willingness to Buy
The cultural framework of consumer motives and behavior is integral to the understanding of
the foreign consumer. If data are available, cultural values and attitudes toward the material
culture, social organizations, the supe1natural, aesthetics, and language should be analyzed for
their possible i11fluence on each of tl1e elements in the finn 's 111arketing progra111. It is easy to
see that such factors as the group's values concerning acquisition of material goods, tl1e role of
the family, the positions of men and women in society, and the various age groups and social
classes can have an effect on marketing because each can influence consumer behavior.
In some areas tastes and l1abits seem to be converging, with different cultures becom
ing more and more integrated into one homogeneous culture, although still separated by 207
MARKETING .INSIGHT Global. Prod.uc.t .Oe:v.elopment
208
Procter & Gamble: According to the P&G website, P&G products are developed as global R&D projects. P&G has 22 research centers in 13 countries from which they can draw expertise. As a good example of a global product, consider the Swifter mop. P&G made use of its research centers in the United States and France to conduct market research and testing in support of this new product.
Apple: In the development of the iPod, Apple worked with about 1 0 different firms and independent contractors throughout the world, and did product design and customer requirement definition in both the United States and Japan.
Ikea: The Swedish furniture retailer knows that its target market (middle-class strivers) crosses international and intercontinental lines, so it operates globally in a streamlined fash ion. It identifies an unmet customer need (say a certain style of table at a given price point), commissions in-house and outsourced designers to compete for the best design, then its manufacturing partners worldwide compete for the rights to manufacture it. Excellent global logistics complete the value delivery to customers.
Bungie Studios: This boutique software company, now owned by Microsoft, developed the MS Halo gaming software series in the United States, but product-tested it in Europe and Asia. Like Ikea customers i n the prior example, gamers are much alike the world over.
Sources: Loida Rosario, "Borderless Innovation: The Impact of Globalization on NPD in Three Industries," Visions, June 2006; Merle Crawford and Anthony DiBenedetto, New Products Management, 10th ed. (Burr Ridge, IL: McGraw-Hill, 2011 ), p. 10.
national boundaries. This appears to be the case in Western Europe, where consumers are
developing into a mass market. This convergence obviously will simplify the task for a
marketer in this region. However, cultural differences still prevail among many areas of the
world and strongly influence consu1ner behavior. Marketing organizations may have to do
primary research in many foreign markets to obtain usable infonnation about these issues.
Differences in Research Tasks and Processes
In addition to the dimensions mentioned earlier, the processes and tasks associated with
carrying out tl1e 111arket research program may also differ from country to country. Many
1narket researchers count on census data for in-depth demographic information. However,
in foreign countries the market researcher is likely to encounter a variety of problems in
lLSing census data. These include
1. La,nguage. Some nations publish their census reports in English. Other countries offer
census reports only in their native language; some do not take a census.
2. Data content. Data contained i n a census vary fro1n country to country and often omit
items of interest to researchers. For example, most foreign nations do not include an
income question on their census. Others do not include such items as marital status or
educatio11 levels.
3. Timeliness. The United States takes a census every 10 years. Japan and Canada con
duct one every five years. However, some northern European nations are abandoning
the census as a data-collection tool and instead are relying on population registers to
account for births, deaths, and changes in marital status or place of residence.
4. A vliilability in the United States. If a researcher requires detailed household demograph
ics on foreign markets, the cost and time required to obtain the data will be significant.
Unfortunately, census data for many countries do not exist. For son1e it will be difficult
to obtain, altl1ough data about others can be found on the Internet.
FIGURE 13.2
International Channel
of-Distribution
Alternatives
Source: From Philip Cateora, John Graham and Mary
Gilly, International Marketing
16£, 2013, p. 442 Reprinted with permission of McGraw Hill Education.
Chapter Thirteen Global Marketing 209
Global Product Strategy Global 1narketing research can help detennine whether (1) tl1ere is an unsatisfied need for
which a new product could be developed to serve a foreign market or (2) there is an unsatis
fied need that could be met with an existing domestic product, either as is or adapted to the
foreign 1narket. In either case, product planning is necessary to determine the type of product
to b e offered a11d whether t11ere is sufficient demand to warrant entry into a foreign market.
Most U.S. firms would not think of entering a domestic market without extensive
product planning. However, some marketers have failed to do adequate product planning
when entering foreign markets. An example of SLLCh a problem occurred when American
1nanufacturers began to export refrigerators to Europe. The firms exported esse11tially the
same mod.els sold in the United States. However, the refrigerators were the wrong size,
shape, and temperature range for some areas and had weak appeal in others-thus failing
miserably. Although adaptation of the product to local conditions may have eliminated this
failure, this adaptation is easier said than done. For example, even in the domestic market,
overproliferation of product varieties and options can dilute economies of scale. This dilu
tion results in higher production costs, which may make the price of serving each market
segment with an adapted product prohibitive.
The solution to this problem is not easy. In some cases, changes need not be made at all
or, if so, can b e accomplished rather inexpensively. In other cases, the sales potential of
the particular market 1nay not warrant expensive product changes. For example, Pepsi's
Radical Fruit line of juice drinks was introduced without adaptation on three continents.
On the other hand, U.S. companies wishing to market software i n foreign countries must
undertake painstaking and costly efforts to convert tl1e embedded code from English to
foreign languages. This undertaking severely limits the potential markets where individ
ual software products can be profitably marketed. In any case, management n1ust examine
these product-related problems carefully prior to making foreign market entry decisions.
Global Distribution Strategy The role of the distribution network in facilitating the transfer of goods and titles and in the
demand stimulation process is as important in foreign markets as it is at home. Figure 13 .2
Home country
Domestic producer or marketer sells to or through
Open distribution via domestic wholesale middlemen
Export management company or company sales force
Exporter
Foreign country
The foreign marketer or producer sells to or through
Importer
Foreign agent or merchant wholesalers
consumer
Foreign retailer
210 Part D Marketing in Special Fields
illustrates some of the most common channel arrangements in global 1narketing.
They range fro111 no control to almost complete control of the distribution system by
manufacturers.
Global distribution strategy can be extrernely challenging because sellers must influ
ence two sets of channels: one in the home country and one in the foreign country. There
are 1nany possibilities as the figure clearly illustrates. The arrows indicate to whom the
producers and various middle1nen might sell in order to move products between countries.
Manufacturers can become more directly involved and, hence, have greater control over
distribution, when they select agents and distributors located in foreign markets. Both per
form similar ft1nctions, except that agents do not assume title to the manufacturers' p r o d
ucts, while wholesalers do. I f manufacturers should assu111e the functions of foreign agents
or wholesalers and establish their own foreign branch, they greatly increase control over
their global distribution system. Manufacturers' effectiveness will then depend on their own
administrative organization rather than on independent intermediaries. If the foreign branch
sells to otl1er intermediaries, such as wholesalers a11d retailers, as is the case with most
consu1ner goods, manufacturers again relinquish some control. However, since the manu
facturers are located i n the market area, they have greater potential to influence tl1ese inter
mediaries. For example, Volkswagen, Anheuser-Busch, and Procter & Gamble have each
1nade substantial investments in building manufacturing facilities in Brazil. These invest tnents allow the companies to begin tnaking direct sales to dealers and retailers in the
country.
The channel arrangement that enables manufacturers to exercise a great deal of con
trol is where the manufacturer sells directly to organizational buyers or ultimate consumers.
Although tl1is arrangeme11t is most co111n1on in the sale of organizational goods, some con
sumer goods con1panies have also pursued this arrangement.
Global Pricing Strategy In domestic markets, pricing is a complex task. The basic approaches used in price determi
nation in foreign markets are the same as those discussed earlier in the chapter on pricing.
However, the pricing task is often more complicated in foreign markets because of additional
problems associated witl1 tariffs, antidttmping laws, taxes, inflation, and currency conversion.
Import duties are probably the major constraint for global marketers and are encoun
tered in many 1narkets. Manage1nent must decide whether i1nport duties will be paid by
the firm or the foreign consumer, or whether they will be paid by both. This and similar
constraints may force the firm to abandon an otherwise desirable pricing strategy or may
force the firm out of a market altogether.
Another pricing problem arises because of the rigidity in ptice structures found iJ1 many
foreign 1narkets. Many foreign intermediaries are not aggressive in their pricing policies.
They often prefer to maintain high unit margins at the expense of low sales volt1me rather
than develop large sales volume by means of lower prices and smaller margins per unit. Many times this .rigidity is encouraged by legislation that prevents retailers fro1n cutting
prices substantially at their own discretion. These are only a few of the pricing problems
foreign marketers encounter.
Global Advertising and Sales Promotion Strategy Wl1en expanding their operations into the world 1narketplace, most firms are aware of
the language barriers that exist and realize the importance of translating their messages
into the proper idiom. However, numerous other issues must be resolved as well, such as
selecting appropriate media and advertising agencies in foreign markets.
Chapter Thirteen Global Marketing 211
There are many problems in selecting media in foreign markets. Often the media that
are traditionally used i.n the do111estic 1narket are not available. For example, it was not
until recently that national commercial TV became a reality in the former Soviet Union.
If media are available, they may be so only on a limited basis or tl1ey may not reach the
potential buyers. In addition to the problem of availability, other difficulties arise from the
lack of accurate media information. Tl1ere is no rate and data service or media directory that covers all the 1nedia available throughout the world. Where data are available, their accu
racy is often questionable.
Another important promotion decision that must be made is the type of agency used
to prepare and place the firm's advertisements. Along with the growth in multinational product co111panies, more multinational advertising agencies are available. Among the top
15 global advertising agencies, less tha.n half are U.S. owned. Alliances and takeovers
have stimulated growth i n the formation of global agencies. The U.S. company can take
either of two major approaches to choosing an agency. The first is to use a purely local
agency in each area where tl,e advertisement is to appear. The rationale for tl1is approach is
that a purely local agency employing only local nationals can better adapt the firm's mes
sage to tl1e local culture.
The other approach is to use either a U.S.-based multinational agency or a multinational
agency with U.S. offices to develop and i1nplen1ent the ad campaign. For exa1np]e, the Coca-Cola Company uses one agency t o create ads for the 80 nations in wl1ich Diet Coke
is marketed. The use of these so-called super agencies is increasing (annual growth rates
averaged over 30 percent i n the last decade). By using global advertising agencies, com
panies are able to take advantage of econo1nies of scale and otl1er efficiencies. However,
global agencies are not witl1out their critics. Many managers believe tl1at small, local agen
cies in emerging markets take a more entrepreneurial and fresher approach to advertising
tl1an do global agencies. Much discussion has developed over which approach is best, and
it appears that both approaches can be ttsed successfully.
The use of sales promotion can also lead to opportunities and problems for marketers
in foreign markets. Sales promotions often contain certain characteristics that are 1nore
attractive than other elements of the promotion mix. In less-wealthy countries, consum
ers tend to be even more interested in saving money through price discounts, sampling,
or premiums. Sales promotion can also be used as a strategy for bypassing restrictions on
advertising placed b y some foreign governments. In addition, sales promotion can be an
effective 1nea.ns for reaching people who live in rural locations where media support for
advertising is virtually nonexistent.
ENTRY AND GROWTH STRATEGIES FOR GLOBAL MARKETING
A major decision facing companies that desire either to enter a foreign market or pursue
growth within a specific market relates to the choice of entry or growth strategy. What type of strategy to employ depends on 1nany factors, including the analysis of market
opportunities, company capabilities, the degree of marketing involvement a.nd commit
ment the company is willing to make, and the amount of risk that the company is able to
tolerate.5 A company can decide to (1) make minimal investments of fLtnds and resources
by limiting its efforts to exportirig; (2) 1nake large initial investments of resources and
managetnent effort to try to establish a long-term share of global markets; or (3) take
an incremental approach whereby the compa.ny starts with a low-risk mode of entry that
requires the least financial and other resource commitment and gradually increases its
comrnjt111ent over time. All three approaches can be profitable. In general, a company can
212 Part D Marketing in Special Fields
initially enter a global market and, subsequently, pursue growtl1 in the global marketplace . .
1.n six ways:
l . Exporting. Exporting occurs when a company produ.ces the product outside the final
destination and then ships it there for sale. It is the easiest and most common approach for a
company making its first international move. Exporting has two distinct advantages. First,
it avoids the cost of establishing ma11ufacturing operations i11 tl1e host country; second,
it may help a firm achieve experience-curve and location economies. By ma11ufacturing
the product in a centralized location and exporting it to other national markets, the firm
may be able to realize substantial scale economies from its global sales volume. This
1nethod is what allowed Sony to dominate the global TV market. The major disadvantages
related to exporting include (a) the sometimes higher cost associated with the process,
(b) the necessity of the exporting firm to pay import duties or face trade barriers, and
( c) the delegation of marketing responsibility for the product to foreign agents who may or
may not be dependable.
2. Licensing. Companies can grant patent rights, trademark rights, and the right to use
technological processes to foreign companies. This is the most common strategy for small
and medium-size companies. The major advantage to licensing is that the finn does not have to bear tl1e development costs and risks associated with opening up a foreign n1ar
ket. In addition, licensing can be an attractive option i n unfamiliar or politically volatile
markets. The major disadvantages are that (a) the firm does not have tight control over
manufacturing, marketing, and strategy that is required for realizing economies of scale; and (b) there is the risk that foreign companies 1n.ay capitalize 011 the licensed technol
ogy. RCA Corporation, for example, once licensed its color TV technology to a number
of Japanese firms. These firms quickly assimilated the technology and used it to enter the
U.S. market.
3. Franchising. Franchising is similar to licensing but tends to involve longer-term
commitments. Also, franchising is commonly employed by service firms, as opposed to
manufactLLring firms. In a franchising agreement, the franchisor sells limited rights to use
its bra11d name i11 return for a lu111p sum and share of the francl1isee' s future profits. In con
trast to licensing agreements, the franchisee agrees to abide by strict operating procedures.
Advantages and disadvantages associated with franchising are primarily the san1e as with
licensing except to a lesser degree. In many cases, franchising offers an effective mix of
centralized and decentralized decision 1naking.
4. Joint ventures. A company 1nay decide to share management with one or more col
laborating foreign firms. Joint ventures are especially _popular in indLLStries that call for
large investments, such as natural gas exploration and automobile manufacturing. Control
of the joint venture 1nay be split equally, or one party 1nay control decision making. Joint
ventures hold several advantages. First, a firm may be able to benefit from a partner's
knowledge of the host country's competitive position, culture, language, political systems,
and so forth. Second, the firm gains by sharing costs and risks of operating in a foreign 111arket. Third, in many countries, political considerations make joint ventures the only fea
sible entry mode. Finally, joint ventures allow frrms to take advantage of a partner's distri
bution system, technological know-how, or marketing skills. For example, General Mills
teamed up with CPC International in an operation called International Dessert Partners to
develop a major baking and dessert-mix business in Latin A111erica. The venture combines
General Mills' technology and Betty Crocker dessert products with CPC' s marketing and
distribution capabilities in Latin America. The major disadvantages associated with joint
ventures are that (a) a firm may risk giving tip control of proprietary knowledge t o its part
ner, and (b) the firm may lose the tight control over a foreign subsidiary needed to engage
in coordinated global attacks against rivals.
Chapter Thirteen Global Marketing 213
5. Strategic alliances. Although some consider strategic alliances a fo1m of joint ven
ture, we consider the1n a distinct entity for two reasons. First, strategic alliances are n o r mally partnerships that two or more firms enter into t o gain a competitive advantage on a
worldwide versus local basis. Second, strategic a.lliances are usually of a much longer-term
nature than are joint ventures. In strategic alliances, the partners share long-term goals
and pledge almost total cooperation. Strategic alliances can be used to red11ce manufactur
ing costs, accelerate technological diffusion and new product develop1nent, and overcome
legal and trade barriers. The major disadvantage associated with formation of a strategic
alliance is the increased risk of co1npetitive conflict between the partners.
6. Direct ownership. Some companies prefer to enter or grow i n markets either through
establishment of a wholly owned subsidiary or through acquisition. In either case, the firm owns 100 percent of the stock. The advantages to direct ownership are that the finn l1as
(a) complete control over its technology and operations, (b) immediate access to foreign
markets, ( c) instant credibility and gains in the foreign country when acquisitions are the
mode of entry or growth, and ( d) the ability to install its own management team. Of course,
the primary disadvantages of direct ownersllip are the huge costs and significant risks
associated with this strategy. T11ese problems may more tl1an offset the advantages depend
ing upon the country entered.
Regardless of the choice of methods used to gain entry into and grow within a for
eign marketplace, companies must somehow integrate their operations. Tl1e complexities involved in operating on a worldwide basis dictate that firms decide on operating strate
gies. A critical decision that marketing n1anagers must make relates to the extent of adapta
tion of the marketing mix elements for the foreign country in which the company operates.
Depending on the area of the world t1nder consideration and the particular product mix, different degrees of standardization/adaptation of tl1e 1narketing mix elements may take
place. As a guideline, standardization of one or more parts of the 1narketing mix is a func
tion of many factors that individually and collectively affect companies' decision making. 6
It is more likely to succeed ttnder the following conditions:
• When markets are economically similar.
• When worldwide custo1ners, 11ot countries, are the basis for segmenting markets.
• When customer behavior and lifestyles are similar.
• When the prodttct is culturally compatible across the host country. • When a firn1's competitive position is similar in different markets.
• When competing against the same competitors, with similar market shares, in different
countries, rather than competing against purely local companies.
• When the product is an organizational and high-technology product rather than a
consumer product.
• When there are si111ilarities in tl1e pl1ysical, political, and legal environ111ents of home
and host countries.
• When the 1narketing infrastructure in the home and host countries is similar.
The decision to adapt or standardize marketing should be made only after a thorough
analysis of the product-market mix has been undertaken. The company's end goal is to
develop, manufacture, and 1narket the products best suited to tl1e actual and potential needs
of the local (wl1erever that may be) customer and to the social and economic conditions of
the marketplace. There can be subtle differences from country to country and from region
to region in the ways a product is used and what customers expect from it.
21.t Part D Marketing in Special Fields
SUMMARY
Additional Resources
Key Terms and Concepts
The world is truly becoming a global market. Many companies that avoid operating i n
the global arena are destined for failure. For those willing to undertake the challenges and
risks necessary to become multinational organizations, 1ong-term survival and growth are
likely outcomes. The purpose of this chapter was to introduce the reader to the opportuni
ties, problems, and challenges involved i n global marketing.
Bahl, Raghaw. SuJ'Jer Poi,ver? The Amazing Race between China's Hctre and India's Tortoise. New York: Portfolio/Penguin, 2010.
Dietz, Bob, and Dan O'Neill. Enough ls Enough: Building a Sustainable Econoniy in a World of Fi,iite Resources. San Francisco: Ban·ett-Koehler Publishers, 20 I 3.
Friechnan, Thomas L. The World Is Flett. New York: Farrar, Straus, and Giroux, 2005.
McEwen, William, Xiaogu.ang Fang, Zhang Chuanping, and Richard Bunkholder. "Inside the Mind
of tl1e Chinese Consumer.'' Harvard Business Review, March 2006, pp. 66-67.
Milanovic, Branko. The Haves and the Have Nots. New York: Basic Books, 2011.
Pettis, Michael. Th.e Great Rebalancing. Princeton, NJ: Princeton University Press, 2013.
Steenkamp, Jan-Benedict E. M., and Inge Geyskens. "How Country Ch.aracteristics Affect the
Perceived Value of Web Site.s." Journal of Mcirketing, July 2006, pp. 136-150.
Diamond of national advantage: Developed by Michael Porter, an explanation of a nation's
competitive advantage and why some companies and industries become global business leaders.
Direct ownership: An organization's strategy for entering and gro,ving in global markets either
through the establishment of a wholly owned subsidiary or through acquisition where it owns
J 00 percent of the stock.
Exporting: A stTategy for entering global 1narkets where a firm produces the product outside the
final destination and tl1en strips it there for sale. It is the easiest and rnost common approach to
entering a foreign n1arket.
Fra11chising: A 1narket entry strategy that is similar to licensing but usually involves longer-term
coffilnitments. The franchisor sells limited rights to use its brand name in return for a lu1np sum
and sl1are of the franchisee's future profits. It is more co1nmo1tly employed by service organizations
than manufacturers.
Global company: A company that views the ,vorld as one market and employs its resources
against the competition in an integrated fashion. It emphasizes c·u]tural similarities across countries
and universal consumer needs and wants rather than differences. l t standardizes marketing activities
where there are cultural similarities and adapts the1n when the cultures ,u·e different.
Joint venture: An organization's entry into a foreign market by sharing manage1nent with one
or more collaborating foreign firms. Decision making may be shared equally or controlled by one
party.
Licensing: Organization's granting of pate11t rights, trademark rights, and the right to use techno
logical processes to foreign 1narkets. By licensing, an orga1rization does not have to bear the costs
and risks associated with actually locating in a foreign market.
Multidomestic company: A company that pursues different strategies in each of its foreign
n:iarkets. It could have as many different product variations, brand names, and advertising
campaigns as countries in which it operates.
Strategic alliance: Pa1tnershjps where two or more fir1ns invest in each other to gain competitive
advantages on a worldwide versus local level. They are usually of a 1nuch longer-term nature than a
joint venture.
Analyzing
Marketing Problems
and Cases
Section
Case studies are designed to help bridge the gap between classroom learning and the prac tice of marketing management. They are designed to accomplish five things:
1. Increase your understanding of what managers should and should not do in guiding a business to success.
2. Build your skills in sizing up company resource strengths and weaknesses and in conducting strategic analysis in a variety of industries and competitive situations.
3. Get valuable practice in identifying strategic issues that need to be addressed, evaluating strategic alternatives, and formulating workable plans of action.
4. Enhance your sense of business judgment.
5. In-depth exposure to different industries and companies, thereby acquiring something close to actual business experience.
Source: Arthur A. Thompson, Margaret A. Peteraf, John E. Gamble, and A. ). Strickland Ill, Crafting and Executing Strategy, 19th ed. (Burr Ridge, IL: McGraw-Hill, 2014), p. CA2.
The use of business cases was developed by faculty members of the Harvard Graduate
School of Business Administration in the 1920s. Case studies l1ave been widely accepted
as one effective way of exposing students to strategic marketing processes.
Basically, cases represent detailed descriptions or reports of business sitL1ations. They are ofte11 written by a trained observer wl10 was actually involved in tl1e firm or organiza
tion and had some dealings with the problems under consideration. Cases generally entail
both qualitative and quantitative data that the student must analyze to determine appropri
ate alternatives and solutions.
The pri111ary purpose of the case metl1od is to introduce a measure of realism into
1narketing management education. Rather thai1 emphasizing the teaching of concepts, the
case method focuses on application of co11cepts and sound logic to real-world business
problen1s. In this way, students learn to bridge the gap between abstraction and application
and to appreciate the value of both. The pri1nary purpose of tl1is section is to offer a logical format for tl1e analysis of case
problems. Altl1ougl1 tl1ere is no one format that can be successfully applied to all cases,
the following framework is intended to be a logical sequence from which to develop
sound analyses. Trus framework is presented for analysis of comprehensive marketing
cases; however, t11e process should also be useful for shorter marketing cases, incidents, and
problems.
A CASE ANALYSIS FRAMEWORK
216
A basic approach to case analysis involves a four-step process. First, the problem is
defined. Second, altemati ve coL1rses of action are formulated to solve tl1e problem. Third,
the alternatives are analyzed in terms of their strengths and weaknesses. And fourth, an
alternative is accepted and a course of action is recomtnended. This basic approach is quite
useful for students well versed i n case analysis, particularly for sl1orter cases or incidents.
However, for the newcomer, this framework may be oversimplified. Thus, the follo\.ving
expanded fra111ework and checklists are intended to aid students in becoming proficient i11
case and probletn analysis.
Section II Analyzing Marketing Problems and Cases 217
1. Analyze and Record the Current Situation Whether the analysis of a firm's problems is done b y a ma11ager, student, or paid business
consultant, the first step is to analyze the current situation. This does not mean writing up a
history of the firm but entails the type of analysis described in the following sections. This
approach is useful not only for getting a better grip on the situation but also for discovering
bot11 real and potential proble1ns--central concerns of any case analysis.
