mba marketing assignment

milestone 1and2/readings.docx

Readings

Marketing

The American Marketing Association (AMA) defines marketing as "the activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large" (AMA, 2013, para. 1).

Kotler and Keller (2015) define marketing management as the science and art of selecting target markets, and the practice of acquiring, maintaining, and growing customers through the creation, delivery, and communication of superior customer value—all while maintaining profitability. Remember: Marketing is not selling; selling is just a component of marketing!

References

AMA (2013). Marketing definition. Retrieved from www.ama.org

Kotler, P., & Keller, K. (2015). Marketing management (15th ed.). Upper Saddle River, NJ. Pearson

Marketing Principles is available under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported license without attribution as requested by the site’s original creator or licensee.

Chapter 1. What Is Marketing?

What makes a business idea work? Does it only take money? Why are some products a huge success and similar products a dismal failure? How was Apple, a computer company, able to create and launch the wildly successful iPod, yet Microsoft's first foray into MP3 players was a total disaster? If the size of the company and the money behind a product's launch were the difference, Microsoft would have won. But for Microsoft to have won, it would have needed something it has not had in a while—good marketing, so it can produce and sell products that consumers want.

So how does good marketing get done?

1. Defining Marketing

Learning objective: Define marketing and outline its components.

Marketing is defined by the American Marketing Association as "the activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large" (American Marketing Association, n.d.). If you read the definition closely, you see that there are four activities, or components, of marketing:

1. Creating—The process of collaborating with suppliers and customers to create offerings that have value

2. Communicating—Broadly, describing those offerings, as well as learning from customers

3. Delivering—Getting those offerings to the consumer in a way that optimizes value

4. Exchanging—Trading value for those offerings

The traditional way of viewing the components of marketing is via the four Ps:

1. Product—Goods and services (creating offerings)

2. Promotion—Communication

3. Place—Getting the product to a point at which the customer can purchase it (delivering)

4. Price—The monetary amount charged for the product (exchanging)

Introduced in the early 1950s, the four Ps were called the marketing mix, meaning that a marketing plan is a mix of these four components.

If the four Ps are the same as creating, communicating, delivering, and exchanging, you might be wondering why there was a change. The answer is that they are not exactly the same. Product, price, place, and promotion are nouns. As such, these words fail to capture all the activities of marketing. For example, exchanging requires mechanisms for a transaction, which consist of more than simply a price or place. Exchanging requires, among other things, the transfer of ownership. For example, when you buy a car, you sign documents that transfer the car's title from the seller to you. That's part of the exchange process.

Even the term product, which seems pretty obvious, is limited. Does the product include services that come with your new car purchase (such as free maintenance for a certain period of time on some models)? Or does the product mean only the car itself?

Finally, none of the four Ps describes particularly well what marketing people do. However, one of the goals of this book is to focus on exactly what marketing professionals do.

Value

Value is at the center of everything marketers do. What does value mean?

When we use the term value, we mean the benefits buyers receive that meet their needs. In other words, value is what the customer gets by purchasing and consuming a company's offering. Although the offering is created by the company, the value is determined by the customer.

Furthermore, our goal as marketers is to create a profitable exchange for consumers. By profitable, we mean that the consumer's personal value equation is positive. The personal value equation is

value = benefits received – [price + hassle].

Hassle is the time and effort the consumer puts into the shopping process. The equation reflects personal impressions, because each consumer will judge the benefits of a product differently, as with the time and effort he or she puts into shopping. Value, then, varies for each consumer.

One way to think of value is to imagine a meal in a restaurant. If you and three friends go to a restaurant and order the same dish, each of you will like it more or less depending on your own personal tastes. Yet the dish was exactly the same, priced the same, and served exactly the same way. Because your tastes varied, the benefits you received varied. Therefore, the value varied for each of you. That's why we call it a personal value equation.

Value varies from customer to customer based on each customer's needs. The marketing concept, a philosophy underlying all that marketers do, requires that marketers seek to satisfy customer wants and needs. Firms operating with that philosophy are said to be market oriented. At the same time, market-oriented firms recognize that the exchange must be profitable for the company to be successful. A marketing orientation is not an excuse to fail to make profit.

Firms don't always embrace the marketing concept and a market orientation. Beginning with the Industrial Revolution in the late 1800s, companies were production oriented. They believed that the best way to compete was by reducing production costs. In other words, companies thought that good products would sell themselves. Perhaps the best example of such a product was Henry Ford's Model A automobile, the first product of his production line innovation. Ford's production line made the automobile cheap and affordable for many more people. The production era lasted until the 1920s, when production-capacity growth began to outpace demand growth, and new strategies were called for. There are, however, companies that still focus on production as the way to compete.

From the 1920s until after World War II, companies tended to be selling oriented, meaning they believed it was necessary to push their products by heavily emphasizing advertising and selling. Consumers during the Great Depression and World War II did not have as much money, so the competition for their available dollars was stiff. The result was this push approach during the selling era. Companies like the Fuller Brush Company and Hoover Vacuum began selling door-to-door, and the vacuum-cleaner salesperson was created. Just as with production, some companies still operate with a push focus.

In the post–World War II environment, demand for goods increased as the economy soared. Some products, limited in supply during World War II, were now plentiful to the point of surplus. Companies believed that to compete, they had to sell different products than the competition, so many focused on product innovation. This focus on product innovation is called the product orientation. Companies like Procter & Gamble created many products that served the same basic function as one another, but with a slight twist or difference in order to appeal to a different consumer, and as a result products proliferated. But as consumers had many choices available to them, companies had to find new ways to compete. Which products were best to create? Why create them? The answer was to create what customers wanted, leading to the development of the marketing concept, and from about 1950 to 1990, businesses operated in the marketing era.

So what era would you say we're in now? Some call it the value era, a time when companies emphasize creating value for customers. Is that really different from the marketing era, in which the emphasis was on fulfilling the marketing concept? Maybe not. Others call today's business environment the one-to-one era, meaning that the way to compete is to build relationships with customers one at a time and to serve each customer's needs individually. For example, the longer you are a customer of Amazon, the more details they gain about your purchasing habits and the better they can target you with offers of new products. With the advent of social media and the empowerment of consumers through ubiquitous information from consumer reviews, there is clearly greater emphasis on meeting customer needs. But is that substantially different from the marketing concept?

Still others argue that this is the time of service-dominant logic, and that we are in the service-dominant logic era. Service-dominant logic is an approach to business that recognizes that consumers want value no matter how it is delivered, whether it's via a product, a service, or a combination of the two. Although there is merit in this belief, there is also merit to the value approach and the one-to-one approach. As you will see throughout this book, all three are intertwined. Perhaps, then, the name for this era has yet to be decided.

Whatever era we're in now, most historians would agree that defining and labeling it is difficult. Value and one-to-one approaches are both natural extensions of the marketing concept, so we may still be in the marketing era. To make matters more confusing, not all companies adopt the philosophy of the era. For example, in the 1800s, Singer and National Cash Register adopted strategies rooted in sales, so they operated in the selling era forty years before it existed. Some companies are still in the selling era. Recently, many believed automobile manufacturers had fallen into trouble because they had been working too hard to sell or push product and not hard enough on delivering value.

Creating Offerings That Have Value

Marketing creates goods and services that the company offers at a price to its customers or clients. The entire bundle consisting of the tangible good, the intangible service, and the price is the company's offering. When you compare one car to another, for example, you can evaluate each of these dimensions—the tangible, the intangible, and the price—separately. However, you can't buy one manufacturer's car, another manufacturer's service, and a third manufacturer's price when you actually make a choice. Together, the three make up a single firm's offer.

Marketing people do not create the offering alone. For example, when the iPad was created, Apple's engineers were also involved in its design. Apple's financial personnel had to review the costs of producing the offering and provide input on how it should be priced. Apple's operations group needed to evaluate the manufacturing requirements the iPad would need. The company's logistics managers had to evaluate the cost and timing of getting the offering to retailers and consumers. Apple's dealers also likely provided input regarding the iPad's service policies and warranty structure. Marketing, however, has the biggest responsibility because it is their responsibility to ensure that the new product delivers value.

Communicating Offerings

Communicating is a broad term in marketing that means describing the offering and its value to your potential and current customers, as well as learning from customers what they want and like. Sometimes communicating means educating potential customers about the value of an offering, and sometimes it means simply making customers aware of where they can find a product. Communicating also means that customers get a chance to tell the company what they think. Today, companies are finding that to be successful, they need a more interactive dialogue with their customers. For example, Comcast customer service representatives monitor Twitter. When they observe consumers tweeting problems with Comcast, the customer service reps will post resolutions to their problems. Similarly, JCPenney has created consumer groups that talk among themselves on JCPenney-monitored websites. The company might post questions, send samples, or engage in other activities designed to solicit feedback from customers.

Mobile devices, like iPads and Droid smartphones, make mobile marketing possible too. For example, if consumers check in at a shopping mall on Foursquare or Facebook, stores in the mall can send coupons and other offers directly to their phones and pad computers.

Companies use many forms of communication, including advertising on the web or television, on billboards or in magazines, through product placements in movies, and through salespeople. Other forms of communication include attempting to have news media cover the company's actions (part of public relations [PR]), participating in special events such as the annual International Consumer Electronics Show in which Apple and other companies introduce their newest gadgets, and sponsoring special events like the Susan G. Komen Race for the Cure.

Delivering Offerings

Marketing can't just promise value, it also has to deliver value. Delivering an offering that has value is much more than simply getting the product into the hands of the user; it also entails making sure the user understands how to get the most out of the product and that he or she is taken care of service is required later on. Value is delivered in part through a company's supply chain. The supply chain includes a number of organizations and functions that mine, make, assemble, or deliver materials and products from a manufacturer to consumers. The actual group of organizations can vary greatly from industry to industry, and include wholesalers, transportation companies, and retailers. Logistics, or the actual transportation and storage of materials and products, is the primary component of supply-chain management, but there are other aspects of supply-chain management that we will discuss later.

Exchanging Offerings

In addition to creating an offering, communicating its benefits to consumers, and delivering the offering, there is the actual transaction, or exchange, that has to occur. In most instances, we consider the exchange to be cash for products and services. However, if you were to fly to Louisville, Kentucky, for the Kentucky Derby, you could pay for your airline tickets using frequent-flier miles. You could also use Hilton Honors points to pay for your hotel, and cash-back points on your Discover card to pay for meals. None of these transactions would actually require cash. Other exchanges, such as information about your preferences gathered through surveys, might not involve cash.

When consumers acquire, consume, and dispose of products and services, an exchange occurs. For example, via Apple's One-to-One program, you can pay a yearly fee in exchange for additional periodic product training sessions with an Apple professional. Each time a training session occurs, another transaction takes place. A transaction also occurs when you are finished with a product. For example, you might sell your old iPhone to a friend, trade in a car, or ask the Salvation Army to pick up your old refrigerator.

Disposing of products has become an important ecological issue. Batteries and other components of cell phones, computers, and high-tech appliances can be very harmful to the environment, and many consumers don't know how to dispose of these products properly. Some companies, such as Office Depot, have created recycling centers where customers can take their old electronics.

Apple has a web page where consumers can fill out a form, print it, and ship it to Apple along with their old cell phones and MP3 players. Apple then pulls out the materials that are recyclable and properly disposes of those that aren't. By reducing the hassle associated with disposing products, Office Depot and Apple add value to their product offerings.

Key Takeaway

The focus of marketing has changed from emphasizing the product, price, place, and promotion mix to one that emphasizes creating, communicating, delivering, and exchanging value. Value is a function of the benefits an individual receives, and consists of the price the consumer paid and the time and effort the person expended making the purchase.

Review Questions

1. What is the marketing mix?

2. How has marketing changed from the four Ps approach to the current value-based perspective?

3. What is the personal value equation?

2. Who Does Marketing?

Learning objective: Describe how the various institutions and entities that engage in marketing use marketing to deliver value.

The short answer to the question of who does marketing is "everybody!" But let's take a moment and consider in greater detail how different types of organizations engage in marketing.

For-Profit Companies

The obvious answer to the question, "who does marketing?" is for-profit companies like McDonald's, Procter & Gamble (the makers of Tide detergent and Crest toothpaste), and Walmart. For example, McDonald's creates a new breakfast chicken sandwich for $1.99 (the offering), launches a television campaign (communicating), makes the sandwiches available on certain dates (delivering), and then sells them in its stores (exchanging). When Procter & Gamble (P&G) creates a new Crest tartar-control toothpaste, it launches a direct-mail campaign in which it sends information and samples for dentists to offer to their patients. P&G then sells the toothpaste through retailers like Walmart, which has a panel of consumers sample the product and provide feedback through an online community. These are all examples of marketing activities.

For-profit companies can be defined by the nature of their customers. A business-to-consumer (B2C) company like P&G sells products to be used by consumers like you, while a business-to-business (B2B) company sells products to be used within another company's operations, as well as by government agencies and entities. To be sure, P&G sells toothpaste to other companies like Walmart (and probably to the army, prisons, and other government agencies), but the end user is an individual person.

Another way to categorize companies that engage in marketing is by the functions they fulfill. P&G is a manufacturer, Walmart is a retailer, and Grocery Supply Company is a wholesaler of grocery items that buys from companies like P&G in order to sell to small convenience store chains. Though they have different functions, all these types of for-profit companies engage in marketing activities. Walmart, for example, advertises to consumers.

Grocery Supply Company salespeople will call on convenience store owners to take orders and will build in-store displays. P&G might help Walmart or Grocery Supply Company with templates for advertising or suggest special cartons to use in an in-store display, but all the companies are using marketing to help sell P&G's toothpaste.

Similarly, all the companies engage in dialogue with their customers to understand what to sell. For Walmart and Grocery Supply, the dialogue may result in changing what they buy and sell. For P&G, customer feedback may yield a new product or a change in pricing strategy.

Nonprofit Organizations

Nonprofit organizations also engage in marketing. When the American Heart Association (AHA) created a heart-healthy diet for people with high blood pressure, it bound the diet into a small book, along with access to a special website that people could use to plan their meals and record their health-related activities. The AHA then sent copies of the diet to doctors to give to patients. When does an exchange take place, you might be wondering? And what does the AHA get out of the transaction?

From a financial standpoint, the AHA does not directly benefit. Nonetheless, the organization is meeting its mission, or purpose, of getting people to live heart-healthy lives and considers the campaign a success when doctors give the books to their patients. The point is that the AHA is engaged in the marketing activities of creating, communicating, delivering, and exchanging. This won't involve the same kind of exchange as a for-profit company, but it is still marketing. When a nonprofit organization engages in marketing activities, this is called nonprofit marketing. Some schools offer specific courses in nonprofit marketing, and many marketing majors begin their careers with nonprofit organizations.

Government entities also engage in marketing activities. For example, when the US Army advertises to parents of prospective recruits, sends brochures to high schools, or brings a Bradley Fighting Vehicle to a state fair, the army is engaging in marketing. The US Army also listens to its constituencies, as evidenced by recent research aimed at understanding how to serve military families more effectively. One result was advertising aimed at improving parents' responses to their children's interest in joining the army. Another was a program aimed at encouraging spouses of military personnel to access counseling services when their spouse is serving overseas.

Similarly, the Environmental Protection Agency (EPA) runs a number of advertising campaigns designed to promote environmentally friendly activities. One such campaign promoted the responsible disposal of motor oil instead of simply pouring it on the ground or into a storm sewer.

There is a difference between these two types of activities. When the army is promoting the benefits of enlisting, it hopes young men and women will join the army. By contrast, when the EPA runs commercials about how to properly dispose of motor oil, it hopes to change people's attitudes and behaviors so that social change occurs. Social marketing, which can be done by government agencies, nonprofit institutions, religious organizations, and others, is conducted in an effort to achieve certain social objectives. Convincing people that global warming is a real threat via advertisements and commercials is social marketing, as is the example regarding the EPA's campaign to promote the responsible disposal of motor oil.

Individuals

If you create a résumé, are you using marketing to communicate the value you have to offer prospective employers? If you sell yourself in an interview, is that marketing? When you work for a wage, you are delivering value in exchange for pay. Is this marketing, too?

Some people argue that these are not marketing activities and that individuals do not necessarily engage in marketing. (Some people also argue that social marketing really isn't marketing either.) Can individuals market themselves and their ideas?

In some respects, the question rhetorical, designed for academics to argue about in class. Our point is that in the end, it may not matter. If, as a result of completing this book, you can learn how to more effectively create value, communicate, and deliver that value to the receiver, and receive something in exchange, then we've achieved our purpose.

Key Takeaway

Marketing can be thought of as a set of business practices that for-profit organizations, nonprofit organizations, government entities, and individuals can use. When a nonprofit organization engages in marketing activities, this is called nonprofit marketing. Marketing conducted in an effort to achieve certain social objectives is called social marketing.

Review Questions

1. What types of companies engage in marketing?

2. What is the difference between nonprofit marketing and social marketing?

3. What can individuals do for themselves that would be considered marketing?

3. Why Study Marketing?

Learning Objective: Explain the role marketing plays in individual firms and society as a whole.

Marketing Enables Profitable Transactions

Contrary to popular belief, products don't sell themselves. Generally, the "build it and they will come" philosophy doesn't work. Good marketing educates customers so that they can find the products they want, make better choices about those products, and extract the most value from them. In this way, marketing helps facilitate exchanges between buyers and sellers for the mutual benefit of both parties. Likewise, good social marketing provides people with information and helps them make healthier decisions for themselves and others.

Of course, all business students should understand all functional areas of the firm, including marketing. There is more to marketing, however, than simply understanding its role in the business. Marketing has a tremendous impact on society.

Marketing Delivers Value

Marketing not only delivers value to customers, it also creates value for the firm as it develops a reliable customer base and increases its sales and profitability. Franklin D. Roosevelt, the US president with perhaps the greatest influence on our economic system, once said, "If I were starting life over again, I am inclined to think that I would go into the advertising business in preference to almost any other. The general raising of the standards of modern civilization among all groups of people during the past half century would have been impossible without the spreading of the knowledge of higher standards by means of advertising" (Famous Quotes and Authors, n.d.). Roosevelt referred to advertising, but advertising alone is insufficient for delivering value. Marketing finishes the job by ensuring that what is delivered is valuable.

Marketing Benefits Society

Marketing benefits society in general by improving people's lives in two ways. First, as we mentioned, it facilitates trade. As you have learned, or will learn, in economics, being able to trade makes people's lives better. Because better marketing means more successful companies, jobs are created. This growth generates wealth for workers, who are then able to make purchases, which, in turn, creates more jobs.

The second way marketing improves the quality of life is through the function of the value-delivery approach in creating choices for consumers. When you add all the marketers together who are trying to deliver offerings of greater value to consumers and are effectively communicating that value, consumers are able to make more informed decisions about a wider array of choices. From an economic perspective, more choices and smarter consumers are indicative of a higher quality of life.

Marketing Costs Money

Marketing can sometimes be the largest expense associated with producing a product. In the soft drink business, marketing expenses account for about one-third of a product's price—about the same as the ingredients used to make the soft drink itself.

Some people argue that society does not benefit from marketing when it represents such a huge chunk of a product's final price. In some cases, that argument is justified. Yet when marketing results in more informed consumers receiving a greater amount of value, the cost is justified.

Marketing Offers People Career Opportunities

Marketing is the interface between producers and consumers. In other words, it is the one function in the organization in which the entire business comes together. Being responsible for both making money for your company and delivering satisfaction to your customers makes marketing a great career. In addition, because marketing can be such an expensive part of a business and is so critical to its success, companies actively seek strong marketing employees. There are a variety of jobs available in the marketing profession. The following positions represent only a few of the opportunities available in the field.

Marketing research

Personnel in marketing research are responsible for studying markets and customers in order to understand what strategies or tactics might work best for firms.

Merchandising

In retailing, merchandisers are responsible for developing strategies regarding what products wholesalers should carry to sell to retailers such as Target and Walmart.

Sales

Salespeople meet with customers, determine their needs, propose offerings, and make sure that the customer is satisfied. Sales departments can also include sales support teams who work on creating the offering.

Advertising

Whether it's for an advertising agency or inside a company, some marketing personnel work on advertising. Television commercials and print ads are only part of the advertising mix. Many people who work in advertising spend all their time creating advertising for electronic media, such as websites and their pop-up ads, podcasts, etc.

Product development

People in product development are responsible for identifying and creating features that meet the needs of a firm's customers. They often work with engineers or other technical personnel to ensure that value is created.

Direct marketing

Professionals in direct marketing communicate directly with customers about a company's product offerings via channels such as e-mail, chat lines, telephone, or direct mail.

Digital media

Digital media professionals combine advertising, direct marketing, and other areas of marketing to communicate directly with customers via social media, the web, and mobile media (including texts). They also work with statisticians in order to determine which consumers receive which message, and with IT professionals to create the right look and feel of digital media.

Event marketing

Some marketing personnel plan special events, orchestrating face-to-face conversations with potential and current customers in a special setting.

Nonprofit marketing

Nonprofit marketers often don't get to do everything listed previously, as nonprofits typically have smaller budgets. But their work is always very important as they try to change behaviors without having a product to sell.

A career in marketing can begin in a variety of ways. Entry-level positions for new college graduates are available in many of the roles previously mentioned.

A growing number of CEOs are people with marketing backgrounds. Some legendary CEOs, like Ross Perot and Mary Kay Ash, got their start in marketing. More recently, CEOs like Mark Hurd, CEO of Oracle, and Jeffrey Immelt at GE, are showing how marketing careers can lead to the highest position of an organization.

Criticisms of Marketing

Marketing is not without its critics. We already mentioned that one reason to study marketing is because it is costly, and business leaders need to understand the cost/benefit ratio of marketing in order to make wise investments. Yet that cost is precisely why some criticize marketing. Some allege that if that money could be put into research and development of new products, perhaps the consumers would be better satisfied. Or, some critics argue, prices could be lowered. But marketing executives do not intentionally waste money on marketing, and are always on the lookout for less expensive ways to have the same performance.

Another criticism is that marketing creates wants among consumers for products and services that aren't really needed. For example, fashion marketing creates demand for high-dollar jeans when much less expensive jeans can fulfill the same basic function. Taken to the extreme, consumers may take on significant credit card debt to satisfy wants created by marketing, with serious negative consequences. When marketers target their messages carefully so an audience that can afford such products is the only group reached, such extreme consequences can be avoided.

Key Takeaway

By facilitating transactions, marketing delivers value to both consumers and firms. At the broader level, this process creates jobs and improves the quality of life in a society. Marketing can be costly, so firms need to hire strong employees to manage their marketing activities. Being responsible for both making money for your company and delivering satisfaction to your customers makes marketing a great career.

Review Questions

1. Why study marketing?

2. How does marketing provide value?

3. Why does marketing cost so much? Is marketing worth it?

4. Themes and Organization of This Book

Learning Objective: Understand and outline the elements of a marketing plan as a planning process.

We previously discussed marketing as a set of activities that anyone can do. Marketing is also a functional area in companies, just like operations and accounting. Within a company, marketing might be the title of a department, but some marketing functions, such as sales, might be handled by another department. Marketing activities do not occur separately from the rest of the company, however.

As we have explained, pricing an offering, for example, will involve a company's finance and accounting departments in addition to the marketing team. Similarly, a marketing strategy is not created solely by a firm's marketing personnel. Instead, it flows from the company's overall strategy.

Everything Starts with Customers

Most organizations start with an idea of how to serve customers better. Apple's engineers began working on the iPod by looking at the available technology and thinking about how customers would like to improve the availability and affordability of their music, through downloading.

Many companies think about potential markets and customers when they start. John Deere, for example, founded his company on the principle of serving customers. When admonished for making constant improvements to his products even though farmers would take whatever they could get, Deere reportedly replied, "They haven't got to take what we make and somebody else will beat us, and we will lose our trade" (John Deere, n.d.). He recognized that if his company failed to meet customers' needs, someone else would.

Here are a few mission statements from other companies. Note that they all refer to their customers, directly or indirectly. Note also how these are written to inspire employees and others who interact with the company.

IBM

IBM will be driven by these values:

· Dedication to every client's success.

· Innovation that matters, for our company and for the world.

· Trust and personal responsibility in all relationships. (IBM, n.d.)

Coca-Cola

Everything we do is inspired by our enduring mission:

· To refresh the world…in body, mind, and spirit.

· To inspire moments of optimism…through our brands and our actions.

· To create value and make a difference…everywhere we engage. (Coca-Cola Company, n.d.)

McDonald's

· To be our customers' favorite place and way to eat (McDonald's, n.d.).

Merck

· To provide innovative and distinctive products and services that save and improve lives and satisfy customer needs, to be recognized as a great place to work, and to provide investors with a superior rate of return (Merck & Co., n.d.).

Not all companies create mission statements that reflect a marketing orientation. Note Apple's mission statement: "Apple ignited the personal computer revolution in the 1970s with the Apple II and reinvented the personal computer in the 1980s with the Macintosh. Today, Apple continues to lead the industry in innovation with its award-winning computers, OS X operating system and iLife and professional applications. Apple is also spearheading the digital media revolution with its iPod portable music and video players and iTunes online store, and has entered the mobile phone market with its revolutionary iPhone" (Apple, Inc, 2009). This mission statement reflects a product orientation, or an operating philosophy based on the premise that Apple's success is due to great products and that simply supplying them will lead to demand for them. Apple, and for that matter, many other companies, have fallen prey to thinking that they knew what a great product was without asking their customers. In fact, Apple's first attempt at a graphic user interface (GUI) was the LISA, a dismal failure.

The Marketing Plan

The marketing plan is the strategy for implementing the components of marketing: creating, communicating, delivering, and exchanging value. Once a company has decided what business it is in and expressed that in a mission statement, the firm then develops a corporate strategy. Marketing strategists subsequently use the corporate strategy and mission and combine that with an understanding of the market to develop the company's marketing plan.

Marketers also want to know their customers—who they are and what they like to do—so as to uncover this information. Generally, this requires marketing researchers to collect sales and other related customer data and analyze it. In this pursuit, there are three important goals: understanding the customer's wants and needs, understanding how the customer wants to acquire, consume, and dispose of the offering, and determining what makes up their personal value equation.

Once this information is gathered and digested, the planners can work to create the right offering. Products and services are developed, bundled together at a price, and then tested in the market. Decisions have to be made about when to alter the offerings, add new ones, or drop old ones. These decisions are the focus of the next set of chapters and are the second step in marketing planning.

Following the material on offerings, we explore the decisions associated with building the value chain. Once an offering is designed, the company has to be able to make it and then be able to get it to the market. This step, planning for the delivery of value, is the third step in the marketing plan.

The fourth step is creating the plan for communicating value. How does the firm make consumers aware of the value it has to offer? How can it help them recognize that value and decide that they should purchase products? These are important questions for marketing planners.

Once a customer has decided that her personal value equation is likely to be positive, she will decide to purchase the product. That decision still has to be acted on, however, which is the exchange. As exchanges occur, marketing planners then refine their plans based on the feedback they receive from their customers, as well as what their competitors are doing and how market conditions are changing.

The Changing Marketing Environment

At the beginning of this chapter, we mentioned that the view of marketing has changed from a static set of four Ps to a dynamic set of processes that involve marketing professionals as well as many other employees in an organization. The way business is being conducted today is changing, too, and marketing is changing along with it. There are several themes that underscore these changes.

Ethics and social responsibility

Businesses exist only because society allows them to. When businesses begin to fail society, society will punish them or revoke their license. The crackdown on companies in the subprime mortgage–lending industry is one example. These companies created and sold loans (products) that could only be paid back under ideal circumstances, and when consumers couldn't pay these loans back, the entire economy suffered greatly. Scandals such as these illustrate how society responds to unethical business practices. However, whereas ethics require only that you do no harm, the concept of social responsibility requires that you actively seek to improve the lives of others. Today, people are demanding businesses take a proactive stance in terms of social responsibility, and companies are being held to ever-higher standards of conduct.

Sustainability

Sustainability, an example of social responsibility, involves engaging in practices that do not diminish the earth's resources. Coca-Cola, for example, is working with governments in Africa to ensure clean water availability, not just for manufacturing Coke products but for all consumers in that region. Further, the company seeks to engage the participation of American by offering opportunities to contribute to clean-water programs. Right now, companies do not have to engage in these practices, but because firms represent the people behind them (their owners and employees), forward-thinking executives are seeking ways to reduce the impact their companies are having on the planet.

Service-dominant logic

You might have noticed that we use the word offering a lot instead of the term product. That's because of service-dominant logic, the approach to business that recognizes that consumers want value no matter how it is delivered—whether through a tangible product or through intangible services. This emphasis on value drives the functional approach to value that we've taken—that is, creating, communicating, delivering, and exchanging value.

Metrics

Technology has increased the amount of information available to decision makers. As such, the amount and quality of data for evaluating a firm's performance is increasing. Earlier in our discussion of the marketing plan, we explained that customers communicate via transactions. Although this sounds both simple and obvious, better information technology has given us a much more complete picture of each exchange. Cabela's, for example, combines data from Web browsing activity with purchase history in order to determine the likely next-best offer. Using data from many sources, we can build more-effective metrics that can then be used to create better offerings, better communication plans, and so forth.

A global environment

Every business is influenced by global issues. The price of oil, for example, is a global concern that affects everyone's prices and even the availability of some offerings. We already mentioned Coke's concern for clean water. But Coke also has to be concerned with distribution systems in areas with poor or nonexistent roads, a myriad of government policies and regulations, workforce availability, and many more issues associated with selling and delivering Coke around the world. Even companies with smaller markets source some or all their offerings from companies in other countries or else face some sort of direct competition from companies based in other countries. Every business professional, whether working in marketing or elsewhere, needs some understanding of the global environment in which companies operate.

Key Takeaway

A company's marketing plan flows from its strategic plan. Both begin with a focus on customers. The essential components of the plan are understanding customers, creating an offering that delivers value, communicating the value to the customer, exchanging with the customer, and evaluating the firm's performance. A marketing plan is influenced by environmental trends such as social responsibility, sustainability, service-dominant logic, the increased availability of data and effective metrics, and the global nature of the business environment.

Review Questions

1. Why does everything start with customers? Or is it only marketing that starts with customers?

2. What are the key parts of a marketing plan?

3. What is the relationship between social responsibility, sustainability, service-dominant logic, and the global business environment? How does the concept of metrics fit?

5. Discussion Questions and Activities

Discussion Questions

1. Compare and contrast a four Ps approach to marketing versus the value approach (creating, communicating, and delivering value). What would you expect to be the same and what would you expect to be different between two companies that apply one or the other approach?

2. Imagine you are about to graduate. How would you apply marketing principles to your job search? In what ways would you be able to create, communicate, and deliver value as a potential employee, and what would that value be, exactly? How would you prove that you can deliver that value?

3. Is marketing always appropriate for political candidates? Why or why not?

4. How do the activities of marketing for value fulfill the marketing concept for the market-oriented organization?

5. How does the personal value equation apply to people who buy for the government, for a business, or for your university? How does that concept apply when organizations are engaged in social marketing?

6. Should marketing be required for all college students, no matter their major? Why or why not?

7. Of the four marketing functions, where does it look like most of the jobs are? What are the specific positions? How are the other marketing functions conducted through those job positions, even though in a smaller way?

8. Why is service-dominant logic important?

9. What is the difference between a need and a want? How do marketers create wants? Provide several examples.

10. The marketing concept emphasizes satisfying customer needs and wants. How does marketing satisfy your needs as a college student? Are certain aspects of your life influenced more heavily by marketing than others? Provide examples.

11. A company's offering represents the bundling of the tangible good, the intangible service, and the price. Describe the specific elements of the offering for an airline carrier, a realtor, a restaurant, and an online auction site.

12. The value of a product offering is determined by the customer and varies accordingly. How does a retailer like Walmart deliver value differently than Banana Republic?

13. Explain how Apple employed the marketing concept in designing, promoting, and supplying the iPhone. Identify the key benefits for consumers relative to comparable competitive offerings.

Activities

1. One of your friends is contemplating opening a coffee shop near your college campus. She seeks your advice about the size of the prospective customer base and how to market the business according to the four Ps. What strategies can you share with your friend to assist in launching the business?

2. You are considering working for United Way upon graduation. Explain how the marketing goals, strategies, and markets for the nonprofit differ from a for-profit organization.

3. Think about the last time you ate at McDonald's. Evaluate your experience using the personal value equation.

4. Marketing benefits organizations, customers, and society. Explain how an organization like DuPont benefits the community in which it operates as well as society at large.

References

American Marketing Association. (n.d.). Definition of marketing. Retrieved December 3, 2009, from http://www.marketingpower.com/AboutAMA/Pages/DefinitionofMarketing.aspx?sq=definition+of+marketing

Apple, Inc. (2009). Apple's app store downloads top 1.5 billion in first year. Retrieved December 3, 2009, from http://www.apple.com/hk/en/pr/library/ 2009/07/14apps.html

Coca-Cola Company. (n.d.). Mission, vision & values. Retrieved December 3, 2009, from http://www.thecoca-colacompany.com/ourcompany/mission_vision_values.html

Famous Quotes and Authors. (n.d.). Franklin D. Roosevelt quotes and quotations. Retrieved December 7, 2009, from http://www.famousquotesandauthors.com/authors/franklin_d__roosevelt_quotes.html

IBM. (n.d.). About IBM. Retrieved December 3, 2009, from http://www.ibm.com/ibm/us/en

John Deere (n.d.). John Deere: A biography. Retrieved December 3, 2009, from http://www.deere.com/en_US/compinfo/history/johndeere2.html

McDonald's. (n.d.). Our company. Retrieved December 3, 2009, from http://aboutmcdonalds.com/mcd/our_company/mcd_faq/student_research.html#1

Merck & Co. (n.d.). The new Merck. Retrieved December 7, 2009, from http://www.merck.com/about/Merck%20Vision%20Mission.pdf

EMarketing

With advances in communication and the growth of Internet services, eMarketing has become an important component in the marketing effort of most companies. eMarketing involves the application of marketing strategies and technologies using electronic media, such as computers and smartphones. eMarketers capitalize on digital technologies to differentiate their products and services from competing offers (Gaikwad & Kate, 2016).

Online retail sales are exploding, as Internet retailers, such as Amazon, provide informative, convenient, and personalized experiences. By saving on brick-and-mortar stores, inventory, and staff, these retailers can offer competitive prices and can profitably sell low-volume merchandise to their niche markets. While customers scan websites searching for the lowest prices, online retailers compete to offer the customer a top-caliber online experience, delivery, and handling of customer complaints and issues. E-commerce allows customers to connect and interact with the brand of their choice. Accordingly, customer service is crucial to the success of these retailers. In addition, B2B commerce is increasingly being conducted online, profoundly changing the supplier-customer relationship (Kotler & Keller, 2015).

eMarketers provide their customers with an individualized buying experience, a wide selection of products, and substantial information to help them research and evaluate these products. However, it is easy for customers to visit another website at any time with the click of a button. For this reason, eMarketers aim to not only attract customers, but to encourage them to stay on their websites, explore, and buy from them. A website’s stickiness—the amount of time that a potential customer spends at the site—can be used as an evaluative measure (Marshall & Johnston, 2011).

Anderson (2006) states that innovations in e-commerce and search engine technologies enhance the efficiency of online retail by encouraging the entry of even more innovative products. This process creates a long tail of niches while simultaneously decreasing the market share of blockbuster products. Anderson argued that Internet innovations reduce the marginal cost of products by allowing online retailers to focus on previously ignored long tail products. According to Anderson, in a world of scarcity, the "curse of the traditional retail" is the obligation to find local customers (p. 17). Traditional retailers typically carry only products that generate profitable demand. They are constrained by their space and retail areas, and thus prioritize their stocked products according to demand. By contrast, online retailers exist in a world of abundance, with infinite shelf space and cheap distribution costs. This advantage allows them to carry a substantial number of niches, which collectively represent a large share of their business and may rival their blockbuster products.

As examples, Anderson (2006) refers to the online book and music sales of Amazon and other online retailers, where selection is virtually unlimited and delivery is cheap. He adds that the market share of niches is increasing, and the cost to customers is decreasing. These shifts are influenced by technological innovations in search engines and recommendation and ranking tools, which effectively drive "demand down the tail" (p. 53). Anderson also argues that three forces underlie long-tail economics: democratization of production tools, democratization of distribution tools, and connecting supply and demand.

References

Anderson, C. (2006). The long tail: Why the future of business is selling less of more. New York, NY: Hyperion.

Gaikwad, J. M., & Kate, P. (2016, September). eMarketing: A modern approach of business at the door of consumer. International Journal of Research in Commerce & Management [serial online], 7(9):56-61.

Kotler, P., & Keller, K. L. (2015). Marketing management (15th ed.). Upper Saddle River, NJ: Pearson.

Marshall, G. W., & Johnston, M. W. (2011). Essentials of marketing managementZ:/MBA640/2175/OLR%20Files/Topic%20Intro/eMarketing_Introduction.html. New York, NY: McGraw-Hill.

Evaluate the Attractiveness of a New Business

Markides (1997) suggested that when evaluating business attractiveness, an organization should ask six questions:

· What could the organization do better than any of its competitors in its existing markets?

· What are the strategic resources required to succeed in the new market?

· Can the organization leapfrog or catch the competition?

· Would diversification break up the organization's strategic assets that may need to be kept together?

· Will the organization be a winner in the new business or just another player?

· And finally, what can the organization learn by entering into the new business, and will it be able to learn from it?

Porter summarized the above questions in the form of three tests that an organization should use when entering into a new business (de Kluyver & Pearce II, 2012, p. 168):

· The attractiveness test: Is the industry that the organization wants to enter fundamentally attractive from a competitive, growth, and profitability perspective, or can the organization make it favorable?

· The cost of entry test: Are the costs of entry into the new business reasonable? Is the timeframe needed to achieve profitability acceptable? Are the associated risks tolerable?

· The better-off test: Does the new business improve the organization's overall business portfolio performance and competitiveness?

References

de Kluyver, C. A., & Pearce II, J. A. (2012). Strategy: A view from the top (4th ed.). Upper Saddle River, NJ: Prentice Hall–Pearson

Markides, C. C. (1997). To diversify or not to diversify. Harvard Business Review, 75(6)93-99. Retrieved from www.hbr.org

Strategic Alliances

Faced with the challenge of turbulent markets and changing consumer tastes and preferences, organizations are increasingly using global strategic alliances in an effort to secure commercial advantage and eliminate waste from their distribution channels (Wu, Shih, & Shan, 2009). These alliances utilize global virtual innovation teams that cross national borders and help to create and enhance the alliance's competitive position.

Organizations are no longer isolated islands; they need to collaborate with one another—including with competitors—in order to survive (Bengtsson, Eriksson, & Wincent, 2010; Ybarra & Turk, 2011). Alliances enable organizations to obtain needed technical and managerial knowledge, to secure valuable resources (Muthusamy & White, 2005), and to enhance organizational innovation (Ahuja, 2000). Alliances enable interorganizational knowledge exchange: Member organizations gain access to unavailable knowledge and may accelerate their innovation process and enhance their competitive advantage. Global virtual teams are at the core of any knowledge exchange. These teams capitalize on their diverse knowledge and talent pool to leverage their organization's global new product development efforts (Salomo, Keinschmidt, & de Brentani, 2010). However, while global virtual teams have their advantages, managing them can be a challenge as they operate across time, space, and corporate boundaries, and because their communication is primarily electronic (Montoya, Massey, Hung, & Crisp, 2009).

References

Ahuja, G. (2000). Alliance networks, structural holes, and innovation: A longitudinal study. Administrative Science Quarterly, 45, 425-455. Retrieved from http://www.johnson.cornell.edu/Administrative-Science-Quarterly.aspx

Bengtsson, M., Eriksson, J. & Wincent, J. (2010). Co-opetition dynamics – an outline for further inquiry. Competitiveness Review, 20(2), 194–214. doi: 10.1108/10595421011029893

Montoya, M. M., Massey, A. P., Hung, Y. C., & Crisp, C. B. (2009). Can you hear me now? Communication in virtual product development teams. Journal of Product Innovation Management, 26(20), 139–155. doi: 10.1111/j.1540-5885.2009.00342.x

Wu, W. Y., Shih, H., & Chan, H. (2009). The analytic network process for partner selection criteria in strategic alliances. Expert System with Applications, 36(3), 4646–4653. doi: 10.1016/j.eswa.2008.06.049

Ybarra, C. E. & Turk, T. A. (2011). Strategic alliances with competing firms and shareholder value. Journal of Management and Marketing Research, 6, 1–10. Retrieved from http://www.aabri.com/jmmr.html

Primary and Secondary Research

The American Marketing Association (AMA) defines marketing research as follows:

Marketing research is the function that links the consumer, customer, and public to the marketer through information—information used to identify and define marketing opportunities and problems; generate, refine, and evaluate marketing actions; monitor marketing performance; and improve understanding of marketing as a process. Marketing research specifies the information required to address these issues, designs the method for collecting information, manages and implements the data collection process, analyzes the results, and communicates the findings and their implications. (AMA, 2013, para. 2)

There are two types of research (Marshall & Johnston, 2011):

· Primary research: Data is collected specifically for a certain research question, i.e., primary data. Data may be quantitative (statistical analysis), or qualitative (e.g., surveys, focus groups, and interviews). Primary research is important when making strategic decisions. While primary research is costly and more time consuming, it is more accurate and reliable.

· Secondary research: Data was collected for some other purpose than the research question at hand. Secondary research may involve an Internet search, periodicals, CRM data, government sources (e.g., economic census), and market research organizations. Secondary data is cheaper to obtain and is less time consuming to use because it is readily available; however, it may be outdated or unreliable. In addition, secondary research may not be a perfect fit for the research question. In general, primary research usually starts with a scan of the available secondary information. This helps get a better idea of what to look for.

References

AMA (2013). Marketing research definition. Retrieved from www.ama.org

Marshall, G. W., & Johnston, M. W. (2011). Essentials of marketing management. New York, NY: McGraw-Hill

Marketing Principlesis available under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported license without attribution as requested by the site's original creator or licensee.

Chapter 10 Gathering and Using Information: Marketing Research and Market Intelligence

Once you have come up with a great idea for an offering, how will you know if people will want to buy it? If they are willing to buy it, what will they want to pay? Will they be willing to pay enough so that you can earn a profit? Wouldn't it be great if you had a crystal ball that would give you the answers to these questions? After all, you don't want to quit your day job to develop a product that's going to be a flop.

In a sense, you do have such a crystal ball. It's called marketing research. Marketing research is the process of collecting, analyzing, and reporting marketing information that can be used to answer questions or solve problems so as to improve a company's bottom line. Marketing research includes a wide range of activities. (By contrast, market research is a narrower activity. It is the process of researching a specific market to determine its size and trends.)

Although marketing research isn't foolproof, it can take some of the guesswork out of decision making. Back to your great product idea: what, for example, should you name the product? Naming a product might sound like a minor decision, but it's not. In some cases it can be a deal-breaker. Just ask the bug-spray maker Out! International, Inc. In the 1990s, Out! International came up with what it thought was a really cute name for bug spray that would appeal to children. The product was called "Hey! There's a Monster in My Room!" The problem was that the name scared kids. They wanted nothing to do with it (Stern, 2002).

Marketing research can help with many tasks:

· developing product ideas and designs

· determining if there is demand for a product so you know whether to produce it

· identifying market segments for a product

· making pricing decisions

· evaluating packaging types

· evaluating in-store promotions

· measuring the satisfaction of customers

· measuring the satisfaction of channel partners

· evaluating the effectiveness of a website

· testing the effectiveness of ads and their placement

· making marketing channel decisions

Closely related to marketing research is market intelligence, which is often referred to as competitive intelligence. Whereas marketing research involves solving a specific marketing problem at a specific point in time, market intelligence involves gathering information on an ongoing basis to stay in touch with what's happening in the marketplace. For example, if you own a convenience store, part of your daily market intelligence gathering would include driving around to see what competing stores are charging for gasoline or checking to see what types of products are being sold and advertised.

If you're a small business owner, and you're talking to your customers and suppliers about new product ideas, you're engaging in market intelligence. If you go so far as to survey your customers with a questionnaire about a new type of service you're considering, you are engaging in marketing research. In big companies, marketing departments are often responsible for gathering market intelligence. But they are by no means the only group to do so. (We'll discuss more about who in the organization does which activities in a moment.) Students also gather market intelligence when they question other students about the best professors to take classes from.

Reference

Stern, S. (2002, July 2). The museum of food failures. Christian Science Monitor. Retrieved from http://www.csmonitor.com/ 2002/0702/p18s03-hfks.html

10.1 Marketing Information Systems

Learning Objectives

After studying this section, you should be able to do the following:

1. Describe the components of a marketing information system and each component's purpose.

2. Explain the situations in which marketing research should be used versus market intelligence.

3. Describe the limitations of market intelligence and its ethical boundaries.

4. Explain when marketing research should and should not be used.

A certain amount of marketing information is being gathered all the time by companies as they engage in their daily operations. When a sale is made and recorded, this is marketing information that's being gathered. When a sales representative records the shipping preferences of a customer in a firm's customer relationship management (CRM) system, this is also marketing information that's being collected. When a firm gets a customer complaint and records it, this, too, is information that should be put to use. All this data can be used to generate consumer insight. However, truly understanding customers involves not just collecting quantitative data (numbers) related to them but qualitative data, such as comments about what they think.

The trick is integrating all the information so it can be used by as many people as possible in an organization to make good decisions. Unfortunately, in many organizations, information isn't shared well among departments. Even within departments, it can be a problem. For example, one group in a marketing department might research a problem related to a brand, or uncover certain findings that would be useful to other brand managers, but never communicate them.

A marketing information system (MIS) is a way to manage the vast amount of information firms have on hand—information marketing professionals and managers need to make good decisions. Marketing information systems range from paper-based systems to sophisticated computer systems. Ideally, however, a marketing information system should include the following components:

· a system for recording internally generated data and reports

· a system for collecting market intelligence on an ongoing basis

· marketing analytics software to help managers with their decision making

· a system for recording marketing research information

Internally Generated Data and Reports

An organization generates and records a lot of information as part of its daily business operations, including sales and accounting data, and data on inventory levels, back orders, customer returns, and complaints. Firms are also constantly gathering information related to their websites, such as clickstream data. Clickstream data is data generated about the number of people who visit a website and its various pages, how long they dwell there, and what they buy or don't buy.

Companies use clickstream data to monitor the overall traffic of visitors, to see which areas of the site people aren't visiting and explore why, and to automatically offer visitors products and promotions by virtue of their browsing patterns. Software can be used to automatically tally the vast amounts of clickstream data gathered from websites and generate reports for managers based on that information. Netflix awarded a $1 million prize to a group of scientists to plow through web data generated by millions of Netflix users so as to improve Netflix's predictions of what users would like to rent (Baker, 2009).

Being able to access clickstream data and other internally generated information quickly can give a company's decision makers a competitive edge. In one example, Walmart took advantage of Target after 9/11 because Walmart's inventory information was updated by the minute; Target's was only updated daily. When Walmart's managers noticed American flags began selling rapidly immediately following the terrorist attacks on 9/11, the company quickly ordered as many flags as possible from various vendors—leaving none for Target.

Many companies make a certain amount of internal data available to their employees, managers, vendors, and trusted partners via intranets. An intranet is a private, internal website that looks like the web and operates like it, but only an organization's employees have access to the information. So, for example, instead of a brand manager asking someone in accounting to run a report on the sales of a particular product, the brand manager could look on the firm's intranet for the information.

However, big companies with multiple products, business units, and databases purchased and installed in different places and at different times often have such vast amounts of information that they can't post it all on an intranet. Consequently, getting hold of the right information can be hard.

Analytics Software

Increasingly, companies are purchasing analytics software to help them pull and make sense of internally generated information. Analytics software allows managers who are not computer experts to gather different information from a company's databases—information not produced in reports regularly generated by the company. The software incorporates regression models, linear programming, and other statistical methods to help managers answer "what if" types of questions. For example, "If we spend 10 percent more of our advertising on TV ads instead of magazine ads, what effect will it have on sales?" Oracle Corporation's Crystal Ball is one brand of analytical software.

The camping, hunting, fishing, and hiking retailer Cabela's has managed to refine its marketing efforts using analytics software developed by the software maker SAS. "Our statisticians in the past spent 75 percent of their time just trying to manage data. Now they have more time for analyzing the data with SAS, and we have become more flexible in the marketplace," says Corey Bergstrom, director of marketing research and analysis for Cabela's. "That is just priceless" (Zarello, 2009).

The company uses the software to help analyze sales transactions, market research, and demographic data associated with its large database of customers. It combines the information with web browsing data to gain a better understanding of the individual customers' marketing channel preferences as well as other marketing decisions. For example, does the customer prefer Cabela's 100-page catalogs or the 1,700-page catalogs? The software has helped Cabela's employees understand these relationships and make high-impact data-driven marketing decisions (Zarello, 2009).

Market Intelligence

A good internal reporting system can tell a manager what happened inside a firm. But what about what's going on outside the firm? What is the business environment like? Are credit-lending terms loose or tight, and how will they affect what you and your customers are able to buy or not buy? How will rising fuel prices and alternate energy sources affect the firm and its products? Do changes such as these present business obstacles or opportunities? Moreover, what are competitors up to?

Not gathering market intelligence leaves a company vulnerable. Remember Encyclopedia Britannica, the market leader in print encyclopedia business for literally centuries? Encyclopedia Britannica didn't see the digital age coming and nearly went out of business as a result. (You can now access Encyclopedia Britannica online.) By contrast, when fuel prices hit an all-time high in 2008, unlike other passenger airline companies, Southwest Airlines was prepared. Southwest had anticipated the problem, and had locked in contracts to buy fuel for its planes at much lower prices. Other airlines weren't as prepared and lost money because their fuel expenses skyrocketed. Meanwhile, Southwest Airlines managed to eke out a profit. Collecting market intelligence can also help a company generate ideas or product concepts that can then be tested by conducting market research.

Gathering market intelligence involves a number of activities, including scanning newspapers, trade magazines, and economic data produced by the government to find out about trends and what the competition is doing. In big companies, personnel in a firm's marketing department are primarily responsible for market intelligence and making sure it gets conveyed to decision makers. Some companies subscribe to news service companies that provide them with this information. LexisNexis is one such company. It provides companies with news about business and legal developments that could affect their operations. Other companies subscribe to mystery shopping services, companies that shop a client and/or competitors and report on service practices and service performance.

Search Engines and Corporate Websites

An obvious way to gain market intelligence is by examining competitors' websites as well as doing basic searches with search engines like Google. To find out what the press is writing about a company, its competitors, or any other topic, sign up to receive free alerts via e-mail by going to Google Alerts at http://www.google.com/alerts.

Suppose you want to monitor what people are saying about you or your company on blogs, the comment areas of websites, and social networks such as Facebook and Twitter. You can do so by going to a site like WhosTalkin.com, typing a topic or company name into the search bar, and voilà! All the good (and bad) things people have remarked about the company or topic turn up. It's a great way to seek out the shortcomings of competitors. It's also a good way to spot talent. For example, designers are using search engines like WhosTalkin.com to search the blogs of children and teens who are "fashion forward" and then involve them in designing new products.

WhosTalkin.com and Radian6 (a similar company) also provide companies with sentiment analysis. Sentiment analysis is a method of examining content in blogs, tweets, and other online media (other than news media) such as Facebook posts to determine what people are thinking. Some companies use sentiment analysis to determine how the market is reacting to a new product. The Centers for Disease Control (CDC) uses sentiment analysis to track the progress of flu; as people post or tweet how sick they are, the CDC can determine where the flu is increasing or decreasing.

Publications

The Economist, The Wall Street Journal, Forbes, Fortune, BusinessWeek, the McKinsey Report, Sales and Marketing Management, and the Financial Times are good to read to learn about general business trends. All discuss current trends, regulations, and consumer issues relevant for organizations doing business in the domestic and global marketplace. All of the publications are online, although you might have to pay a subscription fee to look at some of the content. Some of these publications have Asian, European, and Middle Eastern editions.

Other publications provide information about marketplace trends and activities in specific industries. Consumer Goods and Technology provides information consumer packaged-goods firms want to know. Likewise, Progressive Grocer provides information on issues important to grocery stores. Information Week provides information relevant to people and businesses working in the area of technology. World Trade provides information about issues relevant to organizations shipping and receiving goods from other countries. Innovation: America's Journal of Technology Commercialization provides information about innovative products that are about to hit the marketplace.

Trade Shows and Associations

Trade shows are another way companies learn about what competitors are doing. (If you are a marketing professional working a trade show for your company, visit your competitors' booths and see what they have to offer relative to what you have to offer.) And, every field has a trade association that collects and disseminates information about trends, breakthroughs, new technology, new processes, and challenges in that particular industry. The American Marketing Association, Food Marketing Institute, Outdoor Industry Association, Semiconductor Industry Association, Trade Promotion Management Association, and Travel Industry Association provide their member companies with a wealth of information and often deliver them daily updates via e-mail.

Salespeople

Salespeople provide a vital source of market intelligence. Suppose one of your products is selling poorly. Will you look to newspapers and magazines to figure out why? Will you consult a trade association? Probably not. You will talk to your firm's salespeople.

Perhaps more than anyone else, salespeople know how products are faring in the marketplace, what the competition is doing, and what customers are seeking.

A system for recording this information is crucial, which explains why so many companies have invested in customer relationship management (CRM) systems. Some companies circulate lists so their employees have a better idea of the market intelligence they might be seeking. Textbook publishers are an example. They let their sales representatives know the types of books they want to publish and encourage their representatives to look for authors among the professors to whom they sell.

Suppliers and Industry Experts

Good suppliers know which companies are moving a lot of inventory. And often they have an idea why. In many instances, they will tell you, if the information you're seeking is general enough so they don't have to divulge information that's confidential or that would be unethical to reveal. Befriending an expert in your industry, along with business journalists and writers, can be helpful, too. Often these people get invited to review products (Gardner, 2001).

Customers

Finally, when it comes to market intelligence, don't neglect observing how customers are behaving. They can provide clues, some of which you will be challenged to respond to. For example, during the latest economic downturn, many wholesalers and retailers noticed consumers began buying smaller amounts of goods—just what they needed to get by during the week. Seeing this trend and realizing that they couldn't pass along higher costs to customers (because of, say, higher fuel prices), a number of consumer-goods manufacturers "shrank" their products slightly rather than raise prices. You have perhaps noticed that some of the products you buy got smaller—but not cheaper.

Can Market Intelligence Be Taken Too Far?

Can market intelligence be taken too far? The answer is yes. In 2001, Procter & Gamble admitted it had engaged in "dumpster diving" by sifting through a competitor's garbage to find out about its hair care products. Although the practice isn't necessarily illegal, it cast P&G in a negative light. Likewise, British Airways received a lot of negative press in the 1990s after it came to light that the company had hacked into Virgin Atlantic Airways' computer system (Miller, 2001).

Gathering corporate information illegally or unethically is referred to as industrial espionage. Sometimes companies hire professional spies to gather information about competitors and their trade secrets or even bug their phones. Former and current employees can also reveal a company's trade secret either deliberately or unwittingly. Microsoft sued a former employee it believed had divulged trade secrets to its competitors (Mills, 2009). It's been reported that for years professional spies bugged Air France's first-class seats to listen in on executives' conversations (Anderson, 1995).