Phase 1: The Environment
The first phase in analyzing a marketing problem or case is to consider the environment in
which the firm is operating. The environment can be broken down into a number of different
components such as the economic, social, political, and legal areas. Any of tl1ese may con
tain threats to a firm's success or opportunities for improving a finn's situation.
Phase 2: The Industry
The second phase involves analyzing the industry i n which the f1rm operates. A framework
provided by Michael Porter includes five competitive forces that need to be considered to
do a complete industry analysis. 1 The framework is shown in Figure 1 and includes rivalry
among existing co111petitors, tl1reat of new entra11ts, and threat of substitute products. In
addition, in this framework, buyers a.nd suppliers are included as competitors because they
can threaten the profitability of an i11dustry or firm.
While rivalry among existing competitors is an issue in most cases, analysis and strategies for dealing witl1 the other forces can also be critical. This is partict11ar1y so when a firm is
consideri11g entering a 11ew industry and wants to forecast its potential success. Each of the
five competitive forces is discussed next.
Rivalry among Existing Competitors In most cases and business situations a firm needs
to consider the current competitors in its industry in order to develop successful strategies.
StTategies such as price competition, advertising battles, sales promotion offers, new product
AGURE 1 Competitive Forces in an Industry
-
Threat of new entrants
I ,
.... - ,�
Bargaining Rivalry among Bargaining existing ,
power of , power of competitors
suppliers buyers
I I I
-
Threat of substitute products
I
Source: Adapted from Michael E. Porter, "Industry Structure and Competitive Strategy: Keys to Profitability," Financial Analysts Journal,
July-August 1980, p. 33.
218 Section II Analyzing Marketing Proble,ns and Cases
introdLLctions, and increased customer service are commonly used to attract customers
from competitors.
To fully analyze existing rivalry, it is important to detenni11e which fir1ns are the major
competitors and what are their annual sales, market share, growth profile, and strengths
and weaknesses. Also, it is useful to analyze their cu1Tent and past marketing strategies to
try to forecast their lik.ely reactions to a change in a competitive firm's strategy. Finally, it
is important to consider any trends or changes in govem.ment regulation of an i11dustry or
changes in technology that could affect the success of a firm's strategy.
Threat of New Entrants It is always possible for firms in other industries to try to co1npete
in a new industry. New entrants are more likely in industries that have low entry barriers.
Entry barriers include such things as a need for large financial resources, high brand equity
for existing brands i11 an industry, or economies of scale obtai11ed by existi11g firms in an
industry. Also, existing firms i11 an industry may benefit from experience curves; that is,
their cumulative experience i n producing and marketing a product may reduce their per-unit
costs below those of inexperienced firms. In general, the higher the entry barriers, the less
likely outside fjnns are to enter an industry. For example, the entry barriers for starting up a
new car co1npany are 1nuch higher tha11 for starting up a11 online software company.
Threat of Substitute Products In a broad sense, al] firms in an i11dustry compete wit11
industries producing substitute products. For example, in cultures where bicycles are the
major means of transportation, bicycle manufacturers compete with substitute products
such as motor scooters and automobiles. Substitutes limit the potential return in an industry
by placing a ceiling on the prices a firm in the industry can profitably cl1arge. Tl1e more
attractive the price-performa.nce alten1ative offered by substitutes, the tighter tl1e lid on
industry profits. For example, the price of candy, such as Raisinets chocolate-covered rai
sins, may limit the price that can be charged for granola bars.
Bargaining Power of Sztppliers Suppliers can be a competitive threat in an industry because
they can raise the price of raw materials or reduce their quality. Power f
ul suppliers can reduce the
profitability of an industry or firm if companies ca11not raise tl1eir prices to cover price increases
by suppliers. Also, suppliers may be a threat because they may forward integrate into an industry
by purchasing a firm that they supply or other firms in the industry.
Bargaining Power of Buyers Buyers can compete with an industl)' by forcing prices
down, bargaining for higher quality or more services, and playing competitors off against
each other. All tl1ese tactics can lower the profitability of a firm or industry. For exam ple, because Walmart sells such a large percentage of many companies' products, it ca11
negotiate for lower prices than smaller retailers can. Also, buyers may be a threat because
they may backward integrate into an industry by purchasing firms that supply them or
other firms in the industry.
Phase 3: The Organization
The third phase involves analysis of the organization itself not only in comparison with the
industry and industry averages but also internally in terrns of both quantitative and qualitative
data. Key areas of concern at this stage are such factors as objectives, constraints, management
philosophy, financial condition, and the organizational structure and culture of the finn.
Phase 4: The Marketing Strategy
Altl1ough there may be internal perso1mel or structural problems in the marketing depart
ment that need examination, typically an analysis of the current marketing strategy is the
next phase. In this phase, the objectives of the marketing departme11t are analyzed in
comparison with those of the firm in terms of agree1nent, soundness, and attainability.
Each element of the marketing 1nix as well as other areas, such as marketing research and
A common criticism of prepared cases goes something like this: "You repeated an awful lot of case material, but you really didn't analyze the case." Yet, at the same time, it is difficult to verbalize exactly what analysis means-that is, "I can't explain exactly what it is, but I know it when I see it!"
This is a common problem since the term analysis has many definitions and means different things in different contexts. In terms of case analysis, one thing that is clear is that analysis means going beyond simply describing the case information. It includes determining the implications of the case information for developing strategy. This determination may involve careful financial analysis of sales and profit data or thoughtful interpretation of the text of the case.
One way of thinking about analysis involves a series o f three steps: synthesis, generaliza tions, and implications. A brief example of this process follows.
The high growth rate of frozen pizza sales has attracted a number of large food proces sors, including Pillsbury (Totino1s), Quaker Oats (Celeste), American Home Products (Chef Boy-ar-dee), Nestle (Stouffer's), General Mills (Saluto), and H.J. Heinz (La Pizzeria). The major independents are Jeno's, Tony's, _ Case Material and John's. Jeno's and Totino's are the market leaders, with mar- ket shares o f about 19 percent each. Celeste and Tony's have about 8 to 9 percent each, and the others have about 5 percent or less.
The frozen pizza market i s a highly competitive and highly fragmented market.
In markets such as this, attempts to gain market share through lower consumer prices or heavy advertising are likely to be quickly copied by competitors and thus tend not to be very effective.
Lowering consumer prices and spending more on advertising are likely to be poor strategies. Perhaps increasing freezer space in retail outlets could be effective (this might be obtained through trade discounts). A superior product, for example, better-tasting pizza, microwave pizza, or increasing geographic coverage of the market, may be better strategies for obtaining market share.
Note that none of the three analysis steps includes any repetition o f the case material. Rather, they all involve abstracting a meaning of the information and, by pairing it with market ing principles, coming up with the strategic implications of the information.
'
Synthesis
! Generalizations
'
Implications
I
-
information systems, is analyzed in terms of whether it is internally consistent, synchro
nized with the goals of the department and firm, and focLLsed on specific target markets.
Altl1ough cases often are labeled in terms of tl1eir primary en1phasis, such as "pricing" or
"advertising," it is important to analyze the 1narketing strategy and entire marketing mix,
since a change in one element will usually affect the entire marketing program.
In performing the analysis of the cLirrent situation, the data should be analyzed carefully
to extract the relevant from tl1e superfluous. Many cases contain information that is not
relevant to the proble1n; it is tl1e analyst's job to discard tl1is information to get a clearer
picture of the current situation. As the analysis proceeds, a watchful eye 1nust be kept on
each phase to determine ( 1) symptoms of problems, (2) current problems, and (3) potential
problems. Symptoms of problems are indicators of a problem but are not problems in and
of the111selves. For example, a sympto1n of a problem 111ay be a decline in sales in a particu
lar sales territory. However, the problem is the root cause of the decline in sales-perhaps
the field representative quit making sales calls and is relying on phone orders only. 219
220 Section II Analyzing Marketing Proble,ns and Cases
The following is a checklist of the types of questions that should be asked when
perfonning the a11alysis of the current situation.
Checklist for Analyzing the Citrrent Situation
Phase 1: The Environment
1. What is the state of the economy and are there any trends that could affect the industry,
firm, or marketing strategy?
2. What are current trends i n cultural and social values and how do these affect the indus
try, firm, or marketing strategy?
3. What are current political values and trends and how do they affect the industry, firm,
or marketing strategy?
4. Is there any current or pending federal, state, or local legislation that could change the
industry, finn, or 111arketing strategy?
5. Overall, are there any tl1reats or opportu11ities in tl1e environment tl1at could influence
the industry, firm, or 1narketing strategy?
Phase 2: The Industry
1. What industry is the frrm in?
2. Which firms are the major competitors in the industry and what are their annual sales,
market share, and growth profile?
3. What strategies have competitors in the industry been using and what has been their
success with them?
4. What are the relative strengths and weaknesses of competitors in the indl1stry?
5. Is there a threat of new competitors coming into the industry and what are the major
entry barriers?
6. Are there any substitute products for the industry and what are their advantages and
disadvantages compared to this industry's products?
7. How rnucl1 bargaining power do suppliers have in this industry and what is its impact
on the firm and industry profits?
8. How much bargaining power do buyers l1ave in this industry and what is its impact on
the firm and industry profits?
Phase 3: The Organization
1. What are the objectives of the organization? Are they clearly stated? Attainable?
2. What are the strengths of the organization? Managerial expertise? Financial? Copyrights
or patents?
3. What are tl1e constraints and weaknesses of the organization?
4. Are there any real or potential sources of dysfunctional conflict in the structure of the
organization?
5. How is tl1e n1arketing depart111ent structured in the organization?
Phase 4: The Marketing Strategy
1. What are the objectives of the marketing strategy? Are they clearly stated? Are they
consistent with the objectives of the firm? Is the entire marketing mix structured to
meet these objectives?
2. What marketing concepts are at issue in the current strategy? Is the marketing strategy
well planned at1d laid out? Is the strategy consistent with sou11d marketing principles? If
the strategy takes exception to marketing principles, is there a good reason for it?
Section II Analyzing Marketing Problems and Cases 221
3. To what target market is the strategy directed? Is it well defined? Is tl1e market large
enough to be profitably served? Does the 111arket have long-ru11 potential?
4. What competitive advantage does the marketing strategy offer? If none, what can be
done to gain a competitive advantage in the marketplace?
5. What products are being sold? What are the width, deptl1, and co11siste11cy of the firm's
produ.ct lines? Does the firm need new products to fill out its prod.uct line? Should any
product be deleted? What is fue profitability of the various products?
6. What promotion mix is being used? Is promotion consistent with the products and product
images? What could be done to improve the promotion mix?
7. What channels of distribution are being used? Do they deliver the product at the right
tune and right place to n1eet customer needs? Are the channels typical of tl1ose used in
the industry? Could channels be made 111ore efficient?
8. What p1icing strategies are being used? How do prices co111pare with si111ilar products
of other firms? How are p1ices determined?
9. Are marketing research and information systematically integrated into the 1narketing
strategy? Is the overall marketing strategy internally consistent?
The relevant information from this preliminary analysis is now formalized and recorded.
At this point tl1e analyst 111ust be mindful of the difference betweer1 facts and opinions.
Facts are objective state1nents, such as financial data, whereas opinions are subjective
interpretations of facts or situations. The analyst must make certain not to place too much
emphasis on opinions and to carefully consider any variables that may bias such opinions.
Regardless of how much information is contained in tl1e case or l1ow much additional
it1formation is collected, the analyst usually finds that it is itnpossible to specify a complete
framework for the cmTent situation. At this point, assumptions must be made. Clearly, since
each a.nalyst may make different assumptions, it is critical that assumptions be explicitly
stated. When presenting a case, the analyst may wish to distribute copies of the assumption
list to all class members. This avoids confusion about how the analyst perceives the current
situation, and otl1ers can evaluate the reasonableness and necessity of the assumptions.
2. Analyze and Record Problems and Their Core Elements After careful analysis, problems and their core elements should be explicitly stated and
listed in order of importance. Finding and recording problems and then· core elements can
be difficult. It i s not unco111.mon when reading a case for tl1e first tin1e for the student to
view the case as a description of a situation in wl1icl1 tl1ere are no problems. However, careful
analysis should reveal sympton1s, which lead to problem recognition.
Recognizing and recording problems and their core elements is n1ost critical for a
111eaningful case analysis. Obviously, if the root problems are not explicitly stated and
understood, the remainder of the case analysis has little me1it because the true issues
are not being dealt with. The following checklist of questions is designed t o assist i n
performing this step of the analysis.
Checklist for Analyzing Problems an,d Their Core Elements'
1. What is the primary problem in the case? What are tl1e secondary problems?
2. What proof exists that these are the central issues? How much of this proof is based on
facts? On opinions? On assumptions?
3. What sympto1ns are there that suggest these are the real problems i11 tl1e case?
4 .. How are the problems, as defined, related? Are they independent or are they the result
of a deeper problem?
5. What are the ramifications of these proble111s in the short run? In the long run?
MARKETING INSIGHT Mis:take.s tl1a.t. Mark_e.:ters Make-
222
It is possible that a case could describe a company that is doing everything right and there are no serious problems in it. However, most of the time, analysis of a case will reveal one or more important shortcomings in the organization's marketing strategy. Here is a sample list of mistakes that marketers make that could be in a case.
1. The organization failed to offer products that customers want either because it did no research, did poor research, failed to interpret the research appropriately, or failed to react to it appropriately.
2. The organization underestimated the ability of competitors to gain market share and failed t o react appropriately to successful competitive strategies.
3. The organization failed to react appropriately to changes in other aspects of the envi ronment such as social, political, or legal changes.
4. The organization failed to keep up with or underestimated the impact of competitors' innovations in production and product development.
5. The organization did not position its products on dimensions that customers care about.
6. The organization overestimated the likely success of new products because of faulty sales forecasts or wishful thinking.
7. The organization expanded too rapidly into new markets or offered its products in too many outlets in existing markets.
8. The organization failed to raise prices when warranted or raised prices too much or too frequently.
9. The organization offered an inconsistent marketing mix that failed to provide a clear image of the product in the minds of customers.
10. The organization relied on promotion to sell an inferior product. 11. The organization failed to use the best channels to reach customers. 12. The organization underestimated the cost of competing effectively in an industry.
3. Formulate, Evaluate, and Record
Alternative Courses of Action This step is concerned with the 9Llestion of what can be done to resolve tl1e problem
defined in the previous step. Generally, a nun1ber of alternative courses of action are avail
able that could potentially help alleviate the problem condition. Three to seven are usually
a reasonable number of alternatives to work with. Another approach is to brainstorm as
many alternatives as possible initially and then reduce the list to a workable number.
Sound logic and reasoning are very important in this step. It is critical to avoid alterna
tives that could potentially alleviate the problem, but would create a greater new problem or
require greater resources than the firm has at its disposal.
After serious analysis and listing of a number of alternatives, the next task is t o
evaluate them in terms o f their costs and benefits. Costs are any output or effort the
firm must exert to i1nplement the alternative. Benefits are any input or value received
by the firm. Costs t o be considered are time, money, other resources, and opportunity
costs; benefits are st1ch things as sales, profits, brand equity, and custon1er satisfac
tion. The following checklist provides a guideline of questions to be used when per
forming this phase of the analysis.
Checklist for Formulating and Evaluating Alternative Courses of Action
1. What possible alternatives exist for solving the finn' s problems?
2. What limits are there on the possible alternatives? Competence? Resources ? Management
preference? Ethical responsibility? Legal restrictions?
Section II Analyzing Marketing Problems and Cases 223
3. What major alternatives are now available to the firm? What marketing concepts are
involved that affect these altern.atives?
4. Are the listed alternatives reasonable, given the fir1n's situation? Are they logical? Are
the alternatives consistent with the goals of the marketing program? Are they consistent
with the firm's objectives?
5. What are the financial and other costs of each alternative? What are tl1e benefits? What are the adva11tages a11d djsadva11tages of each alter11ative?
6. Wl1ich alternative best solves the problem and minimizes the creation of new problems,
given the preceding constraints?
4. Select and Record the Chosen Alternative and Implementation Details In light of the previous analysis, the alternative is now selected that best solves the prob
lem with a minimum creation of new problems. It is important to record the logic and
reasoning that precipitated the selection of a particular alternative. This includes articu
lating not only why the alternative was selected but also why the other alternatives were
not selected.
No analysis is co1nplete without an action-oriented decision and plan for implementing
the decision. The accompanying checklist indicates the type of questions that should be
answered in this stage of analysis.
Checklist.for Selecting and Implementing the Chosen Alternative
l. What must be done to implement the alternative?
2. What personnel will be involved? What are tl1e responsibilities of each?
3. When and where will the alternative be implemented?
4. What will be the probable outcome?
5. How will the success or failt1re of the alternative be measured?
PITFALLS TO AVOID IN CASE ANALYSIS
Following is a summary of some of the 1nost common errors analysts make when analyzing
cases. When evaluating your analysis or those of others, this list provides a useful gt1ide for
spotting potential sl1ortcomings.
1. Inadequate definition of the problem. By far the most common en·or made in case
analysis is attempting to recommend cotu·ses of action without first adequately defirung or
understanding tl1e core problems. W11ether presented orally or in a written report, a case analysis
must begin with a focus on the central issues and problems represented in the case situation.
Closely related is the error of analyzing symptoms without determining the root problem.
2. The search.for "tlie answer." In case analysis, there are usually no clear-cut solutions.
Keep i n mind that the objective of case studies is learning through discussion and explora
tion. There is ust1ally no one "official" or "correct" answer to a case. Rather, there are usually
several reasonable alten1ative solutions.
3. Not e,iough, information. Analysts often co1nplain there is not enough infonnation in
some cases to make a good decision. However, there is justification for not presenting all
of the information in a case. As in real life, a marketing manager or consultant seldom has
all the information necessary to make an optimal decision. Thus, reasonable assumptions have to be 1nade, and the chaUe11ge is to find intelligent solutions in spite of the limited
information.
224
A useful approach to gaining an understanding of the situation an organization is facing at a particular time is called SWOT analysis. SWOT stands for the organization's strengths and weaknesses and the opportunities and threats it faces in the environment. Here are some issues an analyst should address in performing a SWOT analysis.
POTENTIAL STRENGTHS AND COMPETITIVE ASSETS
• Competencies that are well matched to industry key success factors.
• Ample financial resources to grow the business.
• Strong brand-name image/company reputation.
• Economies of scale and/or learning and experience curve advantages over rivals.
• Other cost advantages over rivals.
• Attractive customer base.
• Proprietary technology/superior technological skills/important patents.
• Strong bargaining power over suppliers or buyers.
• Resources and capabilities that are valuable and rare.
• Resources that are hard to copy and for which there are no good substitutes.
• Superior product quality.
• Wide geographic coverage and/or strong global distribution capability.
• Alliances/joint ventures that provide access to valuable technology, competencies, and/or attractive geographic markets.
POTENTIAL WEAKNESSES AND COMPETITIVE DEFICIENCIES
• No clear strategic vision.
• No well-developed or proven core competencies. • No distinctive competencies or competitively superior resources.
• Lack of attention to customer needs.
• A product/service with features and attributes that are inferior to those of rivals.
• Weak balance sheet, short on financial resources to grow the firm, too much debt. • Higher overall unit costs relative to those of key competitors.
• Too narrow a product line relative to rivals.
• Weak brand image o r reputation. • Weaker dealer network than key rivals and/or lack of adequate global distribution
capability.
• Lack of management depth.
• Plagued with internal operating problems or obsolete facilities.
• Too much underutilized plant capacity.
• Resources that are readily copied or for which there are good substitutes.
POTENTIAL MARKET OPPORTUNITIES
• Sharply rising buyer demand for the industry's product.
• Serving additional customer groups or market segments.
• Expanding into new geographic markets.
• Expanding the company's product line to meet a broader range of customer needs.
• Utilizing existing company skills or technological know-how to enter new product lines or new businesses.
:M_ARKEtlNG'. INSJGHT � .U.1J.d.e;r:�t� h d_ .i.n::g_. :t.h:e:: ·,.C,tJ. _r.re r� t ,$,:it W"Q.t.Lo 1:1.- • • _ _ _ , ..... ··- . · · · -···· · ·• ·····-- , ... • , ...... - . . , . . ,- ··-· • - • -··-·-·-· .. , t Iii ri o u g tfi 3 � 0 ITT 11 rn a I � s i s �co rn ti' m LI e d)
• Falling trade barriers in attractive foreign markets. • Acquiring rival firms or companies with attractive technological expertise or capabilities_ • Entering into alliances or joint ventures to expand the firm's market coverage or boost
its competitive capability.
POTENTIAL EXTERNAL THREATS TO A COMPANY'S FUTURE PROFITABILITY
• Increasing intensity of competition among industry rivals-may squeeze profit margins. • Slowdowns in market growth.
• Likely entry of potent new competitors. • Growing bargaining power of customers or suppliers. • A shift in buyer needs and tastes away from the industry's product. • Adverse demographic changes that threaten to curtail demand for the industry's
product. • Adverse economic conditions that threaten critical suppliers or distributers. • Changes in technology-particularly disruptive technology that can undermine the
company's distinctive competencies. • Restrictive foreign trade policies_ • Costly new regulatory requirements.
• Tight credit conditions. • Rising prices on energy or other key inputs.
Source: Arthur A. Thompson, Margaret A. Peteraf, John E. Gamble, and A. J. Strickland 111, Crafting and Executing Strategy, 19th ed. (Burr Ridge, IL: McGraw-Hill, 2014), p. 95.
4. Use of generczlities. In analyzing cases, specific recom1nendations are necessarily
not generalities. For example, a suggestion to increase the price is a generality; a sugges
tion to increase the price by $1.07 is a specific.
5. A different situation. Analysts sometimes exert considerable time and effort con
tending that "If the situation were different, I'd know what course of action to take" or "If
the marketing manager hadn't already fottled things up so badly, the firm wouldn't have a proble1n." Such reasoning ignores t11e fact that the events in the case have already happened
and cannot be changed. Even though analysis or criticism of past events is necessary in
diagnosing the problem, in the end, the present situation must be addressed and decisions
must be made based on the given situations.
6. Narrow vision anal)1sis. Although cases are often labeled as a specific type of case,
such as "pricing," "prodt1ct," and so :forth, tl1is does not mean tl1at otl1er marketing vari ables should be ignored. Too often analysts ignore the effects that a change in one n1arket
ing element will have on the others.
7. Realism .. Too often analysts become so focused on solving a particular problem tl1at
their soll1tions become totally unrealistic. For instance, suggesting a $1 million advertising
program for a fi1m with a capital structure of $50,000 is an unrealistic solution.
8. The marketing research solution. A quite con1mon but unsatisfactory solution to
case problems is 1narketing research; for exatnple, "The firm should do this or that type of
marketing research to find a solution to its problem." Although marketing research may be
helpful as an intermediary step in some cases, marketing research does not solve problems
or make decisions. In cases wl1ere 1narketing researcl1 is recormnended, the cost and pote.ntial benefits s11ould be fully specified in the case analysis.
225
226 Section II Analyzing Marketing Proble,ns and Cases
9. Rehashing the case material. Analysts someti1nes spend considerable effort rewrit
ing a two- or three-page l1istory of the firm as presented in the case. This is unnecessary
since the iJ1structor and otl1er analysts are already familiar with tl1is information.
10. Premature conclusions. Analysts sometimes jump to prernature conclusions instead
of waiting until their analysis is completed. Too many analysts jump to conclusions upon
first readi11g the case and then proceed to interpret everytl1ing in the case as justifyi11g their
conclusions, even factors logically agai11st it.
COMMUNICATING CASE ANALYSES
The final concern in case analysis deals with communicating the results of the analysis.
The most comprehensive analysis has little value if it i s not communicated effectively.
Case analyses are commt1nicated tl1rough two prin1ary media-the written report and tl1e
oral presentation.
The Written Report Since the structure of the written report will vary by the type of case analyzed, the purpose
of this section is not to present a "one a11d only" way of writi11g up a case; it is to present
so1ne useful generalizations to aid analysts m case write-ups.
A good written report starts witl1 an outline that organizes the structure of the analysis
in a logical manner. The following is a general outline for a marketing case report.
I. Title Page
II. Table of Contents
ID. Executive Summary (one- to two-page summary of the analysis and recommendations)
IV. Situation Analysis
A. Environment 1. Economic conditions and trends
2. Cultural and social values and trends
3. Political and legal issues
4. Summary of environmental opportunities and threats
5. Implications for strategy develop1nent
B. Industry
1. Classification and definition of industry
2. Analysis of existing competitors
3. Analysis of potential new entrants
4. Analysis of substitute products
5. Analysis of suppliers
6. Analysis of buyers
7. Summary of industry opportunities and threats 8. Implications for strategy developtnent
C. Organ.ization
1. Objectives and constraints
2. Financial condition
3. Ma11agement philosophy
4. Organizational structure
5. Organizational culture
6. Summary of the firm's strengths and weaknesses
7. Implications for strategy development
D. Marketing strateg)'
1. Objectives and constraints
2. Analysis of sales, profits, and market share
MARKETING INSIGHT . -. . . . .
An· Operatio.n.al Approach to c:as.e . - - .
' . . ' . . - .
a1md �rtOb'lerit1 �til'a.lYiS'rs
1. Read the case quickly to get an overview of the situation.
2. Read the case again thoroughly. Underline relevant information and take notes on potential areas of concern.
3. Review outside sources of jnformation on the environment and the industry. Record relevant information and the source of this information.
4. Perform comparative analysis of the firm with the industry and industry averages.
5. Analyze the firm.
6. Analyze the marketing program.
7 . Record the current situation in terms of relevant environmental, industry, firm, and marketing strategy parameters.
8. Make and record necessary assumptions to complete the situational framework.
9. Determine and record the major issues, problems, and their core elements.
10. Record proof that these are the major issues.
11 . Record potential courses of action.
12. Evaluate each initially t o determine constraints that preclude acceptability.
1 3. Evaluate remaining alternatives in terms of costs and benefits.
14. Record analysis of alternatives.
15. Select an alternative.
16. Record alternative and defense of its selection.
1 7. Record the who, what, when, where, how, and why of the alternative and its implementation.
3. Analysis of target market(s)
4. Analysis of marketing mix variables 5. Summary of 1narketing strategy's strengt11s and weaknesses 6. Implications for strategy development
V. Problems Found in Situation Analysis
A. Statement oj'primary problem(s)
1. Evide11ce of problem{s) 2. Effects of problem(s)
B. Statem.ent of secortdary problem( s)
1. Evidence of problem(s) 2. Effects of problem(s)
VI. Strategic Alternatives for Solving Problems
A. Description of strategic alternative 1
1. Benefits of alternative 1 2. Costs of alternative 1
B. Description of strategic alternative 2 1. Benefits of alternative 2 2. Costs of alternative 2
C. Description of· strategic alternative 3
1. Benefits of alternative 3 2. Costs of alternative 3
VII. Selection of Strategic Alternative and Implementation
A. Statement oj·selected strategy B. Justification for selection oj'strategy C. Description of implenientation of strategy
227
228 Section II Analyzing Marketing Proble,ns and Cases
SUMMARY
Additional
Resources
VIII. Summary
IX. Appendices
A. Financial a11.alysis
B. Techriical analysis
Writing the case report entails filling out the details of the outline in prose form. Of
course, not every case report requires all tl1e headings just listed and different headings
may be required for some cases. Like any other skill, it takes practice to determine the
appropriate headings and approach for writing particular cases. However, good case
reports flow logically from topic to topic, are clearly written, are based on solid situation
analysis, and demonstrate sound strategic thjnking.
The Oral Presentation
Case analyses are often presented by an individual or team. As with the written report, a
good outliI1e is critical, and it is often useful to hand out the otttline to each class me1nber. Although tl1ere is no best way to present a case or to divide responsibility between team
members, simply reading the written report is unacceptable because it encourages bore
dom and interferes with all-important class discussion.
The use of visual aids can be quite l1elpful in presenting class analyses. However, simply
presenting financial statements co11tained in tl1e case is a poor use of visual media. On
the other hand, graphs of sales and profit curves can be more easily interpreted and can be
quite useful for making specific points.
Oral presentation of cases is particularly helpful to analysts for learning the skill of
speaking to a group. l11 particular, the ability to handle objections and disagreeme11ts with out antagonizing others is a skill worth developing.
From the discussion it should be obvious that good case analyses require a major commit
ment of time and effort. Individuals must be highly motivated and willing to get involved in
the analysis and discussion if they expect to learn and succeed in a course where cases are
used. Persons with only passive interest who pe1fonn "nigl1t before" analyses cheat them
selves out of valuable learning experie11ces that can aid then1 in their careers.
Aaker, David A. Strategic Market Management. 9th ed. Hoboken, NJ: Wiley, 2009.
Ellet, Willia1u. The Case Study Handbook. Boston: Harvard Business School Press, 2007.
Kerin, R.oger A., and Robert A. Peterson. Strategic Marketing Problems. 12th ed. Upper Saddle River, NJ: Prentice Hall, 2010. Marshall, Greg W., and Mark W. Johnston. Marketing Management. Burr Ridge, IL: McGraw-Hill/
Irwin, 20 I 0.
Frank T. Rothaermel. Strategic Mtinagement. Burr Ridge, IL: McGraw-Hill/Irwin, 2013,
pp. 390-400.
Thotnpson, Arthur A., Margaret A Peteraf, John E. Gamble, and A. J. Strickland ill. Crafting and
Executing Strtitegy. 19th ed. Burr Ridge, IL: McGraw-Hill, 2014, pp. CAl-12.
Section
F1nanc1al Analysis
for Marketing Decisions
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230 Section Ill Financial Analysis for Marketing Decisions
FINANCIAL ANALYSIS
Financial analysis is an important aspect of strategic marketing planning and should be an integral part of marketing problem and case analysis. In this section, we present sev eral financial tools that are useful for analyzing marketing problems and cases. First, we investigate break-even analysis, which is concerned. with determining the number of units or dollar sales, or both, necessary to break even on a project or to obtain a given level of profits. Second, we illustrate net present value analysis, which is a somewhat 1nore sophisticated tool for analyzing marketing alternatives. Finally, we investigate ratio analysis, which can be a useful tool for determining the financial condition of the firm, including its ability to invest i n a new or modified marketing program.
Breakeven Analysis Breakeven analysis is a common tool for investigating tl1e potential profitability of a 1narketing alternative. The breakeven point is tl1at level of sales in eitl1er units or sales dollars at which a firm covers all of its costs. In other words, it is the level at which total sales revenue just equals the total costs necessary to achieve these sales.
To compute the breakeven point, an analyst must have or be able to obtain three values. First, the analyst needs to know the selling price per unit of the product (SP). For example, suppose the Ajax Company plans to sell its new electric car through its own dealerships at a retail price of $5,000. Second, the analyst needs to know the level of f1Xed costs (FC). Fixed costs are all costs relevant to the project that do not change regardless of how many units are produced or sold. For instance, whether Ajax produces and sells 1 or 100,000 cars, Ajax executives will receive their salaries, land must be purchased for a plant, a plant must be constructed, and machinery must be purchased. Other fixed costs include such things as interest, lease payments, and sinking fund payments. Suppose Ajax has totaled all of its fixed costs and the sum is $1.5 million. Third, the analyst must know the vari able costs per unit produced (VC). As the name implies, variable costs are those that vary directly with the number of units produced. For exainple, each car Ajax produces involves costs for raw materials a.nd components to build the car, such as batteries, electric motors, steel bodies, and tires; labor costs for operating employees; and machine costs, such as elect1icity and welding rods. Suppose Ajax totals these costs and the variable costs for each car prod.uced equal $3,500. With this infor1nation, the analyst can now determine the break.even point, which is the number of units that mu.st be sold to just cover the cost of producing the cars. The break.even point is determined by dividing total fixed costs by the contribution margin. The contribtttion mai·gin is simply the difference between the selling price per unit (SP) a11d variable costs per unit (VC). Algebraically,
Total fixed costs BEP(in unics) = Contribution margin
Substituting the Ajax estimates,
BEP < . . ) = m UtlllS
FC
SP-VC
1,500,000
5,000 - 3,500
1,500,000 1,500
= 1,000 units
Section Ill Financial Analysis.for Marketing Decisions 231
In other words, the Ajax Company must sell 1,000 cars to just break even (i.e., for total sales revenue to cover total costs).
Alternatively, the analyst may want to know tl1e breakeven point in tenns of dollar sales volume. Of course, if the preceding analysis has been done, one could simply 1nultiply the BEP(in units) times the selling price to determine the breakeven sales volume (i.e., 1,000 unjts X $5,000/unit = $5 million). However, the BEP(ui dollars) can be computed directly, using the following formula:
BEP ( ui dollars) =
FC
vc
l - SP 1,500,000
l _ 3,500
5,000
1,500,000 1 - 0.7
= $5,000,000
Thus, Ajax must produce and sell 1,000 cars, wluch equals $5 million sales, to break even. Of course, firms do not wa11t to just break even but want to make a profit. The logic of breakeven analysis can. easily be extended to include profits (P). Suppose Ajax decided that a 20 percent return on fixed costs would make the project worth the investment. Thus, Ajax would need 20% X $1,500,000 = $300,000 before-tax profit. To calculate how many units Ajax must sell to achieve this level of profits, the profit figure (P) is added to fixed costs in the preceding fom1u]as. (We wi11 1abel the breakeven point as BEP' to show that we are now computing unit and sales levels to obtain a given profit level.) In the Ajax example:
In terms of dollars,
BEP'. . = FC + p
(1n u1uts) SP _ VC
1,500,000 + 300,000
5,000 - 3,500
1,800,000
1,500
= 1,200 units
BEP' = (in dollars) FC+P l _ vc
SP 1,500,000 + 300,000
l _ 3,500
5,000
_ 1,800,000
1 - 0.7
= $6,000,000
232 Section Ill Financial Analysis for Marketing Decisions
Thus, Ajax must produce and sell 1,200 cars (sales volume of $6 million) to obtain a 20 percent retun1 on fixed costs. Analysis must now b e directed at detennining whether a given marketing plan can be expected to produce sales of at least this level. If the answer is yes, tl1e project would appear to be worth investing in. If not, Ajax should seek other opportunities.
Net Present Value Analysis The profit-oriented 1narketing manager must understand that the capital invested in new products has a cost. It i s a basic principle in business that whoever wishes to use capital must pay for its use. Dollars invested in new products could be diverted to other uses-to pay off debts, pay dividends to stockholders, or bt1y U.S. Treasury bonds tl1at would yield eco nomic benefits to the corporation. If, on the other hand, all of the dollars used to finance a new product have to be borrowed from lenders outside the corporation, interest l1as to be paid on the loan.
One of the best ways to analyze the financial aspects of a marketing alternative is riet present value analysis. This method employs a discounted cash flow, which takes into account the time value of money and its price to the borrower. The following example will illustrate this method.
To compute the net present value of an investment proposal, the cost of capital must be esti1nated. Tl1e cost of capital can be defined as the required rate of rett1m on an investment that would leave the owners of the firm as well off as if the project was not undertaken. Thus, it is the minimum percentage return on investment that a project must make to be worth undertaking. There are 1nany methods of estimating the cost of capital. However, because these methods are not the concern of this text, we will simply assume that the cost of capital for the Ajax Corporation has been determined to b e 10 percent. 1 Again, it should be noted that once the cost of capital is determined, it becomes tl1e minimum rate of return required for an investment-a type of cutoff point. However, some firms in selecting their new product investments select a minimum rate of return that is above the cost of capital figure to allow for errors in judgment or 1n.easurem.ent.
The Ajax Corporation is considering a proposal to market i11stant-developing movie film. After conducting considerable marketing research, sales were projected to be $1 rnillion per year. In addition, the finance department compiled the following information concerning the projects:
New equipment needed
Useful life of equipment
Depreciation
Salvage value
Cost of goods and expenses
Cost of capital
Tax rate
'
$700,000
10 years
10% per year
$100,000
$700,000 per year
10%
50%
To compute the net present value of this project, the net cash flow for each year of the _project must first be determined. This can be done in four steps:
1. Sales - Cost of goods and expenses = Gross income or
$1,000,000 - 700,000 = $300,000
2. Gross income - Depreciation = Taxable income or
$300,000 - (10% X 600,000) = $240,000
Section Ill Financial Analysis.for Marketing Decisions 233
3. Taxable income - Tax = Net income or
$240,000 - (50% X 240,000) = $120,000
4. Net income + Depreciation = Net cash flow or
$120,000 + 60,000 = $180,000 per year
Because the cost of capital is 10 percent, this figure is used to discount tl1e net cash flows for each year. To illustrate, the $180,000 received at the end of the first year would be discounted by the factor 1/(1 + 0.10), which would be 180,000 X 0.9091 = $163,638; the $180,000 received at the end of the second year would be discounted by the factor 1/(l + 0.10)2, wl1ich would be 180,000 X 0.8264 = $148,752, and so on. (Most finance textbooks have present value tables that can be used to simplify the con1putations.) The table that follows shows the present value computations for the 10-year project. It should be noted that the net cash flow for year 10 is $280,000 because there is an additional $100,000 inflow fro111 salvage value.
Thus, at a discount rate of 10 percent, the present value of the net cash flow from new product investment is greater than tl1e $700,000 outlay required, and so the decision can be considered profitable by this standard. Here the net present value is $444,560, which is tl1e difference between the $700,000 in vestment outlay and the $1,144,560 discounted
Year Net Cash Flow 0.10 Discount Factor Present Value
1 $ 180,000 0.9091 $ 163,638
2 180,000 0.8264 148,752
3 180,000 0.7513 135,234
4 180,000 0.6830 122,940
5 180,000 0.6209 111,762
6 180,000 0.5645 101,610
7 180,000 0.5132 92,376
8 180,000 0.4665 83,970
9 180,000 0.4241 76,338
10 280,000 0.3855 107,940
Total $1,900,000 $1,144,560
cash flow. The present value ratio is nothing more than the present value of the net cash flow divided by the cash investment. If this ratio is 1 or larger than 1, the project would be profitable for the firm to invest in.
There are many other measures of investment worth, but only one additional method will be discussed. It is the very popular and easily understood payback method. Payback refers to the amount of time required to pay back the original outlay from the cash flows. Staying with tl1e example, tl1e project is expected to produce a stream of cash proceeds that is constant from year to year, so the payback period can be determined by dividing the investment outlay by this annual cash flow. Dividing $700,000 by $180,000, the payback period is ap_proximately 3.9 years. Firms often set a maximum payback period before a project will be accepted. For example, many fi1111s reft1se to take on a project if tl1e pay back period exceeds three years.
This example should illustrate the difficulty in evaluating marketing investments from a profitability or economic worth standpoint. The most challenging problem is that of deve]oping accurate cash flow estimates because there are many possible alternatives, such as price of the product and channels of distribution, and the consequences of each alternative
MARKETING .INSIGHT $.e,l:e_ct�d Pr.e$ent_ V:alue; Di:sco.u.nt Factor_�
234
. - . - - . - . - . . -
d-
Years 4% 6% 8% 10% 12% 14%
1 .9615 .9434 .9259 .9091 .8929 .8772
2 .9246 .8900 .8573 .8264 .7972 .7695
3 .8890 .8396 .7938 .7513 .7118 .6750
4 .8548 .7941 .7350 .6830 .6355 .5921
5 .8219 .7473 .6806 .6209 .5674 .5194
6 .7903 .7050 .6302 .5645 .5066 .4556
7 .7599 .6651 .5835 .5132 .4523 .3996
8 .7307 .6274 .5403 .4665 .4039 .3506
9 .7026 .5919 .5002 .4241 .3606 .3075
10 .6756 .5584 .4632 .3855 .3220 .2697
must be forecast in terms of sales volumes, selling costs, and other expenses. In spite of all
the problems, management must evaluate the economic worth of new prodLlCt and other decisions, not only to reduce some of the guesswork and ambiguity surrounding marketing
strategy development but also to reinforce the objective of making profits.
Ratio Analysis Finns' inco1ne statements and balance sheets provide a wealth of information that is
useful for developi11g marketing strategies. Frequently, this information is included in
marketing cases, yet analysts often have no convenient way of interpreting the finan
cial position of the firm to make sound marketing decisions. Ratio analysis provides
the analyst an easy and efficient method for investigating a firm's financial position by
co111paring the firm's ratios across time or wjth ratios of similar fir1ns in the industry or
with industry averages.
Ratio analysis involves four basic steps:
1 . Choose the appropriate ratios.
2. Compute the ratios.
3. Compare the ratios.
4. Check for problems or opportunities.
1. Choose the Appropriate Ratios
The five basic types of financial ratios are (1) liquidity ratios, (2) asset rna11agement ratios,
(3) profitability ratios, ( 4) debt management ratios, a.nd (5) market value ratios. 2 While
calculating ratios of all five types i s useful, liquidity, asset manage1nent, and profitability
ratios provide information that is most directly relevant for marketing decision mak ing. Although many ratios can be calculated in each of these groups, we have selected
two of the most co1nmonly used and readjly available ratios in each group to illustrate
the process.
Liquidity Ratios One of the first considerations in a.nalyzing a marketing problem is
the liquidity of the firm. Liquidity refers to the ability of the firm to pay its short-term
obligations. If a firm cannot 1neet its short-term obligations, there is little that can be done until this problem is resolved. Simply stated, reco1n1nendations to increase advertising, to
do marketing research, or to develop new products are of little value if the firm is about t o
go bankrupt.
:MARKETING'. INSIGHJ·· -----· - - -·'-·· •• c '·•·�· ' - ·- --- ·-·-- • . · -- ... - ·- . · -· · -·- .. - Fi·man,cftal iBattos,-: 1Whe_,r_e-;_ to� F'.in.d:· Jh;e,11J. I . . .":". ••'•.·• '- -.,.." 1 •··1.: ,._�-. ••. . ·•· · · •-.. • - •• . • · I ,· .-• ·· I. ·•.· •• ,• ..
2
1. http:/ /finance.yahoo.com/. Input the company symbol to receive financial ratios and other useful information. Under the "Company" heading, "Key statistics," "Competitors," and "Industry" are most useful for comparative ratio analyses.
2. Annual Statement Studies. Published by Robert Morris Associates, this work includes 11 financial ratios computed annually for over 150 lines of business. Each line of business is divided into four size categories.
3. Industry Norms and Key Business Ratios. Published by Dun & Bradstreet, this work provides a variety of industry ratios.
4. Almanac of Business and Industrial Financial Ratios. The almanac, published by Prentice Hall, Inc., lists industry averages for 22 financial ratios. Approximately 1 70 businesses and industries are listed.
5. Quarterly Financial Report for Manufacturing Corporations. This work, published jointly by the Federal Trade Commission and the Securities and Exchange Commission, con tains balance-sheet and income-statement information by industry groupings and by asset-size categories.
6. Trade associations and individual companies often compute ratios for their industries and make them available to analysts.
The two most commonly used ratios for investigating liquidity are the current ratio and
the quick ratio (or "acid test"). The current ratio is determined by dividing current assets by current liabilities and is a measure of the overall ability of the firm to meet its current
obligations. A co1nmon rule of thumb is that current ratio should be about 2: l .
The quick ratio is deter1nined by subtracting inventory from current assets and divid
ing the remainder by current liabilities. Since inventory is the least liquid current asset, the
quick ratio deals with assets that are most readily available for meeting short-tenn (one
year) obligations. A common rule of thumb is that tl1e quick ratio should be at least 1: 1.
Asset Management Ratios Asset management ratios investigate how well the fir1n
handles its assets. For 1narketing problems, two of tl1e most useful asset 1nanage1nent ratios
are concerned with inventory turnover and total asset utilization. The inventory turnover
ratio i s determined by dividing sales by inventories. 3 If the firm is not turning its inven
tory over as rapidly as other firms, it suggests that too much money is being tied up in unproductive or obsolete inventory. In addition, if the firm's turnover ratio is decreasing
over time, it suggests that there may be a problem in the marketing plan, because inventory
is not being sold as rapidly as it had been in the past. One problem with this ratio is that,
since sales usually are recorded at market prices and inventory usually is recorded at cost, the ratio 1nay overstate turnover. Thus, some analysts prefer to use cost of sales rather than
sales in computing turnover. We will use cost of sales in our analysis.
A second useful asset rnanagement ratio is total asset utilization. It is calculated by
dividing sales by total assets and is a measure of how productively the frrm's assets have
been used to generate sales. If this ratio is well below industry figures, it Sltggests that the finn' s marketing strategies are less effective than those of co1npetitors or that some unpro
ductive assets need to be eliminated.
Profitability Ratios Profitability is a 1najor goal of marketing and is an important measure
of the quality of a firm's rnarketing strategies. Two key profitability ratios are profit margin
on sales and return on total assets. Profit margin on sales is determined by dividing profit
before tax by sales. Serious questions about the fmn. and 1narketing plan sl1ould be raised if profit margin on sales is declining across time or is well below other frrms in the industry.
235
236 Section Ill Financial Analysis for Marketing Decisions
FIGURE 1 Balance Sheet and Income Statement for Ajax Home Computer Company
Assets
Ajax Home Computer Company Balance Sheet
March 31, 2015 (in thousands)
Liabilities and Stockholders' Equity
Cash ......................................................................... $ 30 Trade accounts payable ............................................ $ 150
Marketable securities ... ........ ... ........... .. ........ ................ 40
Accounts receivable ..................................................... 200
Inventory ..................................................................... 430
Total current assets .................................................. 700
Plant and equipment ................................................ 1,000
Land ............................................................................ 500
Other investments ....................................................... 200
Total assets .............................................................. $2,400
Accrued ......................................................................... 25
Note.s payable ............................................................... 100
Accrued income tax ....................................................... 40
Total current liabilities ............................................... 315
Bonds ............................................................................ 500
Debentures .................................................................... 85
Stockholders' equity ................................................... 1,500
Total liabilities and stockholders' equity .................... $2,400
Ajax Home Computer Company Income Statement
for the 12-Month Period Ending March 31, 2015 (in thousands)
Sales .............................................................................................................................................................................. $3,600
Cost of sales
Labor and materials ..................................................................................................................................................... 2,000
Depreciation ................................................................................................................................................................... 200
Selling expenses ............................................................................................................................................................... 500
General and administrative expenses ................................................................................................................................ 80
Total cost ................................................................................................................................................................. 2,780
Net operating income ....................................................................................................................................................... 820
Less interest expense
Interest on notes .............................................................................................................................................................. 20
Interest on debentures ................................................................................................................................................... 200
Interest on bonds ........................................................................................................................................................... 300
Total interest .............................................................................................................................................................. 520
Profit before tax ................................................................................................................................................................. 300
Federal income tax (@40%) ........................................................................................................................................... 120
Net profit after tax ......................................................................................................................................................... $ 180
Remm on total assets is detetmined by dividing profit before tax by total assets. This ratio
is the retun1 on the investment for the entire firtn.
2. Compute the Ratios
The next step in ratio analysis is to compute the ratios. Figure 1 presents the balance sheet
and income statement for the Ajax Home Computer Company. These six ratios can be
calculated fro1n the Ajax balance sheet and income state1nent as follows:
Liquidity ratios:
Current ratio =
Quick ratio =
Current assets
Curre11t liabilities =
700 = 2.2
315
Cu1rent assets - Inventory
Current liabilities
270 = 0.86
315
RGURE 2
Ratio Comparison for
Ajax Home Computer Company
Section Ill Financial Analysis.for Marketing Decisions 237
Asset management ratios:
Cost of sales Inventory turnover = - - - - -
Inventory
2,780
430 = 6.5
Sales Total asset utilization = - - - --
3,600 - -= 1.5
Total assets
Profitability ratios:
P f. .