To develop standards of conduct and create respect for marketing professionals who gather market intelligence, the Society of Competitive Intelligence Professionals has developed a code of ethics (SCIP, n.d.):

· to continually strive to increase the recognition and respect of the profession

· to comply with all applicable laws, domestic and international

· to accurately disclose all relevant information, including one's identity and organization, prior to all interviews

· to avoid conflicts of interest in fulfilling one's duties

· to provide honest and realistic recommendations and conclusions in the execution of one's duties

· to promote this code of ethics within one's company, with third-party contractors and within the entire profession

· to faithfully adhere to and abide by one's company policies, objectives and guidelines

Marketing Research

Marketing research is what a company has to resort to if it can't answer a question by using any of the types of information discussed so far—market intelligence, internal company data, or analytics software applied to data. Marketing research is generally used to answer specific questions. The name you should give your new product is an example. Unless your company has previously done specific research on product names—what consumers think of them, good or bad—you're probably not going to find the answer to that question in internal company data. Also, unlike internal data, which is generated on a regular basis, marketing research is not ongoing. Marketing research is done on an as-needed or project basis. If an organization decides that it needs to conduct marketing research, it can either conduct marketing research itself or hire a research firm to do it.

So when is marketing research needed? Keep in mind, marketing research can be expensive. You therefore have to weigh the costs of the research against the benefits. What questions will the research answer, and will knowing the answer result in the firm earning or saving more money than the research costs?

Marketing research can also take time. If a quick decision is needed for a pressing problem, it might not be possible to do the research. Finally, sometimes the answer is obvious, so there is no point in conducting the research. If one of your competitors comes up with a new offering and consumers are clamoring to get it, you certainly don't need to undertake a research study to see if such a product would survive in the marketplace.

Alex J. Caffarini, the president and founder of the marketing research firm Analysights, believes there are a number of other reasons companies mistakenly do marketing research. Caffarini's explanations (shown in parentheses) about why a company's executives sometimes make bad decisions are somewhat humorous. Read through them (Caffarini, n.d.):

· "We've always done this research." (The research has taken on a life of its own; this particular project has continued for years and nobody questioned whether it was still relevant.)

· "Everyone's doing this research." (Their competitors are doing it, and they're afraid they'll lose competitive advantage if they don't; yet no one asks what value the research is creating.)

· "The findings are nice to know." (Great—spend a lot of money to create a wealth of useless information. If the information is nice to know, but you can't do anything with it, you're wasting money.)

· "If our strategy fails, having done the research will show that we made our best educated guess." (They're covering their butts. If things go wrong, they can blame the findings, or the researcher.)

· "We need to study the problem thoroughly before we decide on a course of action." (They're afraid of making a tough decision. Conducting marketing research is a good way to delay the inevitable. In the meantime, the problem gets bigger, or the opportunity closes.)

· "The research will show that our latest ad campaign was effective." (They're using marketing research to justify past decisions. Rarely should marketing research be done after the fact.)

Is Marketing Research Always Correct?

Marketing research can help companies avoid making mistakes. Tim Hortons, a Canadian coffee that has been expanding, opened self-serve kiosks in Ireland, but the service was a flop. Why? Because cars in Ireland didn't have cup holders. Would marketing research have helped? Probably. So would a little bit of market intelligence. It would have been easy for an observer to see that trying to drive a car and hold a cup of hot coffee at the same time is difficult.

That said, that marketing research is not infallible. In fact, marketing research studies have rejected a lot of good ideas. The idea for telephone answering machines was initially rejected following marketing research. So was the hit sitcom Seinfeld, a show that in 2002 TV Guide named the number-one television program of all time. Even the best companies, such as Coca-Cola, have made mistakes in marketing research that have led to huge flops. In the next section of this chapter, we'll discuss the steps related to conducting marketing research.

Key Takeaway

Many marketing problems and opportunities can be solved by gathering information from a company's daily operations and analyzing it. Market intelligence involves gathering information on a regular, ongoing basis to stay in touch with the marketplace. Marketing research is what a company resorts to if it can't answer a question by using market intelligence, internal company data, or analytical software.

Review Questions

1. Why do companies gather market intelligence and conduct marketing research?

2. What activities are part of market intelligence gathering?

3. How do marketing professionals know if they have crossed a line in terms of gathering marketing intelligence?

4. How does the time frame for conducting marketing intelligence differ from the time frame in which marketing research data is gathered?

References

Anderson, J. (1995, March 25). Bugging Air France first class. Ellensburg Daily News. Retrieved from http://news.google.com/newspapers?nid=860&dat=19950320&id=ddYPAAAAIBAJ&sjid=F48DAAAAIBAJ&pg=4554,2982160

Baker, S. (2009, July 24). The web knows what you want. BusinessWeek. Retrieved from http://www.businessweek.com/magazine/content/ 09_30/b4140048486880.htm

Caffarini, A. J. (n.d.). Ten costly marketing mistakes and how to avoid them. Analysights, LLC.

Gardner, J. (2001, September 24). Competitive intelligence on a shoestring. Inc. Retrieved from http://www.inc.com/articles/2001/09/23436.html

Miller, L. (2001, August 31). P&G admits to dumpster diving. Retrieved from http://www.prwatch.org/node/ 663

Mills, E. (2009, January 30). Microsoft suit alleges ex-worker stole trade secrets. Retrieved from http://news.cnet.com/8301-10805_3-10153616-75.html

Society of Competitive Intelligence Professionals (SCIP) (n.d.). SCIP code of ethics for CI professionals. Retrieved from http://www.scip.org/About/content.cfm?ItemNumber=578&navItemNumber=504

Zarello, C. (2009, May 5). Hunting for gold in the great outdoors. Retail Information Systems News. Retrieved from http://www.risnews.com/ME2/dirmod.asp?sid=&nm=&type=MultiPublishing&mod=PublishingTitles&mid=2E3DABA5396D4649BABC55BEADF2F8FD&tier=4&id=7BC8781137EC46D1A759B336BF50D2B6

10.2 Steps in the Marketing Research Process

Learning Objective

1. Describe the basic steps in the marketing research process and the purpose of each step.

Step 1: Define the Problem (or Opportunity)

There's a saying in marketing research that a problem half defined is a problem half solved. Defining the "problem" of the research sounds simple, doesn't it? Suppose your product is tutoring other students in a subject you're a whiz at. You have been tutoring for a while, and people have begun to realize you're good at it. Then, suddenly, your business drops off. Or it explodes, and you can't cope with the number of students you're being asked to help. If the business has exploded, should you try to expand? Perhaps you should subcontract with some other "whiz" students. You would send them students to be tutored, and they would give you a cut of their pay for each student you referred.

Both of these scenarios would be a problem, wouldn't they? They are problems insofar as they cause you headaches. But are they really the problem? Or are they the symptoms of something bigger? For example, maybe business has dropped because the school is experiencing financial trouble and has lowered the number of scholarships. Consequently, there are fewer total students. Conversely, if you're swamped with people who want you to tutor, perhaps the school awarded more scholarships than usual, so there are a greater number of students who need services. Alternately, perhaps you ran an ad in your school's newspaper, and that led to the influx of students.

Businesses are in a similar situation. They take a look at symptoms and try to get to the potential causes. If you approach a marketing research company with either scenario—either too much or too little business—the firm will seek more information from you such as the following:

· In what semester(s) did your tutoring revenues fall (or rise)?

· In what subject areas did your tutoring revenues fall (or rise)?

· In what sales channels did revenues fall (or rise): Were there fewer (or more) referrals from professors or other students? Did the ad you ran result in fewer (or more) referrals this month than in the past months?

· Among what demographic groups did your revenues fall (or rise)—women or men, people with certain majors, or first-year, second-, third-, or fourth-year students?

The key is to look at all potential causes so as to narrow the parameters of the study to the information you actually need to make a good decision about how to fix your business if revenues have dropped or whether to expand if your revenues have exploded.

The next task for the researcher is to put into writing the research objective. The research objective is the goal(s) the research is supposed to accomplish. The marketing research objective for your tutoring business might read as follows:

To survey college professors who teach 100- and 200-level math courses to determine why the number of students referred for tutoring dropped in the second semester.

This is admittedly a simple example designed to help understand the basic concept. If you take a marketing research course, you will learn that research objectives get more complicated. The following is an example (Burns & Bush, 2010, p. 85):

"To gather information from a sample representative of the US population among those who are 'very likely' to purchase an automobile within the next six months, which assesses preferences (measured on a 1–5 scale ranging from 'very likely to buy' to 'not likely at all to buy') for the model diesel at three different price levels. Such data would serve as input into a forecasting model that would forecast unit sales, by geographic regions of the country, for each combination of the model's different prices and fuel configurations."

Now do you understand why defining the problem is complicated? Many a marketing research effort is doomed from the start because the problem was improperly defined. Coke's ill-fated decision to change the formula of Coca-Cola in 1985 is a case in point: Pepsi had been creeping up on Coke in terms of market share over the years as well as running a successful promotional campaign called the "Pepsi Challenge," in which consumers were encouraged to do a blind taste test to see if they agreed that Pepsi was better. Coke spent four years researching "the problem." Indeed, people seemed to like the taste of Pepsi better in blind taste tests. Thus, the formula for Coke was changed. But the outcry among the public was so great that the new formula didn't last long—a matter of months—before the old formula was reinstated. Some marketing experts believe Coke incorrectly defined the problem as "How can we beat Pepsi in taste tests?" instead of "How can we gain market share against Pepsi?" (Burns & Bush, 2010, p. 87–88).

Step 2: Design the Research

The next step in the marketing research process is to do a research design. The research design is the "plan of attack." It outlines what data to gather and from whom, how and when you will collect the data, and how you will analyze it. Let's first look at the data to gather. There are two basic types. The first is primary data, information you collect yourself, using hands-on tools such as interviews or surveys, specifically for the research project you're conducting. Secondary data is data that has already been collected by someone else, or data you have already collected for another purpose. Collecting primary data is more time-consuming, work-intensive, and expensive. Consequently, always try to collect secondary data first to solve a research problem. A great deal of research on a variety of topics already exists. If this research contains the answer to your question, there is no need to replicate it.

Sources of Secondary Data

Your company's internal records are a source of secondary data. So are any data you collect as part of marketing intelligence gathering efforts. You can also purchase syndicated research. Syndicated research is primary data that marketing research firms collect regularly and sell to other companies. J.D. Power & Associates is a provider of syndicated research. The company conducts independent, unbiased surveys of customer satisfaction, product quality, and buyer behavior for industries. The company is best known for its research in the automobile sector.

One of the best-known sellers of syndicated research is the Nielsen Company, which produces the Nielsen ratings. The Nielsen ratings measure the size of television, radio, and newspaper audiences. You have probably read or heard about TV shows that get the highest (Nielsen) ratings. (Arbitron does the same thing for radio.) Nielsen, along with its main competitor, Information Resources Inc. (IRI), also sells businesses scanner-based research. Scanner-based research is collected by scanners at checkout stands in stores. Each week, Nielsen and IRI collect information on the millions of purchases at stores. The companies then compile the information and sell it to firms. The Nielsen Company has also teamed with Facebook to collect marketing research information. Via Facebook, users will see surveys in some of the spaces in which they used to see online ads (Rappeport & Gelles, 2009).

By contrast, MarketResearch.com is an example of a marketing research aggregator, a marketing research company that doesn't conduct its own research and sell it. Instead, it buys research reports from other marketing research companies and then sells the reports in their entirety or in pieces to other firms. Check out MarketResearch.com's website. There are a huge number of studies to buy for relatively small amounts of money.

A local library is a good place to gather free secondary data. It has searchable databases as well as handbooks, dictionaries, and books, some of which can be accessed online. Government agencies also collect and report information on demographics, economic and employment data, health information, and balance-of-trade statistics. The US Census Bureau collects data every 10 years about who lives where. Basic demographic information about sex, age, race, and types of housing in which people live in each state, metropolitan area, and rural area is gathered so that population shifts can be tracked, including determining the number of legislators each state should have in the US House of Representatives. For the US government, this is primary data. For marketing managers, it is an important source of secondary data.

The Survey Research Center at the University of Michigan also conducts periodic surveys and publishes information about trends in the United States. One research study the center continually conducts is called the "Changing Lives of American Families." This is important research data for marketing managers monitoring consumer trends in the marketplace. The World Bank and the United Nations are international organizations that collect a great deal of information. Their websites contain many free research studies and data related to global markets.

Gauging the Quality of Secondary Data

When you are gathering secondary information, it's good to be skeptical. Sometimes studies are commissioned to produce the result a client wants to hear—or wants the public to hear. For example, throughout the twentieth century, numerous studies found that smoking was good for people's health. The problem was the studies were commissioned by the tobacco industry. Web research can also pose certain hazards. There are many biased sites that try to fool people into thinking that they are providing good data. Often the data is favorable to the products they are trying to sell. Beware of product reviews as well. Unscrupulous sellers sometimes get online and create bogus ratings for products. See below for questions you can ask to help gauge the credibility of secondary information.

Gauging the Credibility of Secondary Data: Questions to Ask

· Who gathered this information?

· For what purpose?

· What does the person or organization that gathered the information have to gain by doing so?

· Was the information gathered and reported in a systematic manner?

· Is the source of the information accepted as an authority by other experts in the field?

· Does the article provide objective evidence to support the position presented?

Types of Research Design

By understanding different research designs, a researcher can solve a client's problems more quickly and efficiently. Research designs fall into three categories:

1. exploratory research design

2. descriptive research design

3. causal research design (experiments)

An exploratory research design is useful when you are initially investigating a problem but you haven't defined it well enough to do an in-depth study of it. Perhaps via regular market intelligence, you have spotted what appears to be a new opportunity in the marketplace. You would then do exploratory research to investigate it further and "get your feet wet," as the saying goes. Exploratory research is less structured than other types of research, and secondary data is often used.

One form of exploratory research is qualitative research. Qualitative research is any form of research that includes gathering data that is not quantitative, and often involves exploring questions such as why as much as what or how much. Different forms, such as depth interviews and focus group interviews, are common in marketing research.

The depth interview—engaging in detailed, one-on-one, question-and-answer sessions with potential buyers—is an exploratory research technique. However, unlike surveys, the people being interviewed aren't asked a series of standard questions. Instead, the interviewer is armed with general topics and asks questions that are open-ended, meaning that they allow the interviewee to elaborate. "How did you feel about the product after you purchased it?" is an example. A depth interview also allows a researcher to ask logical follow-up questions such as "Can you tell me what you mean when you say you felt uncomfortable using the service?" or "Can you give me some examples?" to help focus on the research problem. Depth interviews can be conducted in person or over the phone. The interviewer either takes notes or records the interview.

Focus groups and case studies are often used for exploratory research as well. A focus group is a group of potential buyers brought together to discuss a marketing research topic. A moderator is used to focus the discussion, the sessions are recorded, and points of consensus are later summarized by the market researcher. Textbook publishers often gather professors at conferences to participate in focus groups. However, focus groups can also be conducted on the telephone, in online chat rooms, or both, using meeting software like WebEx. The basic steps of conducting a focus group are outlined below.

The Basic Steps of Conducting a Focus Group

1. Establish the objectives of the focus group. What is its purpose?

2. Identify the people who will participate in the focus group. What makes them qualified to participate? How many of them will you need, and what they will be paid?

3. Obtain contact information for the participants and send out invitations (usually e-mails are most efficient).

4. Develop a list of questions.

5. Choose a facilitator.

6. Choose a location in which to hold the focus group and the method by which it will be recorded.

7. Conduct the focus group. If the focus group is not conducted electronically, include name tags for the participants, pens and notepads, any materials the participants need to see, and refreshments. Record participants' responses.

8. Summarize the notes from the focus group and write a report for management.

A case study looks at how another company solved the problem that's being researched. Sometimes multiple cases, or companies, are used in a study. Case studies nonetheless have a mixed reputation. Some researchers believe it's hard to generalize, or apply, the results of a case study to other companies. Nonetheless, collecting information about companies that encountered the same problems a firm is facing can provide insight about what direction to take. In fact, one way to begin a research project is to study a successful product or service.

Two other types of qualitative data used for exploratory research are ethnographies and projective techniques. In an ethnography, researchers interview, observe, and often videotape people while they work, live, shop, and play. The Walt Disney Company has used ethnographers to uncover the likes and dislikes of boys aged 6 to 14, a financially attractive market segment for Disney, but one in which the company had been losing market share. The ethnographers visit the homes of boys, observe the things they have in their rooms to get a sense of their hobbies, and accompany them and their mothers when they shop to see where they go, what the boys are interested in, and what they ultimately buy (the children get $75 out of the deal, incidentally) (Barnes, 2009).

Projective techniques are used to reveal information research respondents might not reveal by being asked directly. Asking a person to complete sentences such as the following is one technique:

People who buy Coach handbags __________.

(Will he or she reply with "are cool," "are affluent," or "are pretentious," for example?)

KFC's grilled chicken is ______.

Or the person might be asked to finish a story that presents a certain scenario. Word associations are also used to discern people's underlying attitudes toward goods and services. Using a word-association technique, a market researcher asks a person to say or write the first word that comes to mind in response to another word. If the initial word is "fast food," what word does the person associate it with or respond with? Is it "McDonald's"? If many people reply that way, and you're conducting research for Burger King, that could indicate Burger King has a problem. However, if the research is being conducted for Wendy's, which recently began running an advertising campaign to the effect that Wendy's offerings are "better than fast food," it could indicate that the campaign is working.

Completing cartoons is yet another type of projective technique. It's similar to finishing a sentence or story, only with the pictures. One of the characters in the picture will have made a statement, and the person is asked to fill in the empty cartoon "bubble" with how they think the second character will respond.

In some cases, your research might end with exploratory research. Perhaps you have discovered your organization lacks the resources needed to produce the product. In other cases, you might decide you need more in-depth, quantitative research such as descriptive research or causal research. Most marketing research professionals advise using both types of research, if feasible. On the one hand, the qualitative-type research used in exploratory research is often considered too "lightweight." Remember when we discussed telephone answering machines and the hit TV sitcom Seinfeld? Both product ideas were initially rejected by focus groups. On the other hand, relying solely on quantitative information often results in market research that lacks ideas.

Descriptive Research

Anything that can be observed and counted falls into the category of descriptive research design. A study using a descriptive research design involves gathering hard numbers, often via surveys, to describe or measure a phenomenon so as to answer the questions of who, what, where, when, and how. "On a scale of 1–5, how satisfied were you with your service?" is a question that illustrates the information a descriptive research design is supposed to capture.

Physiological measurements also fall into the category of descriptive design. Physiological measurements measure people's involuntary physical responses to marketing stimuli, such as an advertisement. Elsewhere, we explained that researchers have gone so far as to scan the brains of consumers to see what they really think about products versus what they say about them. Eye tracking is another type of physiological measurement. It involves recording the movements of a person's eyes when the person is looking at some sort of stimulus, such as a banner ad or a web page. The Walt Disney Company has a research facility to take physical measurements of viewers when they see Disney programs and advertisements. The facility measures three types of responses: heart rates, skin changes, and eye movements (Spangler, 2009).

A strictly descriptive research design instrument—a survey, for example—can tell you how satisfied your customers are. It can't, however, tell you why. Nor can an eye-tracking study tell you why people's eyes tend to dwell on certain types of banner ads—only that they do. To answer "why" questions an exploratory research design or causal research design is needed (Wagner, 2007).

Causal Research

Causal research design examines cause-and-effect relationships. Using a causal research design allows researchers to answer "what if" types of questions. In other words, if a firm changes X (say, a product's price, design, placement, or advertising), what will happen to Y (say, sales or customer loyalty)?

To conduct causal research, the researcher designs an experiment that "controls," or holds constant, all of a product's marketing elements except one (or using advanced techniques of research, a few elements can be studied at the same time). The one variable is changed, and the effect is then measured. Sometimes the experiments are conducted in a laboratory using a simulated setting designed to replicate the conditions buyers would experience. Or the experiments may be conducted in a virtual computer setting.

You might think setting up an experiment in a virtual world such as the online game Second Life would be a viable way to conduct controlled marketing research. Some companies have tried to use Second Life for this purpose, but the results have been mixed as to whether it is a good medium for marketing research. The German marketing research firm Komjuniti was one of the first "real-world" companies to set up an "island" in Second Life upon which it could conduct marketing research. However, with so many other attractive fantasy islands in which to play, the company found it difficult to get Second Life residents, or players, to voluntarily visit the island and stay long enough so meaningful research could be conducted. Plus, the "residents," or players, in Second Life have been known to protest corporations invading their world. When Komjuniti created its research island, the residents showed up waving signs and threatening to boycott (Wagner, 2007).

Why is being able to control the setting so important? Let's say you are an American flag manufacturer and you are working with Walmart to conduct an experiment to see where in its stores American flags should be placed so as to increase their sales. Then the terrorist attacks of 9/11 occur. In the days afterward, sales skyrocketed—people bought flags no matter where they were displayed. Obviously, the terrorist attacks in the United States would have skewed the experiment's data.

An experiment conducted in a natural setting such as a store is referred to as a field experiment. Companies sometimes do field experiments either because it is more convenient or because they want to see if buyers will behave the same way in the "real world" as in a laboratory or on a computer. The place the experiment is conducted or the demographic group of people the experiment is administered to is considered the test market. Before a large company releases a product to the entire marketplace, it will often place the offering in a test market to see how well it will be received. For example, to compete with MillerCoors' 64-calorie beer MGD 64, Anheuser-Busch tested its Select 55 beer in certain cities (McWilliams, 2009).

Many companies use experiments to test all marketing communications. For example, the online discount retailer O.co (formerly called Overstock.com) tests its marketing offers and tracks the results of each. One study the company conducted combined 26 different variables related to offers e-mailed to several thousand customers. The study resulted in a decision to send a group of e-mails to different segments. The company then tracked the results of the sales generated to see if they were in line with the earlier experiment it had conducted that led it to make the offer.

Step 3: Design the Data-Collection Forms

If the behavior of buyers is being formally observed, and a number of different researchers are conducting observations, the data obviously need to be recorded on a standardized data-collection form that's either paper or electronic. Otherwise, the data collected will not be comparable. The items on the form could include a shopper's sex; his or her approximate age; whether the person seemed hurried, moderately hurried, or unhurried; and whether or not he or she read the label on products or used coupons.

The same is true when it comes to surveying people with questionnaires. Surveying people is one of the most commonly used techniques to collect quantitative data. Surveys are popular because they can be easily administered to large numbers of people quickly. However, to produce the best results, the questionnaire needs to be carefully designed.

Questionnaire Design

Most questionnaires follow a similar format: They begin with an introduction describing what the study is for, followed by instructions for completing the questionnaire and, if necessary, returning it to the market researcher. The first few questions are usually basic, warm-up type of questions the respondent can readily answer, such as the respondent's age, level of education, and residence. The warm-up questions are then followed by a logical progression of more detailed, in-depth questions that get to the heart of the question being researched. Lastly, the questionnaire wraps up with a statement that thanks the respondent for participating and explains when and how he or she will be paid for participating.

How the questions are worded is important. It's natural for respondents to want to provide the "correct" answers to the person administering the survey. Therefore, it's possible that people will try to tell you what you want to hear. Consequently, the survey questions must be written in an unbiased, neutral way. They shouldn't lead a person to answer a question one way or another by the way it's worded. The following is an example of a leading question.

Don't you agree that teachers should be paid more?

The questions also need to be clear and unambiguous. Consider the following question:

Which brand of toothpaste do you use?

The question sounds clear enough, but what if the respondent recently switched brands? What if he or she uses Crest at home, but while away from home or traveling, he or she uses something else? Rewording the question as follows so it's more specific will help make the question clearer:

Which brand of toothpaste have you used at home in the past six months? If you have used more than one brand, please list each of them (Quick MBA, n.d.).

Sensitive questions have to be asked carefully. For example, asking a respondent, "Do you consider yourself a light, moderate, or heavy drinker?" can be tricky. Few people want to admit to being heavy drinkers. You can "soften" the question by including a range of answers, as the following example shows:

How many alcoholic beverages do you consume in a week?

· __0–5 alcoholic beverages

· __5–10 alcoholic beverages

· __10–15 alcoholic beverages

Many people don't like to answer questions about their income levels. Asking them to specify income ranges rather than divulge their actual incomes can help.

Other research question "don'ts" include using jargon and acronyms that could confuse people. "How often do you IM?" is an example. Also, don't ask two questions in the same question, something researchers refer to as a double-barreled question. "Do you think parents should spend more time with their children and/or their teachers?" is an example of a double-barreled question.

Open-ended questions, or questions that ask respondents to elaborate, can be included. However, they are harder to tabulate than closed-ended questions, or questions that limit a respondent's answers. Multiple-choice and yes-and-no questions are examples of closed-ended questions.

Testing the Questionnaire

You have probably heard the phrase "garbage in, garbage out." If the questions are bad, the information gathered will be bad, too. One way to make sure you don't end up with garbage is to test the questionnaire before sending it. Is there enough space for people to elaborate on open-ended questions? Is the font readable? To test the questionnaire, marketing research professionals first administer it face-to-face to respondents. This gives them the chance to ask the researcher about questions or instructions that are unclear or don't make sense. The researcher then administers the questionnaire to a small subset of respondents in the actual way the survey is going to be disseminated, whether it's delivered via phone, in person, by mail, or online.

Getting people to participate and complete questionnaires can be difficult. If the questionnaire is too long or hard to read, many people won't complete it. So, eliminate questions that aren't necessary. Including some sort of monetary incentive for completing the survey can increase the number of completed questionnaires.

Step 4: Specify the Sample

Once you have created your questionnaire or other marketing study, how do you figure out who should participate? Obviously, you can't survey or observe all potential buyers in the marketplace. Instead, you must choose a sample. A sample is a subset of potential buyers that are representative of your entire target market, or population being studied. Sometimes market researchers refer to the population as the universe to reflect the fact that it includes the entire target market, whether it consists of a million people, a hundred thousand, a few hundred, or a dozen. "All unmarried people over the age of 18 who purchased Dirt Devil steam cleaners in the United States during 2011" is an example of a population that has been defined.

Obviously, the population has to be defined correctly. Otherwise, you will be studying the wrong group of people. Not defining the population correctly can result in flawed research, or sampling error. A sampling error is any type of marketing research mistake that results because a sample was used. One criticism of Internet surveys is that the people who take these surveys don't really represent the overall population. On average, Internet survey takers tend to be more educated and tech-savvy. Consequently, if they solely constitute your population, even if you screen them for certain criteria, the data could be skewed.

The next step is to put together the sampling frame, the list from which the sample is drawn. The sampling frame can be put together using a directory, customer list, or membership roster (Wrenn, Stevens, & Loudon, 2007). Keep in mind that the sampling frame won't perfectly match the population. Some people will be included who shouldn't be. Other people who should be included will be inadvertently omitted. It's no different than if you were to conduct a survey of, say, 25 percent of your friends, using friends' names you have in your cell phone. Most of your friends' names are likely to be programmed into your phone, but not all. As a result, a degree of sampling error always occurs.

There are two main categories of samples in terms of how they are drawn: probability samples and nonprobability samples. A probability sample is one in which each would-be participant has a known and equal chance of being selected. The chance is known because the total number of people in the sampling frame is known. For example, if every other person from the sampling frame were chosen, each person would have a 50 percent chance of being selected.

A nonprobability sample is any type of sample that's not drawn in a systematic way. So the chances of each would-be participant being selected can't be known. A convenience sample is one type of nonprobability sample. It is a sample a researcher draws because it's readily available and convenient to do so. Surveying people on the street as they pass is an example of a convenience sample. The question: are these people representative of the target market?

For example, suppose a grocery store needed to quickly conduct research on shoppers to get ready for an upcoming promotion. Now suppose that the researcher came between 10 a.m. and noon on a weekday. The shoppers wouldn't be representative of the store's entire target market. What about commuters who stop at the store before and after work? Their views wouldn't be represented. Neither would people who work the night shift or shop at odd hours. As a result, there would be a lot of room for sampling error. For this reason, studies that use nonprobability samples aren't considered as accurate. Nonprobability samples are more often used in exploratory research.

Finally, the size of the sample has an effect on the amount of sampling error. Larger samples generally produce more accurate results. The larger the sample, the more data you will have, which will give you a more complete picture. However, the more people surveyed or studied, the more costly the research.

Statistics can be used to determine a sample's optimal size. If you take a marketing research or statistics class, you will learn more about how to determine the optimal size.

Of course, if you hire a marketing research company, much of this work will be taken care of. Many marketing research companies, such as ResearchNow, maintain panels of prescreened people they draw upon. In addition, the marketing research firm will be responsible for collecting the data or contracting with a company that specializes in data collection.

Step 5: Collect the Data

As we have explained, primary marketing research data can be gathered in a number of ways. Surveys, taking physical measurements, and observing people are just three of the ways. If you're observing customers as part of gathering the data, keep in mind that if shoppers are aware of the fact, it can have an effect on their behavior. For example, if a customer shopping for feminine hygiene products in a supermarket aisle realizes she is being watched, she could become embarrassed and leave the aisle, which would adversely affect your data. To get around problems such as these, some companies set up cameras or two-way mirrors to observe customers. Organizations also hire mystery shoppers to work around the problem. A mystery shopper is someone who is paid to shop at a firm's establishment or one of its competitors to observe the level of service, cleanliness of the facility, and so forth, and report his or her findings to the firm.

Survey data can be collected in many different ways and combinations of ways. The following are the basic methods used:

· face-to-face (can be computer aided)

· telephone (can be computer aided or completely automated)

· mail and hand delivery

· e-mail and the web

A face-to-face survey is, of course, administered by a person. The surveys are conducted in public places such as shopping malls, on the street, or in people's homes if they have agreed to it. In years past, it was common for researchers in the United States to knock on people's doors to gather survey data. However, randomly collected door-to-door interviews are less common today, partly because people are afraid of crime and are reluctant to give information to strangers (McDaniel & Gates, 1998, 61).

Nonetheless, "beating the streets" is still a legitimate way questionnaire data is collected. When the US Census Bureau collects data on the nation's population, it hand-delivers questionnaires to rural households that do not have street-name and house-number addresses. And Census Bureau workers personally survey the homeless to collect information about their numbers. Face-to-face surveys are also commonly used in third world countries to collect information from people who cannot read or lack phones and computers.

A plus of face-to-face surveys is that they allow researchers to ask lengthier, more complex questions because the people being surveyed can see and read the questionnaires. The same is true when a computer is used. For example, the researcher might ask the respondent to look at a list of 10 retail stores and rank the stores from best to worst. The same question wouldn't work so well over the telephone because the person couldn't see the list. The question would have to be rewritten. Another drawback with telephone surveys is that even though federal and state "do not call" laws generally don't prohibit companies from gathering survey information over the phone, people often screen such calls using answering machines and caller ID.

Probably the biggest drawback of both surveys conducted face-to-face and administered over the phone by a person is that they are labor-intensive and therefore costly. Mailing out questionnaires is costly, too, and response rates can be low. If you receive a questionnaire in the mail, it is easy to throw it in the trash; it's harder to tell a market researcher who approaches you on the street that you don't want to be interviewed.

By contrast, gathering survey data collected by a computer, either over the telephone or on the Internet, can be cost-effective and in some cases free. SurveyMonkey and Zoomerang are websites that will allow you to create online questionnaires, e-mail them to a certain amount of people for free, and view the responses as they come in. For larger surveys, you have to pay a subscription price of a few hundred dollars. But that still can be cost-effective. The sites also have a host of other features such as online-survey templates to create your questionnaire, a way to set up automatic reminders sent to people who haven't yet completed surveys, and tools to create graphics for your final research report.

Like a face-to-face survey, an Internet survey can show buyers different visuals such as ads, pictures, and videos of products and packaging. Web surveys are also fast, which is a major plus. Whereas face-to-face and mailed surveys often take weeks to collect, you can conduct a web survey in a matter of days or even hours. And, of course, because the information is electronically gathered, it can be automatically tabulated. You can also potentially reach a broader geographic group than you could if you had to personally interview people. The Zoomerang site allows you to create surveys in different languages.

Another plus for web and computer surveys (and electronic phone surveys) is that there is less room for human error because the surveys are administered electronically. For instance, there's no risk that the interviewer will ask a question wrong or use a tone of voice that could mislead the respondents. Respondents are also likely to feel more comfortable inputting the information into a computer if a question is sensitive than they would divulging the information to another person face-to-face or over the phone. Given all of these advantages, it's not surprising that the Internet is a top way to collect primary data. However, like mail surveys, surveys sent to people over the Internet are easy to ignore.

Finally, before the data collection process begins, the surveyors and observers need to be trained to look for the same things and ask questions the same way. If they are using rankings or rating scales, they need to be "on the same page" as to what constitutes a high ranking or a low ranking. As an analogy, you have probably had some teachers grade your college papers harder than others. The goal of training is to avoid a wide disparity between how different observers and interviewers record the data.

For example, if an observation form asks the observers to describe whether a shopper's behavior is hurried, moderately hurried, or unhurried, they should be given an idea of what defines each rating. Does it depend on how much time the person spends in the store or in the individual aisles? How fast they walk? In other words, the criteria and ratings need to be specified.

Collecting International Marketing Research Data

Gathering marketing research data in foreign countries poses special challenges. However, that doesn't stop firms. Marketing research companies are located across the globe. Eight of the 10 largest marketing research companies in the world are headquartered in the United States. However, five of these eight firms earn more of their revenues abroad than they do in the United States. There's a reason for this: many US markets were saturated, or tapped out, long ago in terms of the amount that they can grow. Coke is an example. Most of the Coca-Cola Company's revenues are earned in markets abroad. To be sure, the United States is still a huge market when it comes to the revenues marketing research firms generate by conducting research in the country: in terms of their spending, American consumers fuel the world's economic engine. Still, emerging countries with growing middle classes, such as China, India, and Brazil, are hot new markets companies want to tap.

What kind of challenges do firms face when trying to conduct marketing research abroad? As we explained, face-to-face surveys are commonly used in third-world countries to collect information from people who cannot read or lack phones and computers. However, face-to-face surveys are also common in Europe, despite the fact that phones and computers are readily available. In-home surveys are also common in parts of Europe. By contrast, in some countries, including many Asian countries, it's considered taboo or rude to try to gather information from strangers either face-to-face or over the phone. In many Muslim countries, women are forbidden to talk to strangers.

And how do you figure out whom to research in foreign countries? In the United States, researchers often ask if they can talk to the heads of households. But in countries in which domestic servants or employees are common, the heads of households aren't necessarily the principal shoppers; their domestic employees are (Malhotra, 2010, p. 764).

Translating surveys is also an issue. Have you ever watched the TV comedians Jay Leno and David Letterman make fun of the English translations found on ethnic menus and products? Research tools such as surveys can suffer from the same problem. Hiring someone who is bilingual to translate a survey into another language can be a disaster if the person isn't a native speaker of the language to which the survey is being translated.

One way companies try to deal with translation problems is by using back translation. When back translation is used, a native speaker translates the survey into the foreign language and then translates it back again to the original language to determine if there were gaps in meaning—that is, if anything was lost in translation. And it's not just the language that's an issue. If the research involves any visual images, they, too, could be a point of confusion. Certain colors, shapes, and symbols can have negative connotations in other countries. For example, the color white represents purity in many Western cultures, but in China, it is the color of death and mourning (Zouhali-Worrall, 2008). What would women in Muslim countries who aren't allowed to converse with male sellers think of it? Chances are, the cartoon wouldn't provide the information you're seeking if Muslim women in some countries were asked to complete it.

One way marketing research companies are dealing with the complexities of global research is by merging with or acquiring marketing research companies abroad. The Nielsen Company is the largest marketing research company in the world. The firm operates in more than 100 countries and employs more than 40,000 people. Many of its expansions have been the result of acquisitions and mergers.

Step 6: Analyze the Data

Step 6 involves analyzing the data to ensure it's as accurate as possible. If the research is collected by hand using a pen and pencil, it's entered into a computer. Or respondents might have already entered the information directly into a computer. For example, when Toyota goes to an event such as a car show, the automaker's marketing personnel ask would-be buyers to complete questionnaires directly on computers. Companies are also beginning to experiment with software that can be used to collect data using mobile phones.

Once all the data is collected, the researchers begin the data cleaning, the process of removing data that have accidentally been duplicated (entered twice into the computer) or correcting data that have obviously been recorded wrong. A program such as Microsoft Excel or a statistical program such as Predictive Analytics Software (PASW, which was formerly known as SPSS) is then used to tabulate, or calculate, the basic results of the research, such as the total number of participants and how collectively they answered various questions. The programs can also be used to calculate averages, such as the average age of respondents, their average satisfaction, etc. The same can done for percentages, and other values you learned about, or will learn about, in a statistics course, such as the standard deviation, mean, and median for each question.

The information generated by the programs can be used to draw conclusions, such as what all customers might like or not like about an offering based on what the sample group liked or did not like. The information can also be used to spot differences among groups of people. For example, the research might show that people in one area of the country like the product better than people in another area. Trends to predict what might happen in the future can also be spotted.

If there are any open-ended questions—for example, "Explain why you like the current brand you use better than any other brand"—the answers to each are pasted together, one on top of another, so researchers can compare and summarize the information. As we have explained, qualitative information such as this can give a fuller picture of the results of the research.

Part of analyzing the data is to see if it seems sound. Does the way in which the research was conducted seem sound? Was the sample size large enough? Are the conclusions that become apparent from it reasonable?

The two most commonly used criteria used to test the soundness of a study are validity and reliability. A study is valid if it actually tested what it was designed to test. If you were to repeat the study, and get the same results (or nearly the same results), the research is said to be reliable. If you get a drastically different result if you repeat the study, it's not reliable. The data collected, or at least some it, can also be compared to, or reconciled with, similar data from other sources either gathered by your firm or by another organization to see if the information seems on target.

Stage 7: Write the Research Report and Present Its Findings

If you end up becoming a marketing professional and conducting a research study after you graduate, hopefully you will do a great job putting the study together. You will have defined the problem correctly, chosen the right sample, collected the data accurately, analyzed it, and your findings will be sound. At that point, you will be required to write the research report and perhaps present it to an audience of decision makers. You will do so via a written report and, in some cases, a slide or PowerPoint presentation based on your written report.

The six basic elements of a research report are as follows (Mersdorf, 2009).

1. Title page: The title page explains what the report is about, when it was conducted and by whom, and who requested it.

2. Table of contents: The table of contents outlines the major parts of the report, as well as any graphs and charts, and the page numbers on which they can be found.

3. Executive summary: The executive summary summarizes all the details in the report in a very quick way. Many people who receive the report—both executives and nonexecutives—won't have time to read the entire report. Instead, they will rely on the executive summary to quickly get an idea of the study's results and what to do about those results.

4. Methodology and limitations: The methodology section of the report explains the technical details of how the research was designed and conducted. The section explains, for example, how the data was collected and by whom, the size of the sample, how it was chosen, and whom or what it consisted of (e.g., the number of women versus men or children versus adults). It also includes information about the statistical techniques used to analyze the data.

Every study has errors—sampling errors, interviewer errors. The methodology section should explain these details, so decision makers can consider their overall impact. The margin of error is the overall tendency of the study to be off kilter—that is, how far it could have gone wrong in either direction. Remember how newscasters present the presidential polls before an election? They always say, "This candidate is ahead 48 to 44 percent, plus or minus 2 percent." That "plus or minus" is the margin of error. The larger the margin of error is, the less likely the results of the study are accurate. The margin of error needs to be included in the methodology section.

5. Findings: The findings section is a longer version of the executive summary that goes into more detail about the statistics uncovered by the research that bolster the study's findings. If you have related research or secondary data on hand that back up the findings, it can be included to help show the study did what it was designed to do.

6. Recommendations: The recommendations section should outline the course of action that should be taken based on the findings of the research and the purpose of the project. For example, if you conducted a global market research study to identify new locations for stores, make a recommendation for the locations.

These are the basic sections of a marketing research report. However, additional sections can be added. For example, you might need to add a section on the competition and each firm's market share. If you're trying to decide on different supply chain options, you will need to include a section on that topic.

As you write the research report, keep your audience in mind. Don't use technical jargon people reading the report won't understand. If technical terms must be used, explain them. Also, proofread the document to ferret out any grammatical errors and typos, and ask a couple of other people to proofread behind you. If your research report is riddled with errors, its credibility will be undermined, even if the findings and recommendations you make are accurate.

Many research reports are presented via PowerPoint. If you're asked to create a slideshow presentation from the report, don't try to include every detail on the slides. The information will be too long and tedious for people attending the presentation. And if they do go to the trouble of reading all the information, they probably won't be listening to the speaker who is making the presentation.

Instead of including all the information from the study in the slides, keep each section to key points and add some "talking points" only the presenter will see. After or during the presentation, you can give the attendees the longer, paper version of the report so they can read the details at a convenient time.

Key Takeaway

Step 1 in the marketing research process is to define the problem. Businesses take a look at what they believe are symptoms and try to get to the potential causes so as to precisely define the problem. The next task for the researcher is to put into writing the objective, or goal, the research is supposed to accomplish. Step 2 is to design the research. The research design is the "plan of attack." It outlines what data you are going to gather, from whom, how, and when, and how you're going to analyze it. Step 3 is to design the data-collection forms, which need to be standardized so the information gathered is comparable. Surveys are a popular way to gather data because they can be easily administered to large numbers of people quickly. However, to produce the best results, survey questionnaires need to be carefully designed and pretested. Step 4 is drawing the sample, or a subset of potential buyers who are representative of the entire target market. If the sample is not correctly selected, the research will be flawed. Step 5 is to actually collect the data, whether by a person face-to-face, over the phone, or with the help of computers or the Internet. The data-collection process is often different in foreign countries. Step 6 is to analyze the data collected for any obvious errors, tabulate the data, and then draw conclusions based on the results. The last step in the process, Step 7, is writing the research report and presenting the findings to decision makers.

Review Questions

1. Explain why it's important to carefully define the problem or opportunity a marketing research study is designed to investigate.

2. Describe the different types of problems that can occur when marketing research professionals develop questions for surveys.

3. How does a probability sample differ from a nonprobability sample?

4. What makes a marketing research study valid? What makes a marketing research study reliable?

5. What sections should be included in a marketing research report? What is each section designed to do?

References

Barnes, B. (2009, April 15). Disney expert uses science to draw boy viewers. The New York Times. Retrieved from http://www.nytimes.com/2009/04/14/arts/television/14boys.html?pagewanted=1&_r=1 (accessed December 14, 2009).

Burns, A., & Bush, R. (2010) Marketing research (6th ed.). Upper Saddle River, NJ: Prentice Hall, p. 85.

Malhotra, N. (2010). Marketing research: An applied approach (6th ed.). Upper Saddle River, NJ: Prentice Hall, p. 764.

McDaniel, C. D., & Gates, R. H. (1998). Marketing research essentials (2nd ed.). Cincinnati, OH: South-Western College Publishing, p. 61.

McWilliams, J. (2009, August 16). A-B puts super-low-calorie beer in ring with Miller. St. Louis Post-Dispatch. Retrieved from http://www.stltoday.com/business/next-matchup-light-weights-a-b-puts-super-low-calorie/article_47511bfe-18ca-5979-bdb9-0526c97d4edf.html

Mersdorf, S. (2009, August 24). How to organize your next survey report [Blog post]. Retrieved from http://survey.cvent.com/blog/cvent-survey/0/0/how-to-organize-your-next-survey-report

QuickMBA. (n.d.). Questionnaire design. Retrieved from http://www.quickmba.com/marketing/research/qdesign

Rappeport, A., & Gelles, D. (2009, September 23). Facebook to form alliance with Nielsen. Financial Times, 16.

Spangler, T. (2009, August 3). Disney lab tracks feelings. Multichannel News, 30(30), 26.

Wagner, J. (2007, April 4). Marketing in Second Life doesn't work…here is why! Retrieved from http://gigaom.com/2007/04/04/3-reasons-why-marketing-in-second-life-doesnt-work

Wrenn, B., Stevens, R. E., & Loudon, D. L. (2007). Marketing research: Text and cases (2nd ed.). Binghamton, NY: Haworth Press, p. 180.

Zouhali-Worrall, M. (2008, July 14). Found in translation: Avoiding multilingual gaffes. Retrieved from http://money.cnn.com/2008/07/ 07/smallbusiness/language_translation.fsb/index.htm

10.3 Discussion Questions and Activities

Discussion Questions

1. Are small business owners at a disadvantage if they lack the marketing research resources large companies have? Why or why not?

2. What drawbacks do you see associated with conducting surveys online? Are privacy issues greater with online surveys than with other forms of administering surveys, such as phone, face-to-face, or mail?

3. Why do you think so many marketing research companies are conglomerating—that is, merging with or acquiring one another? Is it solely to conduct global marketing research?

4. You need to conduct research on consumer acceptance for a new product. Describe the process you would use. How would your project change if the product solved an embarrassing problem? What would your challenges be in that situation?

5. Given the way people tweet about customer service, why do companies still use mystery shoppers? Why not simply follow tweet volume and content to see if service is good?

6. You are working for an organization that provides clean water technology to communities in Africa. The organization has never worked in Malawi but wants to and needs to understand how consumers source water, how they prepare it (sterilize or clean it), and how they use it. You know that a study was done on water sources, water preparation, and water uses in Kenya. What type of research would the Kenya study be considered and how would you go about validating its findings for Malawi (a different country in Africa)? How would your answer change if your organization was considering a community in a remote area of Nicaragua? (By the way, this question is based on a real situation involving Living Water International, a student project at Baylor University and funded by 3M that examined Somotillo, Nicaragua, and a study done in Kenya by Boston University's School of Public Health).

7. Your CEO is personally involved in developing a new product that is really cool, but you have your doubts about whether it really delivers any additional benefits over what is already available. When you pitch the idea of marketing research study to test consumer response, she says, "Are you kidding? Why waste the money and time, as well as let our competitors know what we've got? Let's get this to market!" But the market launch will cost $3 million and your company's profits last year were only $5 million. How would you respond? How would your answer differ if the launch only cost $300,000?

8. The chapter mentions using salespeople and channel partners as sources of information. Describe how you would go about this and if or why salesperson/channel partner input is important when trying to make the following decisions:

a. When trying to design the booth for use at trade shows

b. When trying to decide which features to add or subtract from a product

c. Making pricing decisions

9. Describe how you would use projective techniques to help your university understand how prospective students make schooling decisions. Be specific when describing how you would use the technique, providing examples of questions.

10. In Freakonomics, Steven Leavitt describes a study of public housing residents that began with the question, "How does it feel to be poor and black?" He says that's a bad question to start a survey with. Why? (There are multiple reasons.)

11. You sell manufacturing equipment for a Chinese company that imports the equipment into your country. You want to do a research project on potential brand names for a new product line, and have to choose among the following sampling ideas or projects. For each one, identify what type of study and sample you have, discuss the pros and cons, and then at the end, make a decision.

a. Stopping 200 people at a trade show and showing potential brand names to them to get their reaction.

b. Hosting a breakfast or lunch at a trade show to get 3 groups of 10 to provide feedback to the names and logos.

c. Send an e-mail to your customers with a link to a URL that has the various names and let them vote.

Activities

1. In this activity, you will conduct a survey using either Zoomerang.com or SurveyMonkey.com. Divide into groups of four people. Each group should do the following:

a. Choose a food-service establishment on or near your campus. Then create a 10-question survey designed to gauge how satisfied customers are with the establishment's food and service.

b. Decide how you will deliver the questionnaire you've created. Choose a sampling frame, or list of people from which you will draw your sample.

c. Administer the survey. After you have collected the results, analyze them and write a research report with the sections outlined in the chapter.

d. Contact the owner or manager of the establishment and present him or her with the findings. If your research is helpful to the manager, who knows? It might earn you a free meal or at least some money-off coupons.

2. Would you like to own an all-electric car? Do you think there is a viable market for such a product? Team up into small groups of three or four people. As a team, use secondary data to research the viability of selling electric cars profitably. Use some of the sources mentioned in the chapter. Try to determine the population of electric-car buyers. Finally, write a research report based on your findings. Each group should present its findings to the class. Do the findings differ from group to group? If so, why?

Differences Between a Product and a Service

A service can be viewed as a product and vice versa. Services are characterized in the following ways (Johansson, 2009):

· Intangibility: You cannot easily touch a service. Services are difficult to monitor at borders and hard to assess for customs duty.

· Heterogeneity: The service is not exactly the same each time, especially personal services. Services are less standardized and quality varies.

· Inseparability: Services are produced when they are consumed. Service quality depends on situation and context.

· Perishability: You cannot store a service, unless the service is embodied in a product, e.g., a DVD or an ATM.

The entry barriers in global markets for services are greater than for goods, but exit barriers are lower (Johansson, 2009):

· Local regulations vary widely across countries.

· Local service businesses are typically protected.

· Cultural barriers tend to be higher.

· Intangibility makes trade monitoring difficult.

· Free-trade agreements are hard to complete and enforce.

· Without trade agreements, governments have no incentive to make regulations more homogeneous.

Quality can be hard to define when it comes to global services (Johansson, 2009):

· Since services are intangible, service quality is difficult to quantify .

· Different cultures have different habits and preferences, and therefore have different definitions of service quality.

· Culture strongly affects perceived service quality and customer satisfaction.

· What is considered high service quality in one country may not necessarily be perceived as high in another.

Marketing Plan

A marketing plan is a written document that outlines the marketing program for a company or a product or service, along with the promotional budget allocation over the planning period. In other words, a marketing plan details what is needed to implement a marketing program and achieve the goals within it. When developing a marketing plan, one should be guided by the organization's vision and mission statements.

It is important to note that a marketing plan is not the same as a business plan. While the marketing plan is part of the business plan, business plans typically also include additional information such as financial strategies, operations, risk management, and human resources.

Marketing Principles is available under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported license without attribution as requested by the site's original creator or licensee.

Chapter 16. The Marketing Plan

The average tenure of a chief marketing officer (CMO) spans about twenty-six months or less (Mummert, 2008), partially because marketing is one of those areas in a company in which performance is obvious. If sales go up, the CMO can be lured away by a larger company, or promoted.

Indeed, a successful tenure as a marketing officer can be a ticket to the top. The experience of Paul Polman, a former marketing director at Procter & Gamble (P&G), illustrates as much. Polman parlayed his success at P&G into a position as division president at Nestlé. Two years later, he became the chief executive officer (CEO) of Unilever (Benady, 2008).

However, if sales go down, CMOs can quickly be fired. Nonmarketing executives often have unrealistic expectations for what their marketing departments accomplish. "Sometimes CEOs don't know what they really want, and in some cases CMOs don't really understand what the CEOs want," says Keith Pigues, former CMO for Cemex, the world's largest cement company. "As a result, it's not surprising that there is a misalignment of expectations, and that has certainly led to the short duration of the tenure of CMOs" (Maddox, 2007).

Moreover, many CMOs are under pressure to set ambitious sales forecasts in order to satisfy not only their executive teams but also investors and Wall Street analysts. "The core underpinning challenge is being able to demonstrate you're adding value to the bottom line," explains Jim Murphy, former CMO of the consulting firm Accenture. The problem is that when CMOs promise too much and don't deliver, they set themselves up for failure.

Much as firms must set their customers' expectations, CMOs must set their organization's marketing expectations, and marketing plans help them do that. A well-designed marketing plan should communicate realistic expectations to a firm's CEO and other stakeholders. Another function of the marketing plan is to communicate to everyone in the organization who has been assigned specific marketing responsibilities and how that person should execute those duties.

1. Marketing Planning Roles

Learning Objective: Identify the people responsible for creating marketing plans in organizations.

Who, within an organization, is responsible for creating its marketing plans? From our discussion above, you might think the responsibility lies with the organization's CMO. The reality is that a team of marketing specialists, and sometimes multiple teams, is likely to be involved. Many companies create marketing plans at the divisional level. For example, Rockwell International has so many different business areas that each does its own strategic planning. The division responsible for military avionics, for instance, creates its own marketing plans and strategies separately from the division that serves the telecommunications industry. Each division has its own CMO.

Some team members specialize in specific areas. For example, the copier company Xerox has a team that specializes in competitive analysis. The team includes an engineer who can take competitors' products apart to see how they were manufactured, as well as a systems analyst who tests them for their performance and a marketing analyst who examines the competition's financial and marketing performance.

Some marketing analyst jobs are entry-level positions, so you might be able to land one of these jobs straight out of college. Other positions are more senior and require experience, usually in sales or another area of marketing. Marketing analysts, who are constantly updating marketing information, are likely to be permanent members of the CMO's staff.

In some consumer-goods companies with many brands, such as P&G and SC Johnson, product managers and brand managers serve on their firm's marketing planning teams on an as-needed basis. These individuals are not permanent members of the team, but participate only to the extent that their brands are involved. Many other members of the firm will also participate on marketing planning teams as needed. For example, a marketing researcher is likely to be part of such a team when it needs data for the planning process.

Key Takeaway

The CMO of a business unit is likely to be responsible for the creation of its marketing plan. However, the CMO is generally assisted by marketing professionals and other staff members, who often work on marketing planning teams as needed. Marketing analysts, however, are permanent members of the CMO's staff.

Review Questions

1. Who is involved in the creation of a marketing plan?

2. In addition to marketing analysts, what other members of an organization help create marketing plans?

2. Functions of the Marketing Plan

Learning Objectives

1. Understand the functions of a marketing plan.

2. Write a marketing plan.

A marketing plan should meet several objectives:

1. Identify customers' needs.

2. Evaluate whether the organization can meet those needs in some way that allows for profitable exchanges with customers.

3. Develop a mission statement, strategy, and organization centered on those needs.

a. Create offerings that are the result of meticulous market research.

b. Form operations and supply chains that advance the successful delivery of those offerings.

4. Pursue advertising, promotional, and public relations campaigns that lead to continued successful exchanges between the company and its customers.

5. Engage in meaningful communications with customers on a regular basis.

The Marketing Plan's Outline

The actual marketing plan you create will be written primarily for executives, who will use the forecasts in your plan to make budget decisions for marketing activities and the firm's manufacturing, ordering, production departments, and other functions your plan allows for.

Many other employees aside from executives will use the plan. Your firm's sales team will use the marketing plan to determine its sales strategies and assess how many salespeople are needed. The entire marketing staff will rely on the plan to determine the direction and nature of their activities. The advertising agency you hire to create your promotional campaigns will use the plan to guide its creative team.

Next, we will discuss marketing plan elements in detail so you will know how to prepare it.

The Executive Summary

A marketing plan starts with an executive summary. An executive summary should provide all the information your company's executives need to make a decision without reading the rest of the plan. The summary should include a brief description of the market, the product to be offered, the strategy behind the plan, and the budget. It should also summarize any other important information, such as how your competitors and channel partners will respond to the actions your firm takes. Because most executives will be reading the plan to make budgeting decisions, the budgeting information you include in the summary is very important. If the executives want more detail, they can refer to the budget section, which appears later in the plan. The executive summary should be less than one page long and ideally, about a half page. Most marketing plan writers find it easier to write the summary last, even though it appears first in the plan. A summary is hard to write when you don't yet know the whole plan.

The Business Challenge

In the business challenge section of the plan, the planner describes the offering and provides a brief rationale for why the company should invest in it. In other words, why is the offering needed? How does it fit in with what the company is already doing and further its overall business goals? How does the offering and marketing plan further the company's mission?