1 Profit before tax
ro 1t margin on sa es = Sales
Profit before tax Return 011 total assests = - - - - - --
Total assets
3. Compare the Ratios
2,400
300 = 8.3%
3,600
300 = 12.5%
2,400
While rules of thumb are useful for analyzing ratios, it cannot be overstated that comparison
of ratios is always the preferred approach. The ratios computed for a firm can be compared
in at least three ways. First, they can be compared over time to see if there are any favorable
or 11nfavorable trends in the firm's financial position. Second, they can be compared with
the ratios of other firms of similar size in the industry. Third, they can be compared with
industry averages to get an overalJ idea of the firm's relative financial position in the industry.
Figure 2 provides a summary of the ratio analysis. T11e ratios computed for Ajax are
presented along with the median ratios for firms of similar size in the industry and the
industry median. The median is often reported in financial sources, ratl1er than the mean,
to avoid the strong effect of outliers.4
4. Check/or Problems or Opportunities
The ratio comparison in Figure 2 suggests that Ajax is in reasonably good shape financially.
The cu1Tent ratio is above the industry figures, although the quick ratio is slightly below
them. However, the high inventory tLunover ratio suggests that the slightly low quick ratio
should not be a problem, since inventory turns over relatively quickly. Total asset utiliza
tion is slightly below industry averages and should be monitored closely. This, coupled with
the slightly lower return on total assets, suggests that s01ne unproductive assets should be
eliminated or that tl1e production process needs to be made more efficient. While the prob
lem could be ineffective marketing, the high profit margin on sales suggests that marketing
effort is probably not the problem.
Industry Firms Overall Ajax Median ($1-10 Industry
Million in Assets) Median
Liquidity ratios
Current ratio 2.2 1.8 1.8
Quick ratio 0.86 0.9 1.0
Asset management ratios
Inventory turnover 6.5 3.2 2.8
Total assets utilization 1 .5 1. 7 1.6
Profitability ratios
Profit margin 8.3% 6.7% 8.2%
Return on total assets 12.5% 15.0% 14.7%
238 Section Ill Financial Analysis for Marketing Decisions
SUMMARY
Additional
Resources
This section has focused o n several aspects of financial analysis that are useful for market
ing decisjon making. Tl1e tirst, breakeven analysis, is commonly used in marketing problem
at1d case analysis. The second, net present value analysis, is quite useful for investigating
the fmancial impact of 1narketing alternatives, such as new product introductions or other
long-term strategic changes. The third, ratio analysis, is a useful tool sometin1es overlooked
in marketing problem solving. Performing a ratio analysis as a regular part of marketing
problem and case analysis can increase the understandi11g of the finn and its problems
and opportu.nities.
Block, Stanley B., Geoffrey A. Hirt, and Bartley Danielsen. Foundations of Financial
Man.agen1enJ. Burr Ridge, IL: McGraw-Hi 11, 20 I I.
Brealey, Richard A., Stewart C. Myers, and Alan J. Marcus. Fundamentals of Corporate Finance.
7th ed. Bun· Ridge, IL: McGraw-Hill, 2012.
Ross, Stephen A.; Randolph W. Westerfield; and Bradford D. Jordan. Essentials of Corporate
Fin.ance. 8tl1 ed. Burr Ridge, IL: McGraw-Hill, 2014.
Developing
Marketing Plans
Section
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240 Section IV Developing 1\tfarketing Plans
Imagine this scenario. After receiving your bachelor's or master's degree in marketing,
you are hired by a major consumer goods company. Because you've done well in school,
you are confident that you have a lot of marketi11g knowledge and a lot to offer to the firm.
You're highly motivated and are looking forward to a successful career.
After just a few days of work you are called in for a conference with the vice president
of marketing. The vice president welcomes you and tells you how glad tl1e fim1 is that yot1
have joined the1n. The vice president also says that, because you have done so well in your
marketing courses and have had such recent training, he wants you to work on a special
project.
He tells you that the company has a new product, which is to be introduced in a few
n1onths. He also says, confidentially, tl1at recent new product introductions by the co1npany
haven't been too successful. Suggesting that the recent problems are probably because the
company has not been doing a very good job of developing marketing plans, the vice presi
dent tells you not to look at marketing plans for the company's other products.
Your assign1nent, then, is to develop a marketing plan for the proposed product in tl1e
next six weeks. The vice president explams that a good job here will lead to rapid advance
ment in the company. You thank the vice president for the assignment and promise that
you '11 do your best.
How would you feel when you returned to your desk? Surely, you'd be t1attered
that you had been given this oppo1tunity and be eager to do a good job. However, how
co11fident are you that you could develop a quality marketing plan? Would you even
know where to begin?
We suspect that many of you, even those who have an excellent knowledge of market ing principles and are adept at solvi11g marketing cases, may not yet have the skills 11eces
sary to develop a marketing plan from scratch. Thus, the purpose of this section is to offer
a framework for developing marketing plans. In one sense, this section is no more than a
summary of the whole text. In other words, it is an organizational framework based on the
text material that can be used to direct the development of marketing plans.
Students should note that we are 11ot presenting this framework and discussion as
the only way to develop a marketing plan. While we believe this is a useful framework
for logically analyzing the problems involved in developing a marketing plan, other
approaches can be used just as st1ccessfully.
Often, successful firms prepare much Jess detailed plans because mucl1 of tl1e background
1naterial a.nd current conditions are well known to everyone involved. However, our
review of plans used in various firms suggests that something like this framework is not
Llncommon.
We would like to mention one otl1er qualification before beginning our discussion.
Students sl1ould reme1nber that one i111portant part of the marketing plan involves the
development of a sales forecast. While we have discussed several approaches to sales
forecasting in the text, we will detail only one specific approach here.
A MARKETING PLAN FRAMEWORK
Marketing plans l1ave three basic purposes. First, they are used as a tangible record of anal
ysis so tl1e logic involved can be checked. This is done to ensure the feasibility and internal
consistency of the project and to evaluate the likely consequences of implementing the
plan. Second, tl1ey are used as roadmaps or guidelines for directing appropriate actions.
A marketi11g plan is designed to be the best available scenario ai1d rationale for directing
the firm's efforts for a particular product or brand. Third, they are used as tools to obtain
funding for implementation. This funding may come from internal or external sources. For
FIGURE 1
A Marketing Plan Format
• Title page.
• Executive summary.
• Table of contents.
• Introduction.
• Situational analysis.
• Marketing planning.
• Implementation and control of the marketing plan.
• Summary.
• Appendix: Financial analysis.
• References.
Section IV Developing Marketing Plans 241
example, a brand manager may have to present a marketing plan to senior executives in a
finn to get a budget request filled. This would be an inten1al source. Sitnila:rly, proposals
for funding from investors or business loans from banks often require a marketing plan.
These would be external sources.
Figure 1 presents a format for preparing marketing plans. Each of the 10 elements
will be briefly discussed. We will refer to previous chapters and sections in this text and
to other sources where additional information can be obtained when a marketing pla11 is
being prepared. We also will offer additional information for focusing particular sections
of the plan as well as for developing financial analysis.
Title Page The title page should contain the following information: (1) the name of the product or
brand for which the marketing plan has been prepared-for example, Marketing Plan for
Little Friskies Dog Food; (2) the time period for which the plan is designed-for example, 2014-2016; (3) the person(s) and positio11(s) of those submitting the plan -for example,
submitted by Amy Lewis, brand manager; ( 4) the persons, group, or agency to whom the
plan is being submitted-for example, submitted to Lauren Ellis, product group n1anager;
and (5) the date of submission of the plan-for exa1nple, June 30, 2014.
While preparing tl1e title page is a simple task, remember that it is the first thing read
ers see. Thus, a title page that is poorly laid out, is smudged, or contains 1nisspelled words
can lead to the inference that the project was developed hu1Tiedly and with little attention
to detail. As with the rest of the project, appearances are important and affect what people
think about the plan.
Executive Summary The executive sum.,nary is a two- to three-page summary of the contents of the report. Its
purpose is to provide a quick summary of the marketing plan for executives who need to
be informed about the plan but are typically not directly involved in plan approval. For
instance, senior executives for firms with a broad product line may not have ti111e to read
the entire plan but need an overview to keep informed about operations.
The executive summary should include a brief introduction, the major aspects of the
marketing plan, and a budget statement. This is not the place to go into detail abot1t each and
every aspect of the n1arketing plan. Rather, it should focus on the major n1arket opportunity
and the key elements of the marketing plan that are designed to capitalize on this opportunity.
It is also useful to state specifically how much money is required to implement the plan.
In an ongoing firm, many costs can be estimated from. historical data or from disc11ssions
with other executives in charge of specific functional areas .. However, in 1nany situations
(such as a class project), sufficient information is not always available to give exact costs
for every aspect of production, pron1otion, and distribution. In these cases, include a rough
242 Section IV Developing 1\tfarketing Plans
estimate of total marketing costs of the plan. In many ongoing firms, marketing cost elements
are concentrated in the areas of promotion and 1narketing research, and these figures are integrated with those from other fu11ctional areas as parts of the overall business plan.
Table of Contents The table of contents i s a listing of everything contained in the plan and where it is located in the report. Reports that contain a variety of charts and figures may also have a table of
exhibits listing their titles and page numbers within the report.
In addition to using the table of contents as a place to find specific information, readers
may also review it to see if each section of the report is logically sequenced. For example, situational analysis logically precedes 1narketing planning as an activity, and this ordering
makes sense in presenting tl1e plan.
Introduction The types of infor1nation and amount of detail reported in the introduction depend in part
011 whetl1er the plan is being designed for a new or existing product or brand. If the product
is new, the introduction should explain the product concept and the reasons it is expected
to be successful. Basically, this part of the report should make the new idea sound attrac
tive to n1anagement or investors. In addition, it is useful to offer estimates of expected sales, costs, and return on investment.
If the marketing plan is for an existing brand in an ongoing firm, it is common t o
begin the report with a brief lustory of the brand. The major focus here i s on the brand's
performance in the last three to five years. It is usefLtl to prepare graphs of the brand's
performance that sl1ow its sales, profits, and market share for previous years and to explain
the reasons for any major cl1anges. These exhibits can also be extended to include pre
dicted changes in these variables given the new marketing plan. A brief discussion of
the overall strategy followed in previous years also provides understanding of how much
change is being proposed in the new 1narketing plan.
Also useful in the introduction is to offer a precise statement of the purpose of tl1e report
as well as a roadmap of the report. In other words, tell readers what this report is, how it is
organized, and what will be covered in the following sections.
Situational Analysis The situcltional analysis is not unlike the analysis discussed in Cl1apter I and Section TT
of this text. The focus remaii1s on the most critical and relevant environ1nental conditions
( or changes i n them) that affect the success or failure of the proposed plan. While any
aspect of the economic, social, political, legal, or cooperative environments might deserve
considerable attention, there is seldom if ever a marketing plan in wllich the competi
tive environment does not require considerable discussion. In fact, tl1e competitive envi
ronment may be set off as a separate section called industry arialysis. The strengths and
weaknesses of major competitors, their relative market shares, and the success of various
competitive strategies are critical elements of the situation analysis.
Marketing Planning Marketing planning is, of course, a critical section of the report. As previously noted, it
includes three major elen1ents: marketing objectives, target markets, and the marketing mix.
Marketing Objectives
Marketing objectives are often stated in plans in terms of the percentage of particular o u t
co1nes tl1at are to be achieved: for example, 80 percent awareness of tl1e brand in particular 1narkets, increase in tiial rate by 30 percent, distribution coverage of 60 percent, or increase in
Understanding an industry and the actions of competitors is critical to developing successful marketing plans. Here is a list of some questions to consider when performing competitive analysis. Thinking about these questions can aid the marketing planner in developing better marketing strategies.
1. Which firms compete in this industry and what is their financial position and marketing capability?
2. What are the relative market shares of various brands?
3. How many brands and models does each firm offer?
4. What marketing strategies have the market leaders employed?
5. Which brands have gained and which have lost market share in recent years, and what factors have led to these changes?
6. Are new competitors likely to enter the market?
7. How quickly do competitive firms react to changes in the market?
8. From which firms or brands might we be able to take market share?
9. What are the particular strengths and weaknesses of competitors in the industry?
10. How do we compare with other firms in the industry in terms of financial strength and marketing skills?
total market share by 3 percent over the life of the plan. Similarly, objectives may be stated
in terms of sales units or dollars or increases in these. Of course, the reasons for selection of
the particular objectives and rationale are important points to explain.
Target Markets
The ta.rget markets discussion explains the customer base and rationale or justification for
it. An approach to developing appropriate target 1narkets is contained in Chapter 5 of this
text.
This section also includes relevant discussion of changes or important issues in consumer
or organizational buyer behavior: for example, what benefits consumers are seeking in this
products class, what benefits does the particular brand offer, or what purchasing trends are
shaping the market for this product. Discussions of consumer and organizational buyer
behavior are contained in Chapters 3 and 4 of this text.
Marketing Mix
T11e marketing mix discussion explains ir1 detail the selected strategy consisting of product,
promotion, distribution and price, and tl1e rationale for it. Also, if marketing research has
been done on these elements or is planned, it can be discussed in this section.
Product The product section details a description of the product or brand, its packaging,
and its attributes. Product life-cycle considerations should be mentioned if they affect the
proposed plan.
Of critical i1nportance in this discussion is the competitive advantage of the product or
brand. Here it must be carefully considered whetl1er the bra11d really does anything better
than the competition or is purchased primarily on the basis of brand equity or value. For
example, many brands of toothpaste have fluoride, yet Crest has the largest 1narket share
primarily tl1rough promoting this attribute of its brand. Thus, does Crest do anything more than other toothpastes, or is it Crest's in1age that accounts for sales?
Discussion of product-related issues is contained in Chapters 6 and 7, and services are
discussed in Chapter 12 of this text. For discussion of marketing plans for products mar
keted globally, see Chapter 13. 243
24d Section IV Developing 1\tfarketing Plans
Promotion The promotion discussion consists of a description and justification of the
planned promotion mix. It is useful to explain the theme of the promotion and to include
so1ne examples of potential ads as well as the nature of the sales force if one is to be used.
For mass-n1arketed consumer goods, promotion costs can be large and need to be consid
ered explicitly in the marketing plan.
Discussion of promotion-related issues is contained in Chapters 8 and 9 of this text. Secondary sources, sucl1 as Standard Rate and Data, Simmoris Media/Market Service,
Starch Advertising Readership Service, a.nd the Nielsen Television ln.dex, provide useful
information for selecting, budgeting, and justifying media and other promotional decisions.
Distribution The distribution discussion desc1ibes and justifies the appropriate channel
or channels for the product. This includes types of intermediaries and specifically wl10
tl1ey will be. Otl1er important issues co11cem tl1e level of market coverage desired, cost, and
control considerations. In many cases, the cl1annels of dist1ibution used by the firm, as well
as competitive firms, are well established. For example, General Motors and Ford dist1ibute
their automobiles through independent dealer networks. Thus, unless there is a compelling
reason to change channels, the traditional channel will often be the appropriate alternative.
However, serious consideration may have to be given to metl1ods of obtaining channel
support, for example, trade deals t o obtain sufficient shelf space.
Discussion of distribution -related issues is contained i n Chapter 10 of this text. Useful
retail distribution information can be foLtnd in the Nielsen Retail Index and the Audits and Surveys Natic,nal Total-Market T,idex.
Price The pricing discussion starts witl1 a specific statement of the price of the prod
uct. Depe11ding on what type of channel is used, manufacturer price, wholesale price, and
suggested retail price need to be listed and justified. In addition, special deals or trade dis
counts that are to be employed must be considered in terms of their effect on the firm's selling
p11ce.
Discussion of price-related issues is contained in Cl1apter 11. In addition to a variety of
other useful information, the Nielsen Retail Index provides information on wholesale and
retail prices.
Marketing Research For any aspect of marketing planning, there may be a need for
marketing research. If such research is to be performed, it i s important to justify it and
exp]ain its costs and benefits. Such costs should also be included in the financial analysis.
If marketing research has already been conducted as part of the 1narketing plan, i t can be
reported as needed to justify various decisions that were reached. To illustrate, if research
found that two out of three consL1mers like the taste of a new fo1mula Coke, this informa
tion woLtld likely be included in the product portion of the report. However, the details of
the research couJd be placed here in the 1narketing research section. Discussion of n1arket
ing research is contained in Chapter 2.
Implementation and Control of the Marketing Plan This section contains a discussion and justification of how the marketing plan will be
i111ple111ented and controlled. It also explains who will be in charge of monitoring and
changing the pla11 should unanticipated events occur and how the success or failure of the
plan will be rneasured. Success or failure of the plan is typically measured by a comparison
of the results of implementing the plan with the stated objectives.
For a marketi11g plan developed within an ongoing firn1, this section can be quite
explicit, because procedures for implementing plans tnay be well established. However,
for a classroom project, the key issues to be considered are the persons responsible for
imple1nenting the plan, a timetable for sequencing the tasks, and a method of meast1ring
and evalLtating the success or failLtre of the plan.
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For the direction-setting purpose of objectives to be fulfilled, objectives need to meet five specifications:
1. An objective should relate to a single, specific topic. (It should not be stated in the form of a vague abstraction or a pious platitude "we want to be a leader in our industry" or "our objective i s to be more aggressive marketers.")
2. An objective should relate to a result, not to an activity to be performed. (The objective is the result of the activity, not the performance of the activity.)
3. An objective should be measurable (stated in quantitative terms whenever feasible). 4. An objective should contain a time deadline for its achievement.
5. An objective should be challenging but achievable.
Consider the following examples:
1. Poor: Our objective is to maximize profits. Remarks: How much is "maximum"? The statement i s not subject to measurement.
What criterion or yardstick will management use to determine if and when actual profits are equal to maximum profits? No deadline is specified.
Better: Our total profit target in 2016 is $1 million.
2. Poor: Our objective is to increase sales revenue and unit volume. Remarks: How much? Also, because the statement relates to two topics, it may be
inconsistent. Increasing unit volume may require a price cut, and if demand is price inelastic, sales revenu.e would fall as unit volume rises. No time frame for achievement is indicated.
Better: Our objective this calendar year is to increase sales revenues from $30 million to $35 million; we expect this to be accomplished by selling 1 million units at an average price of $35.
3. Poor: Our objective in 2016 is to boost advertising expenditures by 15 percent. Remarks: Advertising is an activity, not a result. The advertising objective should be
stated in terms of what result the extra advertising is intended to produce. Better: Our objective is to boost our market share from 8 percent to 1 0 percent in
2016 with the help of a 15 percent increase in advertising expenditures.
4. Poor: Our objective is to be a pioneer in research and development and to be the technological leader in the industry.
Remarks: Very sweeping and perhaps overly ambitious; implies trying to march in too many directions at once if the industry is one with a wide range of technological frontiers. More a platitude than an action commitment to a specific result.
Better: During the 2010-2020 decade, our objective is to continue as a leader in introducing new technologies and new devices that will allow buyers of electrically powered equipment to conserve on electric energy usage.
5. Poor: Our objective is to be the most profitable company in our industry. Remarks: Not specific enough by what measures of profit-total dollars, or earnings
per share, o r unit profit margin, or return on equity investment, or all of these? Also, because the objective concerns how well other companies will perform, the objective, while challenging, may not be achievable.
Better: We will strive to remain atop the industry in terms of rate of return on equity investment by earning a 25 percent after-tax return o n equity investment in 2016.
245
MARKET.ING INSIGHT .So111e Questions' to Consider • • •
- • . • • • I • •
246
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Knowledge of consumers is paramount to developing successful marketing plans. Here is a list of questions that are useful to consider when analyzing consumers. For some of the questions, secondary sources of information or primary marketing research can be employed t o aid in decision making. However, a number of them require the analyst to do some serious thinking about the relationship between brands of the product and various consumer groups to better understand the market.
1. How many people purchase and use this product in general?
2. How many people purchase and use each brand of the product?
3. Is there an opportunity t o reach nonusers of the product with a unique marketing strategy?
4. What does the product do for consumers functionally and how does this vary by brand?
5. What does the product do for consumers in a social or psychological sense and how does this vary by brand?
6. Where do consumers currently purchase various brands of the product-what stores or websites?
7. How much are consumers willing t o pay for specific brands and is price a determining factor for purchase?
8. What is the market profile of the heavy user of this product and what percentage of the total market are heavy users?
9. What media reach these consumers?
10. On average, how often is this product purchased?
11. How important is brand equity for consumers of this product?
12. Why do consumers purchase particular brands?
13. How brand loyal are consumers of this product?
Summary This su.mmary need not be much different than the executive summary stated at the begin-
11.ing of the document. However, it is usually a bit longer, 1nore detailed, and states 1nore fully tl1e case for financing t11e plan.
Appendix-Financial Analysis Financial anal)1sis is a very important part of any marketing plan. While a complete busi ness plan often includes extensive financial analysis, such as a complete cost breakdown
and estimated return 011 investment, marketing planners frequently do not have complete
accounting data for computing these figures. For example, decisions concerning how much
overhead is to be apportioned to the product are not usually made solely by marketing
personnel. However, the 1narketing plan should contain at least a sales forecast and estiJ11ates
of relevant 1narketing costs.
Sales Forecast
As noted, there are a variety of ways to develop sales forecasts. Regardless of the method,
however, they all involve trying to predict the futtire as accurately as possible. It is, of
course, necessary to justify the logic for the forecasted figures, rather than offer them with no support.
One basic approach to developing a sales forecast is outlined in Figure 2. This approach
begins by estimating the total number of persons in the selected target market. This esti
mate comes from tl1e market segmentation analysis and may include information fT01n test
FIGURE 2
A Basic Approach to
Sales Forecasting
Total number of people in target markets (a)
Annual number of purchases per person (b)
Total potential market (c)
Total potential market (c)
Percent of total market coverage (d)
Total available market (e)
Total available market (e)
Expected market share (f)
Sales forecast (in units) (g)
Sales forecast (in units) (g)
Price (h)
Sales forecast (in dollars)(i)
Section IV Developing Marketing Plans 247
a
X b
= C
C
X d
= e
e
X f
- g
g X h -
I
marketing and from secondary sources, such as Statistical Abstracts of tlie United States.
For example, suppose a company is marketing a solar-powered watch that is designed not only to tell time but also to take the pulse of the wearer. The product is targeted at joggers
and others interested in aerobic exercise. By reviewing the literature on these activities, the marketing planner, John Murphy, finds that the average estimate of this market on a national level is 60 million persons and is growing by 4 million persons per year. Thus,
John might conclude tl1at the total nt1mber of people in the target market for next year i s
64 million. If l1e has not further limited the product's target market and has no other informa tion, John might use this 11umber as a basis for starti11g the forecast analysis.
The second esti1nate Jol1n needs is the annual number of purchases per person in the
product's target n1arket. This estimate could be quite large for such products as breakfast cereal or less than one (annttal purchase per person) for such products as automobiles. For watches, the estimate is likely to be much less than one since people are likely to buy a new watch only every few years. Thus, John migl1t estimate the annual number of
purchases per person i n the target market to be 0.25. Of course, as a careful marketing
planner, John would probably carefully research this market to refine this estimate. I n any event, multiplying these two nttmbers gives John an estimate of the total potential ,narket, in this case, 64 million times 0.25 equals 16 million. In other words, if next year alone John's
company could sell a watch t o every jogger or aerobic exerciser who is buying a \.Vatch, the
company could expect sales to be 16 million units.
Of course, the fum cannot expect to sell every jogger a watch for several reasons. First, it is unlike]y to obtain 100 percent market coverage in the first year, if ever. Even 1najor consumer
goods companies selling co11venie11ce goods seldo1n reach the entire market in the frrst year and
many never achieve even 90 percent distribution. Given the nature of the product and depend ing o n the distribution alte111ati ve, John's company might be doing quite well to average 50 percent
market coverage in the first year. If John's plans call for this kind of coverage, his estimate of the total available market would be 16 million titnes 0.5, which equals 8 million.
A second reason John's plans would not call for dominating the market is that his com
pany does not have the only product available or wanted by this target market. Many of the people who will purchase such a watch will pttrchase a competitive brand. He must, therefore, esti1nate the product's likely n1arket share. Of all tl1e estimates made in developing a sales fore cast, this one is critical because it is a reflection of the entire marketing plan. Important factors
to consider in developing this estimate include (1) competitive market shares and likely market ing strategies; (2) competitive retaliation should the product do well; (3) competitive advantage of the product, suc]1 as lower price; (4) promotion nlix and budget relative to competitors; and (5) market sl1ares obtained by similar products in the introductory year.
MARKETING INSIGHT .Some o:uesti.ons, to Consid:er
248
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Here is a brief list of questions about the marketing planning section of the report. Answering them honestly and recognizing both the strengths and weaknesses of the marketing plan should help to improve it.
1. What key assumptions were made in developing the marketing plan?
2. How badly will the product's market position be hurt if these assumptions turn out to be incorrect?
3. How good is the marketing research?
4. Is the marketing plan consistent? For example, if the plan is to seek a prestig.e position in the market, is the product priced, promoted, and distributed to create this image?
5. Is the marketing plan feasible? For example, are the financial and other resources (such as a distribution network) available to implement it?
6. How will the marketing plan affect profits and market share, and is it consistent with corporate objectives?
7. Will implementing the marketing plan result in competitive retaliation that will end up hurting the firm?
8. Is the marketing mix designed to reach and attract new customers o r increase usage among existing users or both?
9. Will the marketing mix help to develop brand-loyal consumers?
10. Will the marketing plan not only be successful in the short run but also contribute to a profitable long-run position?
Overall, suppose John estimates the product's 1narket share to be 5 percent, because
other competitive products have beat his company to the market and because the com
pany's competitive advantage is only a slightly more stylish watch. In this case, the sales
forecast for year one would be 8 million times 0.05, which equals 400,000 units. If the
manufactur er's selling price was $50, then the sales forecast in dollars would be 400,000
times $50, whicl1 equals $20 million.
This approach can also be t1sed to extend the sales forecast for any number of years.
Typically, estimates of most of the figures change from year to year, depending on
cl1anges in market size, distribution coverage, and expected 1nark.et sl1ares. The value of
this approach is that it forces an analyst to carefully consider and justify each of the esti
mates offered, rather than simply pulling numbers out of the air.
Estimates of Marketing Costs
A complete delineation of all costs, apportionment of overhead, and other accounting tasks
are usually perfo1med b y other depa1t1nents witl1in a fi1m. All of this information, including
expected return on invest1nent from i1nplementing the marketing plan, is part of the overall
business plan.
However, the marketing plan should at least contain estimates of major marketing costs.
These include such things as advertising, sales force training and compensation, channel develop111ent, and marketing research. Estimates may also be included for product development
and package design.
For some marketing costs, reasonable estin1ates are available from sources such as
Standard Rate and Data. However, some cost figures, such as marketing research, might be
obtained from asking various marketing experts for the estimated price of proposed research.
MARKETING, INSIGHT Som.e _Q:uest_ions to .Consider- . . - . .
SUMMARY
. . - . . . .
; Fri1· ':I' rrnl, · ·l e�,rn1 e @ t ait i Ol i
l' a m d I c·o· mt ri o I
Implementation and control of a marketing plan require careful scheduling and attention to detail. While some firms have standard procedures for dealing with many of the ques tions raised here, thinking through each of the questions should help improve the effi ciency of even these firms in this stage of the process.
1. Who is responsible for implementing and controlling the marketing plan?
2. What tasks must be performed to implement the marketing plan?
3. What are the deadlines for implementing the various tasks and how critical are specific deadlines?
4. Has sufficient time been scheduled to implement the various tasks?
5. How long will it take to get the planned market coverage?
6. How will the success or failure of the plan be determined?
7. How long will it take to get the desired results from the plan?
8. How long will the plan be in effect before changes will be made to improve it based on more current information?
9. If an ad agency or other firms are involved in implementing the plan, how much responsibility and authority will they have?
10. How frequently will the progress of the plan be monitored?
Other types of marketing costs might be estimated from financial statements of firms in the
industry. For exa1nple, Morris's Annual Statement Studies offers percentage breakdow11s of
various inco1ne stateme11t info1mation by industry. These might be used to esti1nate the p e r
centage of the sales-forecast figure that would likely be spent in a particular cost catego1y.
References
T11e references section contains the sources of any secondary information tl1at was used
in developing the marketing plan. This information might include company reports a.nd
memos, statements of company objectives, and articles or books used for information or
support of the marketing plan.
References should be listed alphabetically using a consistent format. One way of prepar
ing references is to use the same approach as is used in marketing journals. For example, the
format used for references in Journal o_f Marketing articles is usually acceptable.
Suppose you're now sitting at your desk faced with the task of developing a marketing
plan for a new product .. Do you believe that you might have the skills to develop a market
ing plan? Of course, your ability to develop a quality plan will depend on your learning
experiences during your course work and the amount of practice you've had; for example,
if you developed a promotion plan in your advertising course, it is likely that you could do
a better job on the promotion phase of the marketing plan. Similarly, your experiences in analyzing cases should have sharpened your skills at recognizing problems and developing
solutions to them. But inexperience (or expe1ience) aside, hopefully you now feel that you
understand the process of developing a marketing plan. You at least know where to start,
where to seek information, l1ow to structure the plan, and some of the critical issues that require analysis.
249
250 Section IV Developing 1\tfarketing Plans
Additional
Resources
Cohen, William A. The Marketing Plan. 5th ed. New York: John Wiley & Sons, 2006.
Cravens, David W., and Nigel F. Piercy, Strategic Marketin.g. 10th ed. Bu1r Ridge, IL: McGraw-Hill
Education, 2013.
Hiebing, Romon G., and Scott W. Cooper. TJie Successful Marketing Plan. Burr Ridge, IL:
McGraw-Hill, 2003.
Hiebing, Ro1nan G., and Scott W. Cooper. The One-Day Marketing Plan: Organizing and
Completing a Plan That Works. 3rd ed. Bun· Ridge, IL: McGraw-Hill, 2004.
Kerin, Roger A., Steven W. Hartley, and Willia1n Rudelius. Marketing. 11th ed. Bu11· Ridge, IL:
McGraw-Hill, 2013.
Leh1nann, Donald R., and Russell S. Winer. Analysis for Marketing Planning. 7th ed. Burr Ridge,
IL: McGraw-Hill, 2008.
Walker, Orville C., John Mullins, and Harper W. Boyd, Jr. Marketing Strategy: A Decision
Focused Approach. 7th ed. Burr Ridge, IL: McGraw-Hill, 20 I I.
Wood, Marian Blrrk. Marketin.g Plan Handbook. Upper Saddle River, NJ: Prentice Hall, 2011.
Chapter 1
1. Approved by the Anterican Marketing Association, 2007.
2. Much of this section is based on J. H . Donnelly Jr.,
J. L. Gibson, and J.M. Ivancevich, Funda1ne11tals
of.Management, 9th ed. (Burr Ridge, IL: Irwin/
McGraw-Hill, 1998), chap. 7.
3. The process may differ depending on the type of
organization or management approach, o r both. For
certain types of organizations, one strategic plan will
be sufficient. Some mantd'acturers with similar prod
uct lines or limited product lines will develop only one
strategic plan. However, organizations with widely
diversified product lines and widely diversified mar
kets may develop strategic plans for units or divisio11s.
These plans usually are combined into a master strate
gic plan.
4. Philip Kotler and Kevin Keller, Marketing Manage
ment, 14th ed. (Englewood Cliffs, NJ: Prentice Hall,
2014), chap 3.
5. Peter Drucker, Management: Tasks, Responsibilities,
Practices (New York: Harper & Row, 1974), pp. 77-89.
6. Much of the following discussio11 is based on Drucker,
Management, pp. 79-87.
7. Originally discussed in the classic H . Igor Ansofl',
Co1porate Strategy (New York: McGraw-Hill, 1965).
8. For complete coverage of this topic, see Michael E.
Porter, Competitive Advantage: Creating and Sustaining
Superior Performance (New York: Free Press, 1985).
9. For a complete discussion of this topic, see Michael
Treacy an.d Fred Wiersema, The Discipline of Market
Leaders (Reading, MA: Addison-Wesley, 1995); and
Michael 1'reacy and Fred Wiersema, "How Market
Leaders Keep Their Edge," Fortu11e, February 6, 1995,
pp. 88-98.
10. Kotler and Keller, 1l.farketing Mant,gement, chap. 1.
11. George S. Day and David B. Montgomery, ''Diagnos
ing the Experience Curve," Journal of Marketing, Spring
1983, pp. 44-58.
12. P. Rajan Varadarajan, Terry Clark, and William M.
Pride, ''Controlling the Uncontrollable: Managing Your
Market Environment," Sloan Management Review,
Winter 1992, pp. 39-47.
13. Reed E. Nelson, "Is There Strategy in Brazil?" Busi
ness Horizons, July-August 1992, pp. 15-23.
14. Peter S. Davis and Patrick L. Schill, "Addressing
the Contingent Effects of Bt1siness Unit Strategic
Orientation on the Relationship between Organizational
Context and Business Unit Performance," Journal of
Business Research, 1993, pp. 183-200.
15. J. Scott Armstrong and Roderick J. Brodie, "Effects
of Portfolio Planning Methods on Decision Making:
Experimental Results," International Journal of
Research in Marketing, January 1994, pp. 73-84.
16. Michel Roberts, "Times Change but Do Business
Strategies?" Journal oj'Business Strategy, March-April
1993, pp. 12-15.
17. Donald L. McCabe and V. K . Narayanan,
"The Life Cycle of the PIMS and BCG Models,"
Industrial Marketing Management, November 1991, pp. 347-352.
Chapter 2
1. Based on Peter D. Bennett, ed., Dictionary of· Market
ing Terms, 2nd ed. (Chicago: American Marketing Asso
ciation, 1995), p. 77.
2. For a discussion of some ge11eral problems in market
ing research, see Alan G. Sawyer and J. Paul Peter, "The
Significance of Statistical Significance Testing in Mar
keting Research," Journal of Marketing Researcli, May
1983,pp. 122-133.
3. This section is based on Gilbert A. Churchill Jr. and
J. Paul Peter, Marketing: Creating Value for Customers,
2nd ed. (Burr Ridge, IL: McGraw-Hill/Irwin, 1998),
pp. 114-116.
Chapter 3
1. Richard P. Coleman, "The Continuing Significance
of Social Class to Marketing," Journal of· Co,isumer
Research, December 1983, pp. 265-180.
2. See William 0. Bearden and Michael J. Etzel, "Refer
ence Group Influence on Product and Brand Purchase
Decisions," Journal of' Consumer Research, September
1982, pp. 183-194; and Terry L. Childers and Akshay R .
Rao, "The Influence of Familial and Peer-Based Refer
ence Groups on Consumer Decisions,'' Journal of Con
sumer Research, September 1992, pp. 198-211.
3. See Rosann L. Spiro, "Persuasion in Family Decision
Making," Joitrnal of Consumer Researclz, March 1983,
pp. 393-402.
4. See Janet Wagner and Sherman Hanna, "The Effec
tiveness of Family Life Cycle Variables in Consumer
Expenditure Research," Journal of Consumer Research,
251
252 Chapter Notes
December 1983, pp. 281-291. Also see Charles M.
Schanninger and William D. Danko, "A Conceptual and
Empirical Comparison of Alternative Household Life
Cycle Models," Jour,zal of Co1zsu1ner Research, March
1993, pp. 580-594.
5. Russell W. Belk, "Situational Variables a11d Con
sun1e1· Behavior,'' Journal of Cons1,mer Research,
December 1975, pp. 156-164. Also see Jacob Hornik,
"Situational Effects on the Consumption o f Time,"
Journal of Marketing, Fall 1982, pp. 44-55; C. Whan
Park, Easwer S. Iyer, and Daniel C. Smith, "The
Effects of Situational Factors on In-Store Grocery
Shopping Behavior: The Role of Store Environment
and Time Available for Shoppi11g," Journal of Con
sumer Research, March 1989, pp. 422-433; a11d Mary
Jo Bitner, "Servicescapes: 'fhe I1npact of Physical Sur
roundings on Customers and Employees," Journal of
Marketi,ig, April 1992, pp. 57-71.
6. J. Paul Peter and Jerry C. Olson, Consumer Beliav
ior and Marketin.g Strategy, 7th ed. (Burr Ridge, IL:
McGraw-Hill/Irwin, 2005), chap. 4.
7. A.H. Maslow, Motivation and Personality (New York:
Harper & Row, 1954); also see James F. Engel, Roger
D. Blackwell, and Paul W. Miniard, Consumer Behavior,
8th ed. (Fort Worth, TX: Dryden Press, 1995), chap. 5,
for further discussion of need recognition.
8. For a detailed review of research on external search,
see Sharon E. Beatty and Scott M. Smith, "External
Search Effort: An Investigation across Several Product
Categories," Journal of Consumer Research, June 1987,
pp. 83-95. Also see Narasimhan Srinivasan and Brian T.
Ratchford, ''An En1pirical Test of a Model of External
Search for Automobiles," Journal of Con.su,ner Research,
September 1991, pp. 233-242; and Julie L. Ozanne, Mer
rie Brtacks, and Dhrtav Grewal, "A Study of Informa
tion Search Behavior during the Categorization of New
Products,'' Joi,rnal of' Consumer Research, March 1992,
pp. 452-463.
9. For further discussion of information processing, see
J. Paul Peter and Jerry C. Olson, Consumer Behavior
and Marketing Strategy, 8th ed. (Burr Ridge, IL:
McGraw-Hill, 2008), chap. 3.
10. For a summary of research on attitude modeling, see
Blair H. Sheppard, Jo11 Hart'\-vick, and Paul R. Warsl1aw,
"The Theory of Reasoned Action: A Meta-Analysis of
Past Research ,vith Recommendations for Modification
and Future Research," Journal of· Consumer Researcli,
December 1988, pp. 325-343.
11. For further discussion of postpurchase feelings,
see Richard L. Oliver, "Cognitive, Affective, and Attri
bute Bases of the Satisfaction Response," Journal of
Consumer Research, December 1993, pp. 418-430; and
Haim Mano and Richard L. Oliver, "Assessing the
Dimensionality and Structure of the Consumption Expe
rience: Evaluation, Feeling, and Satisfaction," Journal o.f
Consumer Research, December 1993, pp. 451-466.
Chapter 4
1. This discussion is based on Gilbert A. Churchill Jr.
and J. Paul Peter, Marketing: Creating Vali,e for Custom
ers, 2nd ed. (Burr Ridge, IL: Irwin/McGraw-Hill, 1998),
pp. 182-184. Also see Michele D. Bunn, "Taxonomy of
Buying Decision Approaches,'' Journal of Marketing,
January 1993, pp. 38-56.
2. This discussion is based on Eric N. Berkowitz, Roger
A. Kerin, Steven W. Hartley, and William Rudelius,
Marketing, 8th ed. (Burr Ridge, IL: McGraw-Hill/Irwin,
2006), p. 157.
3. For research on influence strategies in organizational
buying, see Gary L. Frazier and Raymond Rody, "The
Use of Influence Strategies in Interfirm Relationships
in Industrial Product Channels," Journal of Marketing,
January 1991, pp. 52-69; and Julia M. Bristor, ''Influence
Strategies in Organizational Buyil1g," Journal of Business
to-Business Marketing, 1993, pp. 63-98.
4. For research on the role of organizational climate in
industrial bt1ying, see William J. Qualls and Christopher
P. Puto, "Organizational Climate and Decision Framing:
An Integrated Approach to Analyzing Industrial Buying
Decisions," Journal of Marketi,ig Research, May 1989,
pp. 179-192.
Chapter 5
1. Russell I. Haley, "Benefit Segmentation:
A Decision-Oriented Research Tool," Journal of· Mar
keting, July 1968, pp. 30-35; Russell I. Haley, ''Benefit
Segmentation-20 Years Later," Jour,ial o,f Consumer
Marketing, 1983, pp. 5-13; and Russell I. Haley,
"Benefit Segments: Back,vards and For,vards,"
Journal of Advertising Research, February-March
1984, pp. 19-25.
2. Roger J. Cala11tone and Alan G. Sawyer, "The Stabil
ity of Benefit Seginents,'' Joi,rnal o.f Marketing Research,
August 1978, pp. 395-404; also see James R. Merrill and
William A. Weeks, ''Predicting and Identifying Benefit
Segments in the Elderly Market," in AMA Educator's
Proceedings, eds. Patrick Murphy et al. (Chicago: Amer
ican Marketing Association, 1983), pp. 399-403; Wagner
A. Kamakura, "A Least Squares Procedure for Benefit
Segmentation \vith Conjoint Experiments," Journal of
1W.arketing Research, May 1988, pp. 157-167; and Michel
Wedel and Ja11-Benedict E. M. Steenkamp, "A Cluster
wise Regression Method for Simultaneous Fuzzy l\tlarket
Structuring and Benefit Segmentation," Journal of 1\tlar
keting Research, November 1991, pp. 385-396.
3. John L. Lastovicka, Joh11 P. Murry Jr., and Eric
Joachi1nsthaler, ''Evaluating the Measurement Valid
ity of Lifestyle Typologies with Qualitative Measures
and Multiplicative Factoring," Journal of Marketing
Research, February 1990, pp. 11-23.
4. This discussion is taken from J. Paul Peter and
Jerry C. Olso11, Consumer Behavior and Marketing
Strategy, 8th ed. (Burr Ridge, IL: McGraw-Hill/Irwin,
2008), pp. 373-375.
5. Ibid, pp. 379-381.
6. See Al Ries and Jack Trout, Positioning: The Battle
for Your Mind (New York: Warner Books, 1981); and
Al Ries and Jack Trout, Marketing Warfare (New York:
McGra,v-Hill, 1986).
Chapter 6
1. For a discussion on this topic, see Andrew J. Berg
man, "What the Marketing Professional Needs to Kno,v
about ISO 9000 Series Registration," Industrial Market
i,ig Management, 1994, pp. 367-70.
2. The material for this section comes from Glenn L.
Urban and Steven H. Star, Advanced Marketing Strategy
(Englewood Cliffs, NJ: Prentice Hall, 1991), chap. 16.
3. Peter D. Bennett, ed., Dictionary of Marketing Terms,
2nd ed. (Chicago: American Marketing Association,
1995), p. 27.
4. David A. Aaker and Kevin Lane Keller, "Consumer
Evaluations of Brand Extensions,'' Journal of Marketi,ig,
January 1990, pp. 27-41.
5. Ibid.
6. For a detailed discussion of brand equity, see David
Aaker, Managing Brand Equity (New York and London:
Free Press, 1991).
7. For a complete discussion of this topic, see Geoffrey
L. Gordon, Roger J. Calantone, and C. A. DiBenedetto, "Brand Equity in the Business-to-Business Sector: An
Exploratory Study," Journal of Product & Brand Man
agen-ient, 1993, pp. 4 -16.
8. Thomas Hine, "Why We Buy," Worth, May 1995,
pp. 80-83.
9. For a discussion of problems related to this issue,
see Geoffrey L. Gordon, Roger J. Calantone, and C.
Anthony DiBenedetto, "Mature l\tlarkets and Revitaliza
tion Strategies: An American Fable," Business Horizons,
May-June 1991, pp. 39-50.
10. Barry L. Bayus, "Are Product Life Cycles Really
Getting Shorter?" Jour,ial of Product Innovation Man
agement, September 1994, pp. 300-308.
11. The discussion on benchmarking is based on Stanley
Brown, ''Don't Innovate Imitate," Sales & Market-
ing Ma,zagement, January 1995, pp. 24-25; Charles
Chapter Notes 253
Goldwasser, "Benchmarking: People Make the Process,"
1l1.anagement Review, June 1995, pp. 39-43; and
L. S. Pryor and S. J. Katz, "How Benchmarking Goes
Wrong (and How to Do It Right)," Pla1ini11g Review,
January-Febrttary 1993, pp. 6-14.
Chapter 7
1. Zina Mouhkheiber, "Oversleeping," Forbes, June 15,
1995, pp. 78-79.
2. See C. Merle Crawford and Anthony Di Benedetto,
Ne}v Products Management, 10th ed. (Burr Ridge, IL:
McGraw-HilVIrwin 2011), p. 14.
3. H. Igor Ansoff, Corporate Strategy (New York:
McGraw-Hill, 1965), pp. 109-11().
4. Richard Stroup, "Growing in a Crowded Market
Requires Old and New Strategies," Brandweek, August
22, 1994, p. 19.
5. These two examples came from Justin Martin, "Ignore
Your Customers," Fortune, May 1, 1995, pp. 121-126.
6. The discussion on risk is from Thomas D . Kuczmar
ski and Arthur G. Middlebrooks, "Innovation Risk and
Reward," Sales & Marketi11g Manage111e11t, February
1993, pp. 44-51.
7. For a detailed discussion on these stages, see Karl
'f. Ulrich and Steven D. Eppinger, Product Design and
Developme,it (New York: McGraw-Hill, 1995); and Glen
Rifken, "Prodt1ct Development: Emphatic Design Helps
Understand Users Better/' Harvard Business Review,
March-April 1994, pp. 10-11.
8. For a discussion of this issue, see Christina Brown and
James LattiI1, ''Investigating the Relatio11ship between
Time in Market and Pioneering Advantage," Manage-
11zent Scie,zce, October 1994, pp. 1361-1369; Robin
Peterson, "Forecasting for New Product Introduction/'
Joz,rnal of Business Forecasting, Fall 1994, pp. 21-23;
and Tracy Carlson, "The Race Is On," Brandweek, May
9, 1994, pp. 22-27.
9. For a discussion of reasons why products fail, see
Betsy Spellman, "Big Talk, Little Dollars," Bra,zdweek,
January 23, 1995, pp. 21-29.
Chapter 8
1. This discussion is adapted from material contained
in Gilbert A. Churchill Jr. and J. Paul Peter, Marketing:
Creating Value for Custoniers, 2nd ed. (Burr Ridge, IL:
McGraw-HilVIrwin, 1998), chap. 18.
2. William F. Arens, Michael F. Weigold, and Christian
Arens, Contemporary Advertising, 14th ed. (Burr Ridge,
IL: McGraw-Hill, 2013), chap 8.
3. See George E . Belch and l\tlichael A. Belch, Advertis
ing and Promotion, 9th ed. (Burr Ridge, IL: McGraw
Hill, 2012), chap. 10.
254 Chapter Notes
4. For a fuller explanation of the pros and cons associ
ated with push marketing strategies, see Betsy Spellman,
"Trade Promotion Redefmed," Brandweek, March 13,
1995, pp. 25-34; and John McManus, '"Lost' Money
Redefmed as 'Found' Money Won't Connect the Discon
nects," Brandweek, March 25, 1995, p. 16.
5. Tltis discussio11 is based on Donald R. Glover,
"Distributor Attitudes toward Manufacturer-Sponsored
Promotions," Industrial Marketi,ig Management, August
1991,pp. 241-249.
6. See Dhruv Gre,val and Michael Levy, Marketing,
4th ed. (Burr Ridge, IL: McGraw-Hill, 2014), pp. 559-560.
Chapter 9
1. Material for this discussion came from Ronald B.
Marks, Personal Selling: Ati Interactive Approach, 5th ed.
(Boston, MA: Allyn and Bacon, 1994), pp. 12-13.
2. See Stephen S. Castleberry and John F. Ta1mer,
Selling: Bz,ilding Relationships, 8th ed. (Burr Ridge,
IL: McGraw-Hill, 2014), pp. 559-560.
3. Unless otherwise noted, the discussion on the rela
tionship-building process is based largely on material
contained in Barton A. Weitz, Stephen B. Castleberry,
and John F. Tanner Jr., Selling: Building Partnerships,
3rd ed. (Burr Ridge, IL: McGra,v-Hill/lrwin, 1998);
and Rolph Anderson, Essentials oj'Personal Selling: The
New Professio,ialism (Englewood Cliff's, NJ: Prentice
Hal1, 1995). For an in-depth discussion of this topic,
readers should consult these references.