Remember that a marketing plan is intended to be a persuasive document. You are trying not only to influence executives to invest in your idea but also to convince other people in your organization to buy into the plan. You are also trying to tell a compelling story that will make people outside your organization—for example, the director of the advertising agency you work with, or a potential supplier or channel partner—invest money, time, and effort into making your plan a success. Therefore, as you write the plan you should constantly be answering the question, "Why should I invest in this plan?" Put your answers in the business challenge section of the plan.

The Market

The market section of the plan should describe your customers and competitors, any other organizations with which you will collaborate, and the state of the market. We suggest that you always start the section by describing the customers who will purchase the offering, as customers are central to all marketing plans. After that, discuss your competitors, the business climate, and your company in the order you believe readers will find most persuasive. Discuss the factor you believe is most convincing first, followed by the second-most convincing factor, and so on.

Customers

Whom does your market consist of? What makes these people decide to buy the products they do, and how do they fulfill their personal value equations? What is their buying process like? Which of their needs does your offering meet?

Break the market into customer segments and describe each segment completely, answering those questions for each segment. When you write your plan, begin with the most important segment first and work your way to the least important segment. Include in your discussion the market share and sales goals for each segment.

For example, Progresso Soups' primary market segments might include the following:

· families in colder regions

· people who need a good lunch but have to eat at their desks

· busy young singles

· older, perhaps retired, empty nesters

These segments would be based on research that Progresso has completed showing that these are the groups that eat the most soup.

Your discussion of each segment should also include how to reach the customers within it, what they expect or need in terms of support (both presales and postsales support), and other information that helps readers understand how each segment is different from the others. A reader should have a good grasp of how the segments differ, yet understand how the needs of each are satisfied by the total offering.

Company Analysis

Include the results of your analysis of your company's strengths and weaknesses in this section. How is the company perceived by the customers you described earlier? Why is the company uniquely capable of capitalizing on the opportunity outlined in the plan? How sustainable is the competitive advantage you are seeking to achieve?

You will also need to identify any functional areas in which your company might need to invest for the plan to succeed. For example, money might be needed for new production or distribution facilities and to hire new marketing or sales employees and train existing ones.

The SWOT analysis can be useful for framing these questions. SWOT stands for strengths, weaknesses, opportunities, and threats. Strengths and weaknesses are internal, meaning they are conditions of the company. Either these conditions are positive (strengths) or negative (weaknesses). Opportunities and threats are external to the company, and could impelled by potential or actual actions taken by competitors, suppliers, or customers. Opportunities and threats could also be a function of government action or changes in technology.

Some consultants have noted the difficulty executives have in separating opportunities from strengths and weaknesses from threats. Statements such as "we have an opportunity to leverage our strong product features" indicate such confusion. An opportunity lies in the market, not in a strength. Opportunities and threats are external; strengths and weaknesses are internal. Assuming demand (an external characteristic) for a strength (an internal characteristic) is a common marketing mistake. Sound marketing research is therefore needed to assess opportunities.

Several factors contribute to a more useful SWOT analysis:

· Honesty—A good SWOT analysis is honest. A better way to describe those strong product features would be to note their "strong reputation among product designers," unless consumer acceptance has already been documented.

· Broadness—The analysis has to be broad enough to capture trends. A small retail chain would have to look beyond its regional operating area in order to understand larger trends that may impact the stores.

· Longevity—Consider multiple time frames. A SWOT analysis that only looks at the immediate future (or the immediate past) is likely to miss important trends. Engineers at Mars (makers of Skittles, M&Ms, and Snickers) visit trade shows in many fields, not just candy, so that they can identify trends in manufacturing that may take a decade to reach the candy industry. In this way, they can shorten the development cycle and take advantage of relevant trends early.

· Multiple perspectives—SWOT analyses are essentially based on someone's perception. Therefore, a good SWOT should consider the perspective of all areas of the firm, involving employees from shipping, sales, production, and perhaps even from suppliers and channel members.

The SWOT analysis for a company, or for any organization, is both internal and external in focus. Some of the external areas for focus are collaborators (suppliers, distributors, and others), competitors, and the business climate.

Collaborators

Along with company strengths and weaknesses, identify any actual or potential partners needed to pull the plan off. Note that collaborators are more than just a list of suppliers and distributors. Collaborators are those organizations, either upstream or downstream in the value chain, you need to partner with to cocreate value.

For example, AT&T collaborated with Apple to develop the iPhone. AT&T is downstream in the value chain, providing the needed cellular service and additional features that made the iPhone revolutionary. At the same time, however, AT&T was a part of the development of the iPhone and the attendant marketing strategy. The partnership began well before the iPhone was launched.

Competitors

A good marketing plan is likely to spark retaliation from one or more competitors. For example, Teradata and Unica operate in the same market, both selling data-warehousing products to companies. Teradata primarily focuses on the information technology departments that support the data warehouse, whereas Unica focuses on the marketing departments that actually use the data warehouse. Nonetheless, Teradata is well aware of Unica's marketing strategy and is taking steps to combat it by broadening its own market to include data-warehousing users in marketing departments. Teradata sought to teach its salespeople how marketing managers would use a data warehouse as part of their job so that when these salespeople are talking to marketing managers, they can speak with authority.

Teradata marketing planners also have to be aware of potential competitors. What if IBM or HP decided to enter the market? Who is most likely to enter the market, what would their offering look like, and how can the company make the market less desirable for them? If your company captures their market before they can enter, then they may choose to go elsewhere.

Identify your competitors and be honest about both their strengths and weaknesses in your marketing. Remember that other people, and perhaps other organizations, will be using your plan to create their own plans. If they are to be successful, they have to know what competition they face. This part of the plan should also describe how quickly you expect your competitors to retaliate and the expected nature of that retaliation. Will they lower their prices, create similar offerings, add services to drive up the value of their products, spend more on advertising, or a combination of these tactics?

A complete competitive analysis not only anticipates how the competition will react; it also includes an analysis of the competition's financial resources. Do your competitors have money to invest in a competitive offering? Are they growing by acquiring other companies? Are they growing by adding new locations or new sales staff? Or are they growing simply because they are effective? Maybe they are not growing at all. To answer these questions, you will need to carefully review your competitors' financial statements and all information publicly available about them, including an executive quoted in an article about a company's growth for a particular product or an analyst's projection for future sales within a specific market.

Business Climate

You may have already addressed some of the factors in the business environment that are creating an opportunity for your offering. For example, when you discussed customers, you perhaps noted a new technology they are beginning to use.

A complete coverage of the climate would include a PEST analysis, which evaluates four factors:

1. Political climate

2. Economic climate

3. Social and cultural environment

4. Technological environment

A scan of the political climate should include any new government regulations or legislation. For example, will changes in the tax laws make for more or less disposable income among our customers? Will the tightening of government regulations affect how salespeople can call on doctors, for example, hindering your marketing opportunity? Will federal policies that affect exchange rates or tariffs make global competitors stronger or weaker? For example, the government introduced the Cash for Clunkers program to encourage people to buy new cars. Within only a few weeks, 250,000 new cars were sold through the program, and it ran out of money. Auto dealers were caught unprepared, and many actually ran out of popular vehicles.

The economic climate is also important to consider. While 2008 saw tremendous swings in gas prices, other factors, such as the subprime lending crisis and decline of the housing market, affected everything from the price of corn to the sales of movie tickets. Such volatility is unusual, but it is important nonetheless to know the stat of the economy.

The social and cultural environment is also important to watch. Marketers, for example, may note the rise in the Hispanic population as a market segment, but it is also important to recognize the influence of the Hispanic culture. In creating marketing campaigns for something such as a financial product, it's very important to understand the history that Hispanics have had with financial institutions in their home countries. Understanding that culturally Hispanics might not trust financial institutions and therefore developing campaigns that generate positive word of mouth, such as refer-a-friend and influencer tactics, can be effective in penetrating that segment of the market.

Finally, the technological environment should be considered. Technology is the application of science to solve problems. It encompasses more than just information technology. For example, when discussing a new pacemaker with a cardiac surgeon, a marketer is in essence breaking down the latest technology available. The new technology could be related to the battery used to power the pacemaker, the materials used in the leads (the wires that connect the pacemaker to the body), or even the material that encases the pacemaker. Understanding the technological environment can provide you with a greater understanding of a product's life cycle and the direction the market is taking.

Many of the environmental factors we mentioned impact other factors. For example, technological changes are altering the social and cultural environment. Instead of writing letters to one another, families and friends use e-mail and social networking sites to communicate and maintain relationships. Online communication has affected multitudinous businesses, including the greeting card industry and the US Postal Service, which recently closed many facilities.

Likewise, the economic environment influences the political environment, and vice versa. The government's huge bailout of the banks at the start of 2009 is an example of how the economic environment affects the political environment. The laws passed as a result of the bank bailout, which include more-restrictive lending practices, have affected banks, businesses, and consumers. Any looming changes in the business climate need to be included in your marketing plan.

The Strategy

The next section of the plan details the strategy your organization will use to develop, market, and sell the offering. This section is your opportunity to create a compelling argument for what you intend to do and why others should invest in the strategy. Your reader will be asking, "Why should we adopt this strategy?" To answer that question, you may need to include a brief discussion of the strategic alternatives that were considered and discarded. When readers complete the section, they should conclude that the strategy you proposed is the best one available.

The Offering

In this section, provide details on the features and benefits of the offering, including pricing options. For example, your organization might plan for several variations of the offering, each with a different pricing option. The different options should be discussed in detail, along with the market segments expected to respond to each option. Some marketing professionals like to specify the sales goals for each option in this section, along with the associated costs and gross profit margins for each. Other planners prefer to wait until the budget section of the plan to provide that information.

The plan for the offering should also include the plan for introducing offerings that will follow the initial launch. For example, when should Progresso introduce new soup flavors? Should there be seasonal flavors? Should there be smaller sizes and larger sizes, and should they be introduced all at the same time or in stages?

Part of an offering is the service support, both presale and postsale, that consumers need to extract the offering's full value. For example, Teradata has a team of finance specialists who can help customers document the return on investment they would get from purchasing and implementing a Teradata data warehouse. This presale support helps potential buyers make a stronger business case for buying Teradata's products with executives who control their companies' budgets.

Postsale support can include technical assistance. In business-to-business (B2B) environments, sellers frequently offer to train their customers' employees to use products as part of their postsale support. Before you launch an offering, you need to be sure your firm's support services are in place by training service personnel or creating the appropriate communication channels for customers to air their technical concerns.

The Communication Plan

How will the offering be launched? Will it be like Dow Corning's launch of a new silicon acrylate copolymer, a product used to add color to cosmetics, which was announced at the In-Cosmetics trade show in Barcelona? Or will you invite customers, media, and analysts from around the globe to your company's offices for the launch, as SAS did with its SAS 9 software product?

In addition to the announcement of the new product, the communication plan has to specify how ongoing customer communications will be conducted. The mechanisms used to promote the product to customers and gather feedback from them need to be described. For example, will you create an online community like Laura Carros did with the JCPenney Ambrielle line?

The discussion of the communication plan can be fairly broad. You can put additional details in a separate planning document that outlines the product's advertising strategies, event strategies (such as trade shows and special events like customer golf tournaments that will be used to promote the product), and sales strategies.

Distribution

This section should answer questions about where and how the offering will be sold. Who will sell it? Who will ship it? Who will service and support it? In addition, the distribution section should specify the inventories that need to be maintained in order to meet customer expectations for fast delivery and state where those inventories should be kept.

Budget

The budget section is more than just a discussion of the money needed to launch the new offering. A complete budget section will cover all the resources, such as new personnel, new equipment, new locations, and so forth, for the launch to be a success. Of course, these resources have costs associated with them. In some instances, the budget might require that existing resources be redeployed and a case needs to be made for doing so.

The first portion of the budget will likely cover the investment required for the launch. The plan might point out that additional funds need to be allocated to the offering to make it ready for the market. For example, perhaps additional beta testing or product development beyond what the firm normally commits to new products is needed. Certainly, marketing funds will be needed to launch the offering and pay for any special events, advertising, promotional materials, and so forth. Funds might also be needed to cover the costs of training salespeople and service personnel and potentially hiring new staff members. For example, Teradata introduced a new offering that was aimed at an entirely new market. The new market was so different that it required a revamped sales force. Details about the sales force, such the number of salespeople, sales managers, and support personnel will be needed, would be furnished in this section.

The budget section should include the costs associated with maintaining the amount of inventory necessary to meet customers' needs. The costs to provide customers with support services should also be estimated and budgeted. Some products will be returned, some services will be rejected by the consumer, and other problems are likely to occur. The budget should include projections and allowances for these occurrences.

The budget section is also the place to forecast the product's sales and profits. Even though the plan likely mentioned the sales goals set for each market segment, the budget section is where you can elaborate on these projections. For example, the cost for advertising, trade shows, special events, and salespeople should be explained. The projections should also include timelines, portraying sales costs for one month, two months, six months, and so forth.

That cost line assumes there is a heavy upfront investment to launch the offering, which is usually true for new products. Sales of the offering should grow as it gathers momentum in the market. However, the market potential stays the same, assuming that the number of potential customers stays the same. But that might not always be the case. If we were targeting mothers of babies, for example, the market potential might vary based on the projected seasonality in birth rates, because pregnancy rates vary from month to month.

Conclusion

In the conclusion, repeat the highlights. Summarize the target market, the offer, and the communication plan. Your conclusion should remind the reader of all the reasons your plan is the best choice.

Of course, the written plan is itself a marketing tool. You want it to convince someone to invest in your ideas, so you want it to be compelling. Also, keep in mind that a marketing plan is created at a single point in time, but the market is dynamic. A good marketing plan includes ways the organization should respond to various market changes. In addition, the plan should include triggers that detail what should happen if each of those changes occurs. For example, it might specify that when a certain percentage of market share is reached, the price of the product will be reduced (or increased). Or the plan might specify the minimum amount of the product that must be sold by a certain point in time—say, six months after the product is launched—and what should happen if the mark isn't reached. Remember, the marketing plan is a communication device, so it look somewhat different from the order in which the tasks in the outline are actually completed.

Key Takeaway

A marketing plan's executive summary should include a brief summary of the market, the product to be offered, the strategy behind the plan, and the budget, as well as any other important information. In this section of the plan, the planner describes the offering and a brief rationale for why the company should invest in it. The market section of the plan should describe a firm's customers, competitors, any other organizations with which it will collaborate, and the climate of the market. The strategy section details the tactics the organization will use to develop, market, and sell the offering. When readers complete the strategy section, they should conclude that the proposed strategy is the best one available.

The budget section of the marketing plan covers all the resources, such as new personnel, new equipment, new locations, and so forth, needed to successfully launch the product, and details about the product's costs and sales forecasts.

Review Questions

1. What is a marketing plan and how is it used?

2. Which section of the marketing plan is most important? Why? The least important?

3. What is the purpose of scenario planning?

3. Forecasting

Learning Objectives

1. List steps in the forecasting process.

2. Identify types of forecasting methods and their advantages and disadvantages.

3. Discuss the methods used to improve the accuracy of forecasts.

Creating a marketing strategy is not a single event, and its implementation is not something only the marketing department has to worry about. When the strategy is implemented, the rest of the company must be poised to manage the consequences. As we have explained, the sales forecast, an estimate of how much the company will actually sell, is an important component. The rest of the company must then be prepared to meet that demand. In this section, we explore forecasting in more detail, as there are many choices a marketing executive can make in developing a forecast.

Accuracy is important when it comes to forecasts. If executives overestimate the demand for a product, the company could end up spending money on manufacturing, distribution, and servicing activities it won't need. The software developer Data Impact recently overestimated the demand for one of its new products. Because the sales of the product didn't meet projections, Data Impact lacked the cash available to pay its vendors, utility providers, and others. Employees had to be terminated in many areas of the firm to trim costs.

Underestimating demand can be just as devastating. When a company introduces a new product, it launches marketing and sales campaigns to create demand for it. But if the company isn't ready to deliver the amount of the product the market demands, other competitors can steal sales the firm might otherwise have captured. Sony's inability to deliver the e-reader in sufficient numbers made Amazon's Kindle more readily accepted in the market. The inclusion of other features then gave the Kindle an advantage that Sony is finding difficult to overcome.

The marketing leader of a firm has to do more than just forecast the company's sales. The process can be complex, because how much of a product the company can sell will depend on factors such as the product's cost and how competitors will react. As factors change, the forecast has to change as well. Thus, a sales forecast is actually a composite of several estimates and has to be adaptable to change.

A common first step is to determine market potential, or total industry-wide sales expected in a particular product category for the time period of interest. (The time period of interest might be the coming year, quarter, month, or some other time period.) Some marketing research companies, such as Nielsen, Gartner, and others, estimate the market potential for various products and then sell that research to companies that produce those products.

Once the marketing executive has an idea of the market potential, the company's sales potential can be estimated. A firm's sales potential is the maximum total revenue it hopes to generate from a product or the number of units the company can hope to sell. The sales potential for the product is typically represented as a percentage of its market potential and equivalent to the company's estimated maximum market share for the time period. Companies sell less than their market potential because not everyone will make a decision to buy their product. Some will put off a decision, some will buy a competitor's product, and others might purchase a substitute product. In your budget, you'll want to forecast the revenue earned from the product against the market potential, as well as against the product's costs.

Forecasting Methods

Forecasts, at their basic level, are simply someone's guess about what will happen. Several forecast processes are common for marketing executives to use, and the final forecast is likely to be a blend of results from more than one process. These processes include judgment techniques and surveys, time series techniques, market tests, and spending correlates and other models.

Judgment and Survey Techniques

At some level, every forecast is ultimately someone's judgment. Forecasting techniques that rely mostly on people's opinions or estimates are called judgment techniques. Judgment techniques can include executive or expert opinions, surveys of customers' (or channel members') intentions or estimates, and estimates by salespeople.

Customer and Channel Surveys

In some markets, particularly in B2B markets, research companies ask customers how much they plan to spend in the coming year on certain products. Have you ever filled out a survey asking if you intend to buy a car or refrigerator in the coming year? Chances are your answers were part of someone's forecast. Similarly, surveys are done for products sold through distributors. Companies then buy the surveys from the research companies or do their own surveys to use as a starting point for their forecasting. Surveys are better at estimating market potential than sales potential, because potential buyers are far more likely to know they will buy something than to know which brand or model they will ultimately purchase. Surveys can also be relatively costly, particularly when they are commissioned for only one company.

Sales Force Composite

A sales force composite is a forecast based on estimates of sales in a given time period gathered from all of a firm's salespeople. Salespeople have a pretty good idea about how much can be sold in the coming period of time (especially if they have bonuses riding on those sales). They've been calling on their customers and know when buying decisions will be made.

Estimating the sales for new products or new promotions and pricing strategies will be harder for salespeople to estimate until they have had some experience selling those products after they have been introduced, promoted, or repriced. Further, management may not want salespeople to know about new products or promotions until these are announced to the general public, so this method is may not be useful in situations involving new products or promotions. Another limitation reflects salespeople's natural optimism. Salespeople tend to be optimistic about what they think they can sell and may overestimate future sales. Conversely, if the company uses these estimates to set quotas, salespeople are likely to reduce their estimates to make these quotas easier to achieve.

Salespeople are more accurate in their near-term sales estimates, as their customers are not likely to share plans too far into the future. Consequently, most companies use sales force composites for shorter-range forecasts in order to more accurately predict their production and inventory requirements. Konica-Minolta, an office equipment manufacturer, has recently placed a heavy emphasis on improving the accuracy of its sales force composites because the cost of being wrong is too great. Underestimated forecasts result in some customers having to wait too long for deliveries for products, and they may turn to competitors who can deliver faster. By contrast, overestimated forecasts result in higher inventory costs.

Executive Opinion

Executive opinion is exactly what the name implies: the best-guess estimates of a company's executives. Each executive submits an estimate of the company's sales, which are then averaged to form the overall sales forecast. The advantages of executive opinions are that they are low cost and fast and effective in winning the support of executives. An executive opinion–based forecast can be a good starting point. However, there are disadvantages to the method, so it should not be used alone. These disadvantages are similar to those of the sales force composites. If the executives' forecast becomes a quota upon which their bonuses are estimated, they will have an incentive to underestimate the forecast so they can meet their targets. Organizational factors also come into play. A junior executive, for example, is not likely to forecast low sales for a product that his or her CEO is pushing, even if low sales are likely to occur.

Expert Opinion

Expert opinion is a similar forecasting method to executive opinion, except that the expert is usually someone outside the company. Like executive opinion, expert opinion is a tool best used in conjunction with more quantitative methods. As a sole method of forecasting, however, expert opinions are often inaccurate. Just consider how preseason college football rankings compare with the final standings. The football experts' predictions do not usually pan out.

Time Series Techniques

Time series techniques examine sales patterns in the past in order to predict sales in the future. For example, with a trend analysis, the marketing executive identifies the rate at which a company's sales have grown in the past and uses that rate to estimate future sales. For example, if sales have grown 3 percent per year over the past five years, trend analysis would assume a similar 3 percent growth rate next year.

This simple form of analysis can be useful if a market is stable. However, many markets are not stable, and a rapid change in any one of a market's dynamics is likely to result in wide swings in growth rates. Just think about auto sales before, during, and after the government's Cash for Clunkers program. What sold the previous month could not account for the effects of the program. Consequently, if an executive were to have estimated auto sales based on the rate of change for the previous period, the estimate would have been way off.

The Cash for Clunkers program was an unusual situation, and many products may have wide variations in demand for other reasons. Trend analysis can still be useful in these situations, but adjustments have to be made to account for the swings in rates of change. Two common adjustments are the moving average, whereby the rate of change for the past few periods is averaged, and exponential smoothing, a type of moving average that puts more emphasis on the most recent period.

Correlates and Other Models

A number of more sophisticated models can be useful in forecasting sales. One fairly common method is a correlational analysis, which is a form of trend analysis that estimates sales based on the trends of other variables. For example, executives for furniture companies know that new housing starts (the number of new houses that are begun to be built in a period) predict furniture sales in the near future, because new houses tend to get filled up with new furniture. Such a correlation is considered a leading indicator, because it leads, or precedes, sales. The Conference Board publishes the Index of Leading Indicators, which is a single number that represents a composite of commonly used leading indicators. Some of these leading indicators are housing starts, wholesale orders, orders for durable goods (items like refrigerators, air conditioning systems, and other long-lasting consumer products), and even consumer sentiment, or how consumers think the economy is doing.

Response Models

Some companies create sophisticated statistical models called response models, which are based on how customers have responded in the past to marketing strategies. JCPenney, for example, takes previous sales data and combines it with customer data gathered from the retailer's website. The models help JCPenney see how many customers only buy products when they are on sale and how many customers are likely to respond to certain offers. The retailer can then estimate the sales for products by market segment based on the offers and promotions directed at those segments.

Market Tests

A market test is an experiment in which the company launches a new offering in a limited market in order to gain real-world knowledge of how the market will react to the product. Since there isn't any historical data on how the product has done, response models and time-series techniques are not effective. A market test provides some measure of sales in response to the marketing plan—in that regard, it's like a response model, but based on limited data. The demand for the product can then be extrapolated to the full market. However, remember that market tests are visible to your competitors, and they can undertake actions, such as drastic price cuts, to skew your results.

The grocery chain HEB has a loyalty program that enables it to collect lots of data on its customers. When HEB wants to market test a new product, the firm does it in Waco, Texas, where individual customer data can be combined with sales data. Testing in Waco tells HEB who is likely to buy the product and at what price, information that makes extrapolating to their larger market more accurate.

Building Better Forecasts

At best, a forecast is a scientific estimate, but really, a forecast is still just a sophisticated guess. Still, there are steps that can enhance the likelihood of success. The first step is to commit to accuracy. At Konica-Minolta, regional vice presidents are rewarded for being accurate and punished for being wrong about their forecasts, regardless of the direction in which they erred. Konica-Minolta leadership considers underestimating just as bad as overestimating sales.

We've also mentioned how salespeople and managers will lower estimates if they are used to set quotas. Certainly, using forecasts properly will improve accuracy, but there are other ways to make forecasts more accurate, beginning with selecting the right methods for your business.

Pick the Right Methods for Your Business and Your Decision

Some products have very short selling cycles; others take a long time to produce and sell. What is appropriate for a fast-moving consumer good like toothpaste is not appropriate for a durable good like a refrigerator. A response model might work for Crest toothpaste in the short term, but longer-term forecasts might require a sophisticated time-series technique. By contrast, Whirlpool might find that channel surveys are better predictors of refrigerator sales over the long term.

Use Multiple Methods

Since forecasts are estimates, the more estimates generated from various methods, the better. For example, combining expert opinions with a trend analysis could help you understand what is happening and why. Every forecast informs decisions, such as the decision to hire more people, add manufacturing capacity, order supplies, and so forth. In addition, practice makes perfect, as they say. The more forecasts you have to make and resulting decisions you have to live with, the better you will get at forecasting.

Use Many Variables

Forecasting for smaller business units first can result in greater accuracy. For example, JCPenney may estimate sales by region first, and then roll that information up into a national sales forecast. By forecasting locally, more variables can be considered, and with more variables comes more information, which should help the accuracy of the company's overall sales forecast. Similarly, JCPenney may estimate sales by market segment, such as women over age fifty. Again, forecasting in a smaller segment or business unit can then enable the company to compare such forecasts to forecasts by product line and gain greater accuracy overall.

Use Scenario-Based Forecasts

One forecast is not enough. Consider what will happen if conditions change. For example, how might your forecast change if your competitors react strongly to your strategy? How might it change if they don't react at all? Or if the government changes a policy that makes your product tax free? All of these factors will influence sales, so the smart executive considers multiple scenarios. While the executive may not expect the government to make something tax free, scenarios can be created that consider favorable government regulation, stable regulation, and negative regulation, just as one can consider light competitive reaction, moderate reaction, or strong reaction.

Track Actual Results and Adjust

As time goes on, forecasts should be adjusted to reflect reality. For example, hard sales data and information on how strongly competition has reacted should create the need for adjustments in future forecasts. In other words, the forecast should change regularly based on the company's performance.

Key Takeaway

A forecast is an educated guess, or estimate, of future sales. Accuracy is important because so many other decisions a firm must make depend on the forecasts. When a company forecasts sales, it has to consider market potential and sales potential. Many methods of include expert opinion, channel and customer surveys, sales force composites, time series data, and test markets.

Better forecasts can be created by using by forecasting for various scenarios, tracking actual data (including sales) and adjusting future forecasts accordingly.

4. Ongoing Marketing Planning and Evaluation

Learning Objectives

1. Apply marketing planning processes to ongoing business settings.

2. Identify the role of the marketing audit.

Our discussion so far might lead you to believe that a marketing plan is created only when a new offering is being launched. In reality, marketing plans are created frequently—on an annual basis, when a new CMO is hired, when market dynamics change drastically and quickly, or just whenever a company's CEO wants one. Moreover, a marketing plan should be living document; it should contain triggers that cause a company to reevaluate its strategies should certain scenarios occur.

Some of those scenarios can occur immediately. For example, when a product is launched, the market reacts. Journalists begin to cover the phenomenon, competitors respond, and regulators may take note. What should happen if the sales goals for the product are substantially exceeded? Should its price be raised or lowered? Should follow-on offerings be launched sooner? What if a competitor launches a similar offering a week later? Or worse yet, what if the competition launches a much better offering? The key to a successful ongoing marketing strategy is twofold: good execution of the marketing plan and understanding causality.

Causality

Causality is the relationship between two variables whereby one variable is a direct consequence of the other. For a scientist in a lab, identifying causality is fairly easy because the causal variable can be controlled and the consequences observed. For marketers, such control is a dream, not a reality. Identifying causality, then, can be a real challenge.

Why is causality so important? Assume you've observed a drop in sales that you think is caused by a competitor's lower price. If you reduce your price to combat the competitor's when, in reality, the poor sales are due simply to seasonal factors, lower prices might give consumers the impression that your product is cheap or low quality. This impression could send your sales even further downward. Drawing the wrong conclusions about causality can lead to disastrous results.

Control is an important related concept. Control, in this context, means not the degree to which you can manipulate an outcome but rather the degree to which you can separate the effects of a variable on a consequence. For example, you have complete control over what the customer pays for the offering. You are able to manipulate that outcome. However, you have no control over seasonal effects. Nonetheless, you can identify what those effects are and account for their influence.

The first type of control is managerial control, whereby you have control over how variables in a marketing plan are implemented. You decide, for example, how many stores will carry your product. You can vary that number and have an effect on sales. The second type of control is statistical control, whereby you can remove the influence of the variable on the outcome mathematically. For example, you have no control over seasonality. If you are selling a product for babies and more babies are born in August than any other month, then your sales will go up in September. Statistical control allows you to smooth out the seasonal variance on sales so you can then determine how much of the change in sales is due to other factors, especially those you have control over. The numbers in a statistical analysis can be as easily approximated, so you don't necessarily need to use complicated equations. Consider the following scenario:

1. Over the past five years, you have observed an average decline of 20 percent in sales for the months of June, July, and August, which also happen to be months in which many salespeople and buyers are on vacation.

2. This year, the decline was 28 percent.

3. You can therefore safely assume that about 20 percent of the decline this year was due to people taking vacations, as they have in years past. You can further assume that the amount of the decline due to factors other than vacations was about 8 percent.

Doing a simple analysis like this at least gives you some idea that something new has occurred that is lowering your sales. You can then explore the problem more completely.

So how do you figure out the exact cause of such a decline? In some instances, marketing executives speculate about the potential causes of problems and then research them. For example, if the product's price is perceived to be the problem, conversing with a number of former customers who switched to competing products could either verify this hunch or dispel it. In a B2B environment, salespeople who are aware of a competitor's new lower prices might be the first to identify the problem, rather than marketing executives. Nonetheless, the firm's marketing executives can then try to verify that lower prices led to the sales decline. In the consumer-goods markets, there are often many segments of consumers. Rather than asking a few of them what they think, formal market research tools such as surveys and focus groups can be used.

The Marketing Audit

Another investigative tool that can be used to research a drop in a company's sales performance is a marketing audit. A marketing audit is an examination or snapshot of the state of a company's marketing strategies as they are actually implemented. Here, managerial control becomes important. Was the strategy implemented as intended? Is the strategy working?

For example, when Xerox launched a new workstation, the company ran a promotion giving a customer who bought a workstation a discount on a copier. Despite the promotion, the overall sales of the workstation failed to meet Xerox's expectations. There were, however, geographical areas in which the sales of the product were quite good. What was up?

Upon closer examination, Xerox's managers learned that the firm's salespeople in these areas had actually developed a much more effective selling strategy: they sold the copiers first and then offered the workstation for free by applying the amount of the discount to the workstation, not the copier. Xerox's marketing quickly revamped the promotion and communicated it effectively to the rest of the sales staff.

Fidelity is the degree to which the plan is being implemented as it is supposed to be. In the example of the Xerox workstation, there was substantial fidelity—the plan was being implemented right—but it was a poor plan. Usually, though, the problem is that the plan is not executed properly.

More serious issues require more in-depth study. When Mark Hurd took over as Hewlett-Packard's CEO in 2005, he ordered an immediate audit of HP's sales and marketing activities. Metrics such as the win/loss ratios of business deals, the length of time it took to get a proposal approved and presented to a customer, and other factors exposed numerous problems Hurd needed to fix. The audit identified the causes, many of which Hurd and his team were able to deal with quickly. As a result, HP increased its market share and captured the lead in the PC market in the first year following Hurd's appointment.

According to the marketing consulting company Copernicus, a marketing audit should assess many factors, but especially those listed below ("Marketing Audit," 2011).

Top Ten Factors a Marketing Audit Should Assess

1. Key factors that impacted the business for good or for bad during the past year.

2. Customer satisfaction scores and the number and type of customer complaints.

3. The satisfaction levels of distributors, retailers, and other value-chain members.

4. The marketing knowledge, attitudes, and satisfaction of all executives involved in the marketing function.

5. The extent to which the marketing program was marketed internally and accepted by top managers and nonmarketing executives.

6. Whether the offering met the customer's needs as expected and whether its competitive advantage was defensible.

7. The performance of the organization's advertising, promotion, sales, marketing, and research programs with an emphasis on their return on the money invested in them.

8. Whether the marketing plan achieved its stated financial and nonfinancial goals.

9. Whether the individual elements of the marketing plan achieved their stated financial and nonfinancial goals.

10. The current value of the brand and customer equity for each brand in the product portfolio.

You were probably surprised by a few items on the list. For example, did your marketing plan include a way to sell the marketing program to important internal parties, such as the company's managers and employees? We discussed earlier that the marketing plan should persuade others to invest in the plan's success. A marketing audit should assess the extent to which the plan was successful in achieving the goal of getting important people and departments within an organization to buy into the plan.

Do you think the top ten list above is prioritized correctly? Some people would argue that the first four or five factors that need to be examined are the most important. Others would argue that only the financial factors (factors 7–10) matter. Which group is right?

The answer depends on what's important at the time to a company. Because HP hired Hurd to improve the company's poor financial performance, financial issues were likely his top priority. He knew, however, that the causes of the poor financial performance probably lay elsewhere, so he had his team look deeper. Financial problems are usually the first to prompt a marketing audit.

Many firms don't wait for problems before conducting an audit. Either they hire consultants to conduct the audit, or they do the audits themselves. If a firm's budget doesn't allow for a complete audit annually, the company will often focus on one particular area at a time, such as levels of satisfaction among its customers and channel partners. The following year it might audit the company's communications strategy. Rotating the focus ensures that every aspect is audited regularly, if not annually.

Key Takeaway

The key to a successful ongoing marketing strategy is twofold: good marketing plan execution and understanding causality. Drawing the wrong conclusions about causality, or what actually causes a change in a company's sales performance, can lead to disastrous results. That's why companies investigate the causes by gathering market feedback and conducting market research. A market audit can also be used to research a change in a company's sales performance. A marketing audit is an examination or a snapshot of the state of a company's marketing strategies as they are actually implemented. Complete and partial audits can be done internally or by a consulting firm in order to find areas for improvement.

Review Questions

1. What is the difference between managerial control and statistical control? How is statistical control used?

2. What should a marketing audit accomplish?

5. Discussion Questions and Activities

Discussion Questions

1. In addition to CMOs, why do you believe so many other employees participate in marketing planning?

2. What is the most important part of a marketing plan? Why? What is the least important? Why?

3. Why doesn't the execution of a marketing plan necessarily follow the same order as the plan itself?

4. What is the most important part of a marketing audit? Why? What is the least important part? Why?

Activities

1. Pick a product with which you are very familiar and create a simple marketing plan for it. Focus on one market segment.

2. Conduct an audit of a company's marketing plan as if you were a consultant. Selecting a relatively new consumer product may be easier because it is likely to have more press available that you can use for data.

References

Benady, B. (2008). Working with the enemy. Marketing Week, 18.

Maddox, K. (2007). Bottom-line pressure forcing CMO turnover. B2B 92(17), 3–4.

Marketing audit: 10 critical Components. (2011, July 20). Retrieved from http://www.copernicusmarketing.com/our-thinking/blog/2011/ 07/20/10-critical-components-of-a-marketing-audit/

Mummert, H. (2008). Sitting chickens. Target Marketing 31(4), 11.

PESTEL Analysis

A PESTEL analysis is sometimes called a PEST or PESTLE analysis. It is a tool that scans a company's macro-environment, and enables it to identify, analyze, and monitor the political, economic, social, technology, legal, and environmental factors that may impact its operations (Frue, 2017). PESTEL analyses are used in industry and business to determine organizational situation, direction, and potential; as well as strategic planning (Lin, 2013).

Political Factors

What is the government's involvement in the business environment, and the degree of that involvement? Some examples of political factors are labor laws, taxation policies, tariff and nontariff barriers, and environmental regulations. Political factors may also include the services and goods that a government provides. Changes in the priorities of government spending may have a profound impact on policy, strategy, management, and process issues (Halik, 2012; Lin, 2013; Thomas, 2007).

Economic Factors

Economic factors include the general economic climate, fiscal and monetary policies, economic trends, economic growth, employment levels, government funding, and consumer confidence, and so forth (Halik, 2012; Lin, 2013; Thomas, 2007).

Social Factors

Social factors relate to demographics such as age and population growth, behavior, lifestyle changes, diversity, education, and career attitudes, among others. Trends in social factors may influence the demand for a company's products and services, and may also affect how that company operates and adapts (Halik, 2012; Lin, 2013; Thomas, 2007).

Technological Factors

Technological factors include advances in technology, communications, and information technology, as well as innovation and research and development (R&D). These factors may impact how knowledge is shared and distributed, and the speed at which this knowledge is disseminated. In addition, advances in technology and communication may influence how people communicate and socialize (Chao, Peng, & Nunes, 2007; Halik, 2012; Lin, 2013; Thomas, 2007).

Environmenal Factors

Environmental factors include all those that impact, or are influenced by, the surrounding environment. Environmental factors play a crucial role in certain industries, such as agriculture, tourism, and recreation. These factors include geographical location, weather, climate, global climate change, and environmental offsets (PESTLE Analysis, 2017).

Legal Factors

Legal factors have both external and internal aspects. Certain laws and regulations may impact the business environment in a country, while corporate policies may influence how a company operates. Legal analysis takes into account both of these aspects, and then lays out the strategies accordingly. Examples of laws and regulations include labor laws, safety standards, and consumer laws (PESTLE Analysis, 2017).

References

Chao, G., Peng, A., & Nunes, M.B. (2007). Using PEST analysis as a tool for the refining and focusing contexts for information systems research. Proceedings of the 6th European Conference on Research Methodology for Business and Management Studies.

8.2 PESTEL, Globalization, and Importing from International Business v. 1.0 was adapted by Saylor Academy and is available under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported license without attribution as requested by the work's original creator or licensor.

PESTEL, Globalization, and Importing

Learning Objectives

1. Know the components of PESTEL analysis.

2. Recognize how PESTEL is related to the dimensions of globalization.

3. Understand why importing might be a stealth form of international entry.

Know the Components of PESTEL Analysis

PESTEL analysis is an important and widely used tool that helps show the big picture of a firm's external environment, particularly as related to foreign markets. PESTEL is an acronym for the political, economic, sociocultural, technological, environmental, and legal contexts in which a firm operates. A PESTEL analysis gives managers an understanding of the opportunities and threats they face. This helps to build a vision of the future business landscape and how the firm might compete profitably. This useful tool analyzes for market growth or decline and, therefore, the position, potential, and direction for a business. When a firm is considering entry into new markets, these factors are of considerable importance. Moreover, PESTEL analysis provides insight into the status of key market flatteners, both in terms of their present state and future trends.

Firms need to understand the macroenvironment to ensure that their strategy is aligned with the powerful forces of change affecting their business landscape. When firms exploit a change in the environment—rather than simply survive or oppose the change—they are more likely to be successful. A solid understanding of PESTEL also helps managers avoid strategies that may be doomed to fail given the circumstances of the environment. JCPenney's failed entry into Chile is a case in point.

Understanding PESTEL is critical before moving a business into a new country or region. The fact that a strategy is congruent with PESTEL in the home environment gives no assurance that it will also align in other countries. For example, when Lands' End, the online clothier, sought to expand its operations into Germany, it ran into local laws prohibiting it from offering unconditional guarantees on its products. In the United States, Lands' End had built a reputation for quality on its no-questions-asked money-back guarantee. However, this was considered illegal under Germany's regulations governing incentive offers and price discounts. The political skirmish between Lands' End and the German government finally ended when the regulations banning unconditional guarantees were abolished. While the restrictive regulations didn't put Lands' End out of business in Germany, they did inhibit its growth there until the laws were abolished.

There are three steps in the PESTEL analysis. First, consider the relevance of each of the PESTEL factors to your context. Next, identify and categorize the information that applies to these factors. Finally, analyze the data and draw conclusions. Common mistakes in this analysis include stopping at the second step or assuming that the initial analysis and conclusions are correct without testing the assumptions and investigating alternative scenarios.

The framework for PESTEL analysis is presented below. It's composed of six sections—one for each of the PESTEL headings (Carpenter, Bauer & Erdogan, 2011). The framework includes sample questions or prompts, the answers to which can help determine the nature of opportunities and threats in the macroenvironment. These questions are examples of the types of issues that can arise in a PESTEL analysis.

PESTEL Analysis

1. Political

· How stable is the political environment in the prospective country?

· What are the local taxation policies? How do these affect your business?

· Is the government involved in trading agreements, such as the European Union (EU), the North American Free Trade Agreement (NAFTA), or the Association of Southeast Asian Nations (ASEAN)?

· What are the country's foreign-trade regulations?

· What are the country's social-welfare policies?

2. Economic

· What are the current and forecast interest rates?

· What is the current level of inflation in the prospective country? What is it forecast to be? How does this affect the possible growth of your market?

· What are local employment levels per capita, and how are they changing?

· What are the long-term prospects for the country's economy, gross domestic product (GDP) per capita, and other economic factors?

· What are the current exchange rates between critical markets, and how will they affect production and distribution of your goods?

3. Sociocultural

· What are the local lifestyle trends?

· What are the country's current demographics and how are they changing?

· What is the level and distribution of education and income?

· What are the dominant local religions? What influence do they have on consumer attitudes and opinions?

· What is the level of consumerism, and what are the popular attitudes toward it?

· What pending legislation could affect corporate social policies (e.g., domestic partner benefits or maternity and paternity leave)?

· What are the attitudes toward work and leisure?

4. Technological

· To what level do the local government and industry fund research, and are those levels changing?

· What is the local government's and industry's level of interest and focus on technology?

· How mature is the technology?

· What is the status of intellectual property issues in the local environment?

· Are potentially disruptive technologies in adjacent industries creeping in at the edges of the focal industry?

5. Environmental

· What are the local environmental issues?

· Are there any pending ecological or environmental issues relevant to your industry?

· How do the activities of international activist groups (e.g., Greenpeace, Earth First!, and People for the Ethical Treatment of Animals [PETA]) affect your business?

· Are there environmental protection laws?

· What are the regulations regarding waste disposal and energy consumption?

6. Legal

· What are the local government's regulations regarding monopolies and private property?

· Does intellectual property have legal protections?

· Are there relevant consumer laws?

· What is the status of employment, health and safety, and product safety laws?

Political Factors

The political environment can have a significant influence on businesses. In addition, political factors affect consumer confidence and consumer and business spending. For instance, how stable is the political environment? This is particularly important for companies entering new markets. Government policies on regulation and taxation can vary from state to state and across national boundaries. Political considerations also encompass trade treaties, such as NAFTA, ASEAN, and EU. Such treaties tend to favor trade among the member countries but impose penalties or less favorable trade terms on nonmembers.

Economic Factors

Managers also need to consider macroeconomic factors that will have short-term and long-term effects on the success of their strategy. Inflation rates, interest rates, tariffs, the growth of the local and foreign national economies, and exchange rates are critical. Unemployment, availability of critical labor, and the local cost of labor also have a strong bearing on strategy, particularly as it relates to the location of disparate business functions and facilities.

Sociocultural Factors

The social and cultural influences on business vary from country to country. Depending on the type of business, factors such as the local languages, dominant religions, cultural views toward leisure time, and age and lifespan demographics may be critical. Local sociocultural characteristics also include attitudes toward consumerism, environmentalism, and the roles of men and women in society. For example, Coca-Cola and PepsiCo have grown in international markets due to the increasing level of consumerism outside the United States.

Making assumptions about local norms derived from experiences in your home market is a common cause for early failure when entering new markets. However, even home-market norms can change over time, often caused by shifting demographics due to immigration or aging populations.

Technological Factors

The critical role of technology is discussed in more detail later in this section. For now, suffice it to say that technological factors have a major bearing on the threats and opportunities firms encounter. For example, new technology may make it possible for products and services to be made more cheaply and to a better standard of quality. New technology may also provide the opportunity for more innovative products and services, such as online stock trading and remote working. Such changes have the potential to alter the face of the business landscape.

Environmental Factors

The environment has been a factor in firm strategy for a long time, primarily from the standpoint of access to raw materials. Increasingly, this is best viewed as both a direct and indirect cost for the firm.

Environmental factors are also evaluated on the footprint left by a firm on its respective surroundings. For consumer product companies like PepsiCo, for instance, this can encompass the waste management and organic farming practices used in the countries where raw materials are obtained. Similarly, in consumer markets, it may refer to the degree to which packaging is biodegradable or recyclable.

Legal Factors

Finally, legal factors reflect the laws and regulations relevant to the region and the organization. Legal factors can include whether the rule of law is well established, how easily or quickly laws and regulations may change, and what the costs of regulatory compliance are. For example, Coca-Cola's market share in Europe is greater than 50 percent; as a result, regulators have asked that the company give shelf space in its coolers to competitive products in order to provide greater consumer choice" (Mercer, 2005).

Many of the PESTEL factors are interrelated. For instance, the legal environment is often related to the political environment, where laws and regulations can only change when they're consistent with the political will.

PESTEL and Globalization

Over the past decade, new markets have been opened to foreign competitors, whole industries have been deregulated, and state-run enterprises have been privatized. So, globalization has become a fact of life in almost every industry (Yip, 1989). This entails much more than companies simply exporting products to another country. Some industries that aren't normally considered global do, in fact, have strictly domestic players. But these companies often compete alongside firms with operations in multiple countries; in many cases, both sets of firms are doing equally well. In contrast, in a truly global industry, the core product is standardized, the marketing approach is relatively uniform, and competitive strategies are integrated in different international markets (Porter, 1986; Yip, 1989). In these industries, competitive advantage clearly belongs to the firms that can compete globally.

A number of factors reveal whether an industry has globalized or is in the process of globalizing. The sidebar below groups globalization factors into four categories: markets, costs, governments, and competition. These dimensions correspond well to Thomas Friedman's flatteners (as described in his book The World Is Flat, 2005), though they are not exhaustive.

Factors Favoring Industry Globalization

1. Markets

· Homogeneous customer needs

· Global customer needs

· Global channels

· Transferable marketing approaches

2. Costs

· Large-scale and large-scope economies

· Learning and experience

· Sourcing efficiencies

· Favorable logistics

· Arbitrage opportunities

· High research-and-development (R&D) costs

3. Governments

· Favorable trade policies

· Common technological standards

· Common manufacturing and marketing regulations

4. Competition

· Interdependent countries

· Global competitors

Markets

The more similar markets in different regions are, the greater the pressure for an industry to globalize. Coca-Cola and PepsiCo, for example, are fairly uniform around the world because the demand for soft drinks is largely the same in every country. The airframe manufacturing industry, dominated by Boeing and Airbus, also has a highly uniform market for its products; airlines all over the world have the same needs when it comes to large commercial jets.

Costs

In both of these industries, costs favor globalization. Coca-Cola and PepsiCo realize economies of scope and scale because they make such huge investments in marketing and promotion. Since they're promoting coherent images and brands, they can leverage their marketing dollars around the world. Similarly, Boeing and Airbus can invest millions in new product R&D only because the global market for their products is so large.

Governments and Competition

Obviously, favorable trade policies encourage the globalization of markets and industries. Governments, however, can also play a critical role in globalization by determining and regulating technological standards. Railroad gauge—the distance between the two steel tracks—would seem to favor a simple technological standard. In Spain, however, the gauge is wider than in France. Why? Because back in the 1850s, when Spain and neighboring France were hostile to one another, the Spanish government decided that making Spanish railways incompatible with French railways would hinder any French invasion.

These are a few key drivers of industry change. However, there are particular implications of technological and business model breakthroughs for both the pace and extent of industry change. The rate of change may vary significantly from one industry to the next; for instance, the computing industry changes much faster than the steel industry. Nevertheless, change in both fields has prompted complete reconfigurations of industry structure and the competitive positions of various players. The idea that all industries change over time and that business environments are in a constant state of flux is relatively intuitive. As a strategic decision maker, you need to ask yourself this question: how accurately does current industry structure (which is relatively easy to identify) predict future industry conditions?

Importing as a Stealth Form of Internationalization

Ironically, the drivers of globalization have also given rise to a greater level of imports. Globalization in this sense is a very strong flattener. Importing involves the sale of products or services in one country that are sourced in another country. In many ways, importing is a stealth form of internationalization. Firms often claim that they have no international operations and yet—directly or indirectly—base their production or services on inputs obtained from outside their home country. Firms that engage in importing must learn about customs requirements, informed compliance with customs regulations, entry of goods, invoices, classification and value, determination and assessment of duty, special requirements, fraud, marketing, trade finance and insurance, and foreign trade zones. Importing can take many forms—from the sourcing of components, machinery, and raw materials to the purchase of finished goods for domestic resale and the outsourcing of production or services to nondomestic providers.

Outsourcing occurs when a company contracts with a third party to do some work on its behalf. The outsourcer may do the work within the same country or may take the work to another country (i.e., offshoring). Offshoring occurs when you take a function out of your country of residence to be performed in another country, generally at a lower cost. International outsourcing, or outsourcing work to a nondomestic third party, has become very visible in business and corporate strategy in recent years. However, it's not a new phenomenon; for decades, Nike has been designing shoes and other apparel that are manufactured abroad. Similarly, Pacific Cycle doesn't make a single Schwinn or Mongoose bicycle in the United States, but instead imports them entirely from manufacturers in Taiwan and China. It may seem as if international outsourcing is new because businesses are now more often outsourcing services, components, and raw materials from countries with developing economies (e.g., China, Brazil, and India).

In addition to factors of production, information technologies (IT)—such as telecommunications and the widespread diffusion of the Internet—have provided the impetus for outsourcing services. Business-process outsourcing (BPO) is the delegation of one or more IT-intensive business processes to an external provider that in turn owns, administers, and manages that process on the basis of defined and measurable performance criteria. Firms in service and IT-intensive industries—e.g., insurance, banking, pharmaceuticals, telecommunications, automotive, and airlines—are among the early adopters of BPO. Of these, insurance and banking are able to generate the bulk of the savings, purely because of the large proportion of processes that they can outsource (i.e., the processing of claims and loans and providing service through call centers). Among those countries housing BPO operations, India experienced the most dramatic growth in services where language skills and education were important. Research firm Gartner predicted that the BPO market in India would reach $2.47 billion by 2014 (Gartner, 2011).

Generally, foreign outsourcing locations are defined by how automated a production process or service can be made and the transportation costs involved. When transportation costs and automation are both high, then the knowledge worker component of the location calculation becomes less important. The CAGE framework can help to evaluate potential outsourcing locations. In some cases, though, firms invest in both plant equipment and the training and development of the local workforce. This becomes important when the broader labor force needs to have a specific level of education to operate complex plant machinery or because a firm's technologies also have a cultural component. Brazil is one case in point; Ford, BMW, Daimler, and Cargill have all made significant investments in the educational infrastructure of this significant, emerging economy (Ante, 2009; Cargill, 2006; "Ford ups Brazil bet with new $281 mln investment," 2010; "Cargill to build new $210 million corn processing plant in Brazil ", 2011).

Key Takeaways

· A PESTEL analysis examines a target market's political, economic, social, technological, environmental, and legal dimensions in terms of both its current state and possible trends.

· An understanding of the dimensions of PESTEL helps you better grasp the dimensions on which a target market or industry may be more global or local.

· Importing is a stealth form of international entry, because the factors that favor globalization can also lead to a higher level of imports, and inputs can be sourced from anywhere they have either the lowest cost, highest quality, or some combination of these characteristics.

Exercises

1. What are the components of PESTEL analysis?

2. What are the four dimensions of pressures favoring globalization?

3. How are the PESTEL and globalization dimensions related to the flatteners (in the context that Thomas Friedman talks about them in his book The World Is Flat)?

4. Why might importing be considered a stealth form of internationalization or an internationalization entry mode?

5. What is the difference between outsourcing and offshoring?

References

Ante, S. E. (2009, August 17). IBM Bets on Brazilian Innovation. Retrieved from https://www.bloomberg.com/news/articles/2009-08-17/ibm-bets-on-brazilian-innovation

Carpenter, M., Bauer, T., and Erdogan, B. Principles of Management (Nyack, NY: Unnamed Publisher, 2009). Retrieved from http://www.gone.2012books.lardbucket.org/printed-book/127834

Friedman, T. L. (2005). The world is flat: a brief history of the twenty-first century. New York: Farrar, Straus and Giroux.

Gartner Says Indian Business Process Outsourcing Market to Grow 23.2 Percent in 2011. (2001, April 12). Retrieved from http://www.gartner.com/newsroom/id/1629014

Mercer, C. (2005, June 22). EU curbs Coca-Cola market dominance. Retrieved from http://www.beveragedaily.com/Manufacturers/EU-curbs-Coca-Cola-market-dominance

Porter, M. E. Competition in Global Industries (Boston: Harvard Business School Press, 1986).

Yip, G. S. "Global Strategy in a World of Nations," Sloan Management Review 31, no. 1 (1989): 29–40.

Cargill Annual Report 2006. (2006). Cargill website, Retrieved fromhttp://www.cargill.com.br/wcm/groups/public/@csf/@brazil/documents/document/br-2006-annual-rpt.pdf

Ford ups Brazil bet with new $281 mln investment. (2010, April 08). Retrieved from http://www.reuters.com/article/ford-brazil-idUSN0821323920100408

Cargill to build new $210 million corn processing plant in Brazil. (2011, February 07). Retrieved from http://news.agropages.com/News/NewsDetail---3450.htm

8.2 PESTEL, Globalization, and Importing from International Business v. 1.0 was adapted by Saylor Academy and is available under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported license without attribution as requested by the work's original creator or licensor.

PESTEL, Globalization, and Importing

Learning Objectives

1. Know the components of PESTEL analysis.

2. Recognize how PESTEL is related to the dimensions of globalization.

3. Understand why importing might be a stealth form of international entry.

Know the Components of PESTEL Analysis

PESTEL analysis is an important and widely used tool that helps show the big picture of a firm's external environment, particularly as related to foreign markets. PESTEL is an acronym for the political, economic, sociocultural, technological, environmental, and legal contexts in which a firm operates. A PESTEL analysis gives managers an understanding of the opportunities and threats they face. This helps to build a vision of the future business landscape and how the firm might compete profitably. This useful tool analyzes for market growth or decline and, therefore, the position, potential, and direction for a business. When a firm is considering entry into new markets, these factors are of considerable importance. Moreover, PESTEL analysis provides insight into the status of key market flatteners, both in terms of their present state and future trends.

Firms need to understand the macroenvironment to ensure that their strategy is aligned with the powerful forces of change affecting their business landscape. When firms exploit a change in the environment—rather than simply survive or oppose the change—they are more likely to be successful. A solid understanding of PESTEL also helps managers avoid strategies that may be doomed to fail given the circumstances of the environment. JCPenney's failed entry into Chile is a case in point.

Understanding PESTEL is critical before moving a business into a new country or region. The fact that a strategy is congruent with PESTEL in the home environment gives no assurance that it will also align in other countries. For example, when Lands' End, the online clothier, sought to expand its operations into Germany, it ran into local laws prohibiting it from offering unconditional guarantees on its products. In the United States, Lands' End had built a reputation for quality on its no-questions-asked money-back guarantee. However, this was considered illegal under Germany's regulations governing incentive offers and price discounts. The political skirmish between Lands' End and the German government finally ended when the regulations banning unconditional guarantees were abolished. While the restrictive regulations didn't put Lands' End out of business in Germany, they did inhibit its growth there until the laws were abolished.