4. Tl1e discussion of aftermarketing is based on tl1e work
of Terry Vavra, Aftermarketing: How to Keep Customers
for Life through Relationship Marketing (Burr Ridge, IL:
l\tlcGraw-Hill, 1995).
5. Ibid.
6. The discussion on national account management is
from James S. Boles, Bruce K. Pilling, and George W.
Good,vyn, "Revitalizing Your National Account Market
ing Program," Journal of Business & Industrial Market
ing, no. 1 (1994), pp. 24-33.
7. Based on a survey by the National Indt1strial Confer
ence Board: "Forecasting Sales," Studies in Business
Policy, no. 106.
Chapter 10
1. Peter D. Bennett, Diction.ary of Marketing Ter,ns,
2nd ed. (Chicago: American Marketing Association,
1995), p. 242.
2. For further discussion of relationship marketing,
see Jan B. Heide, "lnterorganizational Governance
in Marketing Channels," Journal of Marketing, Ja11u
ary 1994, pp. 71-85; Robert M. Morgan and Shelby D.
Hunt, "The Commitment-Trt1st Theory of Relationship
Marketing," Journ.al of Marketing, July 1994, pp. 20-38;
and Manohar U. Kalwani and Narakesari Narayandas,
"Long-Term Manufacturer-Supplier Relationsl1ips: D o
They Pay Off for the Supplier Firn1?'' Journal o f Mar
keting, January 1995, pp. 1-16.
3. This section is based on Donald J. Bowersox and M.
Bixby Cooper, Strategic Marketing Cliannel Manage
ment (New York: McGraw-Hill, 1992), pp. 104-107;
and Roger A. Kerin, Eric N . Berkowitz, Steven W.
Hartley, and William Rudelius, Marketing, 8th ed.
(Burr Ridge, IL: Irwin/McGraw-Hill, 2006), pp.
405-407.
4. This section is based on Gilbert A. Churchill Jr. and
J. Paul Peter, Marketing: Creating Value for Customers,
2nd ed. (Burr Ridge, IL: lrwin/1\ilcGraw-Hill, 1998),
pp. 392-398.
5. This classification is based on Michael Levy and
Barton A. Weitz, Retailing Managem.ent, 8th ed. (Burr
Ridge, IL: lrwin/McGra,v-Hill, 2012), p. 10.
6. Ibid., chap. 3.
7. Rachel Pasqua and Noah Elkin, Mobile Marketing
(Indianapolis: Joh11 Wiley and Sons, 2013), p. 234.
8. Dhruv Grewal and Michael Levy, Marketi11g, 4th ed.
(Burr Ridge, IL: McGraw-Hill, 2014), pp. 537-538.
Chapter 11
1. Kent B. Monroe, ''Buyers' St1bjective Perceptions of
Price," Journal of Marketing Research, February 1973,
pp. 70-80; also see Donald R. Lichtenstein and Scot
Burton, "The Relationship between Perceived and
Objective Price-Quality," Journal of Marketi,ig
Research, November 1989, pp. 429-443.
2. For research concerrnng the effects of price and
several other marketing variables o n perceived prod
uct quality, see Akshay R. Rao and Kent B. Monroe,
"The Effect of Price, Brand Name, and Store Name on
Buyers' Perceptions of Product Quality: An Integra
tive Review," Journal of 1\larketing Research, August
1989, pp. 351-357; a11d William B. Dodds, Kent B.
Monroe, and Dhruv Grewal, "Effects of Price, Brand,
and Store Evaluations on Buyers' Product Evalua
tions," Jour,ial of Marketing Research, August 1991,
pp. 307-319.
3. For further discussion of price elasticity, see Stephen
J. Hoch, Byung-Do Kim, Alan L. Montgomery, and Peter
Rosi, "Determinants of Store-Level Price Elasticity,"
Journal of Marketing Research, February 1995,
pp. 17-29.
4. For further discussion of legal issues involved in pric
ing, see Louis W. Stern and Thomas L. Eovaldi, Legal
Aspects of Marketing Strategy (Engle,vood Cliffs, NJ:
Prentice Hall, 1984), chap. 5.
5. For more detailed discussions, see Frederick E.
Webster, Marketing/or Managers (New York: Harper
& Row, 1974), pp. 178-179; also see Thomas T. Nagle
a11d Reed K. Holden, The Strategy and Tactics of Pricing
{Englewood Cliffs, NJ: Prentice Hall, 1995); and Kent
B. Monroe, Pricing: Maki,zg Profitable Decisio,zs, 3rd ed.
(Burr Ridge, IL: McGraw-Hill/Irwin, 2003).
Chapter 12
1. Much of the 1naterial for this introduction came from
Ronald Henk.off, "Service Is Everybody's Business,"
Fortune, June 27, 1994, pp. 48-60; and Tim R. Smith,
"The Tenth District's Expanding Service Sector," Eco
nomic Review, Third Quarter 1994, pp. 55-66.
2. Peter D. Ben11ett, ed., Dictionary of Marketing Terms,
2nd ed. (Chicago: America11 Marketing Associatio11,
1995), p. 261.
3. The material in this section draws from research
performed by Leonard L. Berry, Valerie A. Zeithaml,
and A. Parasuraman, "Quality Counts in Services, Too,"
Busi,iess Horizons, May-June 1985, pp. 44 52; A. Para
surama11, Valerie A. Zeithaml, and Leonard L. Berry, "A
Conceptual Model of Service Quality and Its Implications
for Future Research,'' Journal of Marketing, Fall 1985,
pp. 41-50; Leonard L. Berry,A. Parasuraman, and
Valerie A. Zeithaml, "The Service-Quality Puzzle," Busi
ness Horizons, September-October 1988, pp. 35-43; Ste
phen W. Brown and Teresa A. Swartz, "A Gap Analysis of
Professional Service Quality," Journal o,f Marketing, April
1989, pp. 92-98; Leonard L. Berry, Valerie A. Zeithaml,
and A. Parasuraman, "Five Imperatives for Improving
Service Quality," Sloa,z Management Review, Summer
1990, pp. 29-38; A. Parasuraman, Leonard L. Berry, and
Valerie A. Zeithaml, "Understanding Customer Expec
tations of Service;' Sloan Management Review, Spring
1991, pp. 39-48; and Leonard L. Berry, On Great Service:
A Framework for Action (Ne,v York: Free Press, 1995).
4. Rick Berry, "Defme Service Quality So You Can
Deliver It," Best's Review, March 1995, p. 68.
5. Material for this section is drawn from John T. Men
tzer, Carol C. Bienstock, and Ken11eth B. Kahn, ''Bench
marking Satisfaction," Marketing Management, Summer
1995, pp. 41-46; and Alan Dutka, AMA Ha,idbook for
Customer Satisfaction: A Complete Guule to Research,
Planning and Implementation (Lincolnwood, IL: NTC
Books, 1994). For detailed information on this topic,
readers are advised to consult these sources.
6. Much of the material for this section ,ivas taken from
Karl Albrecht and Ron Zemke, Service A,nerica (Burr
Ridge, IL: Irwin/McGraw-Hill, 1985); and Ron Zemke
and Dick Schaaf, The Service Edge 101: Co,npanies That
Profit from Custonier Care (New York: New American
Library, 1989).
7. Leonard L. Berry and A. Parasura1na11, ''Services
Marketing Starts from Within," Marketing Management,
Winter 1992, pp. 25-34.
Chapter Notes 255
8. Ibid.
9. Leonard L. Berry and A. Parasuran1an, "Prescriptions
for a Service Quality Revol11tion in America," Orga,iiza
tional Dyna,nics, Spring 1992, pp. 5-15.
10. 'fl1is example is from David E. Bowen and Edward
E. Lawler ID, "The Empo,ver1nent of Service Work
ers: What, Why, How, and When," Sloan Management
Review, Spring 1992, pp. 31-39.
Chapter 13
1. William J. Stanton, Michael J. Etzel, and Bruce J.
Walker, Fundamentals of Marketing, 13th ed. (Burr
Ridge, IL: McGraw-Hill/Irwin, 2004), p. 544.
2. Material for this section is from Craig Mellow, "Russia:
Making Cash from Chaos," Fortune, April 17, 1995,
pp.145-151; and Peter Galuszka, "And You 'fhink You've
Got Tax Problems," Business Week, May 29, 1995, p. 50.
3. Mir Magbool Alam Khan, "Enormity Tempts Mar
keters to Make a Passage to India," Advertising Age
International, May 15, 1995, p. 112.
4. The introductory material on foreign research is based
on Michael R. Czintoka, ''Take a Shortcut to Low-Cost
Global Research," Marketing News, March 13, 1995, p. 3.
5. Philip R. Cateora, Mary C. Gilly, and John L.
Graham, International Marketing, 16th ed. (Burr Ridge,
IL: McGraw-Hill, 2013), pp. 352-363.
6. Material in this section is based on Subhash C. Jain,
"Standardization of International Marketing Strategy:
Some Research Hypotheses," Journal of Marketing,
January 1989, pp. 70-79.
Section II
1. Michael E. Porter, Competitive Strategy (New York:
Free Press, 1980). Also see Michael E. Porter, Competi
tive Advantage: Creating a,id Sustai,iing Superior Per
forma,ice (New York: Free Press, 1985); and Michael
E. Porter, The Competitive Advantage of Nations (Ne,iv
York: Free Press, 1990).
Section Ill
1. For methods of estimating the cost of capital, see
Charles P. Jones, Introduction to Financial Manage,nent
(Burr Ridge, IL: McGraw-Hill/Ir,vin, 1992), cl1ap. 14.
2. See Eugene F. Brigham, Fundame,ztals oj'Financial
Management (Hinsdale, IL: Dryden Press, 1986).
3. It is useful to use average inventory ratl1er than a
single end-of-year estimate if monthly data are available.
4. For a discussion of ratio analysis for retailing, see
Michael Levy and Barton A. Weitz, Retailing Managenzent
(Burr Ridge, IL: McGra,v-HilVIrwin, 2007), chap. 5.
ame
A
Aaker, David A., 93, 228, 253
Abdela, Andre,v W., 23 Adamson, Allen P., 118
Albrecht, Karl, 255
Anderson, Erin, 170 Anderson, .Jan1es C., 7 I
Anderson, Rolph, 254
Angus, Brad, l I 8
Ansoff, H. Igor, 106,251,253
Arens, Christian, 13 l , 253 Arens, William F., 131, 253 Armstrong, J. Scott, 251
Ash, Mary Kay, 154
Austin, Robert D., 23
B
Babin, Barry J., 43 Bahl, Raghaw, 214
Bateson, John E.G., 169, 197 Bayus, Barry L., 253
Bearden, William 0., 5, 7, 37, 49, 108, 125,251
Beatty, Sharon E., 252
Belch, George E., 134, 136, 148, 253
Belch, Michael A., 134, 136, 148, 253
Belk, Russell W., 252 Bender, Michael A., I I 8 Bennett, Peter D., 157, 25 l , 253,254,255
Bergman, Andrew J., 253
Berkowitz, Eric N., 94,252,254
Berry, Leonard L .. 189, 191, 193,197,255 Berry, Rick, 255 Bienstock, Carol C., 255 Bitner, Mary Jo, 252
Biyalogorsky, Eyal, I 18
Blackwell, Roger D., 252
Block, Sandra. 50 Block. Stanley B .. 238 Blyalogorsky, Eyal, 117 Boles, Ja1nes S., 254
Bolton, Ruth N., 84
Boulding, Willia1n, 117, 118 Bowen, David E., 255 Bowersox, Donald J., 254
Boyd, Harper W., .Jr., 250
Brealey, Richard A., 238 Brennan. Ross, 7 I
Brigharn. Eugene F., 255
Bristor, Julia M., 252 Brodie, Roderick J., 251 Bro\vn. Christina, 253 Brown, Stanley, 253
Brown, Stephen W., 255
Brown, To1n J., 43 Brucks. Merie, 252 Bunkholder, Richard, 214
Bunn, Michele D., 252 Bums, Alvin C., 43 Burns, Brian C., 137
256
Burton, Scot, 254
Bush, Robert P., 35, 36, 43
Bush, Ronald, 43
C
Calantone, Roger J., 252,253
Calkins, Ti111, 103 Callaway, Ann, 197 Calla,vay, Joseph, 197
Canning, Louise E., 7 I Cannon, Joseph P., 5, 96, 132
Carlson, Tracy, 253 Castleberry, Stephen 8., 143, 144, 254 Cateora, Philip R., 121,200,207,209,255
Celsi, Mary Wolfinbarger, 35
Charan, Ram, 23 Childers, Terry L., 25 I
Christensen, Clayton M .. 23
Chuanping, Zhang, 214 Churchill, Gilben A., .Ir., 38, 43, l53, 251, 252,
253,254
Clark, Te1ry, 25 I
Cohen, Willia1n A., 250 Colen1an, Richard P., 251
Collier, l'vlarsha, 197 Cook,Scott,23 Cooper, Donald R., 42
Cooper, M. Bixby, 254
Cooper, Robert G., 108 Cooper, Scott W .. 250 Cooper-Martin, Elizabeth, 82
Coughlin, Anne T., 170
Cravens, David W., 39, I LO, 180,250
Crawford, C. Merle, 95, 106, l 13,114,208,253
Czintoka, Michael R., 255
Daniels, David, 137
Danielsen, Bartley, 238
Danko. Williatn D., 252 Davis, Peter S .. 251 Day, George S., 251
Del Prete. Dom, 207
Dent, Julian, 164
D
Di Benedetto, Anthony, 95, 106, l 13, 114,
208,253
Dickson. Peter R .. 84 Dietz, Bob. 214
.Dixit, Avinash K., 23
Dodds, William B., 254
Doerr, John E., I 97
Doo1eniquini, Jennifer, 117 Donahoe, John, 49 Donnelly, Jaines H., Jr., 191, 193,203,251 Doorley, John, 137 Dn1cker, Peter, l 0, 251
Dutka, Alan, 255
Dwyer, F. Robert, 63, 66, 71
E
El-Ansiu-y, Adel I., 170
Elkin, Noah, 170, 254 Ellet, William, 228
Engel, Ja,nes F., 252 Eovaldi, Tho1nas L., 254 Eppinger, Steven D., 253 Estrin, Judy, 118
Etzel, Michael J., 49, 90,251,255
Fang, Xiaoguang, 214 Fetterman, Mindy, 50
Ford, Neil M., 153
Fox, Vanessa, 137
F
Frazier, Gary L., 252 Freking, Kevin, 82 Friedman, George, 23 Friedman, Thomas L., 214
Fullerton, Sam, 197 Futrell, Charles M., 142, 151
G
Galuszka, Peter, 255 Gamble, John E., 10, 13,216,225,228
Garvin, David A .. 114 Geyskens, Inge, 214
Gibson, .James L., 203, 251 Giglierano, Joseph, 7 1 Gilly, Mary C., 121,200,207,209, 255 Ginter, Jan1es L., 84
Gladwell. Malco!Jn. 103 Glover, Donald R., 254 Goldon, John, 154 Goldv;asser, Charles, 253
Gonzalez, Gabriel R., I 54
Good,vyn, George \V .. 254
Gordon. Geoffrey L., 253 Graham, John L., 121,200,207,209,255 Grewal, Dhruv, 164, 252, 254
Guiltinan, Joseph, 134
H
Hair, Joseph F., Jr., 20, 35. 36, 43 Haley, Russell I., 252
Hall, Tandy, 23 Hanna. Sherman, 251
Hartley, Steven W .. 64. 67.94,117, 157,250. 252. 254
Hartwick, Jon, 252
Hawkins, Del I., 57, 58, 74, 124
Heide, Jan B., 254
Henkoff, Ronald, 255 Hiebing, Ron1an G., 250 Hine, Thomas, 253
Hirt, Geoffrey A., 238
I-loch, Stephen J., 254 I-Loffman, K. Douglas, 154, 169, 197 Hogan, John, 181 Holden, Reed K., 255
Honeycutt, Earl D., 70 1-lornik, Jacob, 252 Hoyer, Wayne D., 58 !-!uni, Shelby D., 254 Hunter, Gary K., 154
Hutt, Michael D., 71
I
Iacobucci, Dav.rn, 38, 43 Ingrain, Thon,as N., 5, 7 , 37, 108, 125, 153, 154 Jvancevich, John M., 203,251 Iyer, Easwer S., 252
J
Jain, Subhash C., 255 Janisch, John, 154 Jewell, Mark, 50 Joachimsthaler, Eric, 253 Johnston, Mark W., 67,228
Jones, Charles P., 255 Jordan, Bradford D., 238
K
Kahn, Kenneth B., 255 Kahvani, Manohar U., 254 Kamakura, \Vaguer A., 252 Kantinsky, PbjJip, 170 Kanuck, Leslie Lazar, 46, 58 Kaplan, Robert S., 2 3 Katz, S. J ., 253 Keller, Kevin Lane, 94, 95, 205, 251, 253
Keough, Donald R., 103 Kerin, Roger A., 64, 67, 94, 117, 157, 228, 250,
252,254 Khan, Mir Magbool Alain, 255 Kin1, Byung-Do, 254 King, Robert L., 5
Knapp, Duane, 103 KJJight, Joe, 118 Konopaske, Robert, 203 Kotler, Philip, 251 Kucz,narsb, Thon,as D., 253
L
LaForge. Raymond W., 5. 7, 37, 108, 125, 153 Lainb. Charles W., Jr., 20 Lastovicka, John L., 253 Lattin, Ja1nes, 253
Lawler. Edward E., ID. 255 Lehmann, Donald R .. 18, 250 Lemon, Katherine N., 7 Levitt, Ted, 2 3 Levy, Michael, 164, 170, 175, 254, 255 Liao, Carol, 23 Lichenstein, Donald R., 254 Loewe, Pierre, 1 17 Lovallo, Dan P., 117
M
Macdivitt, Harry, 181 MacGregor, Jena, 117 Macinnis, Deborah J., 58
Macintosh, Julie, 118 Mack, Ben, 118 Mano, Hai1n, 252 Marcus, Alan J., 238
Markower, Jack, 23 Marks, Ronald B., 254 Marshall, Greg W., 67, 228 Martin, Justin, 253 Maslow, Abraham, 53, 252 Mayer, Marissa, 110 Mazu1ndar, Tridib, 181 McCabe, Donald L., 251 McCarthy, E. Jerome, 5, 7, 96,132 McDaniel, Carl, 20 McDo\velJ, R a y1nond, 71 McEwan, \Villiam, 214 McManus,John,254 Meer, David, 8 4 Mellow, Craig. 255 MenLzer, John T., 255 Merrill, Ja1nes R., 252 Michael, David, 23 Middlebrooks, Arthur G., 253
Mj)anovic. Branko, 214 Miniard, Paul W., 252 MolhatTa, Naresh K., 43 Monroe, Kent B., 181, 254, 255 Montgomery, Alan L .. 254
Montgo1uery, David B., 251 Morgan, Robert M., 254 Morris, Michael H., 70 Mothersbaugh, David L., 57, 58, 74, l24 Mouhkheiber, Zina, 253 Mullin, Jeanniery, l 37 Mullins, John, 250
Murphy, Patrick_ 252 Murry, John P .. Jr., 253 Myers. James .H., 84 Myers, Matthew B., 84 Myers, Stewart C., 238
N
Nagle, Thon1as T., 181, 255 Narayanan. V. K., 251 Narayandas, Das, 71 Naray,u1das, Narakesari, 254 Narus, Ja1nes A., 7 I Nelson, Reed E., 251
Nete111eyer, Richard G., 103 Noblebuff, Ban)' J., 23 Nolan, R icbard L., 23 Norton, David, 23
0
O'Do1u1ell, Jame, 50
O'Donnell, Shannon, 23 Oliver, Richard L., 252 Olson, Jen·y C., 49, 58, 252, 253 O'Neill, Dan, 214
Name Index 257
Ortinau, David J., 35, 36, 43 O'Sullivan, Don, 2 3 Ozanne, Julie L., 252
p
Parasura111an, A., 189, 255 Park, C. Whan, 252 Pasqua, Rachel, 170, 254 Paul, Gordon, I 34 Percival, Sean, 137 Perreault, Willirun D., Jr., 5, 96, 132, 154 Peter, J. Paul, 49, 58, 25 l , 252, 253, 254 Peteraf, Margaret A., 13, 216, 225, 228 Peterson, Robert A., 228 Peterson, Robin, 253 Petrecca, Laura, 50 Pettis, Michael, 214 Pfoe11sch, \Valdet11ar, 71 Piercy, Nigel F., 39, 110, 180, 250
Pilling, Bruce K., 254 Pitt, Leyland F., 70 Porter, Michael E .. 14, 200-201, 217,251,255 Postn1ai1, Joel, 137 Pride, Willia111 M., 251 Pryor, L . S., 253 Pullig, Chris, 103 Puto, Christopher P., 252
Q
Qualls, Willian1 J., 252
R
Raj, S. P., 18 I Rao, Akshay R., 251,254 Ratchford, Brian T., 252 Reich, Brian, 137
Reichheld, Frederick F., 7 Ries, Al, 253 Rifkin, Glen, 253 Roberts, Michel, 251 Rody, Ray111ond, 252 Rosario, Loida, 208 Rosenbloom, Bert, 170, 254 Rosi, Peler, 254 Ross, Stephen A., 238 l�othaermel, Frai1k T., 228
Rudelius, \.Villiam, 64, 67, 94,117,157,250, 252,254
Rust, Roland T., 7, I 03
s
Sa\ryer, Alan G .. 251. 252 Schaaf. Dick, 255 Schanninger. Charles 1\.1., 252 Schiff1nan, Leon G., 46, 58 SchilJ, Patrick L., 251 Schindler, Pa1nela S., 42 Schroder, Richard M., 154 Schultz, Mike, 197 Sch•.vepker, Charles H., Jr., 153 Seitel, Fraser, 137
258 Name Index
Seltn1an, Kent D., 197
Sheppard, Blair H., 252
Sibony, Oliver, 117
Siegel, Eric, l I 8
Silverstein, Michael J .. 23
Sin1chi-Levi, David. 170
Simchi-Levi, Edith, 170
Sim1nons, Carolyn J ., l 03
Singhi, Abheek, 2 3
Sinha, Indrajit, 181
Suuth, A. Craig, 82
Smith, Daniel C., 252
Smith, Scott fv1., 252
Smith, Tim .R .. I 81,255
Snyder, Ton1 U., 137
Soloman, Don, 137
Solo1non. Michael R .. 58
Speh. Thon1as W., 71
Spellman, Betsy, 253, 254
Spiro. Rosann L., 251
Srinivasan, Narasiinhan, 252
Stael in, Richard, 117, 118
Stanton, Willian1 J .. 90. 255
Star, Steven 1-1 .• 253
Steenkamp, Jan-Benedict E. M., 214,252
Stern, Louis '-IV., 170, 254
Strickland, A . J., III, 10, 13,216,225,228
Stroup, Richard, 253
Suter, Tracy A., 43
Swartz, Teresa A., 255
T
Tanner. John F., Jr., 63, 66, 71, 143,
144,254
Taylor, Thayer C., 153
Thomas, Roger, 118
Thompson, Arthur A., IO, 13,216,225,228
Tbon1pson, Debra Viana, 103
Thompson, Rebecca, I 03
Tho1npson, Thomas W ., 19 I, 193
Treacy, Michael, 251
Trout, Jack, 253
Ulrich, Karl T., 253
Urban, Glenn L., 253
u
V
Yan Praet, Douglas, I 03
Varadarajan, P. Rajan, 251
Vavra, Terry, 146, 254
Vitale, Robert, 71
w
Wagner, Janet, 25 l
\Valker, Bn1ce J., 90, 255
\Valker. OrviUe C., 153, 250
Warshaw, Paul R., 252
Webster, Frederick E., Jr., 5, 254
Wedel, .tvfichael, 252
Weeks, William A., 252
\Veigold, Michael F., l 3 l , 253
Weitz. Barton A., 170, 175, 254, 255
Westerfield, Randolph W., 238
Wierse1na, Fred, 251
Wilkinson, Mike, J 81
Winer, Russell S., 18, J 81, 250
Wood, Marian Burk, 250
y
Yankelovich, Daniel, 84
z
Z'lle, Joseph, 181
ZeithamJ, Valarie A., 7,189,255
Zemke,Ron, 195,255
Zikn1und, William G., 43
I
ec
A
A p1iori segmentation, 74 Accessory equipment, 91
Achievers, 77-78 Acid rest, 235
ACNielsen, 34 Adaptive fir1ns, 67
Administered vertical marketing systems, 163 Adoption, product, 99-100
Advertising budget allocation, 127-130
campaign preparation, 128 consumer behavior and, 128, 130
database contents, 136 decisions to make, 126-130
direct 111arketing, 122, 136-137, 158
ethical and legal issues. 125
evaluating effectiveness, 134
expenditures on, 126-127 Federal agencies involved in control of, 139
global strategy, 210-211 integrated n1arketing con1munications, 122-123
major media sources, 129-130 n1edia n1ix, 130
message strategy, 128, 130 nontraditional 1nedia, 131
objectives of, 124-125 to reach organizational buyers, 63
sales promotion; See Sales promotion Advertising agencies, 210-211
Aerial banners, 131 After-sale service, 142
Aftermarketing, 146
Agent, 157
Agricultural products, 87 Airborne Express, 15
All you can afford strategy, 127
Alliances, strategic, 111, 146, 213
Allocation of budget, 127-130
Alternative evaluation, 55 Alternative search, 54
Altria, 6, 14, 15, 105
A,nazon.com, 54, 168, 170
American Airlines, 135, 146 A1ne1ican Ho1ne Products, 219
Ame1ican Marketing Association. 5, 55, 185 An1e1ican Tobacco, 9
Analysis case; See Case analysis
financial; See Financial analysis industry, 217,220,242
net present value, 232-234 problem, 221
ratio, 234-237 situation, 16-19, 72,242
SWOT, 224-225 vendor, 68-69
Anheuser-Busch, 210 Annual Staternent Studies, 235
Apple, 106, 146, 208 Arbitron Index, 125
Archway cookies, 92 Arm & I-Iamn1er, 13, 106
Asset n1anage1nent ratios, 235. 237
Assurance, 191
AT&T, 101, 106 Attitudes, 122, 134
Attributes, l O l
Audit, product, 100-101
Audits and Surveys National Total-Market Tndex 244 ' Average frequency, 130 Avis, 163
Avon, 168,200 A&W Root Beer, 92
A\1/areness, 120, 123, 125
Bacardi rum, 92 Backward integration, 164
Balance-o f -payment, 202
Bank of A1nerica, 92
Bargaining power, 218
Barnes & Noble, 170
Bass Pro Shops, 168 Batteries Plus, 166
Bayer, 91
BCG Model, 16, 28-29
Behavior, 202 Behavioral costs, 173
B
Behavioral influences on buying, 65-68 Believers, 77-78
Belongingness needs, 53 Bench1narking, 101
Benefit segmentation, 75
Berlitz, 203
Best Buy, 158, 166 Better Business Bureau, 18
Bidding, co1npetitive, 65
Black & Decker, 102
Bli1nps, 131 Biogs, 124
Bonus packs, 135 Boston Consulting Group (BCG), 16, 27-30 Brand equity, 93, 126
Brand extension, 92-93
Brand-n1anager systen1, I 02
Branding, 90-95, 126, 205 Brazi I, top websites in, 121
Break-even analysis, 176, 230-232 Broker, 157
259
260 Subject Index
Brothers Gou1met Coffees, 105 Bro\.vn Foreman Distillers, 14
B2B marketing, 60
Budget
allocation of advertising dollars, 127-J 30 sales expense, 152
Buick, 82 Build share, 29-30
Bundle pricing, 174 Bungie Studios, 208
Burger King, 81
Business strength, 29-30
Business-to-business (B2B) 1narketing, 60; See also Organizational buying;
Buyers, 64, 218
Buying center, 63-64 Buying process, 45, 52-57, 61
C
Cabela's, 168 Cable selling, 158
Carnpaign preparation, 128
Campbell, 50, 81 Canon, 106
Career Track, 146 Carrying costs, 162
Case analysis, 215-228 alternative selection, 223
com1nunicating results, 226-228
courses of action, evaluation of, 222-223
current situation analysis, 72, 217 -221, 224-225
defined, 219 fra1nework for, 2 I 6-223
mistakes made, 222 objectives of, 216
oral reports, 228 pitfalls to avoid, 223-226
problem analysis, 221 wtitten reports, 226-228
Cash co,vs, 28
Catalog selling, 122, 158, 167
Category management, 102 Caterpillar, 204
Cause marketing, 6 CBS Records, 199
Centralization, 65
Channel relationships, 121
Channels of distribution, 156-17 l for consumer goods, 158
defined, 156 flexibility, 160, 162
functions peifonned in, 157
global strategies, 209-210 inte1111ediaries, 61, 156-157, 161
management of, 162-164 n,arketing plans and, 244
for organizational goods, 158-159 relationship 1narketing, 162
selection and planning, 159-162 store and nonstore retailing, 165-170
vertical marketing, 162-164 wholesaling, 164-165, 166
Chrysler, 82, 109, 185, 202 Classification, of products, 87-88