There are three steps in the PESTEL analysis. First, consider the relevance of each of the PESTEL factors to your context. Next, identify and categorize the information that applies to these factors. Finally, analyze the data and draw conclusions. Common mistakes in this analysis include stopping at the second step or assuming that the initial analysis and conclusions are correct without testing the assumptions and investigating alternative scenarios.

The framework for PESTEL analysis is presented below. It's composed of six sections—one for each of the PESTEL headings (Carpenter, Bauer & Erdogan, 2011). The framework includes sample questions or prompts, the answers to which can help determine the nature of opportunities and threats in the macroenvironment. These questions are examples of the types of issues that can arise in a PESTEL analysis.

PESTEL Analysis

1. Political

· How stable is the political environment in the prospective country?

· What are the local taxation policies? How do these affect your business?

· Is the government involved in trading agreements, such as the European Union (EU), the North American Free Trade Agreement (NAFTA), or the Association of Southeast Asian Nations (ASEAN)?

· What are the country's foreign-trade regulations?

· What are the country's social-welfare policies?

2. Economic

· What are the current and forecast interest rates?

· What is the current level of inflation in the prospective country? What is it forecast to be? How does this affect the possible growth of your market?

· What are local employment levels per capita, and how are they changing?

· What are the long-term prospects for the country's economy, gross domestic product (GDP) per capita, and other economic factors?

· What are the current exchange rates between critical markets, and how will they affect production and distribution of your goods?

3. Sociocultural

· What are the local lifestyle trends?

· What are the country's current demographics and how are they changing?

· What is the level and distribution of education and income?

· What are the dominant local religions? What influence do they have on consumer attitudes and opinions?

· What is the level of consumerism, and what are the popular attitudes toward it?

· What pending legislation could affect corporate social policies (e.g., domestic partner benefits or maternity and paternity leave)?

· What are the attitudes toward work and leisure?

4. Technological

· To what level do the local government and industry fund research, and are those levels changing?

· What is the local government's and industry's level of interest and focus on technology?

· How mature is the technology?

· What is the status of intellectual property issues in the local environment?

· Are potentially disruptive technologies in adjacent industries creeping in at the edges of the focal industry?

5. Environmental

· What are the local environmental issues?

· Are there any pending ecological or environmental issues relevant to your industry?

· How do the activities of international activist groups (e.g., Greenpeace, Earth First!, and People for the Ethical Treatment of Animals [PETA]) affect your business?

· Are there environmental protection laws?

· What are the regulations regarding waste disposal and energy consumption?

6. Legal

· What are the local government's regulations regarding monopolies and private property?

· Does intellectual property have legal protections?

· Are there relevant consumer laws?

· What is the status of employment, health and safety, and product safety laws?

Political Factors

The political environment can have a significant influence on businesses. In addition, political factors affect consumer confidence and consumer and business spending. For instance, how stable is the political environment? This is particularly important for companies entering new markets. Government policies on regulation and taxation can vary from state to state and across national boundaries. Political considerations also encompass trade treaties, such as NAFTA, ASEAN, and EU. Such treaties tend to favor trade among the member countries but impose penalties or less favorable trade terms on nonmembers.

Economic Factors

Managers also need to consider macroeconomic factors that will have short-term and long-term effects on the success of their strategy. Inflation rates, interest rates, tariffs, the growth of the local and foreign national economies, and exchange rates are critical. Unemployment, availability of critical labor, and the local cost of labor also have a strong bearing on strategy, particularly as it relates to the location of disparate business functions and facilities.

Sociocultural Factors

The social and cultural influences on business vary from country to country. Depending on the type of business, factors such as the local languages, dominant religions, cultural views toward leisure time, and age and lifespan demographics may be critical. Local sociocultural characteristics also include attitudes toward consumerism, environmentalism, and the roles of men and women in society. For example, Coca-Cola and PepsiCo have grown in international markets due to the increasing level of consumerism outside the United States.

Making assumptions about local norms derived from experiences in your home market is a common cause for early failure when entering new markets. However, even home-market norms can change over time, often caused by shifting demographics due to immigration or aging populations.

Technological Factors

The critical role of technology is discussed in more detail later in this section. For now, suffice it to say that technological factors have a major bearing on the threats and opportunities firms encounter. For example, new technology may make it possible for products and services to be made more cheaply and to a better standard of quality. New technology may also provide the opportunity for more innovative products and services, such as online stock trading and remote working. Such changes have the potential to alter the face of the business landscape.

Environmental Factors

The environment has been a factor in firm strategy for a long time, primarily from the standpoint of access to raw materials. Increasingly, this is best viewed as both a direct and indirect cost for the firm.

Environmental factors are also evaluated on the footprint left by a firm on its respective surroundings. For consumer product companies like PepsiCo, for instance, this can encompass the waste management and organic farming practices used in the countries where raw materials are obtained. Similarly, in consumer markets, it may refer to the degree to which packaging is biodegradable or recyclable.

Legal Factors

Finally, legal factors reflect the laws and regulations relevant to the region and the organization. Legal factors can include whether the rule of law is well established, how easily or quickly laws and regulations may change, and what the costs of regulatory compliance are. For example, Coca-Cola's market share in Europe is greater than 50 percent; as a result, regulators have asked that the company give shelf space in its coolers to competitive products in order to provide greater consumer choice" (Mercer, 2005).

Many of the PESTEL factors are interrelated. For instance, the legal environment is often related to the political environment, where laws and regulations can only change when they're consistent with the political will.

PESTEL and Globalization

Over the past decade, new markets have been opened to foreign competitors, whole industries have been deregulated, and state-run enterprises have been privatized. So, globalization has become a fact of life in almost every industry (Yip, 1989). This entails much more than companies simply exporting products to another country. Some industries that aren't normally considered global do, in fact, have strictly domestic players. But these companies often compete alongside firms with operations in multiple countries; in many cases, both sets of firms are doing equally well. In contrast, in a truly global industry, the core product is standardized, the marketing approach is relatively uniform, and competitive strategies are integrated in different international markets (Porter, 1986; Yip, 1989). In these industries, competitive advantage clearly belongs to the firms that can compete globally.

A number of factors reveal whether an industry has globalized or is in the process of globalizing. The sidebar below groups globalization factors into four categories: markets, costs, governments, and competition. These dimensions correspond well to Thomas Friedman's flatteners (as described in his book The World Is Flat, 2005), though they are not exhaustive.

Factors Favoring Industry Globalization

1. Markets

· Homogeneous customer needs

· Global customer needs

· Global channels

· Transferable marketing approaches

2. Costs

· Large-scale and large-scope economies

· Learning and experience

· Sourcing efficiencies

· Favorable logistics

· Arbitrage opportunities

· High research-and-development (R&D) costs

3. Governments

· Favorable trade policies

· Common technological standards

· Common manufacturing and marketing regulations

4. Competition

· Interdependent countries

· Global competitors

Markets

The more similar markets in different regions are, the greater the pressure for an industry to globalize. Coca-Cola and PepsiCo, for example, are fairly uniform around the world because the demand for soft drinks is largely the same in every country. The airframe manufacturing industry, dominated by Boeing and Airbus, also has a highly uniform market for its products; airlines all over the world have the same needs when it comes to large commercial jets.

Costs

In both of these industries, costs favor globalization. Coca-Cola and PepsiCo realize economies of scope and scale because they make such huge investments in marketing and promotion. Since they're promoting coherent images and brands, they can leverage their marketing dollars around the world. Similarly, Boeing and Airbus can invest millions in new product R&D only because the global market for their products is so large.

Governments and Competition

Obviously, favorable trade policies encourage the globalization of markets and industries. Governments, however, can also play a critical role in globalization by determining and regulating technological standards. Railroad gauge—the distance between the two steel tracks—would seem to favor a simple technological standard. In Spain, however, the gauge is wider than in France. Why? Because back in the 1850s, when Spain and neighboring France were hostile to one another, the Spanish government decided that making Spanish railways incompatible with French railways would hinder any French invasion.

These are a few key drivers of industry change. However, there are particular implications of technological and business model breakthroughs for both the pace and extent of industry change. The rate of change may vary significantly from one industry to the next; for instance, the computing industry changes much faster than the steel industry. Nevertheless, change in both fields has prompted complete reconfigurations of industry structure and the competitive positions of various players. The idea that all industries change over time and that business environments are in a constant state of flux is relatively intuitive. As a strategic decision maker, you need to ask yourself this question: how accurately does current industry structure (which is relatively easy to identify) predict future industry conditions?

Importing as a Stealth Form of Internationalization

Ironically, the drivers of globalization have also given rise to a greater level of imports. Globalization in this sense is a very strong flattener. Importing involves the sale of products or services in one country that are sourced in another country. In many ways, importing is a stealth form of internationalization. Firms often claim that they have no international operations and yet—directly or indirectly—base their production or services on inputs obtained from outside their home country. Firms that engage in importing must learn about customs requirements, informed compliance with customs regulations, entry of goods, invoices, classification and value, determination and assessment of duty, special requirements, fraud, marketing, trade finance and insurance, and foreign trade zones. Importing can take many forms—from the sourcing of components, machinery, and raw materials to the purchase of finished goods for domestic resale and the outsourcing of production or services to nondomestic providers.

Outsourcing occurs when a company contracts with a third party to do some work on its behalf. The outsourcer may do the work within the same country or may take the work to another country (i.e., offshoring). Offshoring occurs when you take a function out of your country of residence to be performed in another country, generally at a lower cost. International outsourcing, or outsourcing work to a nondomestic third party, has become very visible in business and corporate strategy in recent years. However, it's not a new phenomenon; for decades, Nike has been designing shoes and other apparel that are manufactured abroad. Similarly, Pacific Cycle doesn't make a single Schwinn or Mongoose bicycle in the United States, but instead imports them entirely from manufacturers in Taiwan and China. It may seem as if international outsourcing is new because businesses are now more often outsourcing services, components, and raw materials from countries with developing economies (e.g., China, Brazil, and India).

In addition to factors of production, information technologies (IT)—such as telecommunications and the widespread diffusion of the Internet—have provided the impetus for outsourcing services. Business-process outsourcing (BPO) is the delegation of one or more IT-intensive business processes to an external provider that in turn owns, administers, and manages that process on the basis of defined and measurable performance criteria. Firms in service and IT-intensive industries—e.g., insurance, banking, pharmaceuticals, telecommunications, automotive, and airlines—are among the early adopters of BPO. Of these, insurance and banking are able to generate the bulk of the savings, purely because of the large proportion of processes that they can outsource (i.e., the processing of claims and loans and providing service through call centers). Among those countries housing BPO operations, India experienced the most dramatic growth in services where language skills and education were important. Research firm Gartner predicted that the BPO market in India would reach $2.47 billion by 2014 (Gartner, 2011).

Generally, foreign outsourcing locations are defined by how automated a production process or service can be made and the transportation costs involved. When transportation costs and automation are both high, then the knowledge worker component of the location calculation becomes less important. The CAGE framework can help to evaluate potential outsourcing locations. In some cases, though, firms invest in both plant equipment and the training and development of the local workforce. This becomes important when the broader labor force needs to have a specific level of education to operate complex plant machinery or because a firm's technologies also have a cultural component. Brazil is one case in point; Ford, BMW, Daimler, and Cargill have all made significant investments in the educational infrastructure of this significant, emerging economy (Ante, 2009; Cargill, 2006; "Ford ups Brazil bet with new $281 mln investment," 2010; "Cargill to build new $210 million corn processing plant in Brazil ", 2011).

Key Takeaways

· A PESTEL analysis examines a target market's political, economic, social, technological, environmental, and legal dimensions in terms of both its current state and possible trends.

· An understanding of the dimensions of PESTEL helps you better grasp the dimensions on which a target market or industry may be more global or local.

· Importing is a stealth form of international entry, because the factors that favor globalization can also lead to a higher level of imports, and inputs can be sourced from anywhere they have either the lowest cost, highest quality, or some combination of these characteristics.

Exercises

1. What are the components of PESTEL analysis?

2. What are the four dimensions of pressures favoring globalization?

3. How are the PESTEL and globalization dimensions related to the flatteners (in the context that Thomas Friedman talks about them in his book The World Is Flat)?

4. Why might importing be considered a stealth form of internationalization or an internationalization entry mode?

5. What is the difference between outsourcing and offshoring?

References

Ante, S. E. (2009, August 17). IBM Bets on Brazilian Innovation. Retrieved from https://www.bloomberg.com/news/articles/2009-08-17/ibm-bets-on-brazilian-innovation

Carpenter, M., Bauer, T., and Erdogan, B. Principles of Management (Nyack, NY: Unnamed Publisher, 2009). Retrieved from http://www.gone.2012books.lardbucket.org/printed-book/127834

Friedman, T. L. (2005). The world is flat: a brief history of the twenty-first century. New York: Farrar, Straus and Giroux.

Gartner Says Indian Business Process Outsourcing Market to Grow 23.2 Percent in 2011. (2001, April 12). Retrieved from http://www.gartner.com/newsroom/id/1629014

Mercer, C. (2005, June 22). EU curbs Coca-Cola market dominance. Retrieved from http://www.beveragedaily.com/Manufacturers/EU-curbs-Coca-Cola-market-dominance

Porter, M. E. Competition in Global Industries (Boston: Harvard Business School Press, 1986).

Yip, G. S. "Global Strategy in a World of Nations," Sloan Management Review 31, no. 1 (1989): 29–40.

Cargill Annual Report 2006. (2006). Cargill website, Retrieved fromhttp://www.cargill.com.br/wcm/groups/public/@csf/@brazil/documents/document/br-2006-annual-rpt.pdf

Ford ups Brazil bet with new $281 mln investment. (2010, April 08). Retrieved from http://www.reuters.com/article/ford-brazil-idUSN0821323920100408

Cargill to build new $210 million corn processing plant in Brazil. (2011, February 07). Retrieved from http://news.agropages.com/News/NewsDetail---3450.htm

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Porter's Five-Forces Model

Porter's five-forces model is a strategy framework that provides corporations with clear analysis of their competitive strategies. The model was developed and advanced by Michael Porter, a renowned marketing strategist. Porter's five-forces model looks at the strength of five distinct competitive forces, which when taken together, determine long-term profitability and competition. Porter's work has had a greater influence on business strategy.

The five-forces model was developed in Porter's 1980 book, Competitive Strategy: Techniques for Analyzing Industries and Competitors. To Porter, the classic means of developing a strategy—a formula for competition, goals, and policies to achieve those goals—was antiquated and in need of revision. Porter was searching for a solution between the two schools of prevailing thought. One was centered on the Harvard Business School, and it urged firms to adjust to a unique set of changing circumstances. The other strategy, championed by the Boston Consulting Group, was based on the experience curve, whereby the more a company knows about the existing market, the more its strategy can be directed to increase its share of the market. Porter applied microeconomic principles to business strategy and analyzed the strategic requirements of industrial sectors, not just specific companies.

Full Text: 

THE FIVE FORCES

The five forces are competitive factors, which determine industry competition and include: suppliers, rivalry within an industry, substitute products, customers or buyers, and new entrants (see Figure 1).

Although the strength of each force can vary from industry to industry, the forces, when considered together, determine long-term profitability within the specific industrial sector. The strength of each force is a separate function of the industry structure, which Porter defines as “the underlying economic and technical characteristics of an industry.” Collectively, the five forces affect prices, necessary investment for competitiveness, market share, potential profits, profit margins, and industry volume. The key to the success of an industry, and thus the key to the model, is analyzing the changing dynamics and continuous flux between and within the five forces. Porter's model depends on the concept of power within the relationships of the five forces.

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Figure 1  

Industry Competitors. Rivalries naturally develop between companies competing in the same market. Competitors use means such as advertising, introducing new products, more attractive customer service and warranties, and price competition to enhance their standing and market share in a specific industry. To Porter, the intensity of this rivalry is the result of factors like equally balanced companies, slow growth within an industry, high fixed costs, lack of product differentiation, overcapacity and price-cutting, diverse competitors, high-stakes investment, and the high risk of industry exit. There are also market entry barriers.

Pressure from Substitute Products. Substitute products are the natural result of industry competition, but they place a limit on profitability within the industry. A substitute product involves the search for a product that can do the same function as the product the industry already produces. Porter uses the example of security brokers, who increasingly face substitutes in the form of real estate, money-market funds, and insurance. Substitute products take on added importance as their availability increases.

Bargaining Power of Suppliers. Suppliers have a great deal of influence over an industry as they affect price increases and product quality. A supplier group exerts even more power over an industry if it is dominated by a few companies; there are no substitute products; the industry is not an important consumer for the suppliers; their product is essential to the industry; and forward integration potential of the supplier group exists. Labor supply can also influence the position of the suppliers. These factors are generally out of the control of the industry or company but strategy can alter the power of suppliers.

Bargaining Power of Buyers. The buyer's power is significant in that buyers can force prices down, demand higher quality products or services, and, in essence, play competitors against one another, all resulting in potential loss of industry profits. Buyers exercise more power when they are large-volume buyers, the product is a significant aspect of the buyer's costs or purchases, the products are standard within an industry, there are few changing or switching costs, the buyers earn low profits, potential for backward integration of the buyer group exists, the product is not essential to the buyer's product, and the buyer has full disclosure about supply, demand, prices, and costs. The bargaining position of buyers changes with time and a company's (and industry's) competitive strategy.

Potential Entrants. Threats of new entrants into an industry depend largely on barriers to entry. Porter identifies six major barriers to entry:

· Economies of scale, or decline in unit costs of the product, which force the entrant to enter on a large Page 716  |   Top of Article scale and risk a strong reaction from firms already in the industry, or accepting a disadvantage of costs if entering on a small scale.

· Product differentiation, or brand identification and customer loyalty.

· Capital requirements for entry; the investment of large capital, after all, presents a significant risk.

· Switching costs, or the cost the buyer has to absorb to switch from one supplier to another.

· Access to distribution channels. New entrants have to establish their distribution in a market with established distribution channels to secure a space for their product.

· Cost disadvantages independent of scale, whereby established companies already have product technology, access to raw materials, favorable sites, advantages in the form of government subsidies, and experience.

BARRIERS TO ENTRY STRATEGY

The six factors identified by Porter can be narrowed down into two major categories of barriers to entry; market barriers to entry and mobility barriers to entry. Market barriers to entry are the structural characteristics of a market, which favor established firms to the disadvantage of new entrants in the market in such a way that established firms enjoy the flexibility of raising prices over costs without attracting new entrants. Mobility barriers shield a firm operating in one segment of the market from entry by other firms operating in different segments of the same market.

Armstrong and Kotler reckon that barriers to entry as a strategy does not occur naturally and has to be initiated by organizations through anticipatory approach. The major strategies of barriers to entry commonly employed by established firms include adoption of sunk costs, squeezing of new entrants, and raising the costs of competitors.

Sunk costs are one of the most effective barriers to entry strategies that a firm can adopt. This is done by locking itself into a market in such a way that new entrants find it difficult to initiate and enforce counter strategies that would kick the incumbent firm out of business. A firm sinks costs through commitment of substantial capital towards purchasing, expanding, and sustaining its investment resources such as plant, machinery, equipments, and acquisition of advanced technologies which enable the firm to draw the advantages of low pricing through economies of scale. Dell, a leading manufacturer of personal computers, is one of the best examples of companies that have successfully applied this strategy. Dell has been able to retain the lion's share of the personal computer market for many years despite the entry of Macintosh Computers and even the subsequent merger of Hewlett-Packard and Compaq Computers because of the low pricing advantage that it draws from the economies of scale of its vast resources.

Squeezing of new entrants and raising the costs of a competitor are closely related strategies, which focus on creation of a difficult market environment; this denies competitors the likelihood of achieving positive returns on their investments. These strategies of barrier to entry involve introduction of measures such as increased expenditures on advertising, heavy research and development, minimization of access to channels of distribution, patenting of innovations, lowering of prices, optimization of government subsidies, and development of cheaper alternative product ranges in the same market.

New entrants can also expect a barrier in the form of government policy through federal and state regulations and licensing. New firms can expect retaliation from existing companies and also face changing barriers related to technology, strategic planning within the industry, and manpower and expertise problems. The entry deterring price or the existence of a prevailing price structure presents an additional challenge to a firm entering an established industry.

Whereas established firms may find it easy to manipulate the different strategies of barriers to entry according to prevailing market conditions, new entrants always find it difficult to break these barriers and may even run the risks of incurring heavy losses during the efforts to establish favorable market share for their products. It is equally important for management of established firms to adopt a balanced approach when implementing market barrier techniques against competitors and imitators by ensuring that additional costs incurred are appropriately recovered through increased sales volumes.

In summary, Porter's five-forces model concentrates on five structural industry features that comprise the competitive environment, and hence profitability, of an industry. Applying the model means, to be profitable, the firm has to find and establish itself in an industry so that the company can react to the forces of competition in a favorable manner. For Porter, Competitive Strategy is not a book for academics but a blueprint for practitioners—a tool for managers to analyze competition in an industry in order to anticipate and prepare for changes in the industry, new competitors and market shifts, and to enhance their firm's overall industry standing.

Throughout the relevant sections of Competitive Strategy, Porter uses numerous industry examples to illustrate his theory. Although immediate praise for the book and the five-forces model was exhaustive, critiques of Porter have appeared in business literature. Porter's model does not, for example, consider nonmarket changes, such as events in

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the political arena that impact an industry. Furthermore, Porter's model has come under fire for what critics see as his under-evaluation of government regulation and antitrust violations. Overall, criticisms of the model find their nexus in the lack of consideration by Porter of rapidly changing industry dynamics. In virtually all instances, critics also present alternatives to Porter's model.

Yet, in a Fortune interview in early 1999, Porter responded to the challenges, saying he welcomed the “fertile intellectual debate” that stemmed from his work. He admitted he had ignored writing about strategy in recent years but emphasized his desire to reenter the fray discussing his work and addressing questions about the model, its application, and the confusion about what really constitutes strategy. Porter's publications on competitive strategies span across all spheres of business as demonstrated by his 2006 book titled Redefining Health Care: Creating Value-Based Competition on Results.

SEE ALSO Competitive Advantage ; Generic Competitive Strategies ; Product Life Cycle and Industry Life Cycle ; Strategy Formulation

SWOT Analysis

One process used in strategy formulation consists of an organization analyzing its strengths, weaknesses, opportunities, and threats—called a SWOT analysis. The organization then uses the results of the SWOT analysis to help inform and direct where the organization should be going, strategically speaking.

· Strengths—things the organization does well. These may align very closely with the organization's competitive advantages, or they may be strengths due to other factors.

· Weaknesses—things the organization doesn't do well, for whatever reason.

· Opportunities—directions the organization could go, given the realities of the external world. These are directions that would benefit the organization, both in short-run and in long-run contexts.

· Threats—issues occurring outside the organization that can hurt the organization, in both short-run and long-run time contexts.

An Applied SWOT Model

The graphic above shows how the SWOT analysis fits into the process. Using the graphic, we can step through the process the organization should follow.

1. The organization starts with its existing business model, specifically isolating its set of competitive advantages. Competitive advantages are critical in this analysis as they are at the heart of the future direction of the organization—these are the advantages the organization owns that give it an edge over its competitors and should therefore be at the heart of the organization's strategic direction.

2. The organization should now clearly articulate its set of mission, vision, goals, and objectives (MVGO). Sometimes this is difficult for the organization to do—"What do we as an organization believe in? What do we think is important?"—but this step is vital, as it sets the tone and scope of the organization's strategic direction.

3. Armed with all this information, it is time to begin the SWOT analysis.

a. The organization starts first with its external analysis—market/industry analysis, competitive analysis, and a general study of social and economic external analysis. Notice that since this is "external analysis," it concentrates on factors occurring outside the organization. Some of the information uncovered in this process will offer opportunities to the organization, and some will threaten the organization. It is important for the organization to inventory all threats and opportunities out there, both close to the organization and far away. The organization should also be thinking in terms of short- and long-run time frames—threats and opportunities to be faced soon as well as later. Quite often, this analysis involves a brainstorming component—no opportunity or threat is ignored; all are enumerated and recorded. Members of the strategic planning team are given research assignments and are then sent to do their research. They later reconvene to share their findings.

b. Next, the organization moves to an internal analysis, analyzing the strengths and weaknesses of the organization. Here, the organization is concentrating on its own strengths and weaknesses, the sources of which are a function of who they are and where they've been as an organization. Again, no strength or weakness is too large or too small; all should be recorded.

c. Now, it is time to match the information up and prepare to make some decisions. The most desirable aspects to consider are the opportunities:

i. First of all, the organization should search for opportunities that match up with its strengths. These are the directions they should definitely think about moving in, as they are the best places for that company to be. But here comes the hard question: Should they eliminate those parts of the organization that were deemed “weaknesses”? Clearly, it depends on many considerations, but the organization should not be afraid to address these issues in a strategic discussion; everything should be on the table. The hope here is to find opportunities that leverage the organization’s strengths, and to consider ways to eliminate or minimize their weaknesses.

ii. They should next consider which threats they are most vulnerable to and decide how to address them. There are many questions to be answered here. Should they abandon any part of their operations because of the threats? How closely does a threatened part of the organization align with its weaknesses? Should they consider new physical locations for parts of their operation to move away from the threat? Is it possible to reduce the threat by a physical action, or is the threat unavoidable? Quite often, organizations will use scenario planning as a way to illuminate possible directions of threats and opportunities in terms of how each could impact the organization; this analysis helps the organization figure out which ones are most and least important.

Notice that we now have recommended actions to address both opportunities and threats. We now use these recommended actions to formulate strategy at all layers, as shown in the model above.

Notice the feedback loop on the diagram. As we implement strategic initiatives—and as time passes—we learn more. It is very important that we collect information over time to inform us as we continue to engage in this process...the process is iterative and never-ending.

The following graphic shows the vectors of the SWOT:

· Red—a threat that hits you directly in one of your strengths. This is the worst of the four combinations. Let’s say your biggest strength is the blue toaster you make. A competitor engineers a better toaster that is red (threat!), and now you are in trouble. Results that align your strengths with a significant threat could devastate the organization. Your strategy result should have your organization specifically and directly addressing this problem.

· Indigo—the second worst combination. Consider a threat from the market that hits you exactly where you have a weakness. For example, you make a product and unfortunately you are barely making a profit. A new competitor enters the market importing an even cheaper substitute product—clearly a threat. You can see the dangerous result here. Your strategy result should directly address how to remove or alleviate this problem.

· Blue—there is an opportunity in the market, but to exploit it would require you to use the aspect of your organization that is also your weakness. This is probably not an opportunity you can take advantage of. If the opportunity is strong enough and will last long enough, your strategy result may be to address this weakness in some manner so that you can eventually take advantage of the opportunity. Or, if the opportunity is relatively short-lived, you may just have to pass this time.

· Green—the best position. If your SWOT results in opportunities that directly align with your strengths, this is a great opportunity for you, and your strategy result should have you fully taking advantage of it.

The results of your SWOT process should give you multiple results, and it’s likely that some will fall into each of the four boxes. Your job as a strategist is to evaluate which pairings you should address most quickly—prioritizing all of the pairings to figure out what to put most of your organization’s energy into. You’ll probably have to ignore some and address others. Making those decisions is the job of leadership.

SWOT: Conclusion

Using the SWOT tool to help you develop strategy is very important because, used properly, it provides the information needed to make decisions about where the organization should head, where it should dedicate its resources and energies, and how it can best fulfill its mission and vision. It is critical that the organization regularly undergo SWOT analyses so it can capture new opportunities and threats in its thinking and planning.

References

SWOT analysis. (2009). In Encyclopedia of management (6th ed., pp. 915-918). Detroit: Gale. Retrieved from http://ezproxy.umuc.edu/login?url=http://go.galegroup.com.ezproxy.umuc.edu/ps/i.do?id=GALE%7CCX3273100290&v=2.1&u=umd_umuc&it=r&p=GVRL&sw=w&asid=86bd270f6e12bb7d0ee947a39effe1ac

Consumer Buying Behavior

Marketers should have a thorough understanding of how their "consumers think, feel, and act" and must offer a clear value to each target consumer (Kotler & Keller, 2015, p. 157). Consumer behavior refers to the way individuals choose, purchase, use, and discard goods and services to satisfy their wants and needs. Consumer buying behavior is strongly influenced by personal, cultural, and social factors. Of these, cultural factors have the most profound influence. Accordingly, marketers should pay close attention to the cultural values of consumers in their markets to promote sales of their current products and identify opportunities for the future (Kotler & Keller, 2015).

Marketers should understand how their consumers make buying decisions, and who is involved in such decisions. Consumer buying behavior is a five-step process that involves problem recognition, information search, evaluating alternatives, purchase decision, and post-purchase behavior. Each step must be fully understood by the marketer. The five-step process does not necessarily occur in this sequence, and consumers may skip or reverse stages as they alternate between buying offline and online (Kotler & Keller, 2015). Brands play an important role in consumer buying behavior, conveying information about the product, and reassuring the consumer's buying decision (Marshall & Johnston, 2011).

Social norms and situational factors often influence a buyer's final decision. Where group pressures to comply are strong, influence from social norms is expected to override multiattributed evaluation. The force of social norms involves two aspects: social forces, or pressures and normative suggestions, and motivation to comply, or the willingness to listen to others (Johansson, 2009).

The country-of-origin effect also plays a role in the buying decision. This term refers to the impact a branded product or service's perceived country of origin has on customers (for example, "made in" labels). Products or services from countries with a positive image tend to be favorably evaluated, while those from countries of lesser status tend to be downgraded. For example, the entry of Japanese cars into the United States in the 1970s was more a product of positive associations with Japan rather than with specific firms. That is, American drivers sought to buy a Japanese car, and not necessarily a Datsun (now Nissan) or a Toyota. Evidence suggests that this effect, which influences sales, does not stop over time (Johansson, 2009).

The growth of multinational production has changed the importance consumers ascribe to "made in" labels. The perception of Sony is unlikely to change, regardless of where its product is produced. The influence of the country-of-origin effect also depends on whether or not the country in question produces at widely different quality levels. For example, Germany, Japan, Sweden, and Switzerland have very high quality standards in general, which help to guarantee the quality of their products, and Korea seem to be working on joining this group. However, products from the United States, Italy, and China have widely varying quality levels, which can make it harder to judge quality based on the "made in" label alone (Johansson, 2009).

References

Johansson, J. (2009). Global marketing (5th ed.). New York, NY: McGraw-Hill.

Kotler, P., & Keller, K. L. (2015). Marketing management (15th ed.). Upper Saddle River, NJ: Pearson.

Marshall, G. W., & Johnston, M. W. (2011). Essentials of marketing management. New York, NY: McGraw-Hill.

Marketing Principles is available under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported license without attribution as requested by the site's original creator or licensee.

Chapter 3. Consumer Behavior: How People Make Buying Decisions

Why do you buy the things you do? How did you decide to go to the college you're attending? Where do you like to shop and when? Do your friends shop at the same places as you or different places? Do you buy the same brands multiple times or eat at the same restaurants frequently?

Marketing professionals that have your answers to those questions will have a much better chance of creating, communicating about, and delivering value-added products and services that you and people like you will want to buy. That's what the study of consumer behavior is all about. Consumer behavior considers the many reasons—personal, situational, psychological, and social—that people shop for products, buy and use them, sometimes become loyal customers, and then dispose of them.

Companies spend billions of dollars annually studying what propels consumer decisions. Although you might not like it, Google, AOL, and Yahoo! monitor your web patterns and browser history. The companies that pay for search advertising, or ads that appear on the web pages you pull up after doing an online search, want to find out what interests you. Doing so allows these companies to send you pop-up ads and coupons you might actually be interested in instead of ads and coupons for things that don't appeal to you.

Massachusetts Institute of Technology (MIT), in conjunction with a large retail center, has tracked consumers in retail establishments to see when and where they tended "dwell", or stop to look at merchandise. By tracking the position of the consumers' mobile phones as the phones automatically transmitted signals to cellular towers, MIT found that when people's "dwell times" increased, sales increased, too.

Researchers have even looked at people's brains by having them lie in scanners and asking them questions about different products. What people say about the products is then compared to what their brains scans show—that is, what they are really thinking. Scanning people's brains for marketing purposes might sound nutty, but maybe not when you consider the fact that eight out of ten new consumer products fail, even when they are test marketed. Could it be possible that what people say about potential new products and what they think about them are different? Marketing professionals want to find out ("The Way the Brain Buys," 2008).

Studying people's buying habits isn't just for big companies. Small businesses and entrepreneurs can study the behavior of their customers with great success. By figuring out what zip codes their customers live in, a business might determine where to locate an additional store. Small businesses such as restaurants often use coupon codes. For example, coupons sent out in newspapers are given one code. Those sent out via the Internet are given another. When the coupons are redeemed, the restaurants can tell which marketing avenues are having the biggest effect on their sales.

Some businesses, including a growing number of start-ups, are using blogs and social networking web sites to gather information about their customers at a low cost. For example, Proper Cloth, a company based in New York, has a site on Facebook. Whenever the company posts a new bulletin or photos of its clothes, all its Facebook followers automatically receive the information on their own Facebook pages. "We want to hear what our customers have to say," says Joseph Skerritt, the young MBA graduate who founded Proper Cloth. "It's useful to us and lets our customers feel connected to Proper Cloth" (Knight, 2009). Skerritt also writes a blog for the company. Podcasts that can be downloaded from iTunes and Twitter are two other ways companies are amplifying the reach of information about their products.

Environmental factors (such as the economy and technology) and marketing actions taken to create, communicate about, and deliver products and services (such as sale prices, coupons, Internet sites, and new product features) may affect consumers' behavior. However, a consumer's situation, personal factors, and culture also influence what, when, and how he or she buys things. We'll look at those factors in section 1, Factors That Influence Consumers' Buying Behavior. Section 2, Low-Involvement Versus High-Involvement Buying Decisions and the Consumer's Decision-Making Process focuses on different types of buying decisions and the stages consumers may go through when making purchase decisions.

1. Factors That Influence Consumers' Buying Behavior

Learning Objectives

1. Describe the personal and psychological factors that may influence what consumers buy and when they buy it.

2. Explain what marketing professionals can do to influence consumers' behavior.

3. Explain how looking at lifestyle information helps firms understand what consumers want to purchase.

4. Explain how Maslow's hierarchy of needs works.

5. Explain how culture, subcultures, social classes, families, and reference groups affect consumers' buying behavior.

You've been a consumer with purchasing power for much longer than you probably realize—since the first time you were asked which cereal or toy you wanted. Over the years, you've developed rules or mental shortcuts providing a systematic way to choose among alternatives, even if you aren't aware of it. Other consumers follow a similar process, but different people, no matter how similar they are, make different purchasing decisions. You might be very interested in purchasing a smart car, but your best friend might want to buy a Ford F-150 truck. What factors influenced your decision and what factors influenced your friend's decision?

As we mentioned earlier, consumer behavior is influenced by many things, including environmental and marketing factors, the situation, personal and psychological factors, family, and culture. Businesses try to identify trends so they can reach the people most likely to buy their products in the most cost-effective way possible. Businesses often try to influence a consumer's behavior with things they can control, such as the layout of a store, music, the grouping and availability of products, pricing, and advertising. While some influences may be temporary and others are long lasting, different factors can affect how buyers behave—whether they influence you to make a purchase, buy additional products, or buy nothing at all. Let's now look at some of the influences on consumer behavior in greater detail.

Situational Factors

Have you ever been in a department store and couldn't find your way out? No, you aren't necessarily directionally challenged. Marketing professionals take physical factors such as a store's design and layout into account when they are designing their facilities. Presumably, the longer you wander around a facility, the more you will spend. Grocery stores frequently place bread and milk products on the opposite ends of the stores because people often need both types of products. To buy both, they have to walk around an entire store, which, of course, is loaded with other items they might see and purchase.

Store locations also influence behavior. Starbucks has done a good job of locating its stores. You can scarcely drive a few miles down the road without passing a franchise location. You can also buy cups of Starbucks coffee at many grocery stores and in airports—virtually any place there is foot traffic.

Physical factors that firms can control, such as the layout of a store, music played at stores, the lighting, temperature, and even the smells you experience are called atmospherics. Perhaps you've visited the office of an apartment complex and noticed how great it looked and even smelled. It's no coincidence. The managers of the complex were trying to get you to stay for a while and have a look at their facilities. Research shows that "strategic fragrancing" results in customers staying in stores longer, buying more, and leaving with a better impressions of the quality of a store's services and products. Mirrors near hotel elevators are another example of atmospherics. Hotel operators have found that when people are busy looking at themselves in the mirrors, they don't feel like they are waiting as long for their elevators (Moore, 2008).

Not all physical factors are under a company's control, however. Take weather, for example. Rainy weather can be a boon to some companies, like umbrella makers such as Totes, but a problem for others. Beach resorts, outdoor concert venues, and golf courses suffer when it is raining heavily. Businesses like automobile dealers also have fewer customers. Who wants to shop for a car in the rain?

Firms often attempt to deal with adverse physical factors such as bad weather by offering specials during unattractive times. For example, many resorts offer consumers discounts on travel to beach locations during hurricane season. Having an online presence is another way to cope with weather-related problems. What could be more comfortable than shopping at home? If it's raining too hard to drive to Gap, REI, or Abercrombie & Fitch, you can buy products from these companies and many others online. You can shop online for cars, too, and many restaurants take orders online and deliver.

Crowding is another situational factor. Have you ever left a store and not purchased anything because it was just too crowded? Some studies have shown that consumers feel better about retailers with uncrowded stores. However, other studies have shown that to a certain extent, crowding can have a positive impact on a person's buying experience. The phenomenon is often referred to as herd behavior (Gaumer & Leif, 2005).

If people are lined up to buy something, you want to know why. Should you get in line to buy it too? Herd behavior helped drive up the price of houses in the mid-2000s before the prices for them rapidly fell.

Social Situation

The social situation you're in can significantly affect your purchase behavior. Perhaps you have seen Girl Scouts selling cookies outside grocery stores and other retail establishments and purchased nothing from them, but what if your neighbor's daughter is selling the cookies? Are you going to turn her down or be a friendly neighbor and buy a box (or two)?

Companies like Pampered Chef that sell their products at parties understand that the social situation makes a difference. When you're at a friend's Pampered Chef party, you don't want to look cheap or disappoint your friend by not buying anything. Certain social situations can also make you less willing to buy products. You might spend quite a bit of money each month eating at fast-food restaurants like McDonald's and Subway. Where do you take someone for your first date? Some people might take a first date to Subway, but others would perhaps choose a more upscale restaurant. Likewise, if you have turned down a drink or dessert on a date because you were worried about what the person you were with might have thought, your consumption was affected by your social situation (Matilla & Wirtz, 2008).

Time

The time of day, time of year, and how much time consumers have to shop affect what they buy. Researchers have even discovered whether someone is a morning person or evening person affects shopping patterns. Have you ever gone to the grocery store when you are hungry or after payday when you have cash in your pocket? When you are hungry or have cash, you may purchase more than you would at other times. The company 7-Eleven Japan is extremely aware of how time affects buyers. The company's point-of-sale systems at its checkout counters monitor what is selling well and when, and stores are restocked with those items immediately, sometimes via motorcycle deliveries that zip in and out of traffic along Japan's crowded streets. The goal is to get the products on the shelves when and where consumers want them. The company also knows that, like Americans, its customers are busy. Shoppers can pay their utility bills, local taxes, and insurance or pension premiums at 7-Eleven Japan stores, and even make photocopies (Bird, 2002).

Companies worldwide are aware of people's lack of time and are finding ways to accommodate them. Some doctors' offices offer drive-through shots for patients who are in a hurry and for elderly patients who find it difficult to get out of their cars. Tickets.com allows companies to sell tickets by sending them to customers' mobile phones when they call in. The phones' displays are then read by barcode scanners when the ticket purchasers arrive at the events they're attending. Likewise, if you need customer service from Amazon, there's no need to wait on the telephone. If you have an account with Amazon, you just click a button on the company's website, and an Amazon representative calls you immediately.

Reason for the Purchase

The reason you are shopping also affects the amount of time you will spend shopping. Are you making an emergency purchase? What if you need something for an important dinner or a project and only have an hour to get everything? Are you shopping for a gift or for a special occasion? Are you buying something to complete a task and need it quickly?

Purchasing a gift might not be an emergency situation, but you may not want to spend much time shopping for it either. Gift certificates have been popular for years. You can purchase gift cards for numerous merchants at your local grocery store or online. In contrast, suppose you need to buy an engagement ring. Sure, you could buy one online in a jiffy, but you probably wouldn't do that. What if the diamond were fake? What if your significant other turned you down and you had to return the ring? How hard would it be to get back online and return it? (Hornik & Miniero, 2009).

Mood

Have you ever felt like going on a shopping spree? At other times, wild horses couldn't drag you to a mall. Moods can temporarily affect consumers' spending patterns. Some people enjoy shopping, and there are even compulsive spenders who get a temporary high from the activity.

A sour mood can spoil a consumer's desire to shop. The crash of the US stock market in 2008 left many people feeling poorer, leading to a dramatic downturn in consumer spending. Penny-pinching came into became common, and conspicuous spending became more infrequent. Costco and Walmart experienced heightened sales of their low-cost Kirkland Signature and Great Value brands as consumers scrimped (Birchall, 2009b). Saks Fifth Avenue wasn't so lucky. Its annual release of spring fashions usually leads to a feeding frenzy among shoppers, but spring 2009 was different. "We've definitely seen a drop-off of this idea of shopping for entertainment," says Kimberly Grabel, Saks Fifth Avenue's senior vice president of marketing (Rosenbloom, 2009). To get buyers in the shopping mood, companies resorted novel measures. The upscale retailer Neiman Marcus began introducing mid-priced brands. By studying customer's loyalty cards, the French hypermarket Carrefour hoped to find ways to get its customers to purchase nonfood items that have higher profit margins.

The glum mood wasn't bad for all businesses though. Discounters like Half Price Books saw their sales surge. So did seed sellers, as people began planting their own gardens. Finally, what about those products you see being hawked on television (e.g., Aqua Globes, Snuggies, and Ped Eggs)? Their sales were the best ever. Apparently, consumers too broke to go on vacation or shop at Saks were instead watching television and treating themselves to the products advertised there (Ward, 2009).

Personal Factors

Personality and Self-Concept

Personality describes a person's disposition, helps show why people are different, and encompasses a person's unique traits. The big five personality traits that psychologists discuss frequently include openness, or how accepting you are of new experiences; conscientiousness, or how diligent you are; extraversion, or how outgoing or shy you are; agreeableness, or how easy you are to get along with; and neuroticism, or how prone you are to negative mental states.

Do personality traits predict people's purchasing behavior? Can companies successfully target certain products to people based on their personalities? How do you find out what personalities consumers have? Are extraverts wild spenders and introverts penny-pinchers?

The link between people's personalities and their buying behavior is somewhat unclear. Some research studies have shown that sensation seekers, or people who exhibit extremely high levels of openness, are more likely to respond well to advertising that's violent and graphic. The problem for firms is figuring out which consumers exhibit which personality traits.

Marketers have had better luck linking people's self-concepts to their buying behavior. Your self-concept is how you see yourself—be it positive or negative. Your ideal self is how you would like to see yourself—whether it's prettier, more popular, or more ecoconscious. This formulation, along with others' self-concept, or how you think others see you, also influences your purchase behavior. Marketing researchers believe people buy products to enhance how they feel about themselves—to get themselves closer to their ideal selves.

The slogan "Be All That You Can Be," which for years was used by the US Army to recruit soldiers, is an attempt to appeal to the self-concept. Presumably, by joining the US Army, you will become a better version of yourself, which will, in turn, improve your life. Many beauty products and cosmetic procedures are advertised in a way that's supposed to appeal to the ideal self that people seek. All of us want products that improve our lives.

Gender, Age, and Stage of Life

Gender, age, and stage of life are all demographic variables that influence purchase decisions. Men and women need and buy different products (Ward & Thuhang, 2007). They also shop differently and in general have different attitudes about shopping. You know the old stereotypes: Men see what they want and buy it, but women try on everything and shop until they drop. There's some truth to the stereotypes. That's why you see so many advertisements directed at one sex or the other—beer commercials that air on ESPN and commercials for household products that air on Lifetime. Women influence fully two-thirds of all household product purchases, whereas men buy about three-quarters of all alcoholic beverages (Schmitt, 2008). The shopping differences between men and women seem to be changing, though. Younger, well-educated men are less likely to believe grocery shopping is a woman's job and are more inclined to bargain shop and use coupons that are properly targeted at them (Hill & Harmon, 2007). One survey found that approximately 45 percent of married men actually like shopping and consider it relaxing.

A study by Resource Interactive, a technology research firm, found that when shopping online, men prefer sites with lots of pictures of products, and women prefer to see products online in a lifestyle context—say, a lamp in a living room. Women are also twice as likely as men to use viewing tools such as the zoom and rotate buttons and links that allow them to change the color of products.

Many businesses today are taking greater pains to figure out what men want. Face toners and bodywashes for men, such as the Axe brand, and hair salons, like the Men's Zone and Weldon Barber, are a relatively new phenomenon. Some advertising agencies specialize in advertising directed at men. There are also many products such as kayaks and mountain bikes targeted toward women that weren't in the past.

You have probably noticed that the things you buy have changed as you age. Think about what you wanted and how you spent five dollars when you were a child, a teenager, and an adult. When you were a child, the last thing you probably wanted as a gift was clothing. As you became a teen, however, cool clothes probably became a higher priority. Don't look now, but depending on the stage of life you're currently in, diapers and wrinkle cream might be just around the corner.

If you're single and working after graduation, you probably spend your money differently than a recently married couple. How do you think spending patterns change when someone has a young child, or a teenager, or a child in college? Diapers and daycare, orthodontia, tuition, electronics—regardless of their age, children affect the spending patterns of families. Once children graduate from college and parents are empty nesters, spending patterns change again.

Empty nesters and baby boomers are a huge market that companies are trying to tap. Ford and other car companies have created aging suits for young employees to wear when they're designing automobiles ("Designing Cars for the Elderly," 2008). The suit simulates the restricted mobility and vision people experience as they get older. Car designers can then figure out how to configure the automobiles to better meet the needs of these consumers.

Lisa Rudes Sandel, the founder of Not Your Daughter's Jeans (NYDJ), created a multimillion-dollar business by designing jeans specifically for baby boomers. Since its launch seven years ago, NYDJ has become the largest domestic manufacturer of women's jeans under $100. "The truth is," Rudes Sandel says, "I've never forgotten the woman I've been aiming for since day one." Rudes Sandel "speaks to" every one of her customers via a note tucked into each pair of jean that reads, "NYDJ (Not Your Daughter's Jeans) cannot be held responsible for any positive consequence that may arise due to your fabulous appearance when wearing the Tummy Tuck jeans. You can thank me later" (Saffian, 2009).

Your chronological age, or actual age in years, is different from your cognitive age, or how old you perceive yourself to be. A person's cognitive age affects his or her activities and sparks interests consistent with his or her perceived age. Cognitive age is a significant predictor of consumer behaviors, including a person's proclivity for dining out, watching television, going to bars and dance clubs, playing computer games, and shopping (Barak & Gould, 1985). Companies have found that many consumers feel younger than their chronological age and don't take kindly to products that feature "old folks," because they can't identify with them.

Lifestyle

Despite people's similarities (e.g., being middle-class Americans who are married with children), their lifestyles can differ radically. To better understand and connect with consumers, companies interview people or ask them to complete questionnaires about their lifestyles and their activities, interests, and opinions (often referred to as AIO statements). Consumers are not only asked about products they like, where they live, and their gender but also about what they do—that is, how they spend their time and their priorities, values, opinions, and general outlooks on the world. Where do they go other than work? Who do they like to talk to? What do they talk about? Researchers hired by Procter & Gamble have gone so far as to follow women around for weeks as they shop, run errands, and socialize with one another. (Berner, 2006). Other companies have paid people to keep a daily journal of their activities and routines.

A number of research organizations examine the lifestyle and psychographic characteristics of consumers. Psychographics combines the lifestyle traits of consumers and their personality styles with an analysis of their attitudes, activities, and values, to determine groups of consumers with similar characteristics. One of the most widely used systems to classify people based on psychographics is the VALS (values, attitudes, and lifestyles) framework. Using VALS to combine psychographics with demographic information such as marital status, education level, and income provides a better understanding of consumers.

Psychological Factors

Motivation

Motivation is the inward drive we have to get what we need. In the mid-1900s, Abraham Maslow, an American psychologist, developed the hierarchy of needs. Maslow theorized that people have to fulfill their basic needs—food, water, and sleep—before they can begin fulfilling higher-level needs. Have you ever gone shopping when you were tired or hungry? Even if you were shopping for something that would make you the envy of your friends (maybe a new car) you probably wanted to sleep or eat even more than shop.

The need for food is recurring. Other needs, such as shelter, clothing, and safety, tend to be enduring. Still other needs arise at different points in a person's life. For example, during grade school and high school, your social needs probably rose to the forefront. You wanted to have friends and get a date. Perhaps this prompted you to buy certain types of clothing or electronic devices. After high school, you began thinking about how people would view you in your station in life, so you decided to pay for college and get a professional degree, thereby fulfilling your need for esteem. If you're lucky, at some point you will realize Maslow's state of self-actualization. You will believe you have become the person in life that you feel you were meant to be.

Following the economic crisis that began in 2008, the sales of new automobiles dropped sharply virtually everywhere around the world—except the sales of Hyundai vehicles. Hyundai understood that people needed to feel financially secure and ran an ad campaign that assured car buyers they could return their vehicles if they couldn't make the payments on them without damaging their credit. Seeing Hyundai's success, other carmakers began offering similar programs. Likewise, banks began offering "worry-free" mortgages to ease the minds of would-be homebuyers. For a fee of about $500, First Mortgage Corp., a Texas-based bank, offered to make a homeowner's mortgage payment for six months if he or she got laid off (Jares, 2010).

While achieving self-actualization may be a goal for many individuals in the United States, consumers in Eastern cultures may focus more on belongingness and group needs. Marketers look at cultural differences in addition to individual needs. The importance of groups affects advertising (using groups versus individuals) and product decisions.

Perception

Perception is how you interpret the world around you and make sense of it in your mind. You do so via stimuli that affect your senses—sight, hearing, touch, smell, and taste. How you combine these senses also makes a difference. For example, in one study, consumers were blindfolded and asked to drink a new brand of clear beer. Most of them said the product tasted like regular beer. However, when the blindfolds came off and they drank the beer, many of them described it as "watery" tasting (Ries, 2009).

Consumers are bombarded with messages on television, radio, magazines, the Internet, and even bathroom walls. The average consumer is exposed to about three thousand advertisements per day (Lasn, 1999). Consumers are surfing the Internet, watching television, and checking their cell phones for text messages simultaneously. Some, but not all, information makes it into our brains. This phenomenon is called selective exposure.

Have you ever read or thought about something and then started noticing ads and information about it popping up everywhere? Many people are more perceptive to advertisements for products they need. Selective attention is the process of filtering out information based on how relevant it is to you. It's been described as a suit of armor that helps you filter out information you don't need. At other times, people forget information, even if it's quite relevant to them, which is called selective retention. Often the information contradicts the person's belief. To be sure their advertising messages get through to you and you remember them, companies use repetition. Were you tired of iPhone commercials before they tapered off? How often do you see the same commercial aired during a single television show?

Another potential problem that advertisers may experience is selective distortion, or misinterpretation of the intended message. Promotions for weight-loss products show models that look slim and trim after using their products, and consumers may believe they will look like the model if they use the product. They misinterpret other factors, such as how the model looked before or how long it will take to achieve the results. Similarly, have you ever told someone a story about a friend and that person told another person who told someone else? By the time the story gets back to you, it is completely different. The same thing can happen with many types of messages.

Using surprising stimuli, or shock advertising, is also a functional technique. One study found that shocking content increased attention, benefited memory, and positively influenced behavior among a group of university students (Dahl, Frankenberger, & Manchanda, 2003).

Subliminal advertising, the opposite of shock advertising, involves exposing consumers to marketing stimuli, such as photos, ads, and messages, by stealthily embedding them in movies, ads, and other media. For example, years ago the words Drink Coca-Cola flashed for a millisecond on a movie screen. Although there is no evidence that subliminal advertising works, consumers were thought to perceive the information subconsciously and to be influenced to buy the products shown. Many people considered the practice to be subversive, and in 1974, the Federal Communications Commission condemned it. Much of the original research on subliminal advertising, conducted by a researcher trying to drum up business for his market research firm, was fabricated (Crossen, 2007). People are still fascinated by subliminal advertising, however. To create buzz about the television show The Mole in 2008, ABC began hyping it by airing short commercials composed of just a few frames. If you blinked, you missed it. Some television stations actually called ABC to figure out what was going on. One-second ads were later rolled out to movie theaters (Adalian, 2008).

Different consumers perceive information differently. A couple of frames about The Mole might make you want to see the television show. However, your friend might see the ad, find it stupid, and never tune in to watch the show. One man sees Pledge, an outstanding furniture polish, while another sees a can of spray no different from any other furniture polish. One woman sees a luxurious Gucci purse, and the other sees an overpriced bag to hold keys and makeup (Chartrand, 2009).

Learning

Learning refers to the process by which consumers change their behavior after they gain information or experience. It's the reason you don't buy a bad product twice. Learning doesn't just affect what you buy, it affects how you shop. People with limited experience about a product or brand generally seek out more information than people who have used a product before.

Companies try to get consumers to learn about their products in different ways. Car dealerships offer test drives. Pharmaceutical representatives leave samples and brochures at doctor's offices. Other companies give consumers free samples. To promote its new line of coffees, McDonald's offered customers free samples. Have you ever eaten the food samples in a grocery store? While sampling is an expensive strategy, it gets consumers to try the product and gets many customers buy it, especially right after trying it in the store.

A kind of operant learning called instrumental conditioning, is what occurs when researchers are able to get a mouse to run through a maze for a piece of cheese or a get a dog to salivate just by ringing a bell. In other words, learning occurs through repetitive behavior that has positive or negative consequences. Companies engage in operant conditioning by rewarding consumers, which causes them to want to repeat their purchasing behaviors. Examples include the prizes and toys that come in Cracker Jacks and McDonald's happy meals, free tans offered with gym memberships, a free sandwich after a certain number of purchases, and free car washes when you fill up your car's gas tank.

Another learning process called classical conditioning occurs by associating a conditioned stimulus (CS) with an unconditioned stimulus (US) to get a particular response. The more frequently the CS is linked with the US, the faster the learning occurs.

Attitude

Attitudes are mental positions or emotional feelings, favorable or unfavorable evaluations, and action tendencies people have about products, services, companies, ideas, issues, or institutions (Attitude, n.d.). Attitudes tend to be enduring, and because they are based on people's values and beliefs, they are hard to change. Companies want people to have positive feelings about their offerings. A few years ago, KFC began running ads suggesting that fried chicken was healthy, until the US Federal Trade Commission told the company to stop. Wendy's slogan that its products are "way better than fast food" is another example of a business trying to change customers' attitudes. Fast food has a negative connotation, so Wendy's is trying to get consumers to think about its offerings in a more positive light.

An example of a shift in consumers' attitudes occurred when the taxpayer-paid government bailouts of big banks that began in 2008 provoked the wrath of many Americans, creating an opportunity for small banks not involved in the credit bailout and subprime mortgage mess. The Worthington National Bank, a small bank in Fort Worth, Texas, ran billboards reading: "Did Your Bank Take a Bailout? We didn't." Another read: "Just Say NO to Bailout Banks. Bank Responsibly!" The Worthington Bank received tens of millions of dollars in new deposits soon after running these campaigns (Mantone, 2009).