Client relationships, 186, 188 Coach Leather Products, 14
Cobranding, 92 Coca-Cola, 14, 81, 90, 101, 126, 132,165,211
Cognitive dissonance, 56
Commercialization, 113
Co1nmission, 152-153
Commitment, obtaining, 145 Co1nn1unication, 202, 226-228; See also Marketing co1nn1unication;
Co1npany research, 36-37 Co1npaq, I 09 Compensation, of sales force, 152-153 Co1npetencies, distinctive, 9
Competition i1npact on pricing decisions, 177-178
limited, 194-195 Competitive advantage, 14
Competitive advantage test, 13 Competitive analysis, 243
Competitive bidding, 65 Competitive environment. 17, 190
Co1npetiti ve forces, 2 I 7 Competitive parity, 127
Co1nprehension, 123, l 25
Consumer analysis, 246
Consun1er behavior, 45- 59 advertising and, 128, 130
foreign consun,ers, 202, 207-208
marketing influences on, 48-51
psychological influences on, 51-52
situational influences on, 51
social influences on, 46-48
Consumer decision making; See Decision making; Consun1er goods
classes of, 88, 90 distribution channels for, 158
services versus, 187 Consumer pro1notions, 133-134, 135; See also Sales promotion;
Consutner Reports, 54
Contests, I 32, 133, 135
Contract research, 36-37 Contractual vertical marketing systems, 163
Control, degree of, J 61
Convenience goods, 88, 90
Convenience stores, 166 Conviction, 123, 125
Cooperative environment, 16-17 Corporate vertical marketing systems, 163-164
Correlation analysis, 150
Cost leadership strategy, 14
Cost-oriented pricing, 175-176
Cost-plus pricing, 175
Cost reduction, l 06
Costco, 15, 166
Costs
behavioral, 173 carrying, 162
distribution, 161-162
marketing, 248-249
opportunity, l 05
pricing decisions and, 173, 174--176, 180-181
Cott Corporation, 1 5
Coupons, 122,135
CPC International, 212
CPMs, 130
Craftsn,an, 114
Cross-functional teams; See also Teams;
for buying, 63-64
for new product development, 102, 111-112, 115
for strategic planning, 21-22
used for sales, 147
Culture
influence of, 46-47
learning about, 203
misunderstanding, 201-202
Current conditions, 5 1
Current ratio, 235
Current situation analysis, 72, 217-221, 224-225
Customer effort, 189-190
Customer expectations method, 150
Customer 1nigration patterns, l 00
Customer orientation, 4
Customer sales structure, 148-149
Customer satisfaction, 56-57
Custo1ner satisfaction 1neasure1nent (CSM), 192
Customers
clients versus, I 88
expectations by industry, 189
loyal, I 2 I
nice, 196
retention of, 121
value, 7
Custo,nization, 205
D
Database contents, 136
Database management software, 42
Deceptive pricing, 178
Deciders, 64
Decision making
marketing i11fluences on, 48-51
process, 52-57
psychological influences on, 51-52
situational influences on, 51
social influences on, 46-48
types of, 52-53
Decision support syste1n, 42-43
Decline stage, product life cycle, 97-98
Decoding, I 28
Deep packet inspection, 39
Degree of control, 161
Deletions, product, 100
Dell Inc., 15, 60
Demand, fluctuation of, 188
Den,and conditions, 201
Demand influences, on pricing, 172-17 4 De,nographic seg,nentation, 76
Demographics, influence on pricing, 172
Depth, of product mix, 89
Deregulation, 19
Subject Index 261
Diamond of national advantage model, 200-201
Differentiation strategy, 14
Diffusion, 99-100
Direct-action advertisu,g, 158
Direct channel, 158
Direct 1nail, 158, 167
Direct marketing, 122, 136-137, 158
Direct ownership, 213
Direct response advertising, 122
Direct sales, I 68
Disconfirmation paradigm, 57
Discounts, 126, 181
Displays, 122
Distinctive co,npetencies, 9
Distinctiveness, pricing decisions and, 176-177
Distribution; See Channels of distribution;
Di versification strategy, 14, l 07
Divest, 29-30
Dogs, 28
Domino's, 203
Dual branding, 92
Dun & Bradstreet, 235
Dun's Business Locator, 60
DuPont, 101
E
E -procurement, 67
E -service, 187, 195
Early adopters, 100
Early n,ajority, 100
Eastman Kodak, 101, 102
eBay, 50
Economic environment, 17, 204
Eddie Bauer, 168
EDLP, 135, 175
Edn1unds.co1n, 177
Eight-M formula, 128
Elasticity, of pricing, 174
Electronic billboards, 131
Electronjc exchanges, 167
Eli Lilly, 200
Empathy, 191
Encoding, 128
Entry barriers, 218
Entry su·ategies, 21 1 -2 I 3
Environmental influences, on pricing, 177-178
Estee1n needs, 53
Ethical issues
in n,arketing con1111unication, 125
new product safety, 116
nonns,55
for organizational buyers, 66
responsibility of researchers, 41
Evaluation of alternatives, 55
Everyday l o w -price strategies, 135, 175
Excedrin, 53
Exchange controls, 202-203
262 Subject Index
Exclusive distribution, 160
Executive summary, 241-242
Expatica.com, 203
Expenditures on advertising, 126-127
Experience curves, 27 -28
Experiencers, 77
Experiential infonnation sources, 54
Experi1nental research, 35
Exporting, 212
Extended product, 86
Extensive decision making, 52
Exxon, 102
Fab1icating parts/materials, 91
Face-to-face interviews, 34
Facebook, 39
Facilitating agent, 157
Factor conditions, 200-20 I
Fads, 99
F
Failure, of new products, 116-117
Family branding, 92
Fa111ily life cycle, 48
Fashions, 99
Federal agencies, 139
Federal Express. 193-194
Federal Trade Com1nission, 235
Federal Trade Co1nmission Act, 178
Financial analysis, 229-238
break-even analysis, 176, 230-232
locating, 235
tnarketing plans and, 246-249
net present value, 232-234
ratio analysis, 234-237
Firestone Tire and Rubber, 199
Fit test, 13
Flexibility, 160, 162
Fluctuation of den,and, 188
Focus groups, 34, 37
Folgers, 52, I 05, 126
Ford, 101,163,185,244
Forecasting, of sales, 149-150, 246-248
Foreign markets, entering, 201-203; See also Global marketing;
Forward integration, 163-164
Franchise extension, 92
Franchising, 163-164, 212
Frequency marketing programs, 135
Frito-Lay, 174
Functional relationships, 146
G
Gallup Poll, 50
The Gap, 94, 166
Gatekeepers, 64
Gatev;ay, 15 8
General Electric, 6, 90, 204
General Electric Model, 16, 29-30
General Foods, l 05, 204
General Mi.lls, 89, 126, 135,212,219
General Motors, 185, 244
Generic product, 86, 94
Geodemographic seg1nentation, 79-81
Geographic organized sales force, 148-149
Geographic segrnentation, 76
Gillette, 14, 50, 90, 97, 105, 124
Global account n1anager, 149
Global cornpany, 204
Global marketing, 199-214
advertising and promotion strategies, 210-211
branding and, 92, 205
consumers' ability to buy, 206
consun,ers' willingness to buy, 207-2 08
distribution strategy, 209-210
entry and growth strategies, 21 1 -213
exporting, 212
goals of, 199
multinational company organization, 204-206
national advantage 1nodel, 200-201
organizing for, 201-206
pricing strategies, 210
problems with entering foreign markets, 201-203
product strategy, 209
program development, 206-211
research, 206-208
sales of U.S. cotnpanies, 200
Global virt11al team, 102- 103
Goals
of global marketing, 199
of n1arketing con1111unication, 120-121
Gobo/cookie advertising, 131
Going-rate pricing, 178
Goods-service continuum, 185
Google, 110, 177
Government agencies, 61
Goven1ment infonnation sources, 34, 42
Government regulations, impact on pricing, 178
Grainger, 61
Green zone, 30
Grocery receipts advertising, 131
Gross national product, 206
Group sow·ces of information, 54
Groupthink, 117
Growth functions, 150
Growth stage, product life cycle, 97-98
Growth strategies, 211 -213
Growth vectors, 12, 106- 107
Grundig, 203
Guarantee, 115
Guide to Foreign Trade Statistics, 34
Guide to Industrial Statistics, 34
H
Hallmark, 106
Harbor View Savings and Loan Association, 9
Harley-Davidson, 52
Ha1t111ann Luocraoe 14 · · Ob b ' Harvest, 29-30
Heile111an Brewing Co1npany, 82
Hewlett-Packard, 158
Hierarchy of needs, 53-54
High/low p1icing, 175
Hills Brothers, 105
H.J. I-Ieinz, 219
Hold share, 29-30
Holiday Inn, 163
Home Depot, 175
I-Jome shopping, 167
Honda, 15, 92, 124
Honeyvvell, 9, 204
Horizontal n1arket, 88
Horizontal price fixing, 178
Hon11el Meats, 9
H&R Block, 195
Hyundai, 81
I
IBM, 101,102,146,204
Idea generation, 108-110
ldea screening, 110-111
Ikea, 208
Import quotas, 202
In1porl restrictions, 202
lo-flight ads, 131
lndjrect channels, 158
Industry analysis, 217, 220, 242
Industry attractiveness, 29-30
Industry Norms and Key Business Ratios, 235
Inflatables, 131
Influencers, 64
Information systems, 21, 42-43
Initiators, 63
Innovative firms, 67
l nnovators, 99- I 00
Inseparability, 187-188
l nstallations, 91
Intangibility, 186-187
Integrated n1arketing com1nunications, 122-123; See also Market-
ing conununication;
Intensive distribution, I 60
Intention to buy, 134
Tntercultural Press, 203
Intermediaries, 61, 156-157, 161; See also Channels of distribution;
Internal i11fom1ation sources, 54
Internal marketing, 192-194
Inten1al risk, 11 l
International Dessert Partners, 212
Internet
e-procurement, 67
e-service, 187, 195
influence on pricing decisions, l 77
marketing strategies, 124
top websites, 121
website development, 169
Internet surveys, 37
Interviews, 34
Introduction stage, product life cycle, 97-98
Inventory carrying costs, 162
Inventory tun1over, 235
ISO 9000, 89
]
JCPenney Co1npany, Inc., 94
J.D. Power Associates, 34
Jobber, 157
Joint branding, 92
Joint ventures, 212
Journal of Marketing, 249
Jury of executive opi11ion 1nethod, 150
Just-in-ti1ne inventory, 62
JVC, 203
Kellogg's, 92, 126, 200, 203
Kentucky Fried Chjcken, 199
Kiosks, 131
Kinait, 94, 163
Kraft, 14,50
KJ·oger, 94, 166
K
L
L.L.Bean, 14
Laggards, 100
Lai1ds' End, 15, 168
Late majority, 100
Lavatory advertising, 131
Leads, 143-144
Lee, 15
Legal environment
for marketing communicatjon, 125
pricing decisions and, 178
situation analysis, 19
Lethargic firms, 67
Levenger, 167
Lever Brothers, 81
Levi Strauss, 8, 102, 203
Lexus, 81, 82
Licensing, 212
Life cycle, product, 97-100, 177
Limited, 94
Lin1ited con1petition, 194-195
Limited decision making, 52
Line extension strategy, 92
Liquidity ratios, 234-236
Long interviews, 34
Long John Silver's, 92
Louis Vuitton, 90
Love needs, 53
Lower A1nericans, 47
Loyal customers, 121
M
Macy's, 166
Magazine advertising, 122
Mail Boxes Etc., 146
Mail surveys, 35, 37
Major account management, 148
Makers, 77 -78
Subject Index 263
264 Subject Index
Malcolm Baldrige National Quality A ward, 193
Mall intercepts, 37
Manufacturer's agent, 157
Nlarcb of Dimes, 8
Market developn,ent strategies, 13-14, l 07
Market penetration strategies, 13, 106-107
Market risk, 11 I
Market segmentation, 72-84
analyze current situation, 72, 217-221, 224-225
bases for, 75-80
defined, 72
determining needs and wants, 73
divide 1narkets, 73-80
mobile phone example, 74
product positioning, 81-82
strategy selection, 82-83
Market test, 40-41, 112-113, 134
Market versus product focus, 9-10
Marketable questions, 83
Marketing
business-to-business (B2B), 60
defined, 5-6
global; See Global marketing
influences on decision making, 48-51
information sources, 54
inten,al, l 92-194
multichannel, 170
objectives of, 19-20, 245
principal task of, 4
services; See Services ,narketing
sources of conflict, 1 1
types of, 6
Marketing comrnunication
advertising; See Advertising
direct marketing, 122, 136-137, 158
ethical and legal issues in, 125
integrated marketing, 122-123
process, 128
pro1notion mix, 121-122
public relations, I 22, 135-136
strategic goals of, 120-121
Marketing concept, 4-5
Marketing costs, 248-249
Marketing decision support syste1ns, 42-43
Marketing dimensions, l O I
Marketing information systems, 21, 42-43
Marketing rnanage1nent
defined, 16
process, 16-21
strategic planning and; See Strategic planning
Marketing-1nanager systems, 101-102
Marketing mix, 19-20, 72-73, 84, 243-244
Marketing 1nyopia, 86
Marketing plans; See also Strategic planning:
co1npetitive analysis, 243
executive surnmary, 241-242
financial analysis, 246-249; See also Financial analysis
implementation and control of, 20, 244, 249
introduction, 242
marketing mix; See Marketing mix
marketing planning, 242-244
objectives, 19, 242-243
purpose of, 240-241
questions to ask, 19, 248
Jeferences, 249
situational analysis, 242
strategic plan and, 23
su1nmary, 246
table of contents, 242
target n,arket selection, 19
title page, 241
Marketing research
company versus contract, 36-37
defined, 32
ethics of, 41
experin,ental, 35
global, 206-208
infon11ation syste1ns for, 21, 42-43
limitations of, 40-41
performance of, 37-39
plan of, 34-37
process, 33-41
processing data, 39-40
purpose of, 33
qualitative versus quantitative, 34-37
report preparation, 40, 244
Jole of, 32-33
test marketing, 40-41, 112-113, 134
Markup pricing, 175
Mary Kay, 168
Maslow's hierarchy of needs, 53-54
Mass merchandisers, 166
MasterCard, 185
Mathematical modeling, 35-36
Maturity stage, product life cycle, 97-98
Maxim, 105
Maxwell House, 52, 105
McDonald's, 13, 53, 81, 90, 163, 185, 199
Meaningful questions, 83
Measurable questions, 83
Media 1nix, 130
Mercedes Benz, 90
Merchant middleman, 157
Message strategy, 128, 130
Microsoft, 14, 15, 90, 149, 208
Middle class, 47
Middleman, 157
Miliken, 101
Miller Brewing Co., 107
Millstone Coffee Inc., 105
Mission, organizational, 7 -10
Missionary salespeople, 146-14 7
Mitsubishi, 204
Mobile, 163
Mobile rnarketing, 122, 1 3 7
Mobile retailing, 168-169
Modified rebuy, 62, 63, 68
Monsanto, I 02
Motivation
personal, 65-66
of sales force, 152-153
Motivational in1pact, 134
Motorola, 101, 102 Multibranding strategy, 92-93 Multichannel marketing, 170 Multidomestic co1npany, 204 Multinational company organization, 204-206
N
NAFrA, 203 NAJCS, 60, 165 Nationa1 advantage model, 200-201 National Cash Register, 9 Need
detennining, 73 organizational, 68 recognition of, 53-54
Nestle, 105, 219 Net present value analysis, 232-234 New product plarunng/develop1nent, 105-119
causes of failure, 116-117 decisions to 1nake, 114-1 16 global markets, 208 keys to success, 108 performance measures, 114 process, I 08-1 14 product categories, 106 sources for ideas, I 12 strategy, 106-108 tea1ns used for, 102, l 11-112, 115
Ne"v task purchase, 62-63, 68 New-to-firm products, 106 New-to-world products, 106 News conference, 136 News releases, 135 Newspaper advertising, 122 Newspaper bag advertising, 13 l Nielsen Buzzmetrics, 39 Nielsen Index, 125 Nielsen PRJZM, 79-81 Nielsen Retail Index, 244 Nielsen Television Index, 244
Nike, 15 Noncreative manage1nent, 195 Nonpersonal communication; See Marketing co1nmu11ication; Nonproprietary information sources, 42 Nonstore retailing, 167-170 Nordstrom, 49 No1th An,erican Free Trade Agree1nent, 203 North American Industry Classification System (NAICS), 60, 165
0
Objections, responding to, 145 Objectives
of adve1tising, 124-125 of case analysis, 216 1narketing, 19-20, 242-243, 245 organizational, 11-12 of pricing, 174, 179 of the sales force, 141-142
Observational research, 35, 37
Obsolescence, 195 Odd pricing, 174 Off-peak pricing, 188 Oftice Depot, 175 Office Max, 158 Online buying, 67 Online n1arketing, 122 Online retailing, 168-169 Online selling, 158 Opinion tests, 134 Opportunity costs, I 05 Oral reports, 228 Order processing costs, 161 Ordering, 123, 125 Organization 1narketing, 6 Orgamzational buying
behavioral influences on, 65-68 categories of, 60-61 e -procuren1ent, 67 ethics; See Ethical issues key characteristics, 64 process, 61 purchase-type influences on, 62-63 stages in, 68-70 structural influences on, 63-65
Organizational goods catego1ies of, 87-88, 91 distribution channels for, 158-159
Orgamzational mission, 7-10 Organizational need, 68 Organizational objectives, 11-12 Organizational portfolio plan, 15-J 6 Orgamzational strategies, 12-15 Organizing
for global marketing, 201-206 for product 1nanagen1ent, IO 1-103
Orientation, 64 Outdoor advertising, 122, 129 Ownership restrictions, 202-203
p
Packaging, 96-97 Painted vehicles, as an advertising tool, 1 3 I Panasomc, 203
Subject Index 265
Partnerships, 142, 146; See also Strategic alliance; Penetration pricing, 177 PepsiCo, 81, 102, 126, 132, 163, 165,199,209 Per capita national income, 206 P e r -unit expenditure, 126-127 Percent of sales, 126 Performance 01easuren1ent
new product planning/development, I 14 of research, 37- 39 standards, 19
Performance test, 13 Perishabi I ity
t1uctuating demand and, 188 pricing decisions and, 176
Person marketing, 6 Person/situation segmentation, 76
266 Subject Index
Personal interviews, 37
Personal motivation, 65-66
Personal selling, 140-155: See also Sales force;
company's role, 147-148
defined, 122, 140
importance of, 140-141
relationship building process, 142-146
sales process and, 141-147
Personal surveys, 35, 37
Persuasion, 141-142
Physical features, 51
Physiological needs, 53
Pillsbury, 199, 219
PIMS, 27
Pizza Hut, 199, 203
Place influences, 49-51
Place ,narketing, 6
Planning
marketing; See Marketing plans
project, 111-112
strategic; See Strategic planning
Polaroid, 102, 106
Policies and procedures, 65
Political environment, 18-19, 202
Population characteristics, 206
Portfolio 111odel, l 6, 27-30
Portfolio plan, 15-16
Portugal, top websites in, 121
Positioning, product, 81-8 2
Positioning map, 81-82
Positive images, 120
Post cereal, J4
Post hoc segmentation, 74
Postpurchase evaluation, 56-57, 70
Predatory pricing, 178
Pre111iums, 135
Prentice Hall, 235
Present value ratio, 233
Presentations, sales, 145; See also Sales promotion;
Press release, 135
Prestige pricing, 174
Price discrin1ination, 178
Price elasticity, 1 7 4
Price fixing, 178
Priceline.co1n, 168
Pricing strategy, 172-182
bundle, 174
consumer decision making and, 48-49
cost issues, 173, 174-176, 180-181
cost-oriented, 175-176
c o s t -plus, 175
deceptive, 178
demand influences on, 172-174
elasticity, 17 4
environ111ental intluences on, 177-178
everyday lo\V price, 135, 175
general ,node! for developing, 178-181
global, 210
high/low pricing, 175
markup pricing, 175
objectives, 174, 179
off-peak, 188
promotions; See Sales promotion
section in marketing plan, 244
supply influences on, 174-177
Pri1nary data, 34
Private label brands, 94
PRIZM, 79-81
Problem analysis, 221
Procter&Gan1ble,9,50,89,93, 105,106,113,126,135,143, .148,
208,210
Producers, 60
Product adoption, 99-100
Product audit, 100-101
Product deletions, 100
Product design, 1 16
Product development, 14, 106-107, 112; See also New product
planning/develop,nent;
Product features, 115
Product in1proven1ent, 101
Product influences, 48-49
Product involve,nent, 52
Product knowledge, 51-52
Product life cycle, 97-100, 177
Product line extension, 92
Produc t lines,89-90
Product manage1nent
branding, 90-95, 126, 205
packaging, 96-97
product classification, 87-88
product definition, 86-87
product mix, 89-90
quality and value, 88 -8 9
Product-management system, 102
Product-market n1atrix, 12, 106-107
Product mix, 89-90
Product organized sales force, 148-149
Product positioning, 81-82
Product-piice relationship, 179-180
Product safety, 116
Product strategy, 87
Product versus 1narket focus. 9-10
Production orientation, 4
Production plan, 23
Products
branding of, 90-95, 126,205
classification of, 87-88
defined, 86-87
extended, 86
generic, 86
mix of, 89-90
organizing for manage1nent of. 101-103
packaging, 96-97
quality and value, 88-8 9
tangible, 86
Profit, pricing decisions and, 181
Profit Impact of Marketing Strategies (PIMS), 2 7
Profit n1argin on sales, 235
Profitability ratios, 235, 237
Project planning, 11 J-1 J 2
Projective techniques, 37
Promotion influences, 49
Promotion 1nix, 121-122
Promotional ailowances, 181
Proprietary infonnation sources, 42
Prospecting, 142-144
Prospects, identification of, 120- J 21
Psychographic segmentation, 75-79
Psychological costs, 173
Psychological factors, of pricing, 172-174
Psychological influences on decision making, 51-52
Public relations, 122, 135-136
Public service announce1nents, 136
Public sources of information, 54
Publicity, 122, 135-136
Purchase decisions, 55-56
Purchasing, 63-64; See also Organizational buying;
Pure services, 185
Purex, 102
Push versus pull marketing, 132-133
Quaker Oats, 219
Qualitative research, 34, 36
Quality
detenninants of, 190-191
guarantees, J 15
ISO 9000, 89
of new products. 114-115
product, 88-89
of services, 190-194
TQM, 88-89
Q
Quantitative forecasting techniques, 150
Quantitative research, 34-37
Quantity discounts, 181
Quarterly Financial Reports for Manufacturing Corporations, 235
Question 1narks, 28
Quick ratio, 235
Quick response, 15
Quotas
import, 202
sales, 150-152
Radio advertising, 122
Random lead generation, 143
Rapleaf, 39
Rate-of-return pricing, 175-176
Ratio analysis, 234-237
Raw materials, 87
RCA Corporation, 212
Reach, 130
Reactrix brand play, 131
Rebates, 135
Rebuy,62,63,68
Recall tests, 134
Receiver, 128
Recession, reaction to, 50
Recognition of need, 53-54
Recognition tests, 134
Red zone, 30
R
Reference groups, 48, 49
References, 249
Refunds, 122, 135
Related and supporting industries, 201
Relationship building
process of, 142-146
in service organizations, 191, 193
Relationship marketing, 162
Relay approach, 111
Reliability, 190
Repositioning, I 06
Research; See Marketing research;
Research approach to advertising, 127
Responsiveness, 190
Retail cooperative organization, I 63
Retailers, 157
Retailing, 165-170
Return on investment, 27
Return on total assets, 235-236
Risk, 55-56, 111
Rivalry, among competitors, 217-218
R. J. Reynolds Tobacco Company, 8 2
RJR Nabisco, 102
Roadway, 15
Robert Morris Associates, 235
Robinson-Pat1nan Act, 178
Role perceptions, 66-68
Rolex, 14
Routine decision making, 53
Rubbe1111aid, 15, 110
Rugby approach, 111
s
Safety, 116
Safety needs, 53
Salary, 152-153
Sales calls, planning, 144-145
Sales expense budget, 152
Sales force
compensation of, 152-153
control of, 149-152
Subject Index 267
cross-fuctional teams; See Cross-functional teams
motivating and compensating, 152-153
objectives of, 141-142
orgru1ization of, 148-149
people who support, 146-147
product organized, 148-149
relationship building, 142-146
role of, 142
traits of effective, 148
Sales force composite method, 150
Sales forecasting, 149-I 50, 246-248
Sales leads, 143-144
Sales presentations, 145; See also Sales pro1notion;
Sales process, 141-147
Sales pro1notion; See also Advertising;
activities, 132
approaches to, 63
consumer, 133-134, 135
defined, I 22
268 Subject Index
Sales pro1notion-Cont.