Societal Factors

Situational factors, personal factors, and psychological factors influence what you buy, but only on a temporary basis. Societal factors are a bit different. They are more outward and have broad influences on your beliefs and the way you do things. They depend on the world around you and how it works.

Culture

Culture refers to the shared beliefs, customs, behaviors, and attitudes that characterize a society. Culture is a handed-down way of life and is often considered the broadest influence on a consumer's behavior. Your culture prescribes the way in which you should live and has a huge effect on the things you purchase. For example, in Beirut, Lebanon, women can often be seen wearing miniskirts. If you're a woman in Afghanistan wearing a miniskirt, however, you could face bodily harm or death. In Afghanistan women generally wear burqas, which cover them completely from head to toe. Similarly, in Saudi Arabia, women must wear what's called an abaya, or long black garment. Interestingly, abayas have become big business in recent years. They come in many styles, cuts, and fabrics, and some are encrusted with jewels and cost thousands of dollars.

Even cultures that share many of the same values as the United States can be quite different. Following the meltdown of the financial markets in 2008, countries around the world were pressed by the United States to engage in deficit spending to stimulate the worldwide economy. The plan was a hard sell both to German politicians and to the German people in general. Most Germans don't own credit cards and running up a lot of debt is something people in that culture generally don't do.

Subcultures

A subculture is a group of people within a culture who are different from the dominant culture but have something in common with one another, such as common interests, vocations or jobs, religions, ethnic backgrounds, and geographic locations. The fastest-growing subculture in the United States consists of people of Hispanic origin, followed by Asian Americans, and African Americans. The purchasing power of US Hispanics continues to grow, exceeding $1 trillion in 2010 ("Latino Purchasing Power," 2011). Home Depot has launched a Spanish version of its website. Walmart is in the process of converting some of its neighborhood markets into stores designed to appeal to Hispanics. The Supermarcado de Walmart stores are located in Hispanic neighborhoods and feature elements such as cafés that serve Latino pastries and coffee and full meat and fish counters (Birchall, 2009a). Marketing products based on the ethnicity of consumers is useful but may become harder to do in the future as the boundaries between ethnic groups blur.

Other subcultures, can develop in response to people's interests, similarities, and behaviors that allow marketing professionals to design specific products for them. These can include the hip-hop subculture, people who in engage in extreme types of sports, such as helicopter skiing, or people who play the fantasy game Dungeons and Dragons.

Social Class

A social class is a group of people who have the same social, economic, or educational status in society. While income helps define social class, the primary variable determining social class is occupation. To some degree, consumers in the same social class exhibit similar purchasing behavior. In many countries, people are expected to marry within their own social class. When asked, people tend to say they are middle class, which is not always correct. Have you ever been surprised to find out that someone you knew who was wealthy drove a beat-up old car or wore old clothes and shoes or that someone who isn't wealthy owns a Mercedes or other upscale vehicle? While some products may appeal to people in a social class, you can't assume a person is in a certain social class because they either have or don't have certain products or brands.

In a recession when luxury buyers are harder to come by, the makers of upscale brands may want their customer bases to be as large as possible. However, companies don't want to risk "cheapening" their brands. That's why, for example, Smart Cars, which are made by BMW, don't have the BMW label on them. For a time, Tiffany's sold a cheaper line of silver jewelry to a lot of customers. However, the company later worried that its reputation was being tarnished by the line. Keep in mind that a product's price is to some extent determined by supply and demand. Luxury brands therefore try to keep the supply of their products in check so their prices remain high.

Some companies, such as Johnnie Walker, have managed to capture market share by introducing lower-echelon brands without damaging their luxury brands. The company's whiskeys come in bottles with red, green, blue, black, and gold labels. The blue label is the company's best product. Every blue-label bottle has a serial number and is sold in a silk-lined box, accompanied by a certificate of authenticity.

Reference Groups and Opinion Leaders

Reference groups are groups (social groups, work groups, family, or close friends) a consumer identifies with and may want to join. They influence consumers' attitudes and behavior. If you have ever dreamed of being a professional athlete, you have an aspirational reference group. That's why, for example, Nike hires celebrities such as Michael Jordan to pitch the company's products. There may also be dissociative groups, or groups to which a consumer does not want to be associated.

Opinion leaders are people with expertise in certain areas. Consumers respect these people and often ask their opinions before they buy goods and services. An information technology (IT) specialist with a great deal of knowledge about computer brands is one example. These people's purchases often lie at the forefront of leading trends. The IT specialist is probably a person who has the latest and greatest tech products, and his opinion of them is likely to carry more weight with you than any sort of advertisement.

Today's companies are using different techniques to reach opinion leaders, including the use of special software for network analysis. Orgnet's software doesn't mine sites like Facebook and LinkedIn but rather uses sophisticated techniques similar to those that unearthed the links between al-Qaeda terrorists. Valdis Krebs, the company's founder, explains, "Pharmaceutical firms want to identify who the key opinion leaders are. They don't want to sell a new drug to everyone. They want to sell to the 60 key oncologists" (Campbell, 2004).

Family

Most market researchers consider a person's family to be one of the most important influences on their buying behavior. Like it or not, you are more like your parents than you think, at least in terms of your consumption patterns. Many of the things you buy and don't buy are a result of what your parents bought when you were growing up. Products such as the brand of soap and toothpaste your parents bought and used, and even the brand of politics they leaned toward (Democratic or Republican) are examples of the products you may favor as an adult.

Companies are interested in which family members have the most influence over certain purchases. Children have a great deal of influence over many household purchases. For example, in 2003 nearly half (47 percent) of nine- to seventeen-year-olds were asked by parents to go online to find out about products or services, compared to 37 percent in 2001. IKEA used this knowledge to design their showrooms. The children's bedrooms feature fun beds with appealing comforters so children will be prompted to identify and ask for what they want ("Teen Market Profile," 2003).

Marketing to children has come under increasing scrutiny. Some critics accuse companies of deliberately manipulating children to nag their parents for certain products. For example, even though tickets for Hannah Montana concerts ranged from hundreds to thousands of dollars, the concerts often still sold out. However, as one writer put it, exploiting "pester power" is not always ultimately in the long-term interests of advertisers if it alienates parents (Waddell, 2009).

Key Takeaway

· Situational influences are temporary conditions that affect how buyers behave. They include physical factors such as a store's buying locations, layout, music, lighting, and even scent. Companies try to make the physical factors in which consumers shop as favorable as possible. If they can't, they utilize other tactics, such as discounts. The consumer's social situation, time factors, the reason for their purchases, and their moods also affect their buying behavior.

· Your personality describes your disposition as other people see it. Market researchers believe people buy products to enhance how they feel about themselves. Your gender also affects what you buy and how you shop. However, there's some evidence that this is changing. Younger men and women are beginning to shop more alike. People's consumer decisions are also affected by their ages and life stages. A person's cognitive age is how old one feels oneself to be. To further understand consumers and connect with them, companies have begun looking more closely at their lifestyles (what they do, how they spend their time, what their priorities and values are, and how they see the world).

· Psychologist Abraham Maslow theorized that people have to fulfill their basic needs—like the need for food, water, and sleep—before they can begin fulfilling higher-level needs. Perception is how you interpret the world around you and make sense of it in your brain. To be sure their advertising messages get through to you, companies often resort to repetition. Shocking advertisements and product placement are two other methods. Learning is the process by which consumers change their behavior after they gain information about or experience with a product. Consumers' attitudes are the mental positions people take based on their values and beliefs. Attitudes tend to be enduring and are often difficult for companies to change.

· Culture prescribes the way in which you should live and affects the things you purchase. A subculture is a group of people within a culture who are different from the dominant culture but have something in common with one another—common interests, vocations or jobs, religions, ethnic backgrounds, sexual orientations, and so forth. To some degree, consumers in the same social class exhibit similar purchasing behavior. Most market researchers consider a person's family to be one of the biggest determinants of buying behavior. Reference groups are groups that a consumer identifies with and wants to join. Companies often hire celebrities to endorse their products to appeal to people's reference groups. Opinion leaders are people with expertise in certain areas. Consumers respect these people and often ask their opinions before they buy goods and services.

Review Questions

1. Explain what physical factors, social situations, time factors, or moods have affected your buying behavior for different products.

2. Explain how someone's personality differs from his or her self-concept. How does the person's ideal self-concept come into play in a consumer-behavior context?

3. Describe how buying patterns and purchase decisions may vary by age, gender, and stage of life.

4. Why are companies interested in consumers' cognitive ages and lifestyle factors?

5. How does the process of perception work and how can companies use it to their advantage in their marketing?

6. How does Maslow's hierarchy of needs and learning affect how companies market to consumers?

7. Why do people's cultures and subcultures affect what they buy?

8. How do subcultures differ from cultures? Can you belong to more than one culture or subculture?

9. How are companies trying to reach opinion leaders?

2. Low-Involvement Versus High-Involvement Buying Decisions and the Consumer's Decision-Making Process

Learning Objectives

1. Distinguish between low-involvement and high-involvement buying decisions.

2. Understand what the stages of the buying process are and what happens in each stage.

As you have seen, many factors influence a consumer's behavior. Depending on a consumer's experience and knowledge, some consumers may be able to make quick purchase decisions and other consumers may need to get information and be more involved in the decision-making process before making a purchase. The level of involvement reflects how interested you are in consuming a product and how much information you need to make a decision. The level of involvement in buying decisions may be considered a continuum from decisions that are fairly routine to decisions that require extensive thought and a high level of involvement. Whether a decision is low, high, or limited, involvement varies by consumer, not by product, although some products, such as cars or houses, typically require high involvement for all consumers. Consumers with no experience purchasing a product may have more involvement than those who are replacing a product.

You have probably thought about many products you want or need but never did much more than that. At other times, you've probably looked at dozens of products, compared them, and then decided not to purchase any of them. When you run out of products that you buy on a regular basis, like milk or bread, you may buy the product as soon as you recognize the need, because you do not need to search for information or evaluate alternatives. Low-involvement decisions, however, typically involve products that are relatively inexpensive and pose a low risk to the buyer if she makes a mistake by purchasing them.

Consumers often engage in routine response behavior when they make low-involvement decisions—that is, they make automatic purchase decisions based on limited information or information they have gathered in the past. For example, if you always order a Diet Coke at lunch, you're engaging in routine response behavior. You may not even think about other drink options at lunch because your routine is to order a Diet Coke, and you simply do it. Similarly, if you run out of Diet Coke at home, you may buy more without seeking out any new information.

Some low-involvement purchases are made with no planning or previous thought. These buying decisions are called impulse buying. While you're waiting to check out at the grocery store, perhaps you see a magazine with Angelina Jolie and Brad Pitt on the cover and buy it on the spot simply because you want it. You might see a roll of tape at a check-out stand and remember you need one, or you might see a bag of chips and realize you're hungry. These are items that are typically low-involvement decisions. Low-involvement decisions aren't necessarily products purchased on impulse, although they can be.

By contrast, high-involvement decisions carry a higher risk to buyers if they fail, are complex, and/or have high price tags. A car, a house, and an insurance policy are examples. These items are not purchased often but are important to the buyer. Buyers don't engage in routine response behavior when purchasing high-involvement products. Instead, consumers engage in what's called extended problem solving, where they spend a lot of time comparing factors such as the features of the products, prices, and warranties.

High-involvement decisions can cause buyers a great deal of postpurchase dissonance, or anxiety, if they are unsure about their purchases, or if they had a difficult time deciding between two alternatives. Companies that sell high-involvement products are aware that postpurchase dissonance can be a problem. Frequently, they try to offer consumers a lot of information about their products, including why they are superior to competing brands and how they will meet customer expectations. Salespeople may answer questions and be extra attentive to customers.

Limited problem solving falls somewhere between low-involvement (routine) and high-involvement (extended problem solving) decisions. Consumers engage in limited problem solving when they already have some information about a product or service but continue to search for a little more information. Assume you need a new backpack for a hiking trip. While you are familiar with backpacks, you know that new features and materials are available since you purchased your last backpack. You're going to spend some time looking for one that's decent because you don't want it to fall apart while you're traveling and dump everything you've packed on a hiking trail. You might do a little research online and come to a decision relatively quickly. You might consider the choices available at your favorite retail outlet but not look at every backpack at every outlet before making a decision. Or you might rely on the advice of a person you know who's knowledgeable about backpacks. In some way you shorten or limit your involvement and the decision-making process.

Products, such as chewing gum, which entail low-involvement decisions for most consumers, often use advertising such as commercials and sales promotions like coupons to reach many consumers at once. Companies also try to sell these products in as many locations as possible. Many products that typically entail high-involvement decisions, such as automobiles, may be sold with a higher degree of personalization to answer consumers' specific questions. Brand names can also be very important, regardless of the consumer's level of purchasing involvement. Consider a low- versus high-involvement decision—say, purchasing a tube of toothpaste versus a new car. You might routinely buy your favorite brand of toothpaste, not thinking much about the purchase (engage in routine response behavior), but not be willing to switch to another brand either. Having a brand you like saves you search time and eliminates the evaluation period because you know what you're getting.

When it comes to buying a car, you might engage in extensive problem solving but, again, only be willing to consider a certain brand or brands. If it's a high-involvement product you're purchasing, a good brand name is probably going to be very important to you. That's why the manufacturers of products that typically require high-involvement decisions can't become complacent about the value of their brands.

Stages in the Buying Process

At any given time, you're probably in a buying stage for some product or service. You're thinking about the different types of things you want or need to eventually buy, how you are going to find the best ones at the best price, and where and how will you buy them. Meanwhile, there are other products you have already purchased that you're evaluating. Will you discard them, and if so, how? Then what will you buy? Where does that process start?

Stage 1. Need Recognition

You plan to travel around the country after you graduate and don't have a particularly good backpack, so you realize that you must get a new one. You may also be thinking about the job you've accepted after graduation and know that you must get a vehicle to commute. Recognizing a need may involve something as simple as running out of bread or milk or realizing that you must get a new backpack or a car after you graduate. Marketers try to show consumers how their products and services add value and help satisfy needs and wants. Do you think it's a coincidence that Gatorade, Powerade, and other beverage makers locate their machines in gymnasiums so you see them after a long, tiring workout? Previews at movie theaters are another example. How many times have you have heard about a movie and had no interest in it—until you saw the preview? Afterward, you may have felt like you had to see it.

Stage 2. Search for Information

For products such as milk and bread, you may simply recognize the need to make a purchase, go to the store, and buy more. However, if you are purchasing a car for the first time or need a particular type of backpack, you may need to get information on the many options. Maybe you have owned several backpacks and know what you like and don't like about them. Or there might be a particular brand that you've purchased in the past that you liked and want to purchase in the future. This is a great position for the company that owns the brand to be in—something firms strive for—because it often means you will limit your search and simply buy their brand again.

If what you already know about backpacks doesn't provide you with enough information, you'll probably continue to gather information from various sources. Frequently people ask friends, family, and neighbors about their experiences with products. Magazines such as Consumer Reports (considered an objective source of information on many consumer products) or Backpacker Magazine might also help you. Similar information sources are available for learning about different makes and models of cars.

Internet shopping sites, such as Amazon, have become common sources of consumer-generated reviews and information about products. People often prefer independent sources like these when they are looking for product information. However, they also often consult non-neutral sources of information, such advertisements, brochures, company websites, and salespeople.

Stage 3. Product Evaluation

Obviously, there are hundreds of different backpacks and cars available. It's not possible for you to examine all of them. In fact, good salespeople and marketing professionals know that providing you with too many choices can be so overwhelming that you might not buy anything. Consequently, you may use choice heuristics or rules of thumb that provide mental shortcuts in the decision-making process. You may also develop evaluative criteria to help you narrow down your choices. Backpacks or cars that meet your initial criteria before any deeper consideration will determine the set of brands you'll consider for purchase.

Evaluative criteria are characteristics that are important to buyers, such as the price of the backpack, the size, the number of compartments, and color. Some of these characteristics are more important than others. For example, the size of the backpack and the price might be more important to you than the color. You must decide what criteria are most important and how well the different alternatives meet that specification.

Companies want to convince you that the evaluative criteria you are considering reflect the strengths of their products. For example, you might not have thought about the weight or durability of the backpack you want to buy. However, a backpack manufacturer like Osprey might remind you through magazine ads, packaging information, and its website that you should pay attention to the features that happen to be key selling points of its backpacks. Automobile manufacturers may have similar models, so don't be afraid to add criteria to help you evaluate cars.

Stage 4. Product Choice and Purchase

With low-involvement purchases, consumers may go from recognizing a need to purchasing the product. However, for backpacks and cars, you decide which one to purchase after you have evaluated different alternatives. In addition to selecting a backpack or car, you are probably also making other decisions at this stage, including where and how to purchase the product and on what terms. Maybe the backpack was cheaper at one store than another, but the salesperson there was rude. Or maybe you decide to order online because you're too busy to go to the mall. Other decisions related to the purchase, particularly those related to big-ticket items, are made at this point. For example, if you're buying a high-definition television, you might look for a store that will offer you credit or a warranty.

Stage 5. Postpurchase Use and Evaluation

At this point in the process you decide whether the backpack you purchased is everything it was cracked up to be. Hopefully it is. If it's not, you're likely to suffer what's called postpurchase dissonance, also known as buyer's remorse. Typically, dissonance occurs when a product or service does not meet your expectations. Consumers are more likely to experience dissonance with products that are relatively expensive and that are purchased infrequently.

You want to feel good about your purchase, but you don't. You begin to wonder whether you should have waited to get a better price, purchased something else, or gathered more information first. Consumers commonly feel this way, which is a problem for sellers. If you don't feel good about what you've purchased from them, you might return the item and never purchase anything from them again. Or, worse yet, you might tell everyone you know how bad the product was.

For smaller items, companies my try to prevent buyer's remorse by offering a money-back guarantee or encouraging their salespeople to tell you what a great purchase you made. How many times have you heard a salesperson say, "That outfit looks so great on you!" For larger items, companies might offer a warranty, instruction booklets, or a toll-free troubleshooting line to call, or they might have a salesperson call you to see if you need help with product. Automobile companies may offer loaner cars when you bring your car in for service.

Companies, especially service-oriented businesses like restaurants. may also try to set expectations in order to satisfy customers. Think about when the hostess tells you that your table will be ready in 30 minutes. If they seat you in 15 minutes, you are much happier than if they told you that your table would be ready in 15 minutes, but it took 30 minutes to seat you. Similarly, if a store tells you that your pants will be altered in a week and they are ready in three days, you'll be much more satisfied than if they said your pants would be ready in three days, yet it took a week before they were ready.

Stage 6. Disposal of the Product

There was a time when neither manufacturers nor consumers thought much about how products got disposed of, so long as people bought them. But that's changed. The disposal of products is becoming extremely important to consumers and society in general. Computers and batteries, which leech chemicals into landfills, are a huge problem. Consumers don't want to degrade the environment if they don't have to, and companies are becoming more aware of this stance.

Take for example Crystal Light, a water-based beverage that's sold in grocery stores. It is available in a bottle, but many people prefer to buy it in its concentrated form, put it in reusable pitchers or bottles, and add water. That way, they don't have to buy and dispose of many plastic bottles, damaging the environment in the process. Windex has done something similar with its window cleaner. Instead of buying new bottles of it all the time, you can purchase a concentrate and add water. You have probably noticed that most grocery stores now sell cloth bags consumers can reuse instead of continually using and discarding new plastic or paper bags.

Other companies are less concerned about conservation than they are about planned obsolescence. Planned obsolescence is a deliberate effort by companies to make their products obsolete, or unusable, after a period of time. The goal is to improve a company's sales by reducing the amount of time between the repeat purchases consumers make of products. When a software developer introduces a new version of product, it is usually designed to be incompatible with older versions of it. For example, not all the formatting features are the same in Microsoft Word 2007 and 2010. Sometimes documents do not translate properly when opened in the newer version. Consequently, you will be more inclined to upgrade to the new version so you can open all Word documents you receive.

Making products disposable is another way that firms have managed to reduce the amount of time between purchases. Do you know anyone today that owns a non-disposable lighter? Believe it or not, prior to the 1960s, scarcely anyone could have imagined using a cheap disposable lighter. There are many more disposable products today than there were in the past—including everything from bottled water and individually wrapped snacks to single-use eye drops and cell phones.

Key Takeaways

Consumer behavior looks at the many reasons that people buy things and later dispose of them. Consumers go through distinct buying phases when they purchase products: (1) realizing the need or desire, (2) searching for information about the item, (3) evaluating different products, (4) choosing a product and purchasing it, (5) using and evaluating the product after the purchase, and (6) disposing of the product. A consumer's level of involvement corresponds with how interested he or she is in buying and consuming a product. Low-involvement products are usually inexpensive and pose a low risk to the buyer if he or she makes a mistake by purchasing them. High-involvement products carry a high risk to the buyer if they fail, are complex, or are expensive. Limited-involvement products fall somewhere in between.

Review Questions

1. How do low-involvement decisions differ from high-involvement decisions in terms of relevance, price, frequency, and the risks their buyers face? Name some products in each category that you've recently purchased.

2. What stages do people go through in the buying process for high-involvement decisions? How do the stages vary for low-involvement decisions?

3. What is postpurchase dissonance, and what can companies do to reduce it?

3. Discussion Questions and Activities

Discussion Questions

1. Why do people in different cultures buy different products? Discuss with your class the types of vehicles you have seen other countries. Why are they different, and how do they better meet buyers' needs in those countries? What types of cars do you think should be sold in the United States today?

2. What is your opinion of companies like Google that gather information about your browsing patterns? What advantages and drawbacks does this pose for consumers? If you were a business owner, what kinds of information would you gather on your customers and how would you use it?

3. Are there any areas in which you consider yourself an opinion leader? What are they? How are companies getting information about opinion leaders?

4. What purchasing decisions have you been able to influence in your family and why? Is marketing to children a good idea? If not, what if one of your competitors were successful in doing so? Would it change your opinion?

5. Name some products that have led to postpurchase dissonance on your part. Then categorize them as high- or low-involvement products.

6. Describe the decision process for impulse purchases at the retail level. Would they be classified as high- or low-involvement purchases?

7. How do you think the manufacturers of products sold through infomercials reduce postpurchase dissonance?

8. Explain the relationship between extensive, limited, and routine decision making relative to high- and low-involvement decisions. Identify examples of extensive, limited, and routine decision making based on your personal consumption behavior.

9. Why is understanding consumer behavior so important for companies? Think of examples where you do not think companies understood their consumers.

Activities

1. Go to http://www.ospreypacks.com and enter the blog site. Does the blog make you more or less inclined to purchase an Osprey backpack?

2. Select three advertisements and describe the needs identified by Abraham Maslow that each ad addresses. Find an international version of an advertisement for one of the products. What differences do you detect in the international version of the ad?

3. Break up into groups and visit a part of your town where the most common ethnicity of residents differs from your own ethnicity. Walk around the neighborhood and its stores. What types of marketing and buying differences do you see? Write a report of your findings.

4. Using Maslow's hierarchy of needs, identify a list of popular advertising slogans that appeal to each of the five levels.

5. Identify how McDonald's targets both users (primarily children) and buyers (parents, grandparents, etc.). Provide specific examples of strategies used by the fast-food marketer to target both groups. Make it a point to incorporate happy meals and mighty kids meals into your discussion.

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Segmenting, Targeting, and Positioning

A market segment includes customers who share similar wants and needs. It is the marketer's job to identify the segments of the overall market that he or she wants to target . Segmenting enables the company to better design its offerings and to better price and deliver them. Segmenting also allows a marketer to fine tune its marketing program in comparison to its competitors' activities within the same segment. However, the company still needs to be flexible with its offering to individual customers within a certain market segment. Positioning is the design of the company's image to occupy a distinct place in the customers' minds. The company's goal is to place the brand in its customers' minds to maximize potential benefits. Solid brand positioning helps guide the company's marketing strategy by specifying what the brand stands for and how the product or service would satisfy the customers' needs. In other words: What makes this brand special? Positioning should clearly define similarities and differences between brands and communicate these similarities and differences to customers (Kotler & Keller, 2015).

References

Kotler, P., & Keller, K. (2015). Marketing management (15th ed.). Upper Saddle River, NJ. Pearson

Chapter 5. Market Segmenting, Targeting, and Positioning

Suppose you have an idea for a great new offering you hope will become a hot seller. Before you quit your day job, you'll need to ask yourself, does my idea satisfy consumers' needs and add value to existing products? Who's going to buy my product? Will there be enough of these people to make it worthwhile?

Certain people will be more interested in what you plan to offer than others. Not everyone needs homeowner's insurance, not everyone needs physical therapy services, and not every organization needs to purchase vertical lathes or CT scanners. Among those that do, some will buy a few, and a few will buy many. In terms of potential buyers, not all of them are created equal. Your product idea will draw interest if it satisfies a need, adds value, is priced right, or if they are aware of when your product will exist in the marketplace.

Your goal is to figure out which people and organizations are interested in your product ideas. To do this you will need to divide or segment the people and organizations into different groups of potential buyers with similar characteristics. This process, called market segmentation, involves asking the question, what groups of buyers are similar enough that the same product or service will appeal to all of them (Barringer, 2010)? After all, your marketing budget is likely to be limited. You need to get the biggest bang for your buck by focusing on those people you truly have a shot at selling to and tailoring your offering to them.

1. Targeted Marketing versus Mass Marketing

Learning Objectives

· Distinguish between targeted marketing and mass marketing and explain what led to the rise of each.

· Describe how targeted marketing can benefit firms.

· Explain why companies differentiate among their customers.

The segments or groups of people and organizations you decide to sell to is called a target market. Targeted marketing, or differentiated marketing, means that you may differentiate some aspect of marketing (offering, promotion, price) for different groups of customers selected. It is a relatively new phenomenon. Mass marketing, or undifferentiated marketing, came first. It evolved along with mass production and involves selling the same product to everybody. You can think of mass marketing as a shotgun approach: you blast out as many marketing messages as possible on every medium available as often as you can afford (Spellings, Jr, 2009). By contrast, targeted marketing is more like shooting a rifle, homing in on a single target for your message.

Automaker Henry Ford was very successful at both mass production and mass marketing. Ford pioneered the modern-day assembly line early in the twentieth century, which helped him inexpensively produce identical Model T automobiles. They came in only one color: black. "Any customer can have a car painted any color he wants, so long as it is black," Ford used to joke. He also advertised in every major newspaper and persuaded all kinds of publications to carry stories about the new, inexpensive cars. By 1918, half of all cars on America's roads were Model Ts (Ford, 1922).

Then Alfred P. Sloan, the head of General Motors (GM), appeared on the scene. Sloan began to segment consumers in the automobile market—to divide them up by the prices they wanted to pay and the cars they wanted to buy. The idea was to offer a car for every target market or for every income level. His efforts were successful, and in the 1950s, GM overtook Ford as the nation's top automaker (Manzanedo, 2005). (Interestingly, before GM declared bankruptcy in 2009, it was widely believed the automaker actually had too many car models. After eliminating many models, including Pontiac and Oldsmobile, General Motors made a turnaround and posted a large profit for 2011.)

Benefits of Segmenting and Targeting Markets

The story of General Motors raises an important point: segmenting and targeting markets doesn't necessarily mean reducing the number of your customers. In fact, it can help you enlarge your customer base by giving you information with which to successfully adjust some component of your offering—the offering itself, its price, or the way you service and market it. More specifically, the process can help with several import aspects of marketing and sales:

· avoid head-on competition with other firms trying to capture the same customers

· develop new offerings and expand profitable brands and products lines

· remarket older, less-profitable products and brands

· identify early adopters

· redistribute money and sales efforts to focus on your most profitable customers

· retain at-risk customers in danger of defecting to your competitors

The trend today is toward more precise, targeted marketing. Figuring out who's who in your customer base involves some detective work—often market research. A variety of tools and research techniques can be used to segment markets. Government agencies, such as the US Census Bureau, collect and report vast amounts of population information and economic data that can reveal changing consumption trends. Technology is also making it easier for even small companies and entrepreneurs to gather information about potential customers. For example, the online game company GamePUMA.com originally believed its target market consisted of US customers, but when the firm looked more closely at who was downloading games from its website, they were people from all over the globe. With the increased use of social media, companies are able to get information on consumers' search behavior. Loyalty cards that consumers scan at many grocery and drug stores provide an incredible amount of information on consumers' buying behavior.

Companies are now using the Internet to track people's web browsing patterns and segment them into target groups. Even small businesses are able to do this economically because they don't need their own software and programs. They can simply sign up online for products like Google's AdSense and AdWords programs. You can locate potential customers by looking at blog sites and discussion forums on the Internet. Big-boards.com has thousands of discussion forums you can mine to find potential customers interested in your product. If you go to BlogPoll.com, you can embed a survey in your blog to see what people think of your idea. If you have a website, you can download an application onto your iPhone that will give you up-to-the-minute information and statistics on your site's visitors.

Getting a read on potential target markets doesn't necessarily have to involve technology. Your own personal experience and talking to would-be buyers is an important part of the puzzle. Go where you think would-be buyers go—restaurants, malls, gyms, subways, grocery stores, day-care centers, and offices—and ask questions to find out what they do during the day, what they talk about, what products or services do you see them using, and determine whether they seem to be having an enjoyable experience when using those products.

Healthy Choice frozen dinners were conceived as a result of questioning potential customers. The food-maker ConAgra launched the dinners in the late 1980s after its CEO, Charlie Harper, suffered a heart attack. One day, a colleague complimented Harper on his wife's tasty low-fat turkey stew. That's when Harper realized there were people like him who wanted healthy convenience foods, so he began talking mining information about what people in that group sought. Two years after the Healthy Choice line was launched, it controlled 10 percent of the frozen-dinner market by concentrating on the health-conscious segment (Birchall, 2009a).

Segmenting and Targeting a Firm's Current Customers

Finding and attracting new customers is generally far more difficult than retaining your current customers. Think about how much time and energy you spend when you switch your business from one firm to another, even when you're buying something as simple as a haircut. If you aren't happy with your hair stylist and want to find a new hairdresser, you first have to talk to people with haircuts you like or read reviews of salons. Once you decide on a particular salon, you have to find it and explain to the new hairdresser how you want your hair cut and hope he or she gets it right. You also have to figure out what type of credit cards the new salon will accept and whether tips can be put on your credit card.

Finding new customers, getting to know them, and figuring out what they really want is also a difficult process, one that progresses through trial and error. That's why it's so important to get to know current customers, form close relationships, and implement focused selling efforts (Birchall, 2009b).

In 2009, Backroads, a California company focused on adventure-based travel increased its revenues by creating a personalized marketing campaign for people who had done business with them in the past. Backroads looked at customers' past purchases, the seasons in which they took their trips, their levels of activity, and whether or not the customers tended to vacation with children. Based on their findings, Backroads created three relevant trip suggestions for each customer and sent postcards and e-mails with links to customized web pages reminding each customer of the trips he or she had previously booked with Backroads and suggesting new ones. "In terms of past customers, it was like off-the-charts better [than past campaigns]," says Massimo Prioreschi, the vice president of Backroads' sales and marketing group ("Lift Sales with Personalized," 2009).

In addition to studying c buying patterns, firms also try to get a better understanding of their customers by surveying them or using loyalty programs. For example, if you sign up to become a frequent flier with a certain airline, the airline will likely ask you a number of questions about your likes and dislikes. This information will then be entered into a customer relationship management (CRM) system, and you might be e-mailed special deals based on the routes you tend to fly. British Airways goes so far as to track the magazines its most elite fliers like to read so the publications are available to them on its planes.

Twitter is another tool companies use to keep in touch with their customers and boost their revenues. When the homemaking maven Martha Stewart schedules a book signing, she tweets to her followers, and voilà, many of them show up at the bookstore she's appearing at to buy copies. Finding enjoyable ways to interact with customers—whether it's meeting or tweeting to them, or putting on events and tradeshows they want to attend—is the key to forming relationships.

Many firms, even small ones, are using Facebook to develop closer relationships with their customers. Hansen Cakes, a bakery in Beverly Hills, California, has about two thousand customers who visit its Facebook page. During her downtime at the bakery, employee Suzi Finer posts "cakes updates" and photos of the goodies she's working on to the site. Along with information about the cakes, Finer extends special offers to customers and mixes in any gossip about Hollywood celebrities she's spotted in the area. After Hansen Cakes launched its Facebook page, the bakery's sales shot up 15 to 20 percent. "And that's during the recession," notes Finer, who is obviously proud of the results she's gotten (Graham, 2009).

Regardless of how well companies know their customers, it's important to remember that some customers are highly profitable, others aren't, and still others actually end up costing your firm money to serve. Consequently, you will want to interact with some customers more than others. Believe it or not, some firms deliberately "untarget" unprofitable customers. Best Buy got a lot of attention (not all of it good) when it was discovered they had categorized its buyers into "personas," or types of buyers, and created customized sales approaches for each. For example, an upper-middle-class woman was referred to as a "Jill." A young urban man was referred to as a "Buzz." Pesky, bargain-hunting customers that Best Buy couldn't make much of a profit from were referred to as "devils" and taken off the company's mailing lists (Marco, 2008).

The knife cuts both ways, though. Not all firms are equal in the minds of consumers, who will choose to do business with some companies rather than others. Consumers expect market segmentation to manifest though policies and procedures to have their needs met ("Market Segmentation," n.d).

Steps companies take to target their best customers, form close, personal relationships with them, and give them what they want—a process called one-to-one marketing—are outlined in the following subsection. In terms of our shotgun versus rifle approach, you can think of one-to-one marketing as a rifle approach, but with an added advantage: now you have a scope on your rifle.

One-to-one marketing was an idea proposed by Don Peppers and Martha Rogers in their 1994 book, The One to One Future. The book described what life would be like after mass marketing. We would all be able to get exactly what we want from sellers, and our relationships with them would be collaborative, rather than adversarial. Are we there yet? Not quite, but it does seem to be the direction the trend toward highly targeted marketing is following.

Steps in One-to-One Marketing

· Establish short-term measures to evaluate your efforts. Determine how you will measure your effort. Will you use higher customer satisfaction ratings, increased revenues earned per customer, the number of products sold to customers, transaction costs, or another measure?

· Identify your customers. Gather all the information you can about your current customers, including their buying patterns, likes, and dislikes. When conducting business with them, include an "opt in" question that allows you to legally gather and use their phone numbers and e-mail addresses so you can remain in contact with them.

· Differentiate among your customers. Determine who your best customers are in terms of what they spend and will spend in the future (their customer lifetime value), and how easy or difficult they are to serve. Identify and target customers that spend only small amounts with you but large amounts with your competitors.

· Interact with your customers, targeting your best ones. Find ways and media in which to talk to customers about topics they're interested in and enjoy. Spend the bulk of your resources interacting with your best high-value customers. Minimize the time and money you spend on low-value customers with low growth potential.

· Customize your products and marketing messages to meet their needs. Try to customize your marketing messages and products in order to give your customers exactly what they want—whether it's the product itself, its packaging, delivery, or the services associated with it. (Harler, 2008; Peppers & Rogers, 1999; Peppers, Rogers, & Dorf, 1999)

Key Takeaway

Choosing select groups of people to sell to is called target marketing, or differentiated marketing. Mass marketing, or undifferentiated marketing, involves selling the same product to everyone. The trend today is toward more precise, targeted marketing. Finding and attracting new customers is generally far more difficult than retaining one's current customers, which is why organizations try to interact with and form relationships with their current customers. The goal of firms is to do as much business with their best customers as possible. Forming close, personal relationships with customers and giving them exactly what they want is a process called one-to-one marketing.

Review Questions

· Using the shotgun and rifle analogy, how do mass marketing, targeted marketing, and one-to-one marketing compare with one another?

· How is technology making it easier for firms to target potential customers?

· Outline the steps companies need to take to engage in one-to-one marketing with their customers.

2. How Markets Are Segmented

Learning Objectives

· Understand and outline the ways markets are segmented.

· Explain why marketers use some segmentation bases versus others.

Sellers can choose to pursue consumer markets, business-to-business (B2B) markets, or both. Consequently, one obvious way to begin the segmentation process is to segment markets into these two types of groups.

Many of the same factors that influence consumers to buy certain products can also be used to segment customers. A firm will often use multiple segmentation bases, or criteria to classify buyers, to get a fuller picture of its customers and create real value for them. Each variable adds a layer of information. Think of it as being similar to the way your professor builds up information on a PowerPoint slide to the point where you are able to understand the material being presented.

There are all kinds of characteristics you can use to slice and dice a market. Big-and-tall stores cater to the segment of population that's larger in size. What about people with wide or narrow feet, or people with medical conditions, or certain hobbies? Next, we look primarily at the ways consumer markets can be segmented. Later in the chapter, we'll look at the ways B2B markets can be segmented.

Types of Segmentation Bases

Notice that the useful characteristics fall into one of four segmentation categories: behavioral, demographic, geographic, or psychographic. We'll discuss each of these categories in a moment. For now, you can get a rough idea of what the categories consist of by looking at them in terms of how marketing professionals might answer the following questions:

· Behavioral segmentation—What benefits do customers want, and how do they use our product?

· Demographic segmentation—How do the ages, races, and ethnic backgrounds of our customers affect what they buy?

· Geographic segmentation—Where are our customers located, and how can we reach them? What products do they buy based on their locations?

· Psychographic segmentation—What do our customers think about and value? How do they live their lives?

Segmenting by Behavior

Behavioral segmentation divides people and organizations into groups according to how they interact with products. Benefits segmentation—segmenting buyers by the benefits they want from products—is very common. Take toothpaste, for example. Which benefit is most important to you when you buy a toothpaste? The toothpaste's price, ability to whiten your teeth, fight tooth decay, freshen your breath, or something else? Perhaps it's a combination of two or more benefits. If marketing professionals know what those benefits are, they can then tailor different toothpaste offerings to you (and other people like you). For example, Colgate Whitening Icy Blast 2-in-1 toothpaste and mouthwash is aimed at people who want the benefits of both fresher breath and whiter teeth.

Another way businesses segment buyers is by their usage rates—that is, how often, if ever, they use certain products. Harrah's, an entertainment and gaming company, gathers information about the people who gamble at its casinos. High rollers, or people who spend a lot of money, are considered VIPs and get special treatment, including a personal host who looks after their needs during their casino visits. Companies are interested in frequent users because they want to reach other people like them. They are also keenly interested in nonusers and how they can be persuaded to use products.

The ways h people use products is also be a basis for segmentation. Avon's Skin So Soft was originally a beauty product, but after the company discovered that some people were using it as a mosquito repellant, it began marketing the product for that purpose. Eventually, Avon created a separate product called Skin So Soft Bug Guard, which competes with repellents like Off! Similarly, Glad, the company that makes plastic wrap and bags, found out customers were using its Press'n Seal wrap in ways the company could never have imagined. The personnel in Glad's marketing department subsequently launched a website called 1000uses.com that contains both the company's and consumers' use tips. Some of the ways people use the product are pretty unusual, as evidenced by the comments posted on the site: "I have a hedgehog who likes to run on his wheel a lot. After quite a while of cleaning a gross wheel every morning, I got the tip to use Press'n Seal wrap on his wheel, making clean up much easier! My hedgie can run all he wants, and I don't have to think about the cleanup. Now we're both GLAD!"

Although we doubt Glad will ever go to great lengths to segment the Press 'n Seal market by targeting hedgehog owners, the firm has certainly gathered a lot of good consumer insight about the product and publicity from its website.

Segmenting by Demographics

Segmenting buyers by personal characteristics such as age, income, ethnicity and nationality, education, occupation, religion, social class, and family size is called demographic segmentation. Demographics are commonly used to segment markets because demographic information is publicly available in databases around the world. You can obtain a great deal of demographic information on the US Census Bureau's website. Other government websites you can tap include FedStats and The World Factbook, which contains statistics about countries around the world. In addition to current statistics, the sites contain forecasts of demographic trends, such as whether some segments of the population are expected to grow or decline.

Age

At this point in your life, you are probably more likely to buy a car than a funeral plot. Marketing professionals know this. That's why they try to segment consumers by their ages. You're probably familiar with some of the age groups most commonly segmented in the United States. Into which category do you fall?

Today, millennials compose the largest generation. The baby boomer generation is the second largest, and over the course of the last thirty years or so, it has been a very attractive market for sellers. Retro brands—old brands or products that companies bring back for a period of time—were aimed at baby boomers during the recent economic downturn. Pepsi Throwback and Mountain Dew Throwback, which are made with cane sugar like they were in the good old days, instead of corn syrup, are two such products (Schlacter, 2009). Marketing professionals believe they appealed to baby boomers because they reminded them of better times when they didn't have to worry about being laid off, about losing their homes, or about their retirement funds and pensions drying up.

Baby boomers are aging and the size of the group will eventually decline. By contrast, the members of the millennial generation have a lifetime of buying still ahead of them, which translates to a lot of potential customer lifetime value (CLV), the amount a customer will spend on a particular brand over his or her lifetime. However, a recent survey found that the 2009 recession and slow job growth had forced this age group to change their spending habits, and that roughly half of older millennials reported they had no savings ("Generation Y Lacking Savings," 2009).

So which group or groups should your firm target? Although it's hard to be all things to all people, many companies try to broaden their customer bases by appealing to multiple generations so they don't lose market share when demographics change. Several companies have introduced lower-cost brands targeting Generation Xers, who have less spending power than boomers. For example, the kitchenware and home-furnishings company Williams-Sonoma opened the Elm Street chain, a less-expensive version of the Pottery Barn franchise. The Starwood hotel chain's W hotels, which feature contemporary designs and hip bars, are aimed at Generation Xers (Miller & Washington, 2009).

The video game market is very proud of the fact that along with members of Generation X and millennials, many older Americans still play video games. (You probably know some baby boomers who own a Nintendo Wii.) Products and services in the spa market used to be aimed squarely at adults, but not anymore. Parents are now paying for their tweens to get facials, pedicures, and other pampering in numbers no one in years past could have imagined.

As early as the 1970s, US automakers found themselves in trouble because of changing demographic trends. Many of the companies' buyers were older Americans inclined to buy American. These people hadn't forgotten that Japan bombed Pearl Harbor during World War II and weren't about to buy Japanese vehicles, but younger Americans were. Additionally, Japanese cars had developed a better reputation. Despite the challenges US automakers face today, they have taken great pains to cater to the younger generations. If you are a car buff, you perhaps have noticed that the once-stodgy Cadillac now has a sportier look and stiffer suspension. Likewise, the Chrysler 300 looks more like a muscle car than the old Chrysler Fifth Avenue your great-grandpa might have driven.

Automakers have begun reaching out to Generations Xers and millennials, too. General Motors (GM) has sought to revamp the century-old company by hiring a younger group of managers who understand what younger consumers want. "If you're going to appeal to my daughter, you're going to have to be in the digital world," explained one GM vice president (Cox, 2009).

Companies have to develop new products designed to appeal to younger buyers and also find new ways to reach them. People in these generations not only tend to ignore traditional advertising, but also are downright annoyed by it. To market to Scion drivers, who are generally younger, Toyota created Scion Speak, a social networking site where potential customers can communicate, socialize, and view new models of the car. Online events, such as the fashion shows broadcast over the web, are also getting the attention of younger consumers, as are text, e-mail, and Twitter messages they can sign up for to receive coupons, cash, and free merchandise. Advergames are likewise being used to appeal to younger consumers. Advergames are electronic games sellers create to promote a product or service.

Income

Tweens might appear to be a very attractive market when you consider they will be buying products for years to come. But would you change your mind if you knew that baby boomers account for 50 percent of all consumer spending in the United States? Americans over sixty-five now control nearly three-quarters of the net worth of US households. This group spends $200 billion a year on major discretionary purchases, such as luxury cars, alcohol, vacations, and financial products (Reisenwitz, Iyer, Kuhlmeier, & Eastman, 2007).

Income is used as a segmentation variable because it indicates a group's buying power and may partially reflect their education levels, occupation, and social classes. Higher education levels usually result in higher paying jobs and greater social status. The makers of upscale products, such as Rolexes and Lamborghinis, aim their products at high-income groups. However, a growing number of firms today are aiming their products at lower-income consumers. The fastest-growing product in the financial services sector is prepaid debit cards, most of which are being bought and used by people who don't have bank accounts. Firms are finding that this group is a large, untapped pool of customers who tend to show more loyalty to brands than most consumers. If you capture enough of them, you can earn a profit (von Hoffman, 2006). Based on the targeted market, businesses can determine the location and type of stores where they want to sell their products.

Sometimes income isn't always indicative of who will buy your product. Companies are aware that many consumers want to be in higher income groups and behave like they are already part of them. Mercedes Benz's cheaper line of C-class vehicles is designed to appeal to these consumers.

Gender

Gender is another way to segment consumers. Men and women have different needs and also shop differently. Consequently, the two groups are often, but not always, segmented and targeted differently. Marketing professionals don't stop there, though. For example, because women make many of the purchases for their households, market researchers sometimes try to further divide them into subsegments. (Men are also often subsegmented.) For women, those segments might include stay-at-home housewives, plan-to-work housewives, just-a-job working women, and career-oriented working women. Research has found that women who are solely homemakers tend to spend more money, perhaps because they have more time. In addition to segmenting by gender, market researchers might couple gender with marital status and other demographic characteristics.

Family Life Cycle

Family life cycle refers to the stages families go through over time and how they affect people's buying behavior. For example, if you have no children, your demand for pediatric services is likely to be nonexistent. You may be part of the target market not only for pediatric services but also for a host of other products, such as diapers, daycare, children's clothing, entertainment services, and educational products. A secondary segment of interested consumers might be grandparents, who are likely to spend less on day-to-day childcare items, but more on special-occasion gifts for children. Many markets are segmented based on the special events in people's lives. Think about all the products targeted at brides, including websites and television shows such as Say Yes to the Dress, My Fair Wedding, Platinum Weddings, and Bridezillas.

Resorts also segment vacationers depending on where they are in their family life cycles. When you think of family vacations, you probably think of Disney resorts, but some vacation properties, like Sandals, exclude children from some of their locations. Perhaps they do so because some studies show that the market segment with greatest financial potential is married couples without children (Hill, 1990).

Keep in mind that although you might be able to isolate a segment in the marketplace, including one based on family life cycle, you can't make assumptions about what the people in it will want. Just like people's demographics change, so do their tastes. For example, over the past few decades US families have been getting smaller. Households with a single occupant are more commonplace than ever, but until recently, that hasn't stopped people from demanding bigger cars (and more of them) and larger houses. However, the trend toward larger cars and larger houses now appears to be reversing. High energy costs, the credit crunch, and concern for the environment are leading people to demand smaller houses.

Ethnicity

People's ethnic backgrounds have a big impact on what they buy. If you've visited a grocery store that caters to a different ethnic group than your own, you were probably surprised to see the types of products sold there. It's no secret that the United States is becoming—and will continue to become—more diverse. Hispanic Americans are the fastest-growing minority in the United States, and companies are going to great lengths to court this once overlooked group. In California, the health care provider Kaiser Permanente runs television ads letting members of this segment know that they can request Spanish-speaking physicians and that Spanish-speaking nurses, telephone operators, and translators are available at all of its clinics (Berkowitz, 2006).

African Americans are the second-largest ethnic group in America, a group that collectively has the most buying power of any ethnic minority in the country. Many people of Asian descent are perceived to be early adapters of new technology and have above-average incomes. As a result, companies that sell electronic products, such as AT&T, spend more money segmenting and targeting the Asian community ("Telecommunications Marketing Opportunities," n.d.).

As you can guess, even within various ethnic groups there are many differences in the goods and services buyers choose. Consequently, painting each group with a broad brush would leave you with an incomplete picture of your buyers. For example, although the common ancestral language among the Hispanic segment is Spanish, Hispanics trace their lineages to an array of countries. Nearly 70 percent of Hispanics in the United States trace their lineage to Mexico, while others trace theirs to countries throughout Central America, South America, and the Caribbean. Furthermore, Chinese, Japanese, and Korean immigrants, while grouped as Asians, do not share the same language ("Telecommunications Marketing Opportunities," n.d.).

Moreover, both the Asian and Hispanic market segments include new immigrants, people who immigrated to the United States years ago, and native-born Americans. So what language will you use to communicate your offerings to these people, and where?

Subsegmenting the markets could help you. New American Dimension, a multicultural research firm, has divided the Hispanic market into the following subsegments:

· Just moved in-ers—Recent arrivals, Spanish dependent, struggling but optimistic

· FOB-ers (fashionistas on a budget)—Spanish dominant, traditional, but striving for trendy

· Accidental explorers—Spanish preferred, not in a rush to embrace US culture

· The englightened—Bilingual, technology savvy, driven, educated, modern

· Doubting Tomáses—Bilingual, independent, skeptical, inactive, uninvolved in shopping

· Latin flavored—English preferred, reconnecting with Hispanic traditions

· SYL-ers (single, young latinos)—English dominant, free thinkers, multicultural

You could go so far as to break down subsegments to the individual level, which is the goal behind one-to-one marketing. However, doing so would be dreadfully expensive, notes Juan Guillermo Tornoe, a marketing expert who specializes in Hispanic marketing issues. After all, are you really going to develop different products and different marketing campaigns and communications for each group? Probably not, but "you need to perform your due diligence and understand where the majority of the people you are trying to reach land on this matrix, modifying your message according to this insight," Tornoe explains (2008).

Segmenting by Geography

Suppose your great new product or service idea involves opening a local store. Before you open the store, you will probably want to do some research to determine which geographical areas have the greatest potential. For instance, if your business is a high-end restaurant, should it be located near the local college or country club? If you sell ski equipment, you probably will want to locate your shop somewhere in the vicinity of a mountain range where there is a ski area.

Geographic segmentation divides the market into areas based on location and explains why the checkout clerks at stores sometimes ask for your zip code. It's also why businesses print codes on coupons that correspond to zip codes. When the coupons are redeemed, the store can find out where its customers are located. Geocoding is a process that takes this data and plots it on a map. Geocoding can help businesses see where prospective customers might be clustered and target them with various ad campaigns, including direct mail. One of the most popular geocoding software programs is PRIZM NE, which is produced by a company called Claritas. PRIZM NE uses zip codes and demographic information to classify the American population into segments. The idea behind PRIZM is that "you are where you live." Combining both demographic and geographic information is referred to as geodemographics or neighborhood geography, which operates on the idea is that housing areas in different zip codes typically attract certain types of buyers with certain income levels.

The tourism bureau for the state of Michigan was able to identify and target different customer profiles using PRIZM. Michigan's biggest travel segment are Chicagoans in certain zip codes consisting of upper-middle-class households with children—or the "kids in cul-de-sacs" group, as Claritas puts it. The bureau was also able to identify segments significantly different from the Chicago segment, including blue-collar adults in the Cleveland area who vacation without their children. The organization then created substantially different marketing campaigns to appeal to each group.

City size and population density (the number of people per square mile) are also used for segmentation purposes. Have you ever noticed that in rural towns, McDonald's restaurants are hard to find, but Dairy Queen (DQ) restaurants are usually easy to locate? McDonald's generally won't put a store in a town of fewer than five thousand people. However, this is prime turf for DQ because it doesn't have to compete with bigger franchises.

Proximity marketing is an interesting new technology firms are using to segment and target buyers geographically within a few hundred feet of their businesses using wireless technology. In some areas, you can switch your mobile phone to a discoverable mode while you're shopping and, if you want, get ads and deals from stores as you pass by them, which is often less expensive than hiring people to hand you a flier as you walk by ("Bluetooth Proximity Marketing," 2007).

In addition to figuring out where to locate stores and how to advertise to customers in that area, geographic segmentation helps firms tailor their products. Chances are you won't be able to find the same heavy winter coat in a Walmart in Montana and a Walmart in Florida because of the climate differences between the two places. Market researchers also look at migration patterns to evaluate opportunities. TexMex restaurants are more commonly found in the southwestern United States. However, northern states are now seeing more of them as more people of Hispanic descent move northward.

Segmenting by Psychographics

If your offering fulfills the needs of a specific demographic group, then the demographic can be an important basis for identifying groups of consumers interested in your product. What if your product crosses several market segments? For example, the group of potential consumers for cereal could be almost everyone, although groups of people may have different needs with regard to their cereal. Some consumers might be interested in the fiber, children may be interested in the prize that comes in the box, other consumers may be interested in the added vitamins, and still other consumers may be interested in the type of grains. Associating these specific needs with consumers in a particular demographic group could be difficult. Marketing professionals want to know why consumers behave the way they do, what is of high priority to them, or how they rank the importance of specific buying criteria. Think about some of your friends who seem a lot like you. Have you ever gone to their homes and been shocked by their lifestyles and how vastly different they are from yours? Why are their families so much different from yours?

Psychographic segmentation can help explain some of these differences. Psychographic information is frequently gathered via extensive surveys that ask people about their activities, interests, opinions, attitudes, values, and lifestyles. One of the most well-known psychographic surveys is VALS (which originally stood for Values, Attitudes, and Lifestyles) and was developed by a company called SRI International in the late 1980s. SRI asked thousands of Americans the extent to which they agreed or disagreed with questions like, "My idea of fun at a national park would be to stay at an expensive lodge and dress up for dinner" and "I could stand to skin a dead animal" (Donnelly, 2002). Based on their responses to different questions, consumers were divided up into the following categories, each characterized by certain buying behaviors ("U.S. Framework and VALS Type," n.d):

· 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 process. 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 who 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 consensus, 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, and they favor established, prestige products and services that demonstrate success to their peers. Because of their busy lives, they are often interested in a variety of timesaving 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 predictable, opting for 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 consumers 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 projects—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 respectful of government authority and organized labor but resentful of government intrusion on 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 to favorite brands, especially if they can purchase them at a discount.

The segmenting techniques we've discussed so far in this section require gathering quantitative information and data. Quantitative information can be improved with qualitative information gathered by talking to your customers and getting to know them. (Recall that this is how Healthy Choice frozen dinners were created.) Consumer insight is what results when you use both types of information. You want to be able to answer the following questions:

· Am I looking at the consumers the way they see themselves?

· Am I looking at life from their point of view?

Best Buy asked store employees to develop insight about local consumer groups in order to create special programs and processes for them. Employees in one locale invited a group of retirees to their store to explain how to make the switch to digital television. The store sold $350,000 worth of equipment and televisions in just two hours. The total cost included ninety-nine dollars in labor costs plus coffee and donuts.

Intuit, the company that makes the tax software Quicken, has a follow-me-home program. Teams of engineers from Intuit visit people's homes and spend a couple of hours watching consumers use Quicken. Then they use the insights they gain to improve the next version of Quicken. Contrast this story with that of a competing firm that is now struggling to stay in business. When a representative of the firm was asked if he had ever observed consumers installing or using his company's product, he responded, "I'm not sure I'd want to be around when they were trying to use it" (Nee, 2003).

Segmentation in B2B Markets

Many of the same criteria used to segment consumer markets are also used to segment B2B markets. For example, Goya Foods is a US food company that sells ethnic products to grocery stores, depending on the demographic groups the stores serve—Mexican, Spanish, or more generally, Hispanic. Likewise, B2B sellers often divide their customers by geographic areas and tailor their products to them accordingly. Segmenting by behavior is common as well. B2B sellers frequently divide their customers based on their product usage rates. Customers that order many goods and services from a seller often receive special deals and are served by salespeople who call on them in person. By contrast, smaller customers are more likely to have to rely on a firm's website, customer service people, and salespeople via telephone.

Researchers Matthew Harrison, Paul Hague, and Nick Hague (n.d.) have theorized that there are fewer behavioral and needs-based segments in B2B markets than in business-to-consumer (B2C) markets for two reasons: (1) business markets are made up of a few hundred customers, whereas consumer markets can be made up of hundreds of thousands of customers, and (2) businesses aren't as fickle as consumers. Unlike consumers, they aren't concerned about their social standing or influenced by their families and peers. Instead, businesses are concerned solely with buying products that will ultimately increase their profits. According to Harrison, Hague, and Hague, the behavioral, or needs-based, segments in B2B markets include the following:

· A price-focused segment is composed of small companies that have low profit margins and do not regard the good or service being sold as strategically important to their operations.

· A quality and brand-focused segment is composed of firms that want the best possible products and are prepared to pay for them.

· A service-focused segment is composed of firms that demand high-quality products and have top-notch delivery and service requirements.

· A partnership-focused segment is composed of firms that seek trust and reliability on the part of their suppliers and see them as strategic partners.

B2B sellers, like B2C sellers, are exploring new ways to reach their target markets. Trade shows and direct mail campaigns are two traditional ways of reaching B2B markets. Now, however, firms are finding they can target their B2B customers more cost-effectively via e-mail campaigns, search-engine marketing, and fan pages on social networking sites like Facebook. Companies are also creating blogs with cutting-edge content about new products and business trends of interest to their customers. For a fraction of the cost of attending a trade show to exhibit their products, B2B sellers are holding webcasts and conducting online product demonstrations for potential customers.

Key Takeaway

Segmentation bases are criteria used to classify buyers. The main types of buyer characteristics used to segment consumer markets are behavioral, demographic, geographic, and psychographic. Behavioral segmentation divides people and organizations into groups according to how they behave with or toward products. Segmenting buyers by personal characteristics such as their age, income, ethnicity, and family size is called demographic segmentation. Geographic segmentation involves segmenting buyers based on where they live. Psychographic segmentation seeks to differentiate buyers based on their activities, interests, opinions, attitudes, values, and lifestyles. Often, a firm will use multiple bases to get a fuller picture of its customers and create value for them. Marketing professionals develop consumer insight when they gather both quantitative and qualitative information about their customers. Many of the same bases used to segment consumer markets are used to segment business-to-business (B2B) markets. However, there are generally fewer behavioral-based segments in B2B markets.

Review Questions

· What buyer characteristics do companies look at when they segment markets?

· Why do firms often use more than one segmentation base?

· What two types of information do market researchers gather to develop consumer insight?

3. Selecting Target Markets and Target-Market Strategies

Learning Objectives

· Describe the factors that make some markets more attractive targets than others.

· Describe the different market-segmenting strategies companies pursue and why.

· Outline the market-segmentation strategies used in global markets.

Selecting Target Markets

After you segment buyers and develop a measure of consumer insight about them, you can begin to see those that have more potential. Now you are hunting with a rifle instead of a shotgun. The question is, do you want to spend all day hunting squirrels or ten-point bucks? An attractive market has the following characteristics:

· It is large enough to be profitable given your operating cost. Only a tiny fraction of the consumers in China can afford to buy cars. However, because the country's population is so large (nearly 1.5 billion people), more cars are sold in China than in Europe (and in the United States, depending on the month).

· It is growing. The middle class of India is growing rapidly, making it a very attractive market for companies that make consumer products. People under thirty make up the majority of the Indian population, fueling the demand for Bollywood films.

· It is not already swamped by competitors, or you have found a way to stand out in a crowd. IBM used to make PCs. However, after the marketplace became crowded with competitors, IBM sold the product line to a Chinese company called Lenovo.

· Either it is accessible or you can find a way to reach it. Accessibility, or the lack of it, could include geographic accessibility, political and legal barriers, technological barriers, or social barriers. For example, to overcome geographic barriers, the consumer products company Unilever hires women in third-world countries to distribute the company's products to rural consumers who lack access to stores.

· The company has the resources to compete in it. You might have a great idea to compete in the wind-power market. However, is a capital-intensive business, so you will either need a lot of money or must be able to raise it. You might also have to compete with the likes of T. Boone Pickens, an oil tycoon who is attempting to develop and profit from the wind-power market. Does your organization have the resources to do this?

· It fits in with your firm's mission and objectives. Consider TerraCycle, which has made its mark by selling organic products in recycled packages. Fertilizer made from worm excrement and sold in discarded plastic beverage bottles is just one of its products. It wouldn't be a good idea for TerraCycle to open up a polluting, coal-fired power plant, no matter how profitable the market for the service might be.

Target-Market Strategies: Choosing the Number of Markets to Target

Henry Ford proved that mass marketing can work—at least for a while. Mass marketing is also efficient because you don't have to tailor any part of the offering for different groups of consumers, which is more work and costs more money. But buyers are not all alike. If a competitor comes along and offers these groups a product that better meet their needs, you will lose business.

Multisegment Marketing

Most firms tailor their offerings in one way or another to meet the needs of different segments of customers. Because these organizations don't have all their eggs in one basket, they are less vulnerable to competition. Marriott International is an example of a company that operates in multiple market segments. The company has different types of facilities designed to meet the needs of different market segments. Marriott has invested in unique brands so consumers don't confuse the brand and the brand is not diluted. Some of the Marriott brands and their target markets are as follows:

· Marriott Courtyard—Targeted at over-the-road travelers

· Ritz-Carlton Hotels—Targeted at luxury travelers

· Marriott Conference Centers—Targeted at businesses hosting small and midsized meetings

· Marriott ExecuStay—Targeted at executives needing month-long accommodations

· Marriott Vacation Clubs—Targeted at travelers seeking to buy timeshares

A multisegment marketing strategy can allow firms to respond to demographic changes and other trends in markets. For example, the growing number of people too old to travel have the option of moving into one of Marriott's senior living services facilities, which cater to retirees who need certain types of care. A multisegment strategy can also help companies weather an economic downturn by allowing customers to trade up or down among brands and products. Suppose you take a pay cut and can't afford to stay at Marriott's Ritz-Carlton hotels anymore. A room at a JW Marriott—the most luxurious of the Marriott brand hotels, but cheaper than the Ritz—is available to you. A multisegment strategy can also help companies deal with product life cycle issues. If one brand or product is struggling the company has others to compete.

Concentrated Marketing

Some firms—especially smaller ones with limited resources—engage in concentrated marketing. Concentrated marketing involves targeting a very select group of customers. It can be a risky strategy because companies are essentially putting all their eggs in one basket. For example, many North American auto parts makers have traditionally supplied parts exclusively to auto manufacturers. But when General Motors, Ford, Chrysler, and other auto companies experienced a slump in sales following the recession that began in 2008, the auto parts makers found themselves in trouble. Many of them began trying to make and sell parts for wind turbines, aerospace tools, solar panels, and construction equipment (Simon, 2009).

Niche marketing involves targeting an even more select group of consumers. When engaging in niche marketing, a company's goal is to be a big fish in a small pond instead of a small fish in a big pond ("Niche Marketing," n.d.).

Microtargeting22, or narrowcasting, is a new effort to isolate markets and target them. It was originally used to segment voters during elections, including the 2008 US presidential election. Microtargeting involves gathering all kinds of data available on people—everything from their tax and phone records to the catalogs they receive. For a fee, companies like Acxiom can provide you with a list of Hispanic consumers who own two pets, have caller ID, drive a sedan, buy certain personal care products, subscribe to certain television cable channels, read specified magazines, and have income and education levels within a given range (Schiffman & Kanuk, 2010). Clearly, microtargeting has ethical implications and privacy issues.

Targeting Global Markets

Firms that compete in the global marketplace can use any combination of the segmenting strategies or none at all. If you're a seller of a metal like iron ore, you might sell the same product across the entire world via a metals broker. The broker would worry about communicating with customers around the world and devising different marketing campaigns for each of them.

Most companies, however, tailor their offerings to meet the needs of different buyers around the world. For example, Mattel sells Barbie dolls all around the world—but not the same Barbie. Mattel has created thousands of different Barbie offerings designed to appeal to all kinds of people in different countries.

Pizza Hut has franchises around the world, but its products, packaging, and advertising are tailored to different markets. Squid is a popular topping in Asia. Companies tailor products not only for different countries but also for different customers within those countries. For example, Procter & Gamble's China division now offers products designed for different local market segments in that country. P&G has an advanced formulation of laundry detergent for the premium segment, a modified product for the second (economy) segment, and a very basic, inexpensive product created for the third (rural) segment (Sewell, 2009).

Sellers are increasingly targeting consumers in China, Russia, India, and Brazil because of their fast-growing middle classes. Take the cosmetics maker Avon. Avon's largest market is no longer the United States—it's now Brazil. Brazilians are increasingly able to afford cosmetic products as well as plastic surgery (Wheatley, 2010). So attractive are these countries that firms are changing how they develop goods and services, too. "Historically, American companies innovated in the United States and took those products abroad," says Vjay Govindarahan, a professor at Dartmouth's Tuck School of Business. Now, says Govindarahan, companies are creating low-cost products to capture large markets in developing countries and then selling them in developed countries. Acer's $250 laptop and General Electric's inexpensive $1,000 electrocardiogram device are examples. The world's cheapest car, the $2,500 Tata Nano, was developed for India but is slated to be sold in the United States (McGinn, 2010).

Other strategies for targeting markets abroad include acquiring foreign companies or companies with large market shares in markets abroad. To tap the Indian market, Kraft made a bid to buy the candymaker Cadbury, which controls about one-third of India's chocolate market. Likewise, to compete against Corona beer, the Dutch brewer Heineken recently purchased Mexico's Femsa, which makes the beer brands Dos Equis, Tecate, and Sol (de la Merced & Nicholson, 2010). However, some countries don't allow foreign firms to buy domestic firms. They can only form partnerships with them. Other regulatory and cultural barriers sometimes prevent foreign firms from "invading" a country. IKEA, the Swedish home-furnishings maker, eventually left Russia because it found it too hard to do business there. By contrast, McDonald's efforts to expand into Russia have been quite successful. Having saturated other markets, the hamburger chain is hoping to continue to grow by opening hundreds of new stores in the country.

Key Takeaway

A market worth targeting has the following characteristics: (1) It's sizeable enough to be profitable, given your operating costs; (2) it's growing; (3) it's not already swamped by competitors, or you have found a way to stand out in the crowd; (4) it's accessible, or you can find a way to reach it; (5) you have the resources to compete in it; and (6) it fits with your firm's mission and objectives. Most firms tailor their offerings in one way or another to meet the needs of different segments of customers. A multisegment marketing strategy can allow a company to respond to demographic and other changes in markets, including economic downturns. Concentrated marketing involves targeting a very select group of customers. Niche marketing involves targeting an even more select group of consumers. Microtargeting, or narrowcasting, is a new effort to "super target" consumers by gathering all kinds of data available on them—everything from their tax and phone records to the catalogs they receive. Firms that compete in the global marketplace can use any combination of these segmenting strategies or none at all. Sellers are increasingly targeting consumers in China, Russia, India, and Brazil because of their fast-growing middle classes. Firms are creating low-cost products to capture large markets in developing countries and then selling the products in developed countries. Other strategies for targeting markets abroad include acquiring foreign companies or forming partnerships with them.

Review Questions

· What factors does a firm need to examine before deciding to target a market?

· Which of the segmenting strategies discussed in this section is the broadest? Which is the narrowest?

· Why might it be advantageous to create low-cost products for developing countries and then sell them in nations such as the United States? Do you see any disadvantages of doing so?

4. Positioning and Repositioning Offerings

Learning Objectives

· Explain why positioning is an important element when it comes to targeting consumers.

· Describe how a product can be positioned and mapped.

· Explain what repositioning is designed is to do.

Why should buyers purchase your offering versus another? If your product faces competition, you will need to think about how to position it in the marketplace relative to competing products. After all, you don't want the product to go unnoticed by consumers. Positioning is how consumers perceive a product relative to the competition. Companies want to have a distinctive image and offering that stands out from the competition in the minds of consumers.

One way to position your product is to plot customer survey data on a perceptual map. A perceptual map is a two-dimensional graph that visually shows where your product stands, or should stand, relative to your competitors, based on criteria important to buyers. The criteria can involve any number of characteristics—price, quality, level of customer service associated with the product, and so on. To avoid head-to-head competition with your competitors, you want to position your product somewhere on the map where your competitors aren't clustered.

Many companies use taglines in their advertising to try to position their products in the minds of the buyer. A tagline is a catchphrase designed to sum up the essence of a product. You perhaps have heard Wendy's tagline, "It's better than fast food." The tagline is designed to set Wendy's apart from restaurants like McDonald's and Burger King—to plant the idea in consumers' heads that Wendy's offerings are less aligned with negative perceptions about fast food restaurants.

Sometimes firms find it advantageous to reposition their products, especially if they want the product to begin appealing to different market segments. Repositioning is an effort to move a product to a different place in the minds of consumers. The i-house, a prefab house built by Clayton Homes, a mobile home manufacturer, is an example. According to the magazine Popular Mechanics, the i-house "looks like a house you'd order from IKEA, sounds like something designed by Apple, and consists of amenities—solar panels, tankless water heaters, and rainwater collectors—that one would expect to come from an offbeat green company out of California selling to a high-end market" (Schwartz, 2009). A Clayton Homes spokesperson says, "Are we repositioning to go after a new market? I would think we are maintaining our value to our existing market and expanding the market to include other buyers that previously wouldn't have considered our housing product" ("Clayton 'i-house'," 2009). Recently, Porsche unveiled its new line of Panamera vehicles at a Shanghai car show. The car is a global model, but unlike Porsche's other cars, it's longer, because wealthy car buyers in China prefer to be driven by chauffeurs (Gapper, 2009). How do you think Porsche is trying to reposition itself for the future?

Key Takeaway

If a product faces competition, its producer will need to think about how to position it in the marketplace relative to competing products. Positioning is how consumers view a product relative to the competition. A perceptual map is a two-dimensional graph that visually shows where a product stands, or should stand, relative to its competitors, based on criteria important to buyers. Sometimes firms find it advantageous to reposition their products. Repositioning is an effort to move a product to a different place in the minds of consumers.

Review Questions

· Why do companies position products?

· Explain what a tagline is designed to do.

· Why might an organization reposition a product?

5. Discussion Questions and Activities

Discussion Questions

· Think about some of your friends and what you have discovered by visiting their homes. Do they buy different things than you do? If so, why? How might a company distinguish you from them in terms of its targeting?

· Is it always harder to find new customers than it is to retain old ones or does it depend on the business you're in?

· Does one-to-one marketing have to be expensive? How can small organizations interact with their customers in a cost-effective way?

· Are large companies better off using multisegment strategies and small companies better off using niche strategies? Why or why not?

· How have companies such as JCPenney and Sears tried to change their position (reposition their stores)?

· Do you think hotel companies have segmented the market too much and confused customers?

Activities

· Form groups of three students. Think of a product or service that one of you purchased recently on campus. How might you go about developing a customer profile for the product? List the sources you would use.

· Describe a product you like that you believe more people should use. As a marketer, how would you reposition the product to increase its use? Outline your strategy.

· Look at the latest census data and identify at least two areas of the country that are growing. What type of businesses would you recommend enter the growing markets?

· Think of an idea for a new product or service. Who would be the target markets and how would you position your offering?

References

Barringer, B. R., & Ireland, D. (2010). Entrepreneurship: Successfully launching new ventures (3rd ed.). Upper Saddle River, NJ: Prentice Hall.

Berkowitz, E. N., (2006). The essentials of health care marketing (2nd ed.). Sudbury, MA: Jones & Bartlett Publishers, 13.

Birchall, J. (2009a). Out to launch in a downturn. Financial Times, 10.

Birchall, J. (2009b). Value trend tests brand loyalty. Financial Times, 12.

Value Proposition

Companies address their customers' needs and wants through their value proposition, which is the totality of the benefits offered to satisfy customer needs and wants. The product or service will only be successful if it delivers value and satisfies the target customer. In other words, the value proposition is more than just the core positioning of the product or service; the value proposition represents the whole set of benefits that a company promises to deliver. Accordingly, a correct product or service positioning will result in a successful customer-focused value proposition, i.e., a clear reason why the target customers should buy the offering (Kotler & Keller, 2015).

References

Kotler, P. & Keller, K. L. (2015). Marketing management (15th ed.). Upper Saddle River, NJ: Pearson.

Last reviewed: April 2017

A value proposition is an implicit, and sometimes explicit, promise made by the provider of a product, tangible or intangible, to a customer or customers. This is a promise that goes beyond the physical characteristics of the product and involves all forms of utility that can be enjoyed by the customer, manifested in such areas as emotional, status, and self-actualization benefits to be obtained from consumption.

Overview

The standard definition of marketing involves finding out what people want and giving it to them while making a profit (it has been updated in recent years, but this remains the heart of it). The value proposition arises from understanding what a customer really wants from a product and then demonstrating how it might be obtained. This is evident from television advertising, which rarely focuses on the technical details of a product but rather the emotional or lifestyle benefits to be obtained—frozen food provides a happy united family for the mother; a car provides young people with the freedom to roam. In consumer goods, the value proposition rarely involves a subtle presentation. It can be different for specialty goods when people are willing to invest time and energy in obtaining exactly the right technical product.

When it comes to organizational buying, the value proposition can be quite a complex undertaking and involves a number of different features. This is because products or contracts might be complex in themselves and because organizational buyers must follow a specific protocol in determining suppliers, which is aimed at protecting the interest of the organization rather than appealing to an individual. The value proposition in such cases might cover the ability to integrate operations over a number of different sites, the creation of a long-term relationship that will reduce transaction costs, or the possibility of entering new markets.

From the perspective of business strategy, irrespective of the type of market involved, the crucial issue is learning to understand the meaning of value and how to create it. Four main types of value propositions exist, each solving a different common concern: low cost, superior product, ease of use, and expert service. The perception of value varies from case to case, and it is necessary either to have a deep understanding of the market or conduct worthwhile marketing research to understand how it is manifested in different cases. In business-to-business or business-to-government cases, the understanding often comes from stable relationships that give time for each side to learn the nature of the other, which creates high entry barriers for any other company wishing to enter that market. Such relationships often lack transparency to outsiders.

Value propositions are used to direct the design process and to revamp existing products or services in response to the market. Other business concerns including pricing, overhead, and performance metrics hinge on the type of value proposition the company adopts.

Over time, the value proposition concept has been recognized as a useful one in management studies generally and so it has been applied in a range of areas, such as human resources, IT outsourcing, and conflict management as a means of making any offer or suggestion more attractive. The concept has been broadened in a perhaps useful way, although at the cost of having much of its original meaning filleted from it. This is quite common with concepts of this sort and ends with them being so widely used that it has little if any real meaning left.

Bibliography

Barnes, Cindy, Helen Blake, and David Pinder. Creating and Delivering Your Value Proposition: Managing Customer Experience for Profit. London: Kogan Page, 2009. Print.

Cespedes, Frank V. "Any Value Proposition Hinges on the Answer to One Question." Harvard Business Review. Harvard Business School Pub., 13 Jan. 2015. Web. 30 June 2015.

Evans, P. B., and T. S. Wurster, “Strategy and the New Economics of Information.” Harvard Business Review 75.5 (1997): 70–82. Print.

Frow, Pennie and Adrian Payne, “A Stakeholder Perspective of the Value Proposition Concept.” Emerald 45 (2011): n.pag. Print.

Lafley, A. G. Playing to Win: How Strategy Really Works. Cambridge: Harvard Business Rev. P, 2013. Print.

Porter, Michael E., and Mark R. Kramer. “Strategy and Society.” Harvard Business Review 84.12 (2006): 78–92. Print.

Schildkrout, Aaron. "Value-Driven Product Development: Using Value Propositions to Build a Rigorous Product Roadmap." Fast Company. Mansueto Ventures, 21 Aug. 2013. Web. 30 June 2015.

Marketing Principles is available under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported license without attribution as requested by the site's original creator or licensee.

Strategic Planning

2.1 The Value Proposition

Learning Objectives

1. Explain what a value proposition is.

2. Understand why a company may develop different value propositions for different target markets.

What Is a Value Proposition?

Individual buyers and organizational buyers evaluate products and services to see if they provide desired benefits. For example, when you're exploring vacation options, you want to know the benefits of each destination and the value you will get by going to each place. Before you (or a firm) can develop a strategy or create a strategic plan, you have to develop a value proposition. A value proposition is a 30-second "elevator speech" stating the specific benefits a product or service offering provides a buyer. It shows why the product or service is superior to competing offers. The value proposition answers the questions, "Why should I buy from you or why should I hire you?" As such, the value proposition becomes a critical component in shaping strategy.

The following is an example of a value proposition developed by a sales consulting firm: "Our clients grow their business, large or small, typically by a minimum of 30 percent to 50 percent over the previous year. They accomplish this without working 80-hour weeks and sacrificing their personal lives" (Lake, 2016).

Note that although a value proposition will hopefully lead to profits for a firm, when the firm presents its value proposition to its customers, it doesn't mention its own profits. That's because the goal is to focus on the external market or what customers want.

Firms typically segment markets and then identify different target markets, or groups of customers, that they want to reach when firms are developing their value propositions. Be aware that companies sometimes develop different value propositions for different target markets just as individuals may develop a different value proposition for different employers. The value proposition tells groups of customers (or potential employers) why they should buy a product or service, vacation to a particular destination, donate to an organization, hire you, etc.

Once the benefits of a product or service are clear, the firm must develop strategies that support the value proposition. The value proposition serves as a guide for this process. In the case of our sales consulting firm, the strategies it develops must help clients improve their sales by 30 percent to 50 percent. Likewise, if a company's value proposition states that the firm is the largest retailer in the region with the most stores and best product selection, opening stores or increasing the firm's inventory might be a key part of the company's strategy. Looking at Amazon's value proposition, "Low price, wide selection with added convenience anytime, anywhere," one can easily see how Amazon has been so successful (InfoMarketersZone.com, n.d.).

Individuals and students should also develop their personal value propositions. Tell companies why they should hire you or why a graduate school should accept you. Show the value you bring. A value proposition will help you in different situations. Think about how your internship experience and/or study abroad experience may help a future employer. For example, you could explain to the employer the benefits and value of going abroad. Perhaps your study abroad experience helped you understand customers that buy from Company X and your customer service experience during your internship increased your ability to generate sales, which improved your employer's profit margin. Thus you may be able to quickly contribute to Company X, something that Company X might value.

Key Takeaway

A value proposition is a 30-second "elevator speech" stating the specific value a product or service provides to a target market. Firms may develop different value propositions for different groups of customers. The value proposition shows why the product or service is superior to competing offers and why the customer should buy it or why a firm should hire you.

Review Questions

1. What is a value proposition?

2. You are interviewing for an internship. Create a value proposition for yourself that you may use as your 30-second "elevator speech" to get the company interested in hiring you or talking to you more.

References

InfoMarketersZone.com. (n.d.). How do you develop a unique value proposition? Retrieved from http://www.infomarketerszone.com/public/182.cfm

Lake, L. (2016). Develop your value proposition. Retrieved from http://marketing.about.com/od/marketingplanandstrategy/a/valueprop.htm

2.2 Components of the Strategic Planning Process

Learning Objectives

1. Explain how a mission statement helps a company with its strategic planning.

2. Describe how a firm analyzes its internal environment.

3. Describe the external environment a firm may face and how it is analyzed.

Strategic planning is a process that helps an organization allocate its resources to capitalize on opportunities in the marketplace. Typically, it is a long-term process. The strategic planning process includes conducting a situation analysis and developing the organization's mission statement, objectives, value proposition, and strategies.

Conducting a Situation Analysis

As part of the strategic planning process, a situation analysis must be conducted before a company can decide on specific actions. A situation analysis involves analyzing both the external (macro and micro factors outside the organization) and the internal (company) environments. The firm's internal environment—such as its financial resources, technological resources, and the capabilities of its personnel and their performance—has to be examined. It is also critical to examine the external macro and micro environments the firm faces, such as the economy and its competitors. The external environment significantly affects the decisions a firm makes, and thus must be continuously evaluated. For example, during the economic downturn in 2008–2009, businesses found that many competitors drastically cut the prices of their products. Other companies reduced package sizes or the amount of product in packages. Firms also offered customers incentives (free shipping, free gift cards with purchase, rebates, etc.) to purchase their goods and services online, which allowed businesses to cut back on the personnel needed to staff their brick-and-mortar stores. While a business cannot control things such as the economy, changes in demographic trends, or what competitors do, it must decide what actions to take to remain competitive—actions that depend in part on the internal environment.

Conducting a SWOT Analysis

Based on the situation analysis, organizations analyze their strengths, weaknesses, opportunities, and threats, conducting what's called a SWOT analysis. Strengths and weaknesses are internal factors and are somewhat controllable. For example, an organization's strengths might include its brand name, efficient distribution network, reputation for great service, and strong financial position. A firm's weaknesses might include lack of awareness of its products in the marketplace, a lack of human resources talent, and a poor location. Opportunities and threats are factors that are external to the firm and largely uncontrollable. Opportunities might entail the international demand for the type of products the firm makes, few competitors, and favorable social trends such as people living longer. Threats might include a bad economy, high interest rates that increase a firm's borrowing costs, and an aging population that makes it hard for the business to find workers.

You can conduct a SWOT analysis of yourself to help determine your competitive advantage. Perhaps your strengths include strong leadership abilities and communication skills, whereas your weaknesses include a lack of organization. Opportunities for you might exist in specific careers and industries; however, the economy and other people competing for the same position might be threats.

Moreover, a factor that is a strength for one person (say, strong accounting skills) might be a weakness for another person (poor accounting skills). The same is true for businesses.

The easiest way to determine if a factor is external or internal is to take away the company, organization, or individual and see if the factor still exists. Internal factors such as strengths and weaknesses are specific to a company or individual, whereas external factors such as opportunities and threats affect multiple individuals and organizations in the marketplace. For example, if you are doing a situation analysis on PepsiCo and are looking at the weak economy, take PepsiCo out of the picture and see what factors remain. If the factor—the weak economy—is still there, it is an external factor. Even if PepsiCo hadn't been around in 2008–2009, the weak economy reduced consumer spending and affected a lot of companies.

Assessing the Internal Environment

When an organization evaluates which factors are its strengths and weaknesses, it is assessing its internal environment. Once companies determine their strengths, they can use those strengths to capitalize on opportunities and develop their competitive advantage. For example, strengths for PepsiCo are what are called "mega" brands, or brands that individually generate over $1 billion in sales (PepsiCo, n.d.). These brands are also designed to contribute to PepsiCo's environmental and social responsibilities.

PepsiCo's brand awareness, profitability, and strong presence in global markets are also strengths. Especially in foreign markets, the loyalty of a firm's employees can be a major strength, which can provide it with a competitive advantage. Loyal and knowledgeable employees are easier to train and tend to develop better relationships with customers. This helps organizations pursue more opportunities.

Although the brand awareness for PepsiCo's products is strong, smaller companies often struggle with weaknesses such as low brand awareness, low financial reserves, and poor locations. When organizations assess their internal environments, they must look at factors such as performance and costs as well as brand awareness and location. Managers need to examine both the past and current strategies of their firms and determine what strategies succeeded and which ones failed. This helps a company plan its future actions and improves the odds it will be successful. For example, a company might look at packaging that worked very well for a product and use the same type of packaging for new products. Firms may also look at customers' reactions to changes in products, including packaging, to see what works and doesn't work. When PepsiCo changed the packaging of major brands in 2008, customers had mixed responses. Tropicana switched from the familiar orange with the straw in it to a new package and customers did not like it. As a result, Tropicana changed back to the familiar orange with a straw after spending $35 million for the new package design.

Individuals are also wise to look at the strategies they have tried in the past to see which ones failed and which ones succeeded. Have you ever done poorly on an exam? Was it the instructor's fault, the strategy you used to study, or did you decide not to study? See which strategies work best for you and perhaps try the same type of strategies for future exams. If a strategy did not work, see what went wrong and change it. Doing so is similar to what organizations do when they analyze their internal environments.

Assessing the External Environment

Analyzing the external environment involves tracking conditions in the macro and micro marketplace that, although largely uncontrollable, affect the way an organization does business. The macro environment includes economic factors, demographic trends, cultural and social trends, political and legal regulations, technological changes, and the price and availability of natural resources. The micro environment includes competition, suppliers, marketing intermediaries (retailers, wholesalers), the public, the company, and customers.

When firms globalize, analyzing the environment becomes more complex because they must examine the external environment in each country in which they do business. Regulations, competitors, technological development, and the economy may be different in each country and will affect how firms do business.

Although the external environment affects all organizations, companies must focus on factors that are relevant for their operations. For example, government regulations on food packaging will affect PepsiCo but not Goodyear. Similarly, students getting a business degree don't need to focus on job opportunities for registered nurses.

The Competitive Environment

All organizations must consider their competition, whether it is direct or indirect competition vying for the consumer's dollar. Both nonprofit and for-profit organizations compete for customers' resources. Coke and Pepsi are direct competitors in the soft drink industry, Hilton and Sheraton are competitors in the hospitality industry, and organizations such as United Way and the American Cancer Society compete for resources in the nonprofit sector. However, hotels must also consider other options that people have when selecting a place to stay, such as hostels, dorms, bed and breakfasts, or rental homes.

A group of competitors that provide similar products or services form an industry. Michael Porter, a professor at Harvard University and a leading authority on competitive strategy, developed an approach for analyzing industries. Called the five forces model (Porter, 1980, pp. 3-33), the framework helps organizations understand their current competitors as well as organizations that could become competitors in the future. As such, firms can find the best way to defend their position in the industry.

Competitive Analysis

When a firm conducts a competitive analysis, it tends to focus on direct competitors and tries to determine a firm's strengths and weaknesses, its image, and its resources. Doing so helps the firm figure out how much money a competitor may be able to spend on things such as research, new product development, promotion, and new locations. Competitive analysis involves looking at any information (annual reports, financial statements, news stories, observation details obtained on visits, etc.) available on competitors. Another means of collecting competitive information is using mystery shoppers, or people who act like customers. Mystery shoppers might visit competitors to learn about their customer service and their products. Imagine going to a competitor's restaurant and studying the menu and the prices and watching customers to see what items are popular and then changing your menu to better compete. Competitors battle for the customer's dollar, and they must know what other firms are doing. Individuals and teams also compete for jobs, titles, and prizes and must figure out the competitors' weaknesses and plans in order to take advantage of their strengths and have a better chance of winning.

According to Porter, in addition to their direct competitors (competitive rivals), organizations must consider the strength and impact the following could have (Porter, 1980, pp. 3-33):

· substitute products

· potential entrants (new competitors) in the marketplace

· the bargaining power of suppliers

· the bargaining power of buyers

When any of these factors change, companies may have to respond by changing their strategies. For example, because buyers are consuming fewer soft drinks these days, companies such as Coke and Pepsi have had to develop new, substitute offerings such as vitamin water and sports drinks. However, other companies such as Dannon or Nestlé may also be potential entrants in the flavored water market.

When you select a hamburger fast-food chain, you also had the option of substitutes such as getting food at the grocery or going to a pizza place. When computers entered the market, they were a substitute for typewriters. Most students may not have ever used a typewriter, but some consumers still use typewriters for forms and letters.

Suppliers, the companies that supply ingredients as well as packaging materials to other companies, must also be considered. If a company cannot get the supplies it needs, it's in trouble. Also, sometimes suppliers see how lucrative their customers' markets are and decide to enter them. Buyers, who are the focus of marketing and strategic plans, must also be considered because they have bargaining power and must be satisfied. If a buyer is large enough, and doesn't purchase a product or service, it can affect a selling company's performance. Walmart, for instance, is a buyer with a great deal of bargaining power. Firms that do business with Walmart must be prepared to make concessions to them if they want their products on the company's store shelves.

Lastly, the world is becoming "smaller" and more of a global marketplace. Companies everywhere are finding that no matter what they make, numerous firms around the world are producing the same "widget" or a similar offering (substitute) and are eager to compete. Employees are in the same position. The Internet has made it easier than ever for customers to find products and services and for workers to find the best jobs, even if they are abroad. Companies are also acquiring foreign firms. These factors all have an effect on the strategic decisions companies make.

The Political and Legal Environment

All organizations must comply with government regulations and understand the political and legal environments in which they do business. Different government agencies enforce the regulations that have been established to protect both consumers and businesses. For example, the Sherman Act (1890) prohibits US firms from restraining trade by creating monopolies and cartels. The regulations related to the act are enforced by the Federal Trade Commission (FTC), which also regulates deceptive advertising. The US Food and Drug Administration (FDA) regulates the labeling of consumable products, such as food and medicine. One organization that has been extremely busy is the Consumer Product Safety Commission, the group that sets safety standards for consumer products.

When organizations conduct business in multiple markets, they must understand that regulations vary across countries and across states. Many states and countries have different laws that affect strategy. For example, suppose you are opening a new factory because you cannot keep up with the demand for your products. If you are considering opening the factory in France (perhaps because the demand in Europe for your product is strong), you need to know that it is illegal for employees in that country to work more than 35 hours per week.

The Economic Environment

The economy has a major impact on spending by both consumers and businesses, which, in turn, affects the goals and strategies of organizations. Economic factors include variables such as inflation, unemployment, interest rates, and whether the economy is in a growth period or a recession. Inflation occurs when the cost of living continues to rise, eroding the purchasing power of money. When this happens, you and other consumers and businesses need more money to purchase goods and services. Interest rates often rise when inflation rises. Recessions can also occur when inflation rises because higher prices sometimes cause low or negative growth in the economy.

During a recessionary period, it is possible for both high-end and low-end products to sell well. Consumers who can afford luxury goods may continue to buy them, while consumers with lower incomes tend to become more value-conscious. Other goods and services, such as products sold in traditional department stores, may suffer. In the face of a severe economic downturn, even the sales of luxury goods can suffer. The economic downturn that began in 2008 affected consumers and businesses at all levels worldwide. Consumers reduced their spending, holiday sales dropped, financial institutions went bankrupt, the mortgage industry collapsed, and the "Big Three" US auto manufacturers (Chrysler, Ford, and General Motors) asked for emergency loans.

The Demographic and Social and Cultural Environments

The demographic and social and cultural environments—including social trends, such as people's attitudes toward fitness and nutrition; demographic characteristics, such as people's age, income, marital status, education, and occupation; and culture, which relates to people's beliefs and values—are constantly changing in the global marketplace. Fitness, nutrition, and health trends affect the product offerings of many firms. For example, PepsiCo produces vitamin water and sports drinks. More women are working, which has led to a rise in the demand for services such as house cleaning and daycare. US baby boomers are reaching retirement age, sending their children to college, and trying to care for their elderly parents all at the same time. Firms are responding to the time constraints their buyers face by creating products that are more convenient, such as frozen meals and nutritious snacks.

The composition of the population is also constantly changing. Hispanics are the fastest-growing minority in the United States. Consumers in this group and other diverse groups prefer different types of products and brands. In many cities, stores cater specifically to Hispanic customers.

Technology

The technology available in the world is changing the way people communicate and the way firms do business. Everyone is affected by technological changes. Self-scanners and video displays at stores, ATMs, the Internet, and mobile phones are a few examples of how technology is affecting businesses and consumers. Many consumers get information, read the news, use text messaging, and shop online. As a result, marketers have begun allocating more of their promotion budgets to online ads and mobile marketing and not just to traditional print media such as newspapers and magazines. Applications for telephones and electronic devices are changing the way people obtain information and shop, allowing customers to comparison shop without having to visit multiple stores. Many young people may rely more on electronic books, magazines, and newspapers and depend on mobile devices for most of their information needs. Organizations must adapt to new technologies in order to succeed.

Natural Resources

Natural resources are scarce commodities, and consumers are becoming increasingly aware of this. Today, many firms are doing more to engage in "sustainable" practices that help protect the environment and conserve natural resources. Green marketing involves marketing environmentally safe products and services in a way that is good for the environment. Water shortages often occur in the summer months, so many restaurants now only serve patrons water upon request. Hotels voluntarily conserve water by not washing guests' sheets and towels every day unless the guests request it. Reusing packages (refillable containers) and reducing the amount of packaging, paper, energy, and water in the production of goods and services are becoming key considerations for many organizations, whether they sell their products to other businesses or to final users (consumers). Construction companies are using more energy-efficient materials and often have to comply with green building solutions. Green marketing not only helps the environment but also saves the company, and ultimately the consumer, money. Sustainability, ethics (doing the right things), and social responsibility (helping society, communities, and other people) influence an organization's planning process and the strategies it implements.

Although environmental conditions change and must be monitored continuously, the situation analysis is a critical input to an organization's or an individual's strategic plan.

The Mission Statement

The firm's mission statement states the purpose of the organization and why it exists. Both profit and nonprofit organizations have mission statements, which they often publicize. The following are examples of mission statements:

PepsiCo's Mission Statement

"Our mission is to be the world's premier consumer products company focused on convenient foods and beverages. We seek to produce financial rewards to investors as we provide opportunities for growth and enrichment to our employees, our business partners and the communities in which we operate. And in everything we do, we strive for honesty, fairness and integrity" (PepsiCo, Mission and Vision, n.d.).

The United Way's Mission Statement

"United Way improves lives by mobilizing the caring power of communities around the world to advance the common good" (United Way, n.d.).

Sometimes SBUs develop separate mission statements. For example, PepsiCo Americas Beverages, PepsiCo Americas Foods, and PepsiCo International might each develop a different mission statement.

Key Takeaway

A firm must analyze factors in the external and internal environments it faces throughout the strategic planning process. These factors are inputs to the planning process. As they change, the company must be prepared to adjust its plans. Different factors are relevant for different companies. Once a company has analyzed its internal and external environments, managers can begin to decide which strategies are best, given the firm's mission statement.

Review Questions

· What factors in the external environment are affecting the "Big Three" US automobile manufacturers?

· What are some examples of Walmart's strengths?

· Suppose you work for a major hotel chain. Using Porter's five forces model, explain what you need to consider with regard to each force.

References

PepsiCo Inc. (n.d.). PepsiCo brands. Retrieved from http://www.pepsico.com/Brands/BrandExplorer

PepsiCo Mission and Vision (n.d.). Retrieved from http://www.pepsico.com/Company/Our-Mission-and-Vision.html

Porter, M. (1980). Competitive strategy. New York, NY: The Free Press, pp. 3–33.

United Way. (n.d.). Our mission. http://www.liveunited.org/about/missvis.cfm (accessed

2.3 Developing Organizational Objectives and Formulating Strategies

Learning Objectives

1. Explain how companies develop the objectives driving their strategies.

2. Describe the different types of product strategies and market entry strategies that companies pursue.

Developing Objectives

Objectives are what organizations want to accomplish—the end results they want to achieve—in a given time frame. In addition to being accomplished within a certain time frame, objectives should be realistic (achievable) and be measurable, if possible. "To increase sales by 2 percent by the end of the year" is an example of an objective an organization might develop. You have probably set objectives for yourself that you want to achieve in a given time frame. For example, your objectives might be to maintain a certain grade-point average and get work experience or an internship before you graduate.

Objectives help guide and motivate a company's employees and give its managers reference points for evaluating the firm's marketing actions. Although many organizations publish their mission statements, most for-profit companies do not publish their objectives. Accomplishments at each level of the organization have helped PepsiCo meet its corporate objectives. PepsiCo's business units (divisions) have increased the number of their facilities to grow their brands and enter new markets. PepsiCo's beverage and snack units have gained market share by developing healthier products and products that are more convenient to use.

A firm's marketing objectives should be consistent with the company's objectives at other levels, such as the corporate level and business level. An example of a marketing objective for PepsiCo might be "to increase by 4 percent the market share of Gatorade by the end of the year."

Formulating Strategies

Strategies are the means to the ends, the game plan, or what a firm is going to do to achieve its objectives. Successful strategies help organizations establish and maintain a competitive advantage that competitors cannot imitate easily. Tactics include specific actions, such as coupons, television commercials, banner ads, etc., taken to execute the strategy. PepsiCo attempts to sustain its competitive advantage by constantly developing new products and innovations, including "mega brands," which include individual brands that generate over $1 billion in sales each. The tactics may consist of specific actions (commercials during the Super Bowl; coupons; buy one, get one free, etc.) to advertise each brand.

Firms often use multiple strategies to accomplish their objectives and capitalize on marketing opportunities. For example, in addition to pursuing a low-cost strategy (selling products inexpensively), Walmart has simultaneously pursued a strategy of opening new stores rapidly around the world. Many companies develop marketing strategies as part of their general, overall business plans. Other companies prepare separate marketing plans.

A marketing plan is a strategic plan at the functional level that provides a firm's marketing group with direction. It is a road map that improves the firm's understanding of its competitive situation. The marketing plan also helps the firm allocate resources and divvy the tasks that employees need to do for the company to meet its objectives.

Market penetration strategies focus on increasing a firm's sales of its existing products to its existing customers. Companies often offer consumers special promotions or low prices to increase their products' use and encourage consumers to buy products. When Frito-Lay distributes money-saving coupons to customers or offers them discounts to buy multiple packages of snacks, the company is using a penetration strategy. The Campbell Soup Company gets consumers to buy more soup by providing easy recipes using soup as an ingredient for cooking quick meals.

Product development strategies involve creating new products for existing customers. A new product can be a new innovation, an improved product, or a product with enhanced value, such as one with a new feature. Cell phones that allow consumers to charge purchases with the phone or take pictures are examples of a product with enhanced value. A new product can also be one that comes in different variations, such as new flavors, colors, and sizes. Mountain Dew Voltage, introduced by PepsiCo Americas Beverages in 2009, is an example. Keep in mind, however, that what works for one company might not work for another. For example, just after Starbucks announced it was cutting back on the number of its lunch offerings, Dunkin' Donuts announced it was adding items to its lunch menu.

Market development strategies focus on entering new markets with existing products. For example, during a recent economic downturn, manufacturers of high-end coffee makers began targeting customers who go to coffee shops. The manufacturers are hoping to develop the market for their products by making sure consumers know they can brew a great cup of coffee at home for a fraction of what they spend at Starbucks.

New markets can include any new groups of customers such as different age groups, new geographic areas, or international markets. Many companies, including PepsiCo and Hyundai, have entered—and been successful in—emerging markets such as Russia, China, and India. Decisions to enter foreign markets are based on a company's resources as well as the complexity of factors such as the political environmental, economic conditions, competition, customer knowledge, and probability of success in the desired market. There are different ways, or strategies, by which firms can enter international markets. The strategies vary in the amount of risk, control, and investment firms face. Firms can simply export, or sell their products to buyers abroad, which is the least risky and least expensive method but also offers the least amount of control. Many small firms export their products to foreign markets.

Firms can also license, or sell the right to use some aspect of their production processes, trademarks, or patents to individuals or firms in foreign markets. Licensing is a popular strategy, but firms must figure out how to protect their interests if the licensee decides to open its own business and void the license agreement. The French luggage and handbag maker Louis Vuitton faced this problem when it entered China. Competitors started illegally putting the Louis Vuitton logo on different products, which cut into Louis Vuitton's profits.

Franchising is a longer-term (and thus riskier) form of licensing that is popular with service firms, such as restaurants like McDonald's and Subway, hotels like Holiday Inn Express, and cleaning companies like Stanley Steemer. Franchisees pay a fee and must adhere to certain standards; however, they benefit from the advertising and brand recognition the franchising company provides.

Contract manufacturing allows companies to hire manufacturers to produce their products in another country. The manufacturers are provided specifications for the products, which are then manufactured and sold on behalf of the company that contracted the manufacturing. Contract manufacturing may provide tax incentives and may be more profitable than manufacturing the products in the home country. Examples of products in which contract manufacturing is often used include cell phones, computers, and printers.

Joint ventures combine the expertise and investments of two companies and help companies enter foreign markets. The firms in each country share the risks as well as the investments. Some countries such as China often require companies to form a joint venture with a domestic firm in order to enter the market. After entering the market in a partnership with a domestic firm and becoming established in the market, some firms may decide to separate from their partner and become their own business. Fuji Xerox Co. Ltd. is an example of a joint venture between the Japanese Fuji Photo Film Co. and the American document management company Xerox. Another example of a joint venture is Sony Ericsson. The venture combined the Japanese company Sony's electronic expertise with the Swedish company Ericsson's telecommunication expertise. With investment by both companies, joint ventures are riskier than exporting, licensing, franchising, and contract manufacturing but also provide more control to each partner.

Direct investment (owning a company or facility overseas) is another way to enter a foreign market, providing the most control but also having the most risk. For example, In Bev, the Dutch maker of Beck's beer, was able to capture market share in the United States by purchasing St. Louis-based Anheuser-Busch. A direct investment strategy involves the most risk and investment but offers the most control. Other companies such as advertising agencies may want to invest and develop their own businesses directly in international markets rather than trying to do so via other companies.

Diversification strategies involve entering new markets with new products or doing something outside a firm's current businesses. Firms that have little experience with different markets or different products often diversify their product lines by acquiring other companies. Diversification can be profitable, but it can also be risky if a company does not have the expertise or resources it needs to successfully implement the strategy. Warner Music Group's purchase of the concert promoter Bulldog Entertainment is an example of a diversification attempt that failed.

Key Takeaway

The strategic planning process includes a company's mission (purpose), objectives (end results desired), and strategies (means). Sometimes the different SBUs of a firm have different mission statements. A firm's objectives should be realistic (achievable) and measurable. The different product market strategies firms pursue include market penetration, product development, market development, and diversification.

Review Questions

1. How do product development strategies differ from market development strategies?

2. Explain why some strategies work for some companies but not others.

3. What factors do firms entering foreign markets need to consider?

4. How do franchising and licensing strategies differ?

2.4 Where Strategic Planning Occurs Within Firms

Learning Objectives

1. Identify the different levels at which strategic planning may occur within firms.

2. Understand how strategic planning that occurs at multiple levels in an organization helps a company achieve its overall corporate objectives.

Strategic planning is a long-term process that helps an organization allocate its resources to take advantage of different opportunities. In addition to marketing plans, strategic planning may occur at different levels within an organization. For example, in large organizations, top executives will develop strategic plans for the corporation as a whole. These are corporate-level plans. In addition, many large firms have different divisions, or businesses, called strategic business units. A strategic business unit (SBU) is a business or product line within an organization that has its own competitors, customers, and profit center for accounting purposes. A firm's SBUs may also have their own mission statements (purpose) and will generally develop strategic plans for themselves. These are called business-level plans. The different departments, or functions (accounting, finance, marketing) within a company or SBU might also develop strategic plans. For example, a company may develop a marketing plan or a financial plan, which are functional-level plans.

The number of levels can vary, depending on the size and structure of an organization. Not every organization will have every level or have every type of plan.

The strategies and actions implemented at the functional (department) level must be consistent with an organization's objectives and help an organization achieve those objectives at both the business and corporate levels, and vice versa. The SBUs at the business level must also be consistent with an organization's corporate-level objects and help an organization achieve those corporate objectives. For example, if a company wants to increase its profits at the corporate level and owns multiple business units, each unit might develop strategic plans to increase its own profits and thereby the firm's profits as a whole. At the functional level, a firm's marketing department might develop strategic plans to increase sales and the market share of the firm's most profitable products, which will increase profits at the business level and help the corporation's profitability. Both business level and functional plans should help the firm increase its profits, so that the company's corporate-level strategic objectives can be met.

At the functional (marketing) level, for example, to increase PepsiCo's profits, employees responsible for different products or product categories such as beverages or foods might focus on developing healthier products and making their packaging more environmentally friendly so the company captures more market share. For example, the new Aquafina bottle uses less plastic and has a smaller label, which helps the environment by reducing the amount of waste.

Organizations can use multiple methods and strategies at different levels in the corporation to accomplish their goals just as you may use different strategies to accomplish your goals. However, the basic components of the strategic planning process are the same at each of the different levels.

Key Takeaway

Strategic planning can occur at different levels (corporate, business, and functional) in an organization. The number of levels may vary. However, if a company has multiple planning levels, the plans must be consistent, and all must help achieve the overall goals of the corporation.

Review Questions

1. What different levels of planning can organizations utilize?

2. Give an example and explain how a corporation that wants to help protect the environment can do so at its corporate, business, and functional levels.

2.5 Strategic Portfolio Planning Approaches

Learning Objectives

1. Explain how SBUs are evaluated using the Boston Consulting Group matrix.

2. Explain how businesses and the attractiveness of industries are evaluated using the General Electric approach.

When a firm has multiple strategic business units as PepsiCo does, it must decide what the objectives and strategies for each business are and how to allocate resources among them. A group of businesses can be considered a portfolio, just as a collection of artwork or investments compose a portfolio. In order to evaluate each business, companies sometimes use what's called a portfolio planning approach. A portfolio planning approach involves analyzing a firm's entire collection of businesses relative to one another. Two of the most widely used portfolio planning approaches include the Boston Consulting Group (BCG) matrix and the General Electric (GE) approach.

The Boston Consulting Matrix

The Boston Consulting Group (BCG) matrix helps companies evaluate each of its strategic business units based on two factors: the SBU's market growth rate (i.e., how fast the unit is growing compared to the industry in which it competes) and the SBU's relative market share (i.e., how the unit's share of the market compares to the market share of its competitors). Because the BCG matrix assumes that profitability and market share are highly related, it is a useful approach for making business and investment decisions. However, the BCG matrix is subjective, and managers should also use their judgment and other planning approaches before making decisions. Using the BCG matrix, managers can categorize their SBUs (products) into one of four categories.

Stars

Everyone wants to be a star. A star is a product with high growth and a high market share. To maintain the growth of its star products, a company may have to invest money to improve them and how they are distributed as well as promote them. The iPod, when it was first released, was an example of a star product.

Cash Cows

A cash cow is a product with low growth and a high market share. Cash cows have a large share of a shrinking market. Although they generate a lot of cash, they do not have a long-term future. For example, DVD players were a cash cow for Sony. Eventually, DVDs are likely to be replaced by digital downloads, just like MP3s replaced CDs. Companies with cash cows need to manage them so that they continue to generate revenue to fund star products.

Question Marks or Problem Children

Did you ever hear an adult say they didn't know what to do with a child? The same question or problem arises when a product has a low share of a high-growth market. Managers classify these products as question marks or problem children. They must decide whether to invest in them and hope they become stars, or gradually eliminate them or sell them. For example, as the price of gasoline soared in 2008, many consumers purchased motorcycles and mopeds, which get better gas mileage. However, some manufacturers have a very low share of this market. These manufacturers now have to decide what they should do with these products.

Dogs

In business, it is not good to be considered a dog. A dog is a product with low growth and low market share. Dogs do not make much money and do not have a promising future. Companies often get rid of dogs. However, some companies are hesitant to classify any of their products as dogs. As a result, they keep producing products and services they shouldn't or invest in dogs in hopes they'll succeed.

The BCG matrix helps managers make resource allocation decisions once different products are classified. Depending on the product, a firm might decide on a number of different strategies for it. One strategy is to build market share for a business or product, especially a product that might become a star. Many companies invest in question marks because market share is available for them to capture. The success sequence is often used as a means to help question marks become stars. With the success sequence, money is taken from cash cows (if available) and invested into question marks in hopes of them becoming stars.

Holding market share means the company wants to keep the product's share at the same level. When a firm pursues this strategy, it only invests what it has to in order to maintain the product's market share. When a company decides to harvest a product, the firm lowers its investment in it. The goal is to try to generate short-term profits from the product regardless of the long-term impact on its survival. If a company decides to divest a product, the firm drops or sells it. That's what Procter & Gamble did in 2008 when it sold its Folgers coffee brand to Smuckers. Proctor & Gamble also sold Jif peanut butter brand to Smuckers. Many dogs are divested, but companies may also divest products because they want to focus on other brands they have in their portfolio.

As competitors enter the market, technology advances, and consumer preferences change, the position of a company's products in the BCG matrix is also likely to change. The company has to continually evaluate the situation and adjust its investments and product promotion strategies accordingly. The firm must also keep in mind that the BCG matrix is just one planning approach and that other variables can affect the success of products.

The General Electric Approach

Another portfolio planning approach that helps a business determine whether to invest in opportunities is the General Electric (GE) approach. The GE approach examines a business's strengths and the attractiveness of the industry in which it competes. As we have indicated, a business's strengths are factors internal to the company, including strong human resources capabilities (talented personnel), strong technical capabilities, and the fact that the firm holds a large share of the market. The attractiveness of an industry can include aspects such as whether there is a great deal of growth in the industry, whether the profits earned by the firms competing within it are high or low, and whether it is difficult to enter the market. For example, the automobile industry is not attractive in times of economic downturn such as the recession in 2009, so many automobile manufacturers don't want to invest more in production. They want to cut or stop spending as much as possible to improve their profitability. Hotels and airlines face similar situations.

Companies evaluate their strengths and the attractiveness of industries as high, medium, and low. The firms then determine their investment strategies based on how well the two correlate with one another. The investment options outlined in the GE approach can be compared to a traffic light. For example, if a company feels that it does not have the business strengths to compete in an industry and that the industry is not attractive, this will result in a low rating, which is comparable to a red light. In that case, the company should harvest the business (slowly reduce the investments made in it), divest the business (drop or sell it), or stop investing in it, which is what happened with many automotive manufacturers.

Although many people may think a yellow light means "speed up," it actually means caution. Companies with a medium rating on industry attractiveness and business strengths should be cautious when investing and attempt to hold the market share they have. If a company rates itself high on business strengths and the industry is very attractive (also rated high), this is comparable to a green light. In this case, the firm should invest in the business and build market share. During bad economic times, many industries are not attractive. However, when the economy improves, businesses must reevaluate opportunities.

Key Takeaway

A group of businesses is called a portfolio. Organizations that have multiple business units must decide how to allocate resources to them and decide what objectives and strategies are feasible for them. Portfolio planning approaches help firms analyze the businesses relative to each other. The BCG and GE approaches are two or the most common portfolio planning methods.

Review Questions

1. How would you classify a product that has a low market share in a growing market?

2. What does it mean to hold market share?

3. What factors are used as the basis for analyzing businesses and brands using the BCG and the GE approaches?

2.6 Discussion Questions and Activities

Discussion Questions

1. Explain how a marketing objective differs from a marketing strategy. How are they related?

2. Explain how an organization such as McDonald's can use licensing to create value for the brand.

3. How has PepsiCo employed a product development strategy?

4. Discuss how conducting a SWOT (strengths, weaknesses, opportunities, threats) analysis helps a firm (or an individual) develop its strategic plan.

5. Describe the value propositions the social networking sites YouTube and Facebook offer web users.

Activities

1. Outline a strategic plan for yourself to begin planning for a job after graduation. Include your value proposition, targeted organizations, objectives, strategies, and the internal and external factors that may affect your plans.

2. Assume you have an interview for an entry-level sales position. Write a value proposition emphasizing why you are the best candidate for the position relative to other recent college graduates.

3. A mission statement outlines an organization's purpose and answers the question of how a company defines its business. Write a mission statement for a campus organization.

4. The Web site My M&Ms allows customers to personalize M&M candies with words, faces, and colors and select from multiple packaging choices. Identify and explain the product market or market development strategies Mars pursued when it introduced personalized M&Ms.