global, 210-211
influences on, 49
pros and cons of, 134-135
push versus puJI ,narketing, 132-133
trade, 133, 135
Sales quotas, 150-152
Sales territories, 150-152
Sales trends, I 00
Sampling, 135
Sara Lee, 14
Scraping, 39
Screening
of ideas, 110-111
or prospects, 143
Sealed-bid pricing, 178
Seal test Dairy, 14
Sears, 114, 163
Secondary data, 34, 35
Securities and Exchange Co1nmissio11, 235
Segmentation, n1arket, 72-84
analyze current situation, 72, 217-221, 224-225
bases for, 75-80
defined, 72
determining needs and wants, 73
divide n1arkets, 73-80
mobile phone exa1nple, 74
product positioning, 81-82
strategy selection, 8 2-83
Selected-lead generation, 143
Selective distribution, 160
Self-actualization needs, 54
Sender, 128
Service products, 185
Services
characteristics of, I 86-190
defined, 185
e-service, 187, 195
versus goods, 187
quality of, 190-194
Services marketing, 184-198
client relationships, 186, 188
customer effort, 189-190
customer expectations, 189
goods-service continuum, 185
i1nplications, 196-197
inseparability, 187-188
intangibility, 186-187
inte1nal marketing, 192-194
overcoming obstacles, 194-195
perishability, I.88
relationship building, 191, 193
7 -Eleven, 166
Shell Oil, 199
Shennan Antitrust Act, 178
Shopping goods, 88
Sien,ens, 204
Si,nmons Media/Market Service, 244
Sin11nons Reports, 125
Simulation models, 150
Situation analysis, 16-19, 72, 242
Situational influences on decision making, 51
Skim1ning policy, 177
Skunkworks, 111
Slotting allowances, 181
Social classes, 47-48
Social environment, 18
Social features of a situation, 5 J
Social influences on decision making, 46-48
Social media, 1nonitoring of, 39
Software, 42-43
Sole sourcing, 65
Sony, 106,203,212
Sourcing, sole, 65
South Korea, top websites in, 121
Southwest Airlines, 14, 15
Spatial boundaries, 202
Specialty goods, 88
Specialty stores, 166
Sponsorship, 136
SRI International, 77
Standard Rate and Data, 244, 248 -249
Standardization, 205, 213
Starbucks, 15, 52, I 05, 146
Starch Advertising Readership Service, 244
Starch Reports, 125
Stars, 28
Statistical Abstracts o_f' the United States, 24 7
Store retailing, 166-167
Straight rebuy, 62, 63, 68, 69
Strategic alliance, 11 I, 146, 213
Strategic Business Insights, 77
Strategic business units (SB Us), 15-16, 27-29
Strategic partnerships, 146
Strategic planning
cross-functional teams and; See Cross-functional teams
n,arketing 1nanagen1ent and, 6 -7, 16-21
marketing's role in, 21-22
mission, 7-10
organizational objectives, 11-12
organizational strategies, 12-15
portfolio plan, 15-16
process of, 7-16
selection of strategy, 15
Strategic Planning Institute, 27
Strategic risk, 111
Strategies
entry, 211-213
global, 209-210
Internet marketing, 124
market development, 13-14
market penetration, 13, 106-107
new product, 106-108
organizational, 12-15
pricing; See Pricing strategy
Strivers, 77-7 8
Structural intluences on buying, 63-65
Subculture, 46-47
Substitution, 218
Sun Ivficrosysten1s, 200
Suppliers, power of, 218
Supply influences, on pricing, 174-177
Survey of Current Business, 34 Survey research, 35
Survivors, 77-78 Sweepstakes, 122, 135
SWOT analysis, 224-225
T
Table of contents, 242 Taco Bell, 199
Tangible product, 86 Tangibles, 190
Target, 94 Target 111arket, 19, 72, 82, 83, 243
'fariffs, 202 Task approach, 127
Task features, 51 Teams
cross-functional; See Cross-functional teams global virtual, 102-103
new product development, 102, I 1 1-112, 115
require1nents for effective, l 02
strategic planning and, 21 -22 venture, 102
Technical sales specialist, 147
Telemarketing, 122, 158 Telephone surveys, 35, 37
Television advertising, 129 Television ho1ne shopping, 167
Territories, sales, 150-152 Test n1arketing, 40-41, 112-113, 134
Theater tests, 134 Thinkers, 77-78
Thoughts and feelings based segmentation, 76 Threat, of new entrants/substitute products, 218
Time, 51, 202 Time costs, 173
Time dimension o f a situation, 59
Time-series analvsis, 150 ,
Time to 1narket, 113 Timex, 14, 204
T.J. Maxx, 166 Total asset utilization, 235
Total distribution cost, 16.1-162 Total quality management (TQM), 88-89 Toyota, 81, 92
Toys 'R' Us, 175
TQM, 88-89
Trade promotions, 133, 135 Trademark, 91
Train car advertising, 131 Training, of sales people, 146
Transactional function, 157 Transit tenninal don1ination, 131
Transportation costs, 161 Trash receptacles advertising, 131
'fupperware, 168 Turnover, inventory, 235
Twitter, 39, 124
u
Uniformity, 190 United Airlines, 146
United Parcel Service of A1nerica (UPS), 146 U.S. Industrial Outlook, 34
Upper A1ne1icans, 47 US Airways, 92
Users, 63
V
V ALST},f, 77-79 Value pricing, 180 Values
cultural, 46-47 of custon1ers, 7
product, 88-89 strategy based on, 14-15
Vaseline, 14 Vending ,nachine sales, I 67
Vendor analysis, 68-69 Venture team, 102
Vertical 1narket, 88 Vertical marketing systen1s, 162-164
VF Corporation, 15
Viral n1arketing, 124
Volkswagen, 210 Volvo, 81, 124
w
Walgreens, 94
Subject Index 269
Walmart, 14, 48, 61, 94, 163, 165, 166, 173,175,203,218 Warranty, 115
Websites, developing, 169 Whirlpool, 203
Wholesaler-sponsored voluntary chain, 163 Wholesalers, 61, 157
Wholesaling, 164-165, 166
Wholly owned subsidiaries, 213
Width, of product nux, 89 Working class, 47
World Factbook, 203 Wrangler, 15
Written reports, 226-228
X
Xerox, 101, 102
y
Yellow zone, 30
z
Zenith. 199
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MARKETING· INSIGHT Potential Sources of Cross-Func.tiona.1
'Commi:iet; fio · Mariket·ens ,:�,-5
Functions
Research and development
Production/operations
Finance
Accounting
Human resources
Organizational Objectives
What They May
Want to Deliver
Basic research projects Product features Few projects
Long ptoduction runs Standardized products No model changes Long lead times Standard orders No new products
Rigid budgets Budgets based on return on investment Low sales commissions
Standardized billing Strict payment terms Strict credit standards
Trainable employees Low salaries
What Marketers May
Want Them to Deliver
Products that deliver customer value Customer benefits Many new products
Short production runs Customized products Frequent model changes Short lead times Customer orders Many new products
Flexible budgets Budgets based on need to increase sales High sales commissions
Custom billing Flexible payment terms Flexible credit standards
Skilled employees High salaries
Organizationcll objectives are the end points of a.n organization's mission a.nd are what it
seeks through the ongoing, long-run operations of the organization. The organizational
1nission is distilled into a finer set of specific and achievable organizational objectives.
These objectives 1nust be SJJecific, ,rieasitrable, actiori commit,nents by wl1ich the 1nission
of the organization i s to be achieved.
As with the statement of mission, organizational objectives are more than good inten
tions. In fact, if formulated properly, they can accomplish tl1e following:
l . T11ey can be co11verted into specific action.
2. Tl1ey will provide direction. That is, tl1ey can serve as a starting point for more spe
cific and detailed objectives at lower levels in the organization. Each manager will then
know how his or her objectives relate to those at higher levels.
3. They ca.n establish long-run priorities for the organization.
4. They can facilitate management control because they serve as standards against which
overall organizational performance can be evaluated.
Organizational objectives are necessary in all areas that may inf1L1ence the performance
and long-n1n suTvival of the organization. As sl1own in Figure 1.3, objectives can be estab
lished in and across many areas of the organization. The list provided in Figure 1.3 is by no
means exhat1stive. For example, some organizations are specifying the primary objective
as the attainment of a specific level of quality, either in the marketing of a product or the
providing of a service. These organizations believe that objectives should retlect an orga
nization's commitment to the customer rather than its own finances. Obviously, during the
strategic planning process conflicts are likely to occur between various functional depart
ments i n the organization. The important point is that management must translate the
11
Chapter
•
onsumer av1or
The marketing concept emphasizes that profitable marketing begins with the discovery
and understanding of consumer needs and then develops a marketing mix to satisfy these
needs. Thus, an understanding of consun1ers and tl1eir needs and purchasing bel1avior is
integral to successful marketing. Unfortunately, there is no single theory of consu1ner
behavior that can totally explain why consumers behave as they do. Instead, there are
numerous theories, models, and concepts making up the field. In addition, the majority
of these notions have been borrowed from a variety of other disciplines, such as sociol
ogy, psychology, anthropology, and economics, and must be integrated to und.erstand
consumer behavior.
In this chapter, consumer behavior will be examined in terms of the model i n Figure 3.1.
Tl1e chapter begins by reviewing social, marketing, a11d situational influences on consumer
decision 1naking. These provide infonnation tl1at can influence consumers' thoughts and
feelings about purchasing various products and brands. The degree to which this information
influences consumers' decisions depends on a nu1nber of psychological influences. Two of
the most important of these are product knowledge and product involvement, which will
then be discussed. T11e chapter concludes by discussing t11e consumer decision-1naking
process.
AGURE 3.1 An Overview of the Buying Process
-
Social influences >- Marketing influences
I I
'
• Psychological influences .
'
Consumer decision making
- - - Situational influences >-
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45
Chapter
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Market segmentation is one of the most important concepts in marketing. In fact, a p1imary reason for sttLdying consumer and organizational buyer behavior is to provide bases for effective segmentation, and a large portion of 1narketing researcl1 is concerned with
segmentation. From a 1narketing management point of view, selection of the appropriate
target market i s paramount to developing successful marketing programs. The logic of market segmentation is qLLite simple and is based on the idea that a single
product item can seldom n1eet the needs and wants of all consumers. Typically, consumers vary as to their needs, wants, and preferences for products and services, and successful
1narketers adapt their marketing programs to fulfill these preference patterns. For exam ple, even a simple product like chewing gum has multiple flavors, package sizes, sugar contents, calories, con.sistencies (e.g., liquid centers), and colors to meet the preferences of various consumers. While a single product item can11ot meet tl1e needs of all consum
ers, it can almost always serve more than one consumer. Thus, there are usually groups
of consumers who can be served well by a single item. If a particular group can be served
profitably by a fi1m, it is a viable market segment. In other words, the film should develop a marketing mix to serve the group or market seg1nent.
It1 tlus chapter we consider the process of market segn1entatio11. We define niarket
segmentation as the process of dividing a market into groups of sinular consumers and selecting the most appropriate group(s) for the firm to serve. The group or segment that
a company selects to m.arket to is called a target market. We break down the process of 1narket seg1nentation into six steps, as shown in Figure 5. l . While we recognize that the
order of these steps may vary, depending on the firm and situation, there are few if any
times when market segmentation analysis can be ignored. In fact, even if the final deci sion is to ''mass market" and not segment at all, this decision should be reached only after a market segmentation analysis has been conducted. Thus, market segn1entation analysis is a cornerstone of sound marketing planning and decision making.
DELINEATE THE FIRM'S CURRENT SITUATION
72
As emphasized in Chapter 1, a firm must do a complete sitt1ational analysis when embark ing on a ne\.v or modified marketing program. At the marketing planning level, such an ai1alysis aids in determining objectives, opportunities, and constraints to be considered when selecting target markets and developing marketing nuxes. In addition, marketing
managers must have a clear idea of the a.1nount of financial and other resources that will be available for developing and executing a marketing plan. Thus, the inclusion of this first step in the market segmentation process is intended to be a remjnder of tasks to be perfonned prior to marketing planning.
130 Part C The Marketing Mix
purchase decision. The end goal of an advertisement and its associated campaign is to
1n.ove the buyer to a decision to purchase the advertised brand. By doing so, the advertise ment will have succeeded in moving the consumer to the trial and repeat purchase stage of
the consumer behavior process, which is the end goal of advertising strategy.
The planning of an advertising campaign and the creation of persuasive messages require
a mixture of 1narketing skill and creative kn.ow-how. Relative to the dimension of 1narket ing skills, some important pieces of marketing irlfo11nation are needed before launching a11
ad campaign. Most of this information must be generated by the firm and kept up-to-date.
Listed here are some of the critical types of information an advertiser should have.
l. Who the firm's customers and potential customers are: their demographic, econo1nic, and psycl1ological cl1aracteristics and a11y other factors affecting their likelihood of buying.
2. How many sucl1 customers tl1ere are.
3. How ,nuch of tl1e firm's type and brand of product they are currently bu)ring a11d can
reasonably be expected to buy in the short-term and long-term future.
4. Which individuals, other than customers and potential customers, i,�fiuence purchasing
decisions.
5. �Vhere they buy the firm's brand of product.
6. When they buy, and frequency of purchase.
7. Which competitive bra11ds they buy and frequency of purchase.
8. How they use tl1e product.
9. Why they buy particular types and brands of products.
Media Mix
Media selection is no easy task. To start with, there are numerous types and combinations
of media to choose from. Marketing Insight 8-5 presents a brief summary of the advan tages and disadvantages of some of the major advertisin.g media.
In the advertising industry, a common measure of efficie11cy or productivity is cost per thou
sand, or CPMs. This figure generally refers to the dollar cost of reaching 1,000 prospects,
and its chief advantage lies in its simplicity and allowance for a common base of comparison between differing media types. The major disadvantage of the use of CPMs also relates to its simplicity. For example, the same commercial placed in two different television progra1ns,
having the same ,,iewership and the same audience proftle, may very well generate different
responses depending on the level of viewer involvement. This "positive effects" theory states
that the more the viewers are involved in a television program, the stronger they will respond to
co1nmercials. In essence, involving programs produce engaged respondents who demonstrate more favorable responses to advertising 1nessages.
Generally, such measures as circulation, audience size, and sets in use per comrner
cial minute are used in the calculation. Of course, different relative rankings of media can
occur, depending on the measure used. A related problem deals with what is meant by "effectively reaching" the prospect.3 Reach, in general, is the number of different targeted
audience members exposed at least once to the advertiser's message within a predetermined
time frame. Just as important as the number of different people exposed (reach) is the number of times, on average, tl1at they are exposed to an advertisement within a given time period.
This rate of exposure is called average frequency. Since marketers all have budget con
straints, they must decide whether to increase reach at the expense of average frequency or
average frequency at the expense of reach. In essence, the marketer's dilemma is to develop
a media schedule that both ( I ) exposes a sufficient number of targeted customers (reach) to
the firm's product and (2) exposes them enougl1 times (average frequency) to tl1e product
to produce the desired effect. The desired effect can come in the fonn of reaching goals
SUMMARY
Additional
Resources
Key Terms
and Concepts
Chapter Twelve The Marketing o.f Services 197
This development facilitates the use of intermediaries, because the service can now be
separated from tl1e producer. In additio11, the development of new services paves tl1e way
for companies to expat1d at1d segment their mai·kets. With the use of varying service bun
dles, new technology, and alternative means of distributing the service, companies are now
able to practice targeted marketing.
This chapter has dealt with tl1e complex topic of service marketing. While the 1narketing of
services has much in co1nmon with the marketing of products, unique problems in the area
require highly creative marketing management skills. Many of the problems i n the service
area can be traced to the intangible and inseparable nature of services and the difficulties
involved in 1neasuring service quality. However, considerable progress has been made i11
understanding and reacting to these difficult problems, particularly i11 the area of distribu
tion. In view of the major role services play in our economy, it is important for marketing
practitioners to better understand and appreciate the ttnique problems of service marketing.
Berry, Leonard L. Discovering the Soul of Service. New York: Free Press, 2000.
Berry, Leonard L., and Kent D. Seltman. Management usson.s ji·om Mayo Clinic. New York:
McGraw-Hill, 2008.
Callaway, Joseph, and Ann Callaway. Clients First. Hoboken, NJ: John Wiley and Sons, 2013.
Collier, Marsha. The Ultimate Online Customer Service Guide. New York: John Wiley
and Sons, 2011.
Fullerton, Sam. Sports Marketing. Burr Ridge, IL: McGraw-Hi11/Irwin, 2007.
Hoffman, K. Douglas, and John E.G. Bateson. Service Marketing. Mason, OH: Thomson
South-Western, 2009.
Schultz, Mike, and Jobn E. Doerr. Professional Service Mctrketing. New York: John Wiley and
Sons, 2009.
Client relationship: Relationship in which the buyer o f services views the seller as someone wl10
has knowledge that is of value; may be of an ongoing nature.
Customer effort: For many services, the involvement of customers to so1ne degree in the produc
tion of the service (e.g., some restaurants, airline baggage).
Inseparability: An ilnportant characteristic of services, the impossibility of separati11g a
service from the person of the seller. In other words, services 111ust often be produced and
consumed simultaneously.
Intangibility: A11 important difference between goods and services is the intangibility of services
which means that most services cam1ot appeal to a buyer's sense of touch, taste, smell, sight or
hearing before purchase, intangibility places a burden on the marketing organization.
Internal marketing: The continual process by which managers actively encourage, stimulate, and
Sltpport employee commit1n.ent to the organization and its customers.
Off-peak pricing: The different prices service 1uarketers charge during different times or days in
order to stimulate de1nand during slow periods and hopefully, smooth out dema11d for the service.
Perisl1ability and fluctuating dema11d: Services are perishable, which means tl1at unused capac
ity represents busi11ess that is lost forever. The de1nand for many services also fluctuates by season,
day o f the week, or time of the day.