5. Explain how changing demographics and the social and cultural environment have impacted the health care industry. Identify new venues for health care that didn't exist a decade ago. (Hint: emergency care services are available outside a hospital's emergency room today.)

6. Select an organization for which you would like to work. Look up its mission statement. What do you think the organization's objectives and strategies are? What macro and micro environmental and internal factors might affect its success?

7. Break into teams. Come up with as many real-world examples as you can of companies that pursued market penetration, market development, product development, or diversification strategies. Explain what the company did and how successful you think each strategy will be.

New Product Innovation Process

Innovation and External Forces

External factors that influence an organization's ability to innovative include such environmental elements as legal, political, social, and technological factors, as well as competition and customer demand. Understanding these opportunities and challenges will enable an organization to formulate realistic plans and aspirations for their innovation strategies (Tushman & O'Reilly III, 2002).

Competitive Factors

In deciding on an innovation strategy, vision, and objectives, organizations should first assess competitive opportunities and threats. This process includes assessing entry to new product classes or exit from current ones. Global players now compete in terms of product quality, customer service, and innovation.

Legal, Political, and Social Factors

Organizations need to assess how legal, political, and social factors will affect their ability to innovate and compete. This assessment requires an understanding of how regulation, deregulation, and privatization, as well as ecological issues and changing customer demographics will impact their ability to innovate and remain competitive. Examples include the impact of NAFTA, the reunification of Germany, and the abolition of apartheid in South Africa. External factors like these will direct or affect how organizations innovate and shift their priorities in their innovation efforts.

Technological Factors

Across industries, technological change may pose a profound opportunity or threat to an organization's innovation efforts and its competitive advantage. New industry standards and technological shifts may rapidly change a product class. This change may lead to increased competition, or "open up periods of ferment that are often threatening" to established organizations and that may create opportunities for new entrants (Tushman & O'Reilly III, 2002). Given the complexity and expense of new technologies and the nature of technological change, no single organization can control its direction and pace. Accordingly, organizations should track and monitor technological opportunities and threats as they make decisions about their innovation strategies.

Customer Demand

In this era of total quality management, organizations must understand their "internal and external customers' evolving" needs and requirements (Tushman & O'Reilly III, 2002, p. 44). This factor is compounded by globalization and changes in customers' needs, wants, and tastes.

Innovative Global Corporations

Innovative global corporations leverage knowledge from around the world. It is important for global companies to consider local tastes and preferences when developing new products. Standardization will not work with all markets or with all produce. Accordingly, local teams are in a better position to spot and recognize innovations that will satisfy such inclinations, such that new innovative ideas will come from the local subsidiary's employees, customers, suppliers, and distributors. Corporate strategy can also confer influence to the local culture's approach to innovation. For example, while Japanese companies focus more on incremental and continuous product improvements, American companies tend to focus on "home run–type" breakthroughs (Crawford & Di Benedetto, 2011, p. 359).

In addition to incremental innovation, companies need a radical approach to innovation. The term radicalness refers to an innovation's degree of differentness and newness, extending to innovations that are new to the world, the industry, or the company. Most radical innovations are new to the world (e.g., digital photography), and are very different from existing processes and products (Schilling, 2013). On the other hand, incremental innovations lie at the other end of the spectrum; they are not exceptional or particularly new, may currently exist in the industry, and may involve minor tweaks, adjustments, or changes from existing examples. A radical innovation may become an incremental innovation over time, as its underlying technology becomes more common (Schilling, 2013).

Incremental innovations that include line extensions, product improvements, and modifications may be the revenue-generators for R&D (research and development) in certain corporations, and may be foundational for subsequent radical innovations. However, they are fine as a short-term strategy only (Cooper, 2011). While radical innovation entails risk (Schilling, 2013), the disruptive technologies that sometimes result are needed for long-term profitability and survival. Only bolder, game-changing new product initiatives, larger-scope projects, and more systems-oriented solutions can fuel future growth. The best performers focus more on innovative game-changing projects (Cooper, 2011).

Stage-Gate System

A stage-gate new product development system with go/kill decision points should be implemented to avoid continued support for projects that have proven to yield negative profitability. The system capitalizes on cross-functional teams who undertake parallel tasks at each stage that aim to minimize uncertainty and reduce risk. At each stage, the cross-functional teams gather vital market, financial, and technical information to make the decision to continue with the project (go), discontinue it (kill), hold, or recycle it (Schilling, 2013). Involving customers in the development ensures that their needs are understood and that the new product will meet their expectations. The use of spirals, or continuous feedback from customers, is crucial in this system. In addition, companies should seek their suppliers' feedback to help reduce costs and ensure that they have met the required quality standard. Finally, project championing may have its risks, as it may cloud judgment about the true value of the project (Schilling, 2013, p. 238).

Screening of New Ideas: The Innovation Funnel

The innovation funnel is a screening and processing system for creative ideas. The process starts with ideation, or the gathering of creative ideas and the identification of existing and embryonic creative technologies and leading players, and ends with ideas that proceed to development (Cooper, 2011). The trigger for a new product-development system is a creative new product idea that matches technological possibilities with market needs. A new product idea, however creative, can make or break a project. While creative ideas are the feedstock for the innovation process, the best stage-gate system cannot make up for a shortage in quality ideas. A stage-gate system cannot turn a bad idea into a star—garbage in, garbage out! Accordingly, in the ideation or discovery stage of a new product development, an effective idea-generating system is vital to the successful development and launch of the product (Cooper, 2011).

One funneling method is to build the new product process around gates, or go/kill decision points. At this point, management should consider whether they are doing the project right and whether they are doing the right project. Gates allow managers of new product development to weed out weak projects and redirect resources toward higher value ones (Cooper, 2011). In open innovation (such as alliances), new tasks are built into the critical pre-development stage, including actions that involve potential partners or outsourced suppliers that will provide technological and marketing capabilities to develop and commercialize the new product. These actions include identifying early the need for partners or outsourced suppliers, placing external calls for expression of interest, choosing potential partners or suppliers and mechanisms, developing partnering strategies, handling intellectual property and legal issues with external firms, cooperatively undertaking voice-of-customer work and technical feasibility studies, cooperatively building the business case, and executing the various legal documents (Cooper, 2011).

Spirals and Voice of Customer (VoC)

Accessing voice of customer through a flexible spirals-based process is crucial, as customer feedback and revision loops are needed for the following reasons (Cooper, 2011):

· Spirals confirm new product designs early and minimize wasted time.

· Spirals prevent moving too far with incorrect requirement assumptions.

· Spirals allow for early revisions of product design and specification if needed.

· Customers do not know what they want until they see it. New product development teams should get something in front of customers quickly, use cheap early versions (protocepts), and seek fast feedback!

Failure of Newly Developed Products

Many newly developed products fail because they do not satisfy customer requirements, needs, wants, and preferences—especially in pricing and performance. New products may also fail because they take a long time to develop (Schilling, 2013), and by the time they are launched, the competition has rendered them obsolete. Accordingly, customer involvement in the generation of new ideas, or ideation, and in the approval of concepts and products in the pipeline is crucial to successful innovation and new product launch (Cooper, 2011).

References

Cooper, R. G. (2011). Winning at new products (4th ed.). New York, NY: Basic Books.

Crawford, M., & Di Benedetto, A. (2011). New product management (10th ed.). New York, NY: McGraw-Hill.

Schilling, M. (2013). Strategic management of technological innovation (4th ed.). New York, NY: McGraw Hill.

Tushman, M. L., & O'Reilly III, C. A. (2002). Winning through innovation (2nd ed.). Boston, MA: Harvard Business School Publishing.

Branding Strategy

A brand is a product or service whose dimensions differentiate it from other products or services designed to satisfy the same needs (Kotler & Keller, 2015). The American Marketing Association (AMA) defines a brand as "a name, term, sign, symbol, or design, or a combination of them, intended to identify the goods and services of one seller or group of sellers and to differentiate them from those of competitors" (AMA, 2017). Brands identify the source or maker of a product and allow consumers—either individuals or organizations—to assign responsibility for its performance to a particular manufacturer or distributor (Kotler & Keller, 2015).

AMA (2017) defines brand equity as "the value of a brand. From a consumer perspective, brand equity is based on consumer attitudes about positive brand attributes and favorable consequences of brand use."

Over time, products may become generic, showing very little differentiation (e.g., cereals), which makes branding crucial in differentiating products. Even utilitarian product choices are influenced by branding, and competition is the driving force. When competition is intense, many brands begin to tout the functional advantages of their products; me-too products and follow-the-leader strategies emerge. Imitative targeting of new product development makes product differentiation difficult to sustain as customers learn that quality and the range of features are comparable across competitors. Consequently, the only sustainable competitive advantage is brand image (Johansson, 2009), and a continuous marketing effort is needed to support the brand (product or service). As Levitt (1983) mentions, anything can be branded—even something as plain as pasta (e.g., Barilla and Buitoni).

References

AMA (2013). Marketing definition. Retrieved from www.ama.org

Johansson, J. K. (2009). Global marketing (5th ed.). New York, NY: McGraw-Hill/Irwin.

Kotler, P., & Keller, K. L. (2015). Marketing management (15th ed.). Upper Saddle River, NJ: Pearson.

Levitt, T. (1983). The globalization of markets. Harvard Business Review, 61(3), 92–12.

Marketing Principles is available under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported license without attribution as requested by the site’s original creator or licensee.

Creating Offerings

Why do buyers purchase something? Why do you own anything? Many of us own iPhones, but few of us do for the sake of owning an iPhone. We own one because it allows us to call, text, and use apps. Or we own one because we have been influenced to buy one. Shortly after the iPhone's introduction, some people undoubtedly purchased the devices because other people thought they were cool, and they wanted to be cool by owning one. Now iPhones are so ubiquitous that no one gives them a second glance. The impact that iPhones have had on our lives has been huge because the product revolutionized the way we interact with the world.

What Composes an Offering?

Learning Objectives

1. Distinguish between the three major components of an offering—product, price, and service.

2. Explain, from both a product-dominant and a service-dominant approach, the mix of components that compose different types of offerings.

3. Distinguish between technology platforms and product lines.

People buy things to meet needs. In the case of the iPhone, the need is to have better access to communicate, to look cool, or both. Offerings are products and services designed to deliver value to customers—either to fulfill their needs, satisfy their wants, or both. By the end of this text, we will understand how marketing fills those needs through the creation and delivery of offerings.

Product, Price, and Service

Most offerings consist of a product, or a tangible good people can buy, sell, and own. Purchasing a classic iPod, for example, will allow you to store up to 40,000 songs or 200 hours of video. The amount of storage is an example of a feature, or characteristic of the offering. If your playlist consists of 20,000 songs, then this feature delivers a benefit to you—the benefit of plenty of storage. However, the feature will only benefit you up to a point. For example, you won't be willing to pay more for the extra storage if you only need half that much. When a feature satisfies a need or want, then there is a benefit. Features, then, matter differently to different consumers based on each individual's needs. Remember: The value equation is different for every customer.

An offering also consists of a price, or the amount people pay to receive the offering's benefits. The price paid can consist of a one-time payment, or it can consist of something more than that. Many consumers think of a product's price as only the amount they paid; however, the true cost of owning an iPod, for example, is the cost of the device itself plus the cost of the music or videos downloaded onto it. The total cost of ownership (TCO), then, is the total amount someone pays to own, use, and eventually dispose of a product.

TCO is usually thought of as a concept businesses use to compare offerings. However, consumers also use the concept. For example, suppose you are comparing two sweaters, one that can be hand-washed and one that must be dry-cleaned. The hand-washable sweater will cost you less to own in dollars but may cost more to own in terms of your time and hassle. A smart consumer would take that into consideration. When we first introduced the personal value equation, we discussed hassle as the time and effort spent making a purchase. A TCO approach, though, would also include the time and effort related to owning the product—in this case, the time and effort to hand wash the sweater.

A service is an action that provides a buyer with an intangible benefit. A haircut is a service. When you purchase a haircut, it's not something you can hold, give to another person, or resell. Pure services are offerings that don't have any tangible characteristics associated with them. Skydiving is an example of a pure service. You are left with nothing after the jump but the memory of it (unless you buy a DVD of the event). Yes, a plane is required, and it is certainly tangible. But it isn't the product—the jump is. At times people use the term "product" to mean an offering that's either tangible or intangible. Banks, for example, often advertise specific types of loans, or financial "products," they offer consumers. Yet truly these products are financial services. The term "product" is frequently used to describe an offering of either type.

The intangibility of a service creates interesting challenges for marketers and buyers when they try to judge the relative merits of one service over another. An old riddle asks, "You enter a barbershop to get a haircut and encounter two barbers—one with a bad haircut and the other with a great haircut. Which do you choose?" The answer is the one with the bad haircut; he cut the hair of the other barber. But in many instances, judging how well a barber will do before the haircut is difficult. Thus, services can suffer from high variability in quality due to the fact that they are often created as they are received.

Services usually also require the consumer to be physically present or involved. A haircut, a night in a hotel, a flight from here to there—all require the consumer to be physically present. Consumption of the service is not separate from the creation of the service. Unlike a physical product, which can be created and purchased off a shelf, a service often (but not always) involves the consumer in its creation.

Another challenge for many services providers is that services are perishable; they can't be stored. A night at a hotel, for example, can't be saved and sold later. If it isn't sold that day, it is lost forever. A barber isn't really paid for a haircut (to use the riddle) but for time. Services have difficult management and marketing challenges because of their intangibility.

Many tangible products have an intangible service components attached to them, however. When Hewlett-Packard (HP) introduced its first piece of audio testing equipment, a key concern for buyers was the service HP could offer with it. Could a new company such as HP back up the product, should something go wrong with it? As you can probably tell, a service does not have to be consumed to be an important aspect of an offering. HP's ability to provide good after-sales service in a timely fashion was an important selling characteristic of the audio oscillator, even if buyers never had to use the service.

What services do you get when you purchase a can of soup? You might think that a can of soup is as close to a pure product devoid of services that you can get. But think for a moment about your choices in terms of how to purchase the can of soup. You can buy it at a convenience store, a grocery store like Publix, or online. Your choice of how to get it is a function of the product's intangible service benefits, such as the way you are able to shop for it.

The Product-Dominant Approach to Marketing

From the traditional product-dominant perspective of business, marketers consider products, services, and prices as three separate and distinguishable characteristics. To some extent, they are. HP could, for example, add or strip out features from a piece of testing equipment and not change its service policies or the equipment's price. The product-dominant marketing perspective has its roots in the Industrial Revolution. During this era, businesspeople focused on the development of products that could be mass produced cheaply. In other words, firms became product-oriented, meaning that they believed the best way to capture market share was to create and manufacture better products at lower prices. Marketing remained oriented that way until after World War II.

The Service-Dominant Approach to Marketing

Who determines which products are better? Customers do, of course. Thus, taking a product-oriented approach can result in marketing professionals focusing too much on the product itself and not enough on the customer or service-related factors that customers want. Most customers will compare tangible products and the prices charged for them in conjunction with the services that come with them. In other words, the complete offering is the basis of comparison. So, although a buyer will compare the price of product A to the price of product B, in the end, the prices are compared in conjunction with the other features and services of the products. The dominance of any one of these dimensions is a function of the buyer's needs.

The advantage of the service-dominant approach is that it integrates the product, price, and service dimensions of an offering. This integration helps marketers think more like their customers, which can help them add value to their firm's products. In addition to the offering itself, marketers should consider what services it takes for the customer to acquire their offerings (e.g., the need to learn about the product from a sales clerk), to enjoy them, and to dispose of them (e.g., someone to move the product out of the house and haul it away), because each of these activities create costs for their customers—either monetary costs or time and hassle costs.

Critics of the service-dominant approach argue that the product-dominant approach also integrated services (though not price). The argument is that at the core of an offering is the product, such as an iPod or iPhone. The physical product, in this case an iPhone, is the core product. Surrounding it are services and accessories, called the augmented product, that support the core product. Together, these make up the complete product. One limitation of this approach has already been mentioned; price is left out. But for many "pure" products, this conceptualization can be helpful in bundling different augmentations for different markets.

Customers are now becoming more involved in the creation of benefits. Let's go back to that pure product, Campbell's Cream of Chicken Soup. The consumer may prepare that can as a bowl of soup, but it could also be used as an ingredient in King Ranch Chicken. As far as the consumer goes, no benefit is experienced until the soup is eaten; thus, the consumer played a part in the creation of the final product when the soup was an ingredient in the King Ranch Chicken. Or suppose your school's cafeteria made King Ranch Chicken for you to consume; in that case, you both ate a product and consumed a service.

Some people argue that focusing too much on the customer can lead to too little product development or poor product development. These people believe that customers often have difficulty seeing how an innovative new technology can create benefits for them. Researchers and entrepreneurs frequently make many discoveries and then products are created as a result of those discoveries. 3M's Post-it Notes are an example. The adhesive that made it possible for Post-it Notes to stick and restick was created by a 3M scientist who was actually in the process of trying to make something else. Post-it Notes came later.

Product Levels and Product Lines

A product's technology platform is the core technology on which it is built. Take for example, the iPod, which is based on MP3 technology. In many cases, the development of a new offering is to take a technology platform and rebundle its benefits in order to create a different version of an already-existing offering. For example, in addition to the iPod Touch, Apple offers the Shuffle and the Nano. Both are based on the same core technology.

In some instances, a new offering is based on a technology platform originally designed to solve a different problem. For example, a number of products originally were designed to solve the problems facing NASA's space-traveling astronauts. Later, that technology was used to develop new types of offerings. EQyss's Micro Tek pet spray, which stops pets from scratching and biting themselves, is an example. The spray contains a trademarked formula developed by NASA to decontaminate astronauts after they return from space.

A technology platform isn't limited to tangible products. Knowledge can be a type of technology platform in a pure services environment. For example, the bioesthetic treatment model was developed to help people who suffer from TMJ, a jaw disorder that makes chewing painful. A dentist can be trained on the bioesthetic technology platform and then provide services based on it. There are, however, other ways to treat TMJ that involve other platforms, or bases of knowledge and procedures (such as surgery).

Few firms survive by selling only one product. Most firms sell several offerings designed to work together to satisfy a broad range of customers' needs and desires. A product line is group of related offerings. Product lines are created to make marketing strategies more efficient. Campbell's condensed soups, for example, are basic soups sold in cans with red labels. But Campbell's Chunky is a ready-to-eat soup sold in cans that are labeled differently. Most consumers expect there to be differences between Campbell's red-label chicken soup and Chunky chicken soup, even though they are both made by the same company.

A product line can be broad, as in the case of Campbell's condensed soup line, which consists of several dozen different flavors. Or, a product line can be narrow, as in the case of Apple's iPod line, which consists of only a few different devices. How many offerings there are in a single product line—that is, whether the product line is broad or narrow—is called line depth. When new but similar products are added to the product line, it is called a line extension. If Apple introduces a new iPhone to the iPhone family, that would be a line extension. Companies can also offer many different product lines. Line breadth (or width) is a function of how many different, or distinct, product lines a company has. For example, Campbell's has a Chunky soup line, condensed soup line, Kids' soup line, Lower Sodium soup line, and a number of nonsoup lines like Pace Picante sauces, Prego Italian sauces, and crackers. The entire assortment of products that a firm offers is called the product mix.

There are four offering levels. Consider the iPod Shuffle. There is (1) the basic offering (the device itself), (2) the offering's technology platform (the MP3 format or storage system used by the Shuffle), (3) the product line to which the Shuffle belongs (Apple's iPod line of MP3 music players), and (4) the product category to which the offering belongs (MP3 players as opposed to iPhones, for example).

Key Takeaway

Companies market offerings composed of a combination of tangible and intangible characteristics for certain prices. During the Industrial Revolution, firms focused primarily on products and not so much on customers. The service-dominant perspective to marketing integrates three different dimensions of an offering—not only the product, but also its price and the services associated with it. This perspective helps marketers think more like their customers, which helps firms add value to their offerings. An offering is based on a technology platform, which can be used to create a product line. A product line is a group of similar offerings. A product line can be deep (many offerings of a similar type) and/or broad (offerings that are very different from one another and cover a wide range of customers' needs). The entire assortment of products that a company offers is called the product mix.

Review Questions

1. How do the product-dominant and service-dominant approaches to marketing differ?

2. Do "product-dominant" and "product-oriented" mean the same thing?

3. What is the difference between a technology platform and a product line?

4. Does a product line have to be built on one technology platform?

5. What is the difference between product depth and product breadth?

Types of Consumer Offerings

Learning Objectives

1. Define the various types of offerings marketed to individual consumers.

2. Explain why a single offering might be marketed differently to different types of consumers.

Products and services can be categorized in a number of ways. We will use these categories throughout the book because they are the most commonly referred to categories by marketers and because there are marketing implications for each. Consumer offerings fall into four general categories:

· convenience offerings

· shopping offerings

· specialty offerings

· unsought offerings

In this section, we will discuss each of these categories. Keep in mind that the categories are not a function of the characteristic of the offerings themselves. Rather, they are a function of how consumers want to purchase them, which can vary from consumer to consumer. What one consumer considers a shopping good might be a convenience good to another consumer.

Convenience Offerings

Convenience offerings are products and services consumers generally don't want to put much effort into shopping for because they see little difference between competing brands. For many consumers, bread is a convenience offering. A consumer might choose the store in which to buy the bread but be willing to buy whatever brand of bread the store has available. Marketing convenience items is often limited to simply trying to get the product in as many places as possible where a purchase could occur.

Closely related to convenience offerings are impulse offerings, or items purchased without any planning. The classic example is Life Savers, originally manufactured by the Life Savers Candy Company, beginning in 1913. The company encouraged retailers and restaurants to display the candy next to their cash registers and to always give customers a nickel back as part of their change so as to encourage them to buy one additional item—a roll of Life Savers, of course!

Shopping Offerings

A shopping offering is one for which the consumer will make an effort to compare and select a brand. Consumers believe there are differences between similar shopping offerings and want to find the right one or the best price. Buyers might visit multiple retail locations or spend a considerable amount of time visiting websites and reading reviews about the product, such as the reviews found in Consumer Reports.

Consumers often care about brand names when they're deciding on shopping goods. If a store is out of a particular brand, then another brand might not do. For example, if you prefer Crest Whitening Expressions toothpaste and the store you're shopping at is out of it, you might put off buying the toothpaste until your next trip to the store. Or you might go to a different store, or buy a small tube of some other toothpaste until you can get what you want. Note that even something as simple as toothpaste can become a shopping good for someone very interested in her dental health—perhaps after she's read online product reviews or consulted with her dentist. That's why companies like Procter & Gamble, the maker of Crest, work hard to influence not only consumers but also people like dentists who can influence the sale of their products.

Specialty Offerings

Specialty offerings are highly differentiated offerings, and the brands under which they are marketed are very different across companies, too. For example, an Orange County Chopper or Iron Horse motorcycle is likely to be far different feature-wise than a Kawasaki or Suzuki motorcycle. Typically, specialty items are available only through limited channels. For example, exotic perfumes available only in exclusive outlets are considered specialty offerings. Specialty offerings are purchased less frequently than convenience offerings. Therefore, the profit margin on them tends to be greater.

Note that while marketers try to distinguish between specialty offerings, shopping offerings, and convenience offerings, it is the consumer who ultimately makes the decision. Therefore, what might be a specialty offering to one consumer may be a convenience offering to another. For example, one consumer may never go to Sport Clips or Ultra-Cuts because hair styling is seen as a specialty offering. A consumer at Sport Clips might consider it a shopping offering, while a consumer for Ultra-Cuts may view it as a convenience offering. The choice is the consumer's.

Marketing specialty goods requires building brand name recognition in the minds of consumers and educating them about your product's key differences. This is critical. For fashion goods, the only point of difference may be the logo on the product (for example, an Izod versus a Polo label). Even so, marketers spend a great deal of money and effort to try to get consumers to perceive these products differently than their competitors'.

Unsought Offerings

Unsought offerings are those that buyers do not generally want to have to shop for until they need them. Towing services and funeral services are generally considered unsought offerings. Marketing unsought items is difficult. Some organizations try to presell the offering, such as preneed sales in the funeral industry or towing insurance in the auto industry. Other companies, such as insurance companies, try to create a strong awareness among consumers so that when the need arises for these products, consumers think of their organizations first.

Key Takeaway

Convenience offerings, shopping offerings, specialty offerings, and unsought offerings are the major types of consumer offerings. Convenience offerings often include life's necessities (bread, milk, fuel, and so forth), for which there is little difference across brands. Shopping goods do vary, and many consumers develop strong preferences for some brands versus others. Specialty goods are even more exclusive. Unsought goods are a challenge for marketers because customers do not want to have to shop for them until they need them.

Review Questions

1. What are the four types of consumer offerings? How do they differ from one another?

2. Is it possible for cemetery plots or caskets to be a shopping good or a specialty good? Or are they always unsought goods?

Types of Business-to-Business (B2B) Offerings

Learning Objectives

1. Define the various types of offerings marketed to businesses.

2. Identify some of the differences with regard to how the various types of business offerings are marketed.

Just like there are different types of consumer offerings, there are different types of business-to-business (B2B) offerings as well. But unlike consumer offerings, which are categorized by how consumers shop, B2B offerings are categorized by how they are used. The primary categories of B2B offerings are as follows:

· capital equipment offerings

· raw materials offerings

· original equipment manufacturer (OEM) offerings

· maintenance, repair, and operations (MRO) offerings

· facilitating offerings

Capital Equipment Offerings

A capital equipment offering is any equipment purchased and used for more than one year and depreciated over its useful life. Machinery used in a manufacturing facility, for example, would be considered capital equipment. Professionals who market capital equipment often have to direct their communications to many people within the firms to which they are selling, because the buying decisions related to the products can be rather complex and involve many departments. From a marketing standpoint, deciding who should get what messages and how to influence the sale can be very challenging.

Raw materials offerings are materials firms offer other firms so they can make a product or provide a service. Raw materials offerings are processed only to the point required to economically distribute them. Lumber is generally considered a raw material, as is iron, nickel, copper, and other ores. If iron is turned into sheets of steel, it is called a manufactured material because it has been processed into a finished good but is not a standalone product; it still has to be incorporated into something else to be usable. Both raw and manufactured materials are then used in the manufacture of other offerings.

Raw materials are often thought of as commodities, meaning that there is little difference among them. Consequently, the competition to sell them is based on price and availability. Natuzzi is an Italian company that makes leather furniture. The wood Natuzzi buys to make its sofas is a commodity. By contrast, the leather the company uses is graded, meaning each piece of leather is rated based on quality. To some extent, the leather is still a commodity, because once a firm decides to buy a certain grade of leather, every company's leather within that grade is virtually the same.

OEM Offerings or Components

An original equipment manufacturer (OEM) is a manufacturer or assembler of a final product. An OEM purchases raw materials, manufactured materials, and component parts and puts them together to make a final product. OEM offerings or components, like an on/off switch, are components, or parts, sold by one manufacturer to another that get built into a final product without further modification. If you look at that picture of the Natuzzi couch, you may notice that it sits on metal feet. The metal feet are probably made by a manufacturer other than Natuzzi, making the feet an OEM component. Dell's hard drives installed in computer kiosks like the self-service kiosks in airports that print your boarding passes are another example of OEM components.

MRO Offerings

Maintenance, repair, and operations (MRO) offerings refer to products and services used to keep a company functioning. Janitorial supplies are MRO offerings as is hardware used to repair any part of a building or equipment. MRO items are often sold by distributors. However, you can buy many of the same products at a retail store. For example, you can buy nuts and bolts at a hardware store. A business buyer of nuts and bolts, however, will also need repair items that you don't, such as very strong solder used to weld metal. For convenience sake, the buyer would prefer to purchase multiple products from one vendor rather than driving all over town to buy them. So the distributor sends a salesperson to see the buyer. Most distributors of MRO items sell thousands of products, set up online purchasing websites for their customers, and provide a number of other services to make life easier for them.

Facilitating Offerings

Facilitating offerings include products and services that support a company's operations but are not part of the final product it sells. Marketing research services, banking and transportation services, copiers and computers, and other similar products and services fall into this category. Facilitating offerings might not be central to the buyer's business, at least not the way component parts and raw materials are. Yet to the person who is making the buying decision, these offerings can be very important. If you are a marketing manager who is selecting a vendor for marketing research or choosing an advertising agency, your choice could be critical to your own personal success. For this reason, many companies that supply facilitating offerings try to build strong relationships with their clients.

Key Takeaway

Business buyers purchase various types of offerings to make their own offerings. Some of the types of products they use are raw materials, manufactured materials, and component parts and assemblies, all of which can become part of an offering. MRO (maintenance, repair, and operations) offerings are those that keep a company's depreciable assets in working order. Facilitating offerings are products and services a company purchases to support its operations but are not part of the firm's final product.

Review Questions

1. What types of offerings do businesses buy? How do the offerings differ in terms of how they are marketed?

2. Consumer offerings can belong to different categories depending on how the buyer wants to purchase them. Is the same true for business offerings?

Branding, Labeling, and Packaging

Learning Objectives

· Understand the branding decisions firms make when they're developing new products.

· Identify the various levels of packaging for new products.

What comes to mind when someone says Coke or Nike or Microsoft? According to BusinessWeek magazine, the Coca-Cola brand is the strongest brand in the world. However, a global study of consumers sponsored by Reuters found that Apple has the best brand. What is a "brand" and what do these studies mean when they report that one brand is the strongest or the best?

Branding

We have mentioned brands periodically throughout this chapter. But what is a brand? A brand is a name, picture, design, or symbol, or combination of those items, used by a seller to identify its offerings and to differentiate them from competitors' offerings. Branding is the set of activities designed to create a brand and position it in the minds of consumers. Did you know that The Beatles started a recording studio called Apple? When Apple Computer (the iPhone company) was formed, Apple Corp., Ltd. (the Beatles' recording studio), sued Apple Computer because two companies with the same name can create confusion among consumers. This wasn't much of a problem when Apple was only selling computers, but following the release of the iPod and launch of Apple's iTunes program, a case could be made that the companies' offerings are similar enough for consumers to confuse the two companies and their products. In fact, it wasn't until very recently that the lawsuit over the name was settled, some 30 years after the initial lawsuit was filed. Nonetheless, the situation signifies how important brand names are to the companies that own them.

A successful branding strategy is one that accomplishes what Coke and Apple have done—it creates consumer recognition of what the brand (signified by its name, picture, design, symbol, and so forth) means. Consequently, when marketing professionals are considering whether a potential new offering fits a company's image, they are very concerned about whether the offering supports the organization's brand and position in the mind of the consumer. For this reason, many consider branding to be much more than how the product is packaged or labeled, and they are right. Characteristics of the offering, such as pricing and quality, have to support the brand's position. If Apple (the brand) stands for innovation, then products and services have to be innovative. But branding itself refers to strategies that are designed to create an image and position in the consumers' minds.

A brand name, like Apple, is the spoken part of a brand's identity. A brand mark is the symbol, such as Coke's wave or Apple Computer's multicolor apple (not to be confused with Apple Records' green apple), associated with a brand. Brand names and brand marks are important to companies because consumers use them to make choices. That's why it was important to sort out the Apple brand. Each company wanted to make sure that consumers were getting what they wanted and would know what each brand meant.

An important decision companies must make is under which brand a new offering will be marketed. For example, Black & Decker makes power tools for consumers under its Black & Decker brand, while tools for more serious do-it-yourselfers and professionals are under its Dewalt brand. If Black & Decker decided to add to its Dewalt line new products such as coolers, portable radios, CD players, and other accessories construction professionals might find useful at a job site, the company would be creating a brand extension. A brand extension involves utilizing an existing brand name or brand mark for a new product category.

Why would Black & Decker add these accessories to the Dewalt line? If the company did, it would be because Dewalt already has a good reputation for high-quality, long-lasting durability, and performance among construction professionals. These same professionals would trust the Dewalt brand to deliver.

One thing firms have to consider when they're branding a new offering is the degree of cannibalization that can occur across products. Cannibalization occurs when a firm's new offering eats into the sales of one of its older offerings. (Ideally, when you sell a new product, you hope that all of its sales come from your competitors' buyers or buyers that are new to the market.) A completely new offering will not result in cannibalization, whereas a line extension likely will. A brand extension will also result in some cannibalization if you sell similar products under another brand. For example, if Black & Decker already had an existing line of coolers, portable radios, and CD players when the Dewalt line of them was launched, the new Dewalt offerings might cannibalize some of the Black & Decker offerings.

Some marketers argue that cannibalization can be a good thing because it is a sign that a company is developing new and better offerings. These people believe that if you don't cannibalize your own line, then your competitors will.

Packaging Decisions

Another set of questions to consider involves the packaging on which a brand's marks and name will be prominently displayed. Sometimes the package itself is part of the brand. For example, the curvaceous shape of Coca-Cola's Coke bottle is a registered trademark. If you decide to market your beverage in a similar-shaped bottle, Coca-Cola's attorneys will have grounds to sue you.

Packaging has to fulfill a number of important functions, including the following:

· communicating the brand and its benefits

· protecting the product from damage and contamination during shipment, as well as damage and tampering once it's in retail outlets

· preventing leakage of the contents

· presenting government-required warning and information labels

Sometimes packaging can fulfill other functions, such as serving as part of an in-store display designed to promote the offering.

Primary packaging holds a single retail unit of a product. For example, a bottle of Coke, a bag of M&Ms, or a ream of printer paper (five hundred sheets) are all examples of primary packages. Primary packaging can be used to protect and promote products and get the attention of consumers. Primary packaging can also be used to demonstrate the proper use of an offering, provide instructions on how to assemble the product, or any other needed information. If warning or nutrition labels are required, they must be on the primary packaging. Primary packaging can be bundled together as well. Consumers can buy bottles of Coke sold in six-packs or cans of Coke in 12-packs, for example.

Secondary packaging holds a single wholesale unit of a product. A case of M&M bags is an example, as are cartons of reams of paper. Secondary packaging is designed more for retailers than consumers. It does not have to carry warning or nutrition labels, but is still likely to have brand marks and labels. Secondary packaging further protects the individual products during shipping.

Tertiary packaging is packaging designed specifically for shipping and efficiently handling large quantities. When a Coca-Cola bottler ships cases of Coke to a grocery store, they are stacked on pallets (wooden platforms) and then wrapped in plastic. Pallets can be easily moved by a forklift truck and can even be moved within the grocery store by a small forklift.

A product's packaging can benefit the customer beyond just protecting the offering while it's being shipped. No-spill caps, for example, can make it easier for you to use your laundry detergent or prevent spills when you're adding oil to your car's engine. And, as we have noted, secondary packaging (and also tertiary packaging) can serve as part of an in-store display, thereby adding value for your retailers.

Key Takeaway

A brand is a name, picture, design, or symbol, or combination of those items, used by a seller to identify its offerings and differentiate them from competitors' offerings. Branding is the set of activities designed to create a brand and position it relative to competing brands in the minds of consumers. An important decision companies must make is under which brand a new offering will be marketed. A brand extension involves utilizing an existing brand name or brand mark for a new product or category (line) of products. Cannibalization occurs when a company's new offering eats into the sales of one of its older offerings. It is something to be avoided in most cases, but it can also be a sign of progress because it means a company is developing new and better products. Packaging protects products from damage, contamination, leakage, and tampering, but it is also used to communicate the brand and its benefits, product warnings, and proper use.

Review Questions

1. How do brands help companies market their products?

2. What is the purpose of a brand extension?

3. Name the basic types of packaging used in marketing.

Managing the Offering

Learning Objectives

1. Understand the people involved in creating and managing offerings.

2. Recognize the differences in organizing product marketing for consumer versus B2B companies.

Managing a company's offerings presents a number of challenges. Depending on the size of the company and the breadth of the company's offerings, several positions may be needed.

A brand manager is one such position. A brand manager is the person responsible for all business decisions regarding offerings within one brand. By business decisions, we mean making decisions that affect profit and loss, which include such decisions as which offerings to include in the brand, how to position the brand in the market, pricing options, and so forth. Indeed, a brand manager is often charged with running the brand as if it were its own separate business.

A brand manager is much more likely to be found in consumer marketing companies. Typically, B2B companies do not have multiple brands, so the position is not common in the B2B environment. What you often find in a B2B company is a product manager, someone with business responsibility for a particular product or product line. Like the brand manager, the product manager must make many business decisions, such as which offerings to include, advertising selection, and so on. Companies with brand managers include Microsoft, Procter & Gamble, SC Johnson, Kraft, Target, General Mills, and ConAgra Foods. Product managers are found at Xerox, IBM, Konica-Minolta Business Solutions, Rockwell International, and many others.

The University of Georgia was the first to launch a graduate program in brand management, but the only major program now being taught in the United States is at the University of Wisconsin. The program is managed through the university's Center for Brand and Product Management. Most brand managers simply have an undergraduate degree in marketing, but it helps to have a strong background in either finance or accounting because of the profitability and volume decisions brand managers have to make. In the United Kingdom, a number of schools have undergraduate degree programs specializing in brand management, as does Seneca College in Toronto, Canada.

In some companies, a category manager has responsibility for business decisions within a broad grouping of offerings. For example, a category manager at SC Johnson may have all home cleaning products, which would mean that brands such as Pledge, Vanish, Drano, Fantastik, Windex, Scrubbing Bubbles, and Shout would be that person's responsibility. Each of those brands may be managed by a brand manager who then reports directly to the category manager.

At the retail level, a category manager at each store is responsible for more than just one manufacturer's products. The home cleaning category manager would have responsibility for offerings from SC Johnson, as well as Procter & Gamble, Colgate-Palmolive, and many other producers.

Another option is to create a market manager, who is responsible for business decisions within a market. In this case, a market can be defined as a geographic market or region; a market segment, such as a type of business; or a channel of distribution. For example, SC Johnson could have regional insect control managers. Regional market managers would make sense for insect control because weather has an influence on which bugs are a problem at any given time. For example, a southern regional manager would want more inventory of the repellent Off! in March because it is already warm and the mosquitoes are already breeding and biting in the southern United States.

In B2B markets, a market manager is more likely to have responsibility for a particular market segment, (e.g., hospital health care professionals or doctor's offices). All customers such as these (retail, wholesale, and so forth) in a particular industry compose what's called a vertical market, and the managers of these markets are called vertical market managers. B2B companies organize in this way for the following reasons:

· buying needs and processes are likely to be similar within an industry

· channels of communication are likely to be the same within an industry but different across industries.

Because magazines, websites, and trade shows are organized to serve specific industries or even specific positions within industries, B2B marketers find vertical market structures for marketing departments to be more efficient than organizing by geography.

Market managers sometimes report to brand managers or are a part of their firms' sales organizations and report to sales executives. Market managers are less likely to have as much flexibility in terms of pricing and product decisions and have no control over the communication content of marketing campaigns or marketing strategies. These managers are more likely to be tasked with implementing a product or brand manager's strategy and be responsible for their markets. Some companies have market managers but no brand managers. Instead, marketing vice presidents or other executives are responsible for the brands.

Key Takeaway

Brand managers decide what products are to be marketed and how. Other important positions include category managers, market managers, and vertical market managers. Category managers are found in consumer markets, usually in retail. Market managers can be found in both consumer markets and B2B markets. However, vertical market managers are found only in B2B markets. Some companies have market managers but no brand managers. Instead, a vice president of marketing or other executive is responsible for the brands.

Review Questions

1. What is a brand manager?

2. How do brand managers differ from category managers?

3. What is a market manager?

4. Which type of manager has the most marketing responsibility?

Discussion Questions and Activities

Discussion Questions

1. How is marketing capital equipment different from marketing MRO offerings?

2. What are the marketing implications for your company if buyers stop viewing your primary offering as a shopping good and begin considering it a convenience good? How would you respond to the change?

3. Can you market unsought goods? If so, how?

4. How does packaging add value for consumers and retailers?

5. If consumers find the most value in the services of your offering rather than the tangible product, how will perishability, intangibility, variability, and inseparability influence your marketing? Be specific for each characteristic.

6. Choose two of the different marketing jobs or positions described and compare and contrast the challenges associated with each. One position should be one you would want while the other is one you would not. Why did you pick one over the other?

7. Describe three decisions that would be made differently from a product-dominant approach when compared to a service-dominant approach. What is each decision and how would it be different?

8. When would a product orientation be useful? Why?

9. Describe an example of a core product where there are many different augmented products and the augmented products are considered very different by the consumer or user.

10. Branding is much more than labeling or packaging. Provide some examples where you believe the product did not live up to the brand. Using examples to illustrate how consistency works, discuss how the offering and the desired brand image have to be consistent.

Activities

1. Identify three television commercials designed to persuade buyers to view the products being advertised as shopping items rather than convenience items. What is similar about the strategies employed in the commercials? Do you think the commercials are successful? Why or why not?

2. Identify a product for which packaging adds value and describe how that value is added for the consumer. Identify a second brand for which the organization uses primary packaging to distinguish the brand at the point of purchase, and describe how the package contributes to the branding. Do not use brands used as examples in this text. Finally, identify a pure service brand and describe how that service is packaged.

3. Select two brands that serve the same market but are not discussed in this text. Using print advertising, screenshots from websites, and stills from commercials (use screenshots from streaming video), assemble supporting material that helps you describe what each brand stands for and how consumers view each brand. Is one brand better than the other? Why or why not?

Pricing Strategy

Pricing does not simply represent a figure on a price tag. Price has historically been negotiated between the seller and the buyer, and has traditionally been a leading determinant in deciding whether or not to buy. The idea of a single set price developed with the emergence of large retailers. With the increased use of the Internet, customers have more and better access to pricing information from different sellers, thereby forcing retailers to lower their prices. Companies have responded by offering distinctive product combinations that sell at a premium. Branding is crucial with respect to these offers (Kotler & Keller, 2015).

Pricing is complex, and any price changes require extensive research on competitors and market trends before they can be implemented. Prices inevitably change over time due to competition, changes in customer preferences, or the appearance of new and better products. Accordingly, any changes in pricing may substantially affect the ability of the other marketing mix variables to reflect product positioning in customers' minds (Marshall & Johnston, 2011).

References

Kotler, P., & Keller, K. (2015). Marketing management (15th ed.). Upper Saddle River, NJ. Pearson.

Marshall, G. W., & Johnston, M. W. (2011). Essentials of marketing management. New York, NY: McGraw-Hill.

Marketing Principles is available under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported license without attribution as requested by the site’s original creator or licensee.

Price, the Only Revenue Generator

Many people will stand in line for something free, even if it takes hours. When Chick-fil-A opens new locations, the company offers the first 100 customers a free meal every week for a year. Customers camp out to get the free meals. When KFC introduced its grilled chicken, the company put coupons good for a free piece of chicken in many Sunday newspaper magazines. So how do sellers make any money if they always offer goods and services on sale or for a special deal? Many sellers give customers something for free, hoping they'll buy other products, but a careful balance is necessary to make sure a profit is made. Are free products a good pricing strategy?

Price is the only marketing mix variable that generates revenue. All the other variables (product, communication, distribution) cost organizations money. Buyers relate the price of a product to value. They must feel they are getting value for the price paid. Pricing decisions are important. So how do organizations decide how to price their goods and services?

15.1 The Pricing Framework and a Firm's Pricing Objectives

Learning Objectives

1. Understand the factors in the pricing framework.

2. Explain the different pricing objectives organizations have to choose from.

Prices can be easily changed and easily matched by competitors. Consequently, a product's price alone might not provide the company with a sustainable competitive advantage. Nonetheless, prices can attract consumers to different retailers and businesses to different suppliers.

Organizations must remember that the prices they charge should be consistent with their offerings, promotions, and distribution strategies. In other words, it wouldn't make sense for an organization to promote a high-end, prestige product, make it available in only a limited number of stores, and then sell it for an extremely low price. The price, product, promotion (communication), and placement (distribution) of a good or service should convey a consistent image.

The Pricing Framework

Before pricing a product, an organization must determine its pricing objectives. In other words, what does the company want to accomplish with its pricing? Companies must also estimate demand for the product or service, determine the costs, and analyze all factors (e.g., competition, regulations, and economy) affecting price decisions. Then, to convey a consistent image, the organization should choose the most appropriate pricing strategy and determine policies and conditions regarding price adjustments.

The Firm's Pricing Objectives

Firms want to accomplish different things with pricing strategies. For example, one firm may want to capture market share, another may be solely focused on maximizing its profits, and another may want to be perceived as having products with prestige. Some examples of different pricing objectives include profit-oriented objectives, sales-oriented objectives, and status quo objectives.

Earning a Targeted Return on Investment (ROI)

ROI, or return on investment, is the amount of profit an organization hopes to make given the amount of assets, or money, it has tied up in a product. ROI is a common pricing objective for many firms. Companies typically set a certain percentage, such as 10 percent, for ROI in a product's first year following its launch. So, for example, if a company has $100,000 invested in a product and is expecting a 10 percent ROI, it would want the product's profit to be $10,000.

Maximizing Profits

Many companies set their prices to increase their revenues as much as possible relative to their costs. However, large revenues do not necessarily translate into higher profits. To maximize its profits, a company must also focus on cutting costs or implementing programs to encourage customer loyalty.

In weak economic markets, many companies manage to cut costs and increase their profits, even though their sales are lower. How do they do this? The Gap cut costs by doing a better job of controlling inventory. The retailer also reduced its real estate holdings to increase profits when its sales were down during an economic recession. Other firms such as Dell cut jobs to increase profits. Meanwhile, Walmart tried to lower its prices to undercut its competitors' prices to attract more customers. After it discovered that wealthier consumers who didn't usually shop at Walmart before the recession were frequenting its stores, Walmart decided to upgrade some of its offerings, improve the checkout process, and improve the appearance of some of its stores to keep these high-end customers happy and enlarge its customer base. Other firms increased their prices or cut back on their marketing and advertising expenses.

A firm has to remember, however, that prices signal value. If consumers do not perceive that a product has a high degree of value, they probably will not pay a high price. Furthermore, cutting costs cannot be a long-term strategy if a company wants to maintain its image and position in the marketplace.

Maximizing Sales

Maximizing sales involves pricing products to generate as much revenue as possible, regardless of what it does to a firm's profits. When companies are struggling financially, they sometimes try to generate cash quickly to pay debts. They do so by selling inventory or cutting prices temporarily. Such cash may be necessary to pay short-term bills, such as payroll. Maximizing sales is typically a short-term objective since profitability is not considered.

Maximizing Market Share

Some organizations try to set their prices in a way that allows them to capture a larger share of the sales in their industries. Capturing more market share doesn't necessarily mean a firm will earn higher profits, though. Nonetheless, many companies believe capturing a maximum amount of market share is necessary to survive. In other words, they believe if they remain a small competitor, they will fail. Firms in the cellular phone industry are an example. The race to be the biggest cell phone provider hurt companies like Motorola, once a leader in cell phones. Google bought Motorola in 2012 and sold it two years later to Lenovo. However, a Lenovo official said the company planned to use the Moto brand for high-end products (Cheng, 2016).

Maintaining the Status Quo

Sometimes a firm's objective may be to maintain the status quo or simply meet, or equal, its competitors' prices or keep its current prices. Airline companies are a good example. Have you ever noticed that when one airline raises or lowers its prices, others do the same? If consumers don't accept an airline's increased prices (and extra fees), other airlines may decide not to implement the extra charge and the airline charging the fee may drop it. Companies, of course, monitor their competitors' prices closely when they adopt a status quo pricing objective.

Key Takeaway

Price is the only marketing variable that generates money for a company. All the other variables (product, communication, distribution) cost organizations money. A product's price is the easiest marketing variable to change and also the easiest to copy. Before pricing a product, an organization must determine its pricing objective(s). A company can choose from pricing objectives such as maximizing profits, maximizing sales, capturing market share, achieving a target return on investment (ROI) from a product, and maintaining the status quo in terms of the price of a product relative to competing products.

Review Questions

1. What are the steps in the pricing framework?

2. In addition to profit-oriented objectives, what other types of pricing objectives do firms use?

Reference

Cheng, R. (2016, January 7). Goodbye, Moto(rola). Iconic brand name to be phased out. Retrieved from https://www.cnet.com/news/goodbye-moto-rola-iconic-brand-name-to-be-phased-out/

15.2 Factors That Affect Pricing Decisions

Learning Objectives

1. Understand the factors that affect a firm's pricing decisions.

2. Understand why companies must conduct research before setting prices in international markets.

3. Learn how to calculate the break-even point.

Having a pricing objective isn't enough. A firm also has to look at many factors before setting prices. Those factors include the offering's costs, the demand, the customers whose needs it is designed to meet, the external environment—such as the competition, the economy, and government regulations—and other aspects of the marketing mix, such as the nature of the offering, the current stage of its product life cycle, and its promotion and distribution. If a company plans to sell its products or services in international markets, research on each market must be analyzed before setting prices. Organizations must understand buyers, competitors, the economic conditions, and political regulations in other markets before they can compete successfully.

Customers

How will buyers respond? Three important factors are whether the buyers perceive the product offers value, how many buyers there are, and how sensitive they are to changes in price. In addition to gathering data on the size of markets, companies must try to determine how price-sensitive customers are. Will customers buy the product, given its price? Or will they believe the value is not equal to the cost and choose an alternative or decide they can do without the product or service? Equally important is how much buyers are willing to pay for the offering. Figuring out how consumers will respond to prices involves judgment as well as research.

Price elasticity, or people's sensitivity to price changes, affects the demand for products. Think about a pair of sweatpants with an elastic waist. You can stretch an elastic waistband in sweatpants, but it's much more difficult to stretch the waistband of a pair of dress slacks. Elasticity refers to the amount of stretch or change. For example, the waistband of sweatpants may stretch if you pull on it. Similarly, the demand for a product may change if the price changes. Imagine the price of a 12-pack of sodas changing to $1.50 a pack. People are likely to buy a lot more soda at $1.50 per 12-pack than they are at $4.50 per 12-pack. Conversely, the waistband on a pair of dress slacks remains the same (doesn't change) whether you pull on it or not. Likewise, demand for some products won't change even if the price changes. The formula for calculating the price elasticity of demand is as follows.

Price elasticity = percentage change in quantity demanded divided by percentage change in price

When consumers are sensitive to the price change of a product—that is, they buy more of it at low prices and less of it at high prices—the demand for it is price elastic. Durable goods such as TVs, stereos, and freezers are more price elastic than necessities. People are more likely to buy them when their prices drop and less likely to buy them when their prices rise. By contrast, when the demand for a product stays relatively the same and buyers are not sensitive to changes in its price, the demand is price inelastic. Demand for essential products such as many basic food and first-aid products is not as affected by price changes as demand for many nonessential goods.

The number of competing products and substitutes available affects the elasticity of demand. Whether a person considers a product a necessity or a luxury and the percentage of a person's budget allocated to different products and services also affect price elasticity. Some products, such as cigarettes, tend to be relatively price inelastic since most smokers keep purchasing them regardless of price increases and the fact that other people see cigarettes as unnecessary. Service providers, such as utility companies in markets in which they have a monopoly (only one provider), face more inelastic demand since no substitutes are available.

Competitors

How competitors price and sell their products will have a tremendous effect on a firm's pricing decisions. If you wanted to buy a certain pair of shoes, but the price was 30 percent less at one store than another, what would you do? Because companies want to establish and maintain loyal customers, they will often match their competitors' prices. Some retailers will provide an extra discount if you find the same product for less somewhere else. Similarly, if one company offers free shipping, you might discover other companies will, too. With so many products sold online, consumers can compare the prices of many merchants before making a purchase.

The availability of substitute products affects a company's pricing decisions as well. If you can find a similar pair of shoes selling for 50 percent less at a third store, would you buy them? Merchants must look at substitutes and potential entrants as well as direct competitors.

The Economy and Government Laws and Regulations

The economy also has a tremendous effect on pricing decisions. Factors in the economic environment include interest rates and unemployment levels. When the economy is weak and many people are unemployed, companies often lower prices. In international markets, currency exchange rates also affect pricing decisions.

Pricing decisions are affected by federal and state regulations. Regulations are designed to protect consumers, promote competition, and encourage ethical and fair behavior by businesses. For example, the Robinson-Patman Act limits a seller's ability to charge different customers different prices for the same products. The intent of the act is to protect small businesses from larger businesses that try to extract special discounts and deals for themselves in order to eliminate their competitors.

However, cost differences, market conditions, and competitive pricing by other suppliers can justify price differences in some situations. In other words, the practice isn't illegal under all circumstances. You have probably noticed that restaurants offer senior citizens and children discounted menus. Movie theaters also charge different people different prices based on their ages and charge different amounts based on the time of day, with matinees usually less expensive than evening shows. These price differences are legal.

Price fixing, which occurs when firms get together and agree to charge the same prices, is illegal. Usually, price fixing involves setting high prices so consumers must pay a high price regardless of where they purchase a good or service. Video systems, LCD (liquid crystal display) manufacturers, auction houses, and airlines are examples of offerings in which price fixing had existed. When a company is charged with price fixing, it is usually ordered to take some type of action to reach a settlement with buyers.

Nintendo and its distributors in the European Union were charged with price fixing and increasing the prices of hardware and software, and the company was fined $147 million (Meller, 2002). Sharp, LG, and Chungwa collaborated and fixed the prices of the LCDs used in computers, cell phones, and other electronics. Fines totaled $388 million (Reisinger, 2011). Virgin Atlantic Airways and British Airways were also involved in price fixing for their flights (Chan, 2012). Sotheby's and Christie's, two large auction houses, used price fixing to set their commissions (Vogel & Blumenthal, 2000).

One of the most famous price-fixing schemes involved Robert Crandall, the CEO of American Airlines in the early 1990s. Crandall called Howard Putnam, the CEO of Braniff Airlines, since the airlines were fierce competitors in the Dallas market. Unfortunately for Crandall, Putnam taped the conversation and turned it over to the US Department of Justice. Their conversation went like this (Jackson, Demott, & Pusey, 1983):

Crandall: "I think it's dumb—to pound—each other and neither one of us making a [expletive] dime."

Putnam: "Well…"

Crandall: "I have a suggestion for you. Raise your—fares 20 percent. I'll raise mine the next morning."

Putnam: "Robert, we—"

Crandall: "You'll make more money and I will too."

Putnam: "We can't talk about pricing."

Crandall: "Oh, [expletive] Howard. We can talk about any [expletive] thing we want to talk about."

By requiring sellers to keep a minimum price level for similar products, unfair trade laws protect smaller businesses. Unfair trade laws are state laws preventing large businesses from selling products below cost (as loss leaders) to attract customers to the store. When companies act in a predatory manner by setting low prices to drive competitors out of business, it is a predatory pricing strategy.

Similarly, bait-and-switch pricing is illegal in many states. Bait and switch, or bait advertising, occurs when a business tries to "bait," or lure in, customers with an incredibly low-priced product. Once customers take the bait, sales personnel attempt to sell them more expensive products. Sometimes the customers are told the cheaper product is no longer available.

You perhaps have seen bait-and-switch pricing tactics used to sell different electronic products or small household appliances. While bait-and-switch pricing is illegal in many states, stores can add disclaimers to their ads stating that there are no rain checks or that limited quantities are available to justify trying to get you to buy a different product. However, the advertiser must offer at least a limited quantity of the advertised product, even if it sells out quickly.

Product Costs

The costs of the product—its inputs—including the amount spent on product development, testing, and packaging required have to be considered when a pricing decision is made. So do the costs related to promotion and distribution. For example, when a new offering is launched, its promotion costs can be high because people need to be made aware that it exists. Thus, the offering's stage in the product life cycle can affect its price. Keep in mind that a product may be in a different stage of its life cycle in other markets. For example, while sales of the iPhone remain fairly constant in the United States, the Koreans felt the phone was not as good as their current phones and was somewhat obsolete. Similarly, if a company has to open brick-and-mortar storefronts to distribute and sell the offering, this, too, will have to be built into the price the firm must charge for it.

The point at which total costs equal total revenue is known as the break-even point (BEP). For a company to be profitable, a company's revenue must be greater than its total costs. If total costs exceed total revenue, the company suffers a loss.

Total costs include both fixed costs and variable costs. Fixed costs, or overhead expenses, are costs that a company must pay regardless of its level of production or level of sales. A company's fixed costs include items such as rent, leasing fees for equipment, contracted advertising costs, and insurance. As a student, you may also incur fixed costs such as the rent for an apartment. You must pay rent whether you stay there for the weekend or not. Variable costs are costs that change with a company's level of production and sales. Raw materials, labor, and commissions on units sold are examples of variable costs. You, too, have variable costs, such as gasoline or utility bills, which vary depending on use.

Consider a small company that manufactures specialty DVDs and sells them through different stores. The manufacturer's selling price (MSP) is $15, which is what the retailers pay for the DVDs. The retailers then sell the DVDs to consumers for an additional charge. The manufacturer has the following charges:

Copyright and distribution charges for the titles	$150,000
Package and label designs for the DVDs	$10,000
Advertising and promotion costs	$40,000
Reproduction of DVDs	$5 per unit
Labels and packaging	$1 per unit
Royalties	$1 per unit

In order to determine the break-even point, you must first calculate the fixed and variable costs. To make sure all costs are included, you may want to highlight the fixed costs in one color and the variable costs in another color. Then, using the formulas below, calculate how many units the manufacturer must sell to break even.

The formula for BEP is as follows:

BEP = total fixed costs (FC) divided by contribution per unit (CU)

contribution per unit = MSP minus variable costs (VC)

BEP = $200,000 divided by ($15 – $7) = $200,000 divided by $8 = 25,000 units to break even

To determine the break-even point in dollars, you simply multiply the number of units to break even by the MSP. In this case, the BEP in dollars would be 25,000 units times $15, or $375,000.

Key Takeaway

In addition to setting a pricing objective, a firm has to look at a number of factors before setting its prices. These factors include the offering's costs, the customers whose needs it is designed to meet, the external environment—such as the competition, the economy, and government regulations—and other aspects of the marketing mix, such as the nature of the offering, the stage of its product life cycle, and its promotion and distribution. In international markets, firms must look at environmental factors and customers' buying behavior in each market. For a company to be profitable, revenues must exceed total costs.

Review Questions

1. What factors do organizations consider when making price decisions?

2. How do a company's competitors affect the pricing decisions the firm will make?

3. What is the difference between fixed costs and variable costs?

References

Chan, S. P. (2012, April 19). British Airways fined £58.5M for fuel price-fixing. The Telegraph. Retrieved from http://www.telegraph.co.uk/finance/newsbysector/transport/9213267/British-Airways-fined-58.5m-for-fuel-price-fixing.html

Jackson, D. S., Demott, J. S., & Pusey, A. (1983, March 7). Dirty tricks in Dallas. Time. Retrieved from http://www.time.com/time/magazine/article/ 0,9171,953755,00.html

Meller, P. (2002, October 31). Europe fines Nintendo $147 million for price fixing. The New York Times. Retrieved from http://www.nytimes.com/2002/10/31/business/europe-fines-nintendo-147-million-for-price-fixing.html

Reisinger, D. (2011, December 7). LCD makers fined $388 million for alleged price fixing. Retrieved from https://www.cnet.com/news/lcd-makers-fined-388-million-for-alleged-price-fixing/

Vogel, C., & Blumenthal, R. (2000, September 23). Art auction houses agree to pay $512 million in price fixing case. The New York Times. Retrieved from http://www.nytimes.com/2000/09/23/business/art-auction-houses-agree-to-pay-512-million-in-price-fixing-case.html

15.3 Pricing Strategies

Learning Objectives

1. Understand introductory pricing strategies.

2. Understand the different pricing approaches that businesses use.

Once a firm has established its pricing objectives and analyzed the factors that affect how it should price a product, the company must determine the pricing strategy (or strategies) that will help it achieve those objectives. As we have indicated, firms use different pricing strategies for their offerings. And often, the strategy depends on the stage of life cycle the offerings are currently in. Products may be in different stages of their life cycle in various international markets.

Introductory Pricing Strategies

Think of products that have been introduced in the last decade and how products were priced when they first entered the market: LCD televisions, digital cameras, and many high-tech products. A skimming price strategy is when a company sets a high initial price for a product. The idea is to go after consumers who are willing to pay a high price (top of the market) and buy products early. This way, a company recoups its investment in the product faster.

The easy way to remember a skimming approach is to think of the turkey gravy at Thanksgiving. When the gravy is chilled, the fat rises to the top and is often "skimmed" off before serving. Price skimming is a pricing approach designed to skim that top part of the gravy, or the top of the market. Over time, the price of the product goes down as competitors enter the market and more consumers are willing to purchase the offering.

In contrast to a skimming approach, a penetration pricing strategy is one in which a low initial price is set. Often, competitive products are already in the market. The goal is to get as much of the market as possible to try the product.

Penetration pricing is used on many new food products, health and beauty supplies, and paper products sold in grocery stores and mass merchandise stores such as Walmart, Target, and Kmart.

Another approach companies use when they introduce a new product is everyday low prices. That is, the price initially set is the price the seller expects to charge throughout the product's life cycle.

Pricing Approaches

Companies can choose many ways to set their prices. Many stores use cost-plus pricing, in which they take the cost of the product and then add a profit to determine a price. The strategy helps ensure that a company's products' costs are covered and the firm earns a certain amount of profit. When companies add a markup, or an amount added to the cost of a product, they are using a form of cost-plus pricing. When products go on sale, companies mark down the prices, but they usually still make a profit. Potential markdowns or price reductions should be considered when deciding on a starting price.

Many pricing approaches have a psychological appeal. Odd-even pricing occurs when a company prices a product a few cents or a few dollars below the next dollar amount. For example, instead of being priced $10.00, a product will be priced at $9.99. Likewise, a $20,000 automobile might be priced at $19,998, although the product will cost more once taxes and other fees are added.

Prestige pricing occurs when a higher price is used to give an offering a high-quality image. Some stores have a quality image, and people perceive that perhaps the products from those stores are of higher quality. Many times, two different stores carry the same product, but one store prices it higher because of the store's perceived higher image. Neckties are often priced using a strategy known as price lining, or price levels. In other words, there may be only a few price levels ($25, $50, and $75) for the ties, but a large assortment of them at each level. Movies and music often use price lining. You may see a lot of movies and CDs for $15.99, $9.99, and perhaps $4.99, but you won't see a lot of different price levels.

Remember when you were in elementary school and many students bought teachers gifts before the holidays or on the last day of school. Typically, parents set an amount such as $5 or $10 for a teacher's gift. Knowing that people have certain maximum levels that they are willing to pay for gifts, some companies use demand backward pricing. They start with the price demanded by consumers (what they want to pay) and create offerings at that price. If you shop before the holidays, you might see a table of different products being sold for $5 (mugs, picture frames, ornaments) and another table of products being sold for $10 (mugs with chocolate, decorative trays, and so forth). Similarly, people have certain prices they are willing to pay for wedding gifts—say, $25, $50, $75, or $100—so stores set up displays of gifts sold at these different price levels. IKEA also sets a price for a product—which is what the company believes consumers want to pay for it—and then, working backward from the price, designs the product.

Leader pricing involves pricing one or more items low to get people into a store. The products with low prices are often on the front page of store ads and "lead" the promotion. For example, prior to Thanksgiving, grocery stores advertise turkeys and cranberry sauce at low prices. The goal is to get shoppers to buy many more items in addition to the low-priced items. Leader or low prices are legal; however, as you learned earlier, loss leaders, or items priced below cost in an effort to get people into stores, are illegal in many states.

Sealed bid pricing is the process of offering to buy or sell products at prices designated in sealed bids. Companies must submit bids by a certain time. The bids are later reviewed all at once, and the most desirable one is chosen. Sealed bids can occur on either the supplier or the buyer side. Via sealed bids, oil companies bid on land for potential drilling purposes, and the highest bidder is awarded the right to drill on the land. Similarly, consumers sometimes bid on lots to build houses. The highest bidder gets the lot. On the supplier side, contractors often bid on a job and the lowest bidder is awarded the job. The government often makes purchases based on sealed bids. Projects funded by stimulus money were awarded based on sealed bids.

Bids are also being used online. Online auction sites such as eBay give customers the chance to bid and negotiate prices with sellers until an acceptable price is agreed upon. When a buyer lists what he or she wants to buy, sellers may submit bids. This process is known as a forward auction. If the buyer not only lists what he or she wants to buy but also states how much he or she is willing to pay, a reverse auction occurs. The reverse auction is finished when at least one firm is willing to accept the buyer's price.

Going-rate pricing occurs when buyers pay the same price regardless of where they buy the product or from whom. Going-rate pricing is often used on commodity products such as wheat, gold, or silver. People perceive the individual products in markets such as these to be largely the same. Consequently, there's a "going" price for the product that all sellers receive.

Price bundling occurs when different offerings are sold together at a price that's typically lower than the total price a customer would pay by buying each offering separately. Combo meals and value meals sold at restaurants are an example. Companies such as McDonald's have promoted value meals in many different markets. Products such as shampoo and conditioner are sometimes bundled together. Automobile companies bundle product options. For example, power locks and windows are often sold together, regardless of whether customers want only one or the other. The idea behind bundling is to increase an organization's revenues.

Captive pricing is a strategy firms use when consumers must buy a given product because they are at a certain event or location or they need a particular product because no substitutes will work. Concessions at a sporting event or a movie provide examples of how captive pricing is used. Maybe you didn't pay much to attend the game, but the snacks and drinks were expensive. Similarly, if you buy a razor and must purchase specific blades for it, you have experienced captive pricing. The blades are often more expensive than the razor because customers do not have the option of choosing from another manufacturer.

Pricing products consumers use together (such as blades and razors) with different profit margins is also part of product mix pricing. A product mix includes all the products a company offers. If you want to buy an automobile, the base price might seem reasonable, but the options such as floor mats might earn the seller a much higher profit margin. While consumers can buy floor mats at stores for $30, many people pay almost $200 to get the floor mats that go with the car from the dealer.

Most people have cell phones. Are you aware of how much data you use and what it costs if you go over the limits of your phone plan? Maybe not if your plan involves two-part pricing. Two-part pricing means there are two different charges customers pay. In the case of a cell phone, a customer might pay a charge for data use, and then pay a separate charge for data above the carrier's plan threshold.

Have you ever seen an ad for a special item only to find out it is more expensive than what you recalled seeing in the ad? A company might advertise a price such as $25, but when you read the fine print, the price is really five payments of $25 for a total cost of $125. Payment pricing, or allowing customers to pay for products in installments, is a strategy that helps customers break up their payments into smaller amounts, which can make them inclined to buy higher-priced products.

Promotional pricing is a short-term tactic designed to get people into a store or to purchase more of a product. Examples of promotional pricing include back-to-school sales, rebates, extended warranties, and going-out-of-business sales. Rebates are a great strategy for companies because consumers think they're getting a great deal. But many consumers forget to request the rebate. Extended warranties have become popular for all types of products, including automobiles, appliances, electronics, and even athletic shoes. If you buy a vacuum for $35, and it has a one-year warranty from the manufacturer, does it make sense to spend an additional $15 to get another year's warranty? However, when it comes to automobiles, repairs can be expensive, so an extended warranty often pays for itself following one repair. Buyers must look at the costs and benefits and determine if the extended warranty provides value.

We discussed price discrimination, or charging different customers different prices for the same product, earlier in the chapter. In some situations, price discrimination is legal. Certain customer groups (students, children, and senior citizens, for example) are sometimes offered discounts at restaurants and events. However, the discounts must be offered to all senior citizens or all children within a certain age range, not just a few. Price discrimination is used to get more people to use a product or service. Similarly, a company might lower its prices in order to get more customers to buy an offering when business is slow. Matinees are often cheaper than movies at night; bowling might be less expensive during nonleague times.

Price Adjustments

Organizations must also decide what their policies are when it comes to making price adjustments, or changing the listed prices of their products. Some common price adjustments include quantity discounts, which involves giving customers discounts for larger purchases. Discounts for paying cash for large purchases and seasonal discounts to get rid of inventory and holiday items are other examples of price adjustments.

A company's price adjustment policies also need to outline the firm's shipping charges. Many online merchants offer free shipping on certain products, orders over a certain amount, or purchases made in a given time frame. FOB (free on board) origin and FOB delivered are two common pricing adjustments businesses use to show when the title to a product changes along with who pays the shipping charges. FOB (free on board) origin means the title changes at the origin—that is, when the product is purchased—and the buyer pays the shipping charges. FOB (free on board) destination means the title changes at the destination—that is, after the product is transported—and the seller pays the shipping charges.

Uniform-delivered pricing, also called postage-stamp pricing, means buyers pay the same shipping charges regardless of where they are located. If you mail a letter across town, the postage is the same as when you mail a letter to a different state.

An example of a trade allowance would be when a manufacturer might give a retail store an advertising allowance to advertise the manufacturer's products in local newspapers. Similarly, a manufacturer might offer a store a discount to restock the manufacturer's products on store shelves rather than having its own representatives restock the items.

Reciprocal agreements are agreements in which merchants agree to promote each other to customers. Customers who patronize a particular retailer might get a discount card to use at a certain restaurant, and customers who go to a restaurant might get a discount card to use at a specific retailer.

A promotion that's popular during weak economic times is called a bounce back. A bounce back is a promotion in which a seller gives customers discount cards or coupons after purchasing. Consumers can then use the cards and coupons on their next shopping visits. The idea is to get the customers to return to the store or online outlets later and purchase additional items. Some stores set minimum amounts that consumers have to spend to use the bounce back card.

Key Takeaway

Both external and internal factors affect pricing decisions. Companies use many pricing strategies and price adjustments. However, the price must generate enough revenues to cover costs in order for the product to be profitable. Cost-plus pricing, odd-even pricing, prestige pricing, price bundling, sealed bid pricing, going-rate pricing, and captive pricing are just a few of the strategies used. Organizations must also decide what their policies are when it comes to making price adjustments, or changing the listed prices of their products. Some companies use price adjustments as a short-term tactic to increase sales.

Review Questions

1. Explain the difference between a penetration and a skimming pricing strategy.

2. Describe how both buyers and sellers use sealed bid pricing.

3. Identify an example of each of the following: odd-even pricing, prestige pricing, price bundling, and captive pricing.

4. What is the difference between FOB origin and FOB destination when paying for shipping charges?

5. Explain how trade allowances work.

15.4 Discussion Questions and Activities

Discussion Questions

1. What is the difference between leader pricing and a loss leader?

2. Which pricing approaches do you feel work best in the long term?

3. When is price discrimination legal?

4. Which pricing strategies have you noticed when you shop?

5. What new products have you purchased in the last two years that were priced using either a penetration or a skimming approach?

Activities

1. In order to understand revenues and costs, get a two-liter bottle of soda, 10 to 20 cups, and a bucket of ice. Fill each cup with ice and then fill it with soda. Assume each cup of soda sells for at least $1 and you paid $1 for the soda and $1 for the cups. How much profit can you make?

2. Go to a fast-food restaurant for lunch. Figure out how much the price of a bundled meal is versus buying the items separately. Then decide if you think many consumers add a soda or fries because they feel like they're getting a deal.

Distribution and Supply Chain Strategy

A company uses its distribution channels to promote, sell, and deliver its products or services to end users. These channels may include wholesalers, distributors, retailers, and agents. The supply chain is a longer channel that comprises raw materials, individual components, and final products that are delivered to customers. Companies only take part of the overall value that is generated at each step of the supply chain. When a company expands downstream or upstream or acquires competitors, it is trying to gain a larger portion of the overall supply-chain value (Kotler & Keller, 2015).

It is common for a company to perceive itself as an integral unit of a value network composed of the formal and informal connections the company uses to purchase, modify, enhance, and deliver its final product to its end users. Value networks are complex and fluid, and change over time. A value network consists of the numerous other businesses the company works with vertically within its distribution channel and horizontally across other businesses that contribute to product creation and dissemination. Value networks strategically combine capabilities, allowing companies to reduce costs and maximize efficiency at every step of their supply and distribution chains, making strategic alliances crucial (Marshall & Johnston, 2011).

References

Marshall, G. W., & Johnston, M. W. (2011). Essentials of marketing management. New York, NY: McGraw-Hill.

Kotler, P., & Keller, K. (2015). Marketing management (15th ed.). Upper Saddle River, NJ. Pearson.

Marketing Principlesis available under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported license without attribution as requested by the site's original creator or licensee.

Chapter 8 Using Marketing Channels to Create Value for Customers

Sometimes when you buy a good or service, it passes straight from the producer to you. But suppose every time you purchased something, you had to contact its maker? For some offerings, such as a haircut, this would work. But what about the products at the grocery store? You couldn't begin to contact and buy from all the makers of those products. It would be an incredibly inefficient way to do business.

Fortunately, companies partner with one another, alleviating you of this burden. So, for example, instead of Procter & Gamble selling individual toothbrushes to consumers, it sells many of them to a drugstore, which then sells them to you and others.

The specific avenue a seller uses to make a finished good or service available for purchase—for example, whether you are able to buy it directly from the seller, at a store, online, from a salesperson, and so on—is referred to as the product's marketing channel (or distribution channel). All of the people and organizations that buy, resell, and promote the product "downstream" as it makes its way to you are part of the marketing channel. This chapter focuses on downstream channels.

8.1 Marketing Channels and Channel Partners

Learning Objectives

1. Explain why marketing channel decisions can result in the success or failure of products.

2. Understand how supply chains differ from marketing channels.

3. Describe the different types of organizations that work together as channel partners and what each does.

Today, marketing channel decisions are as important as the decisions companies make about the features and prices of products (Littleson, 2007). Consumers have become more demanding. They are used to getting what they want. If you can't get your product to them when, where, and how they want it, they will buy a competing product. In other words, how companies sell has become as important as what they sell (CBSNews, 2007).

The firms a company partners with to actively promote and sell a product as it travels through its marketing channel to users are called its channel members (or partners). Companies strive to choose not only the best marketing channels but also the best channel partners. A strong channel partner like Walmart can promote and sell a product that might not otherwise turn a profit for its producer. In turn, Walmart wants to work with strong channel partners to continuously provide it with products popular with consumers. By contrast, a weak channel partner can be a liability.

The simplest marketing channel consists of just two parties—a producer and a consumer. Your haircut is a good example. When you get a haircut, it travels straight from your barber or hairdresser to you. No one else owns, handles, or remarkets the haircut. However, many other products and services pass through multiple organizations before they get to you. These organizations are called intermediaries (or middlemen or resellers).

Companies partner with intermediaries not because they necessarily want to (ideally they could sell their products straight to users) but because the intermediaries can help sell the products better than companies working alone. In other words, the intermediaries have capabilities the producer needs: contact with many customers or the right customers, marketing expertise, shipping and handling capabilities, and the ability to lend the producer credit. There are four forms of utility, or value, that channels offer: time, form, place, and ownership.

Intermediaries also create efficiencies by streamlining the number of transactions an organization must make, each of which takes time and costs money.

The marketing environment is always changing, so what was a great channel or channel partner yesterday might not be today. Changes in technology, production techniques, and customers' needs mean you have to continually reevaluate marketing channels and the channel partners. Moreover, when you create a new product, you can't assume the channels used in the past are the best ones (Lancaster & Withey, 2007, p. 173). A different channel or channel partner might be better.

Consider Microsoft's digital encyclopedia, Encarta, which was first sold on CD and via online subscription in the early 1990s. Encarta nearly destroyed Encyclopedia Britannica, a firm that had dominated the print encyclopedia business for centuries. Ironically, Microsoft had actually tried to partner with Encyclopedia Britannica to use its encyclopedia information to make Encarta but was turned down.

But Encarta no longer exists. It's been put out of business by the free online encyclopedia Wikipedia. The point is that products and their marketing channels are constantly evolving. Consequently, you and your company have to be ready to evolve, too.

Marketing Channels vs. Supply Chains

In the past few decades, organizations have begun taking a more holistic look at marketing channels. Instead of looking at only the firms that sell and promote their products, they have begun looking at all the organizations that figure the process of producing, promoting, and delivering an offering to users. All these organizations are considered part of the offering's supply chain.

For instance, the supply chain includes producers of the raw materials that go into a product. If it's a food product, the supply chain extends back through the distributors all the way to the farmers who grew the ingredients and the companies from which the farmers purchased the seeds, fertilizer, or animals. A product's supply chain also includes transportation companies such as railroads that help move the product and companies that build websites for other companies. If a software maker hires a company in India to write a computer program, the Indian company is part of the partner's supply chain. These types of firms aren't considered channel partners because it's not their job to actively sell the products. Nonetheless, they contribute to a product's success or failure.

Firms are constantly monitoring their supply chains and tinkering with them. This process is called supply chain management. Supply chain management is challenging. If done well, it's practically an art.

Types of Channel Partners

To understand the types of channel partners, we will go over the common types of intermediaries. The types you hear about most frequently are wholesalers and retailers. Keep in mind, however, that the categories we discuss are just that—categories. In recent years, the lines between wholesalers, retailers, and producers have begun to blur. Microsoft is a producer of goods, but it has opened its own retail stores, much as Apple has done (Lyons, 2009, p. 27). Walmart and other large retailers now produce their own store brands and sell them to other retailers. Similarly, many producers have outsourced their manufacturing, and although they still call themselves manufacturers, they act more like wholesalers. Wherever organizations see an opportunity, they are beginning to take it, regardless of their positions in marketing channels.

Wholesalers

Wholesalers obtain large quantities of products from producers, store them, and break them down into cases and other smaller units more convenient for retailers to buy, a process called "breaking bulk." Wholesalers get their name from the fact that they resell goods "whole" to other companies without transforming the goods. If you are trying to stock a small electronics store, you probably don't want to purchase a truckload of iPods. Instead, you probably want to buy a smaller assortment of iPods as well as other merchandise. Via wholesalers, you can get the assortment of products you want in the quantities you want. Some wholesalers carry a wide range of different products. Other carry narrow ranges of products.

Most wholesalers "take title" to goods—or own them until purchased by other sellers. Wholesalers such as these assume a great deal of risk on the part of companies further down the marketing channel as a result. For example, if the iPods you plan to purchase are stolen during shipment, damaged, or become outdated because a new model has been released, the wholesaler suffers the loss—not you. Electronic products, in particular, become obsolete quickly. Think about the cell phone you owned just a couple of years ago. Would you want to have to use it today?

There are many types of wholesalers. The three basic types of wholesalers are merchant wholesalers, brokers, and manufacturers' agents.

Merchant Wholesalers

Merchant wholesalers are wholesalers that take title to the goods. They are also sometimes referred to as distributors, dealers, and jobbers. The category includes both full-service wholesalers and limited-service wholesalers. Full-service wholesalers perform a broad range of services, such as stocking inventories, operating warehouses, supplying credit to buyers, employing salespeople to assist customers, and delivering goods to customers. Maurice Sporting Goods is a large North American full-service wholesaler of hunting and fishing equipment. The firm's services include helping customers figure out which products to stock, how to price them, and how to display them (CBSNews, 2007).

Limited-service wholesalers offer fewer services to their customers but lower prices. They might not offer delivery services, extend their customers' credit, or have sales forces that actively call sellers. Cash-and-carry wholesalers are an example. Small retailers often buy from cash-and-carry wholesalers to keep their prices as low as big retailers that get large discounts because of the volumes of goods they buy.

Drop shippers are another type of limited-service wholesaler. Although drop shippers take title to the goods, they don't actually take possession of them or handle them, often because they deal with goods that are large or bulky. Instead, they earn a commission by finding sellers and passing their orders along to producers, who then ship them directly to the sellers. Mail-order wholesalers sell their products using catalogs instead of sales forces and then ship the products to buyers. Truck jobbers (or truck wholesalers) actually store products, which are often perishable (e.g., fresh fish), on their trucks. The trucks make the rounds to customers, who inspect and select the products off the trucks.

Rack jobbers sell specialty products, such as books, hosiery, and magazines that they display on their own racks in stores. Rack jobbers retain the title to the goods while the merchandise is in the stores for sale. Periodically, they take count of what's been sold and then bill the stores for those items.

Brokers

Brokers, or agents, don't purchase or take title to the products they sell. Their role is limited to negotiating sales contracts for producers. Clothing, furniture, food, and commodities such as lumber and steel are often sold by brokers. They are generally paid a commission for what they sell and are assigned to different geographical territories by the producers with whom they work. Because they have excellent industry contacts, brokers and agents are "go-to" resources for both consumers and companies trying to buy and sell products.

The most common form of agent and broker consumers encounter is in real estate. A real estate agent represents, or acts for, either the buyer or the seller. The listing agent is contacted by the homeowner who wants to sell, and puts the house on the market. The buyer also contacts an agent who shows the buyer a number of houses. If there is a house that the buyer wants to purchase, the agent calls the listing agent and the price is negotiated. In some states, the buyer's agent is a legal representative of the seller, unless a buyer's agent agreement is signed, which is something to keep in mind when you are the buyer. Agents work for brokers, who act as sort of a head agent and market the company's services while making sure that all of the legal requirements are met.

Manufacturers' Sales Offices or Branches

Manufacturers' sales offices or branches are selling units that work directly for manufacturers. These are found in business-to-business settings. For example, Konica-Minolta Business Solutions (KMBS) has a system of sales branches that sell KMBS printers and copiers directly to companies. As a consumer, it would be rare to interact directly with a manufacturer through a sales office because in those instances, such as with Apple stores and Nike stores, these are considered retail outlets.

Retailers

Retailers buy products from wholesalers, agents, or distributors and then sell them to consumers. Retailers vary by the types of products they sell, their sizes, the prices they charge, the level of service they provide consumers, and the convenience or speed they offer. You are familiar with many of these types of retailers because you have purchased products from them. We mentioned Nike and Apple as examples of companies that make and sell products directly to consumers, but in reality, Nike and Apple contract manufacturing to other companies. They may design the products, but they actually buy the finished goods from others.

Supermarkets, or grocery stores, are self-service retailers that provide a range of food products to consumers, as well as some household products. Supermarkets can be high, medium, or low range in terms of the prices they charge and the service and variety of products they offer. Whole Foods and Central Market offer a variety of products, generally at higher prices. Midrange supermarkets include Albertsons and Kroger. Aldi and Sack 'n Save are examples of supermarkets with a limited selection of products and service but low prices. Drugstores specialize in selling over-the-counter medications, prescriptions, and health and beauty products and offer services such as photo developing.

Convenience stores are miniature supermarkets. Many of them sell gasoline and are open 24 hours. Often they are located on highway corners, making it easy for consumers. Some of these stores contain fast-food franchises. Consumers pay for the convenience in the form of higher markups on products. In Europe, as well as in parts of the United States, convenience stores offer fresh meat and produce.

Specialty stores sell a certain type of product, but they usually carry a deep line of it. Zales, which sells jewelry, and Williams-Sonoma, which sells an array of kitchen and cooking-related products, are examples. The personnel who work in specialty stores are usually knowledgeable and often provide customers with a high level of service. Specialty stores vary by size. Many are small. However, in recent years, giant specialty stores called category killers have emerged. A category killer sells a high volume of a particular type of product and, in doing so, dominates the competition, or "category." Petco and PetSmart are category killers in the retail pet-products market. Best Buy is a category killer in the electronics-product market. Some category killers are struggling since shoppers are moving to the web or to discount department stores.

Department stores, by contrast, carry a variety of household and personal types of merchandise such as clothing and jewelry. Many are chain stores. The prices department stores charge range widely, as does the level of service shoppers receive. Neiman Marcus, Saks Fifth Avenue, and Nordstrom sell expensive products and offer extensive personal service. The prices department stores such as JCPenney, Sears, and Macy's charge are midrange, as is the level of service shoppers receive. Walmart, Kmart, and Target are discount department stores with cheaper goods and a limited amount of service. As mentioned earlier, these discount department stores are a threat to category killers, especially in the form of a superstore.

Superstores are oversized department stores that carry a broad array of general merchandise as well as groceries. Banks, hair and nail salons, and restaurants such as Starbucks are often located within these stores. You have probably shopped at a SuperTarget or a huge Walmart with offerings such as these. Superstores are also referred to as hypermarkets and supercenters.

Warehouse clubs are supercenters that sell products at a discount. They require people who shop with them to become members by paying an annual fee. Costco and Sam's Club are examples. Off-price retailers sell a variety of discount merchandise that consists of seconds, overruns, and the previous season's stock other stores have liquidated. Big Lots, Ross Dress for Less, and dollar stores are off-price retailers.

Outlet stores were a phenomenon for a while. These were discount retailers that operated under the brand name of a single manufacturer, selling products that couldn't be sold through normal retail channels due to mistakes made in manufacturing. Often located in rural areas but along interstate highways, these stores had lower overhead than similar stores in big cities due to lower rent and lower employee salaries. But due to the popularity of the stores, demand far outstripped the supply of mistakes. Most outlet malls are only selling first-quality products, perhaps at a discount.

Online retailers can fit into any of the previous categories; indeed, most traditional stores also have an online version. You can buy from JCPenney.com, Walmart.com, BigLots.com, and so forth. There are also stores, like O.co (formerly called Overstock.com) that operate only on the web.

Used retailers are retailers that sell used products. Online versions, like eBay and Craigslist, sell everything from used airplanes to clothing. Traditional stores with a physical presence that sell used products include Half-Priced Books and clothing consignment or furniture stores like Amelia's Attic. Note that in consignment stores, the stores do not take title to the products but only retail them for the seller.

A new type of retail store is the pop-up store. Pop-up stores are small temporary stores. They can be kiosks or temporarily occupy unused retail space. The goal is to create excitement and "buzz" for a retailer that then drives customers to their regular stores. In 2006, JCPenney created a pop-up store in Times Square for a month. Kate Coultas, a spokesperson for JCPenney, said the store got the attention of Manhattan's residents. Many hadn't been to a JCPenney in a long time. "It was a real dramatic statement," Coultas said. "It kind of had a halo effect" on the company's stores in the surrounding boroughs of New York City (Austin, 2009, p. 1C). Most commonly, though, pop-up stores are used for seasonal sales, such as a costume store before Halloween or the Hillshire Farms sausage and cheese shops you see at the mall just before Christmas.

Not all retailing goes on in stores, however. Nonstore retailing—retailing not conducted in stores—is a growing trend. Online retailing, party selling, selling to consumers via television, catalogs, and vending machines, and telemarketing are examples of nonstore retailing. These are forms of direct marketing. Companies that engage in direct marketing communicate with consumers urging them to contact their firms directly to buy products.

Key Takeaway

How a product moves from raw material to finished good to the consumer is a marketing channel, also called a supply chain. Marketing channel decisions are as important as the decisions companies make about the features and prices of products. Channel partners are firms that actively promote and sell a product as it travels through its channel to its user. Companies try to choose the best channels and channel partners to help them sell products because doing so can give them a competitive advantage.

Review Questions

1. Why are marketing channel decisions as important as pricing and product feature decisions?

2. What are the benefits of looking at all of the organizations that contribute to the production of a product versus just the organizations that sell them?

3. Why do channel partners rely on each other to sell their products and services?

4. How do companies add value to products via their marketing channels?

References

Austin, J. (2009, November 27). Pop-up stores offer long-term strategy. Fort Worth Star-Telegram.

CBSNews.com. (2007). Developing a channel strategy. Retrieved from http://www.cbsnews.com/news/developing-a-channel-strategy/

Lancaster, G., & Withey, F. (2007, February 6). Marketing fundamentals. Burlington, MA: Butterworth-Heinemann.

Littleson, R. (2007, February 6). Supply chain trends: What's in, what's out. Retrieved from http://www.manufacturing.net/articles/2007/02/supply-chain-trends-whats-in-whats-out

Lyons, D. (2009). The lost decade. Newsweek.

8.2 Typical Marketing Channels

Learning Objectives

1. Describe the basic types of channels in business-to-consumer (B2C) and business-to-business (B2B) markets.

2. Explain the advantages and challenges companies face when using multiple channels and alternate channels.

3. Explain the pros and cons of disintermediation.

4. List the channels firms can use to enter foreign markets.

The shortest marketing channel consists of two parties—a producer and a consumer. A channel such as this is a direct channel. By contrast, a channel that includes one or more intermediaries—say, a wholesaler, distributor, or broker or agent—is an indirect channel. In an indirect channel, the product passes through one or more intermediaries. That doesn't mean the producer will do no marketing directly to consumers. Levi's runs ads on TV designed to appeal directly to consumers. The makers of food products run coupon ads. However, the seller also has to focus its efforts on these intermediaries because the intermediary can help with the selling. Not everyone wants to buy Levi's online.

Notice how the channels resemble those in B2C markets, except that the products are sold to businesses and governments instead of consumers. The industrial distributors shown are firms that supply products that businesses or government departments and agencies use but don't resell. Grainger Industrial Supply, which sells tens of thousands of products, is one of the world's largest industrial distributors.

Disintermediation

You might be tempted to think middlemen, or intermediaries, are bad. If you can cut them out of the deal—a process marketing professionals call disintermediation—products can be sold more cheaply, can't they? Large retailers, including Target and Walmart, sometimes bypass middlemen. Instead, they buy their products directly from manufacturers and then store and distribute them to their own retail outlets. Walmart is even purchasing produce directly from farmers (Birchall, 2010, p. 4).

However, sometimes cutting out the middleman is desirable but not always. A wholesaler with buying power and excellent warehousing capabilities might be able to purchase, store, and deliver a product to a seller more cheaply than its producer could acting alone. Walmart doesn't need a wholesaler's buying power, but a local convenience store does. Likewise, hiring a distributor will cost a producer money. But if the distributor can help the producer sell greater quantities of a product, it can increase the producer's profits. Moreover, when you cut out the middlemen, you have to perform their functions. Maybe it's storing the product or dealing with hundreds of retailers. More than one producer has ditched its intermediaries only to rehire them later because of the hassles involved.

The trend today is toward disintermediation. The Internet has facilitated a certain amount of disintermediation by making it easier for consumers and businesses to contact one another without middlemen. The Internet has also made it easier for buyers to shop for the lowest prices on products. Today, most people book trips online without going through travel agents. People also shop for homes online rather than using real estate agents. To remain in business, resellers need to find new ways to add value to products.

However, for some products, disintermediation via the Internet doesn't work well. Insurance is an example. You can buy it online directly from companies, but many people want to buy through an agent they can talk to for advice.

Sometimes, it's impossible to cut out middlemen. Would the Coca-Cola Company want to take the time and trouble to personally sell you an individual can of Coke? No. Coke is no more capable of selling individual Cokes to people than Santa is capable of delivering toys to children around the globe. Even Dell, which initially made its mark by selling computers straight to users, now sells its products through retailers such as Best Buy as well. Dell found that to compete effectively, its products needed to be placed in stores alongside Hewlett-Packard, Acer, and other computer brands (Kraemeer & Dedrick, 2008).

Multiple Channels and Alternate Channels

Marketing channels can get a lot more complex, however. Notice how in some situations, a wholesaler will sell to brokers, who then sell to retailers and consumers. In other situations, a wholesaler will sell straight to retailers or straight to consumers. Manufacturers also sell straight to consumers, and, as we explained, sell straight to large retailers like Target.

The point is that firms can and do use multiple channels. You can buy a pair of Levi's from a retailer such as Kohl's, or you can buy a pair directly from Levi's at one of its outlet stores. You can also buy a pair from the Levi's website.

The key is understanding the target markets for your product and designing the best channel to meet the needs of customers in each. Is there a group of buyers who would purchase your product if they could shop online? Perhaps there is a group of customers interested in your product but they do not want to pay full price. The ideal way to reach these people might be with an outlet store and low prices. Each group then needs to be marketed to accordingly. Many people regularly interact with companies via numerous channels before making buying decisions.

Using multiple channels can be effective. At least one study has shown that the more marketing channels your customers use, the more loyal they are likely to be to your products (Fitzpatrick, 2005). Companies try to integrate their selling channels so users get a consistent experience. For example, QVC's TV channel, website, and mobile service—which sends alerts to customers and allows them to buy products via their cell phones—all have the same look and feel.

A company can also use a marketing channel to set itself apart. Jones Soda Co. initially placed its own funky-looking soda coolers in skate and surf shops, tattoo and piercing parlors, individual fashion stores, and national retail clothing and music stores. The company then began an up-and-down-the-street "attack," placing products in convenience and food stores. Finally, the company was able to sell its drinks to bigger companies such as Starbucks, Safeway, Target, and 7-Eleven (Jones Soda, n.d.).

Some companies find ways to increase their sales by forming strategic channel alliances with one another. Harley-Davidson has a strategic channel alliance with Best Western. You can sign up to receive points and other discounts by staying at Best Western hotels and motels (Gonzalez-Wertz, 2009). Starbucks now dispenses its beverages in some of Safeway's grocery stores. Starbucks wants grocery shoppers at Safeway craving a cup of coffee to grab one; Safeway hopes customers dropping in for a Starbucks cup of coffee will buy groceries.

International Marketing Channels

Consumer and business markets in the United States are well developed and growing slowly. However, the opportunities for growth abound in other countries. Coca-Cola, in fact, earns most of its income abroad—not in the United States. In the last decade, the company moved into China (Waldmeir, 2009, p. 10)

The question is how to enter these markets? Via what marketing channels? Some third-world countries lack good intermediary systems. In these countries, firms are on their own in terms of selling and distributing products to users. Other countries have elaborate marketing channels that must be navigated. Japan has an extensive, complicated system of intermediaries, each of which demands a cut of a company's profits. Carrefour, a global chain of hypermarkets, tried to expand to Japan but eventually left the country because its marketing channel system was so complicated.

Walmart managed to develop a presence in Japan, but only after acquiring the Japanese supermarket operator Seiyu (Boyle, 2009). Acquiring part or all of a foreign company is a common strategy for companies. It is referred to as making a direct foreign investment. However, some nations don't allow foreign companies to do business within their borders or buy local companies. The Chinese government blocked Coca-Cola from buying Huiyuan Juice, that country's largest beverage maker.

Corruption and unstable governments also make it difficult to do business in some countries. The banana company Chiquita found itself in the position of having to pay off rebels in Colombia to prevent them from seizing the banana plantations of one of its subsidiaries.

One of the easier ways of using intermediaries to expand abroad is a joint venture. A joint venture is an entity created when two parties agree to share their profits, losses, and control with one another in an economic activity they jointly undertake. The German automaker Volkswagen has struggled to penetrate Asian markets. It signed an agreement with Suzuki, the Japanese company, in an effort to challenge Toyota's dominance in Asia. But the alliance failed (Griemel, 2015).

Many joint ventures fail, particularly when they involve companies from different countries. Daimler-Chrysler, the union between the German car company and US automaker Chrysler, is one of many joint ventures that fell by the wayside. However, in some countries, such as India, it is the only way companies are allowed to do business within their borders.

An even easier way to enter markets is to simply export your products. Microsoft didn't do well with its Zune MP3 player in the United States. It subsequently redesigned the product and launched it in other countries (Bradshaw, 2009), but eventually the company decided to distribute most Zune services under Microsoft's other brands (Zune, n.d.). Companies can sell their products directly to other firms abroad, or they can hire intermediaries such as brokers and agents that specialize in international exporting to help them find potential buyers for their products.

Recall that many companies, particularly those in the United States, have expanded their operations via franchising. Franchising grants an independent operator the right to use a company's business model, name, techniques, and trademarks for a fee. McDonald's is the classic example of a franchise. Unlike Walmart, McDonald's has had no trouble in Japan, selling thousands of franchises there. The company also has thousands of franchises in Europe and other countries. There is even a McDonald's franchise in the Louvre, the prestigious museum in Paris that houses the Mona Lisa. Licensing is similar to franchising. For a fee, a firm can buy the right to use another firm's manufacturing processes, trade secrets, patents, and trademarks for a certain period.

Key Takeaway

A direct marketing channel consists of two parties—a producer and a consumer. By contrast, a channel that includes one or more intermediaries (wholesaler, distributor, or broker or agent) is an indirect channel. Firms often use multiple channels to reach more customers and increase their effectiveness. Some companies find ways to increase their sales by forming strategic channel alliances with one another. Other companies look for ways to cut out the middlemen from the channel, a process known as disintermediation. Direct foreign investment, joint ventures, exporting, franchising, and licensing are some of the channels by which firms attempt to enter foreign markets.

Review Questions

1. Why are direct marketing channels possible for some products and not others?

2. Explain the value middlemen can add to products.

3. Name some companies that have multiple marketing channels for their products. What are those channels?

4. How do marketing channels differ around the world? Why is it sometimes hard for firms to penetrate foreign markets?

References

Birchall, J. (2010, January 4). Walmart aims to cut supply chain cost. Financial Times.

Boyle, M. (2009, October 13). Walmart's painful lessons. BusinessWeek. Retrieved from http://www.businessweek.com/managing/content/oct2009/ca20091013_227022.htm

Bradshaw, T. (2009, Novciteber 16). Zune to launch outside U.S. Financial Times. Retrieved from http://www.ft.com/cms/s/0/76f98ae8-d205-11de-a0f0-00144feabdc0.html

Fitzpatrick, M. (2005, October 1). The seven myths of channel integration. Retrieved from http://chiefmarketer.com/multi_channel/myths_integration_1001 (accessed Decciteber 12, 2009).

Gonzalez-Wertz, C. (2009, February 11). Ten examples of smarter customer focus [Blog post]. Retrieved from http://museandmaven.wordpress.com/2009/02/11/10-examples-of-smarter-customer-focus

Griciteel, H. (2015, August 3). How the VW-Suzuki alliance went wrong. Retrieved from http://www.autonews.com/article/20150803/Ocite/308039944/how-the-vw-suzuki-alliance-went-wrong

Jones Soda. (n.d.). About Jones Soda. Retrieved from https://www.jonessoda.com/pages/company

Kraciteeer, K. L., & Dedrick, J. (2008). Dell computer: Organization of a global production network. Center for Research on Information Technology and Organizations, University of California, Irvine. Retrieved from http://escholarship.org/uc/itcite/89x7p4ws#page-2

Waldmeir, P. (2009, March 7). Coca-Cola in new China push. Financial Times.

Zune. In Wikipedia. Retrieved April 19, 2017 from https://en.wikipedia.org/wiki/Zune

8.3 Functions Performed by Channel Partners

Learning Objectives

1. Describe the activities performed in channels.

2. Explain which organizations perform which functions.

Different organizations in a marketing channel are responsible for different value-adding activities. The following are some of the most common functions channel members perform. However, keep in mind that "who does what" can vary, depending on what the channel members actually agree to in their contracts.

Disseminate Marketing Communications and Promote Brands

Somehow wholesalers, distributors, retailers, and consumers need to be informed—via marketing communications—that an offering exists and that there's a good reason to buy it. Sometimes, a push strategy is used to help marketing channels accomplish this. A push strategy is one in which a manufacturer convinces wholesalers, distributors, or retailers to sell its products. Consumers are informed via advertising and other promotions that the product is available for sale, but the main focus is to sell to intermediaries.

The problem with a push strategy is that it doesn't focus on the needs of the actual users of the products. Coca-Cola used a push strategy for years before realizing that instead of focusing on moving beverages through a retailer's back door and into a warehouse, it needed to help the retailer sell to shoppers through the retailer's front door (Isdell, 2006).

College textbook publishers are in a similar position. Traditionally, they have concentrated their selling efforts on professors and bookstore managers. (Has a textbook company ever asked you what you want out of a textbook?) But the price of textbooks is climbing and students are purchasing fewer of them. Like Coca-Cola, textbook publishers are probably going to have to rethink their sales and marketing channel strategies (Blumenstyk, 2009).

By contrast, a pull strategy focuses on creating demand for a product among consumers so that businesses agree to sell the product. The pharmaceutical industry uses both pull and push strategies. Pharmaceutical companies promote their drugs to pharmacies and doctors, but they now also run ads designed to persuade individual consumers to ask their physicians about drugs that might benefit them.

In many cases, two or more organizations in a channel jointly promote a product to retailers, purchasing agents, and consumers, and work out which organization is responsible for what type of communication to whom. For example, the ads from Target, Walmart, and other retailers you see in the paper on Sunday are often a joint effort between manufacturers and the retailer. Coupons are another joint form of promotion even when offered directly by the manufacturer—joint in the sense that the retailer still has to accept the coupon and process it.

Sorting and Regrouping Products

Many businesses don't want to receive huge quantities of a product. One of the functions of wholesalers and distributors is to break down large quantities of products into smaller units and provide an assortment of products.

For example, cranberry farmers have large crops to sell. You don't want to buy large amounts of cranberries, make your own juice or cranberry sauce, or dry them into craisins for salads. So the farmers sell their produce to a co-op, which sorts the berries by size; large ones become craisins while others are destined to become either juice or sauce, depending on their liquid content. Those are then sold to the juice and sauce producers.

Storing and Managing Inventory

If a channel member has run out of a product when a customer wants to buy it, the result is often a lost sale. That's why most channel members stock, or "carry," reserve inventory. However, storing products is not free. Warehouses cost money to build or rent and heat and cool; employees have to be paid to stock shelves, pick products, and ship them. Some companies, including Walmart, put their suppliers in charge of their inventory. The suppliers have access to Walmart's inventory levels and ship products when and where the retailer's stores need them.

Storing and managing inventory is not just a function provided for retailers, though. Storage also involves storing commodities such as grain prior to processing. Gigantic grain elevators store corn, wheat, and other grains until processors like Oroweat need them. You can buy fresh bread every day because the wheat was stored first at a grain elevator until it was needed.

Distributing Products

Physical goods that travel within a channel need to be moved from one member to another and sometimes back again. Some large wholesalers, distributors, and retailers own their own fleets of trucks for this purpose. In other cases, they hire third-party transportation providers—trucking companies, railroads—to move their products.

Being able to track merchandise like you can track a FedEx package is important to channel partners. They want to know where their products are and what shape they are in. Losing inventory or having it damaged or spoiled can wreak profits. So can not getting products on time or being able to get them at all when your competitors can.

Assume Ownership Risk and Extend Credit

If products are damaged during transit, one of the first questions is who owned the product at the time. In other words, who suffers the loss? Generally, no one channel member assumes all of the ownership risk in a channel. Instead, it is distributed among channel members, depending on the contracts they have with one another and their free on board provisions. A free on board (FOB) provision designates who is responsible for what shipping costs and who owns the title to the goods and when. However, the type of product, the demand for it, marketing conditions, and the clout of the various organizations in its marketing channel can affect the contract terms for channel members. Some companies try to wait as long as possible to take ownership of products so they don't have to store them. During the economic downturn in 2008-2009, many channel members tried to hold as little inventory as possible for fear it would go unsold or become obsolete (Jorgensen, 2009, p. 60).

Share Marketing and Other Information

Each of the channel members has information about the demand for products, trends, inventory levels, and what the competition is doing. The information is valuable and can be doubly valuable if channel partners trust one another and share it. More information can help each firm in the marketing channel perform its functions better and overcome competitive obstacles (Frazier, Maltz, Kersi, Antia, & Rindfleisch, 2009).

That said, confidentiality is a huge issue among supply chain partners because they share so much information, such as sales and inventory data. For example, a salesperson who sells Tide laundry detergent for Procter & Gamble will have a good idea of how many units of Tide Walmart and Target are selling. However, it would be unethical for the salesperson to share Walmart's numbers with Target or Target's numbers with Walmart. Many business buyers require their channel partners to sign nondisclosure agreements or make the agreements part of purchasing contracts. A nondisclosure agreement (NDA) is a contract that specifies what information is proprietary, or owned by the partner, and how, if at all, the partner can use that information.

Key Takeaway

Different organizations in a marketing channel are responsible for different value-adding activities. These activities include disseminating marketing communications and promoting brands, sorting and regrouping products, storing and managing inventory, distributing products, assuming the risk of products, and sharing information.

Review Questions

1. Explain the difference between a pull and a push strategy when it comes to marketing communications.

2. Why is taking ownership of products an important marketing channel function?

3. Which firms manage inventory in marketing channels?

References

Blumenstyk, G. (2009, June 29). Kaplan U.'s catchy ad provokes a question: Do colleges serve today's students? Chronicle of Higher Education. Retrieved from http://chronicle.com/article/Kaplan-Us-Question-Do/46956

Frazier, G. L., Maltz, E., Kersi, D., Antia, D., & Rindfleisch, A. (2009, July 1). Distributor sharing of strategic information with suppliers. Journal of Marketing. Retrieved from http://www.atypon-link.com/AMA/doi/abs/10.1509/jmkg.73.4.31?cookieSet=1&journalCode=jmkg

Isdell, E. N. (2006, September 1). Bottling success. Retrieved from http://www.packaging-gateway.com/features/feature738/

Jorgensen, B. (2009, April 23). Distributors' services help keep customers afloat. EDN 54(8), 60.

8.4 Marketing Channel Strategies

Learning Objectives

1. Describe the factors that affect a firm's channel decisions.

2. Explain how intensive, exclusive, and selective distribution differ from one another.

3. Explain why some products are better suited to some distribution strategies than others.

Channel Selection Factors

Selecting the best marketing channel is critical because it can mean the success or failure of a product. One of the reasons the Internet has been so successful as a marketing channel is because customers get to make some of the channel decisions. They can shop virtually for any product in the world when and where they want to, as long as they can connect to the web. They can also choose how the product is shipped.

Type of Customer

The Internet isn't necessarily the best channel for every product, however. For example, do you want to closely examine the fruits and vegetables you buy to make sure they are ripe enough or not overripe? Then, online grocery shopping might not be for you. Clearly, how your customers want to buy products will have an impact on the channel you select. In fact, it should be the prime consideration.

First of all, are you selling to a consumer or a business customer? Generally, these two groups want to be sold to differently. Most consumers are willing to go to a grocery or convenience store to purchase toilet paper. The manager of a hospital trying to replenish its supplies would not. The hospital manager would also be buying a lot more toilet paper than an individual consumer and would expect to be called upon by a distributor, but perhaps only semiregularly. Thereafter, the manager might want the toilet paper delivered regularly and billed to the hospital via automatic systems. Likewise, when businesses buy expensive products such as machinery and computers or products that have to be customized, they generally expect to be sold to personally via salespeople. And often they expect special payment terms.

Type of Product

The type of product you're selling will also affect marketing channel choices. Perishable products often have to be sold through shorter marketing channels than products with longer shelf lives. For example, a yellowfin tuna bound for the sushi market will likely be flown overnight to its destination and handled by few intermediaries. By contrast, canned tuna can be shipped by "slow boat" and handled by more intermediaries. Valuable and fragile products also tend to have shorter marketing channels. Automakers generally sell their cars to car dealers (retailers) rather than through wholesalers. The makers of corporate jets often sell them straight to corporations, which demand they be customized.

Channel Partner Capabilities

Your ability versus the ability of other types of organizations that operate in marketing channels can affect channel choices. If you are a massage therapist, you are capable of delivering your product straight to the client. If you produce downloadable products such as digital books or recordings, you can sell straight to customers on the Internet. Hypnotic World, a UK producer of self-hypnosis recordings, is such a company. If you want to stop smoking or lose weight, you can pay for and download a recording at its Internet site.

But suppose you've created a great personal gadget—something that's tangible, or physical. You've managed to sell it via two channels—on TV (via the Home Shopping Network, perhaps) and on the web. Now you want to get the product into retail stores such as Target, Walgreens, and Bed Bath & Beyond. If you can get the product into these stores, you can increase your sales exponentially. In this case, you might want to contract with an intermediary—perhaps an agent or a distributor who will convince the corporate buyers of those stores to carry your product.

The Business Environment and Technology

The general business environment, such as the economy, can also affect the marketing channels for products. For example, think about what happens when the value of the dollar declines. When the dollar falls, products imported from other countries cost more to buy relative to products produced and sold in the United States. Products "made in China" become less attractive because they have gotten more expensive. As a result, some companies then look closer to home for their products and channel partners.

Technological changes affect marketing channels, too. The Internet has changed how products are bought and sold. Many companies like selling products on the Internet as much as consumers like buying them. An Internet sales channel gives companies more control over how their products are sold and at what prices than if they leave the job to another channel partner such as a retailer. Plus, a company selling on the Internet has a digital footprint, or record, of what shoppers look at, or click on, at its site. As a result, it can recommend products they appear to be interested in and target them with special offers and even prices (Food Channel, 2008).

Some sites let customers tailor products to their liking. On the Domino's website, you can pick pizza ingredients and then watch them as they fall onto a virtual pizza. The site then lets you know who is baking your pizza, how long it's taking to cook, and who's delivering it. Even though interaction is digital, it somehow feels more personal than a basic phone order. Developing customer relationships is what today's marketing is about. The Internet is helping companies do this.

Competing Products' Marketing Channels

How your competitors sell their products can also affect your marketing channels. You don't always have to choose the channels your competitors rely on, though. Netflix turned the video rental business on its head by coming up with a new marketing channel that better meets the needs of many consumers. Beginning with direct mail and then moving to Internet delivery, Netflix (along with competitors) may end up revolutionizing the way television is watched. With the exception of sports and other live events, television will move to an "on-demand" model, where you will watch what you want when you want, not when it is broadcast. Along the way, though, Netflix (and Redbox, the video vending machine) has already virtually eliminated DVD rental through stores. Maybelline and L'Oréal products are sold primarily in retail stores. However, Mary Kay and Avon use salespeople to personally sell their products to consumers.

Factors That Affect a Product's Intensity of Distribution

Firms that choose an intensive distribution strategy try to sell their products in many outlets. Intensive distribution strategies are often used for convenience offerings—products customers purchase on the spot. Soft drinks and newspapers are an example. You see them sold in different places. Redbox, which rents DVDs out of vending machines, has made headway using an intensive distribution strategy: the machines are located in fast-food restaurants, grocery stores, and other places people go frequently.

By contrast, selective distribution involves selling products at select outlets in specific locations. For instance, Sony televisions can be purchased at a number of outlets such as Best Buy or Walmart, but the same models are generally not sold at all the outlets. The lowest-priced TVs are at Walmart, but the better Sony models are more expensive and found in stores like Best Buy or specialty electronics stores. By selling different models with different price points at different outlets, a manufacturer can appeal to different target markets. You don't expect, for example, to find the highest-priced products in Walmart.

Exclusive distribution involves selling products through one or very few outlets. Most students often think exclusive means high-priced, but that's not always the case. Exclusive simply means limiting distribution to only one outlet in any area, and can be a strategic decision based on applying the scarcity principle to creating demand. For instance, supermodel Cindy Crawford's line of furniture is sold exclusively at the furniture company Rooms To Go. Designer Michael Graves has a line of products sold exclusively at Target. To purchase those items, you need to go to one of those retailers. In these instances, retailers are teaming up with these brands in order to create a sense of quality based on scarcity, a sense of quality that will not only apply to the brand but to the store.

TV series are distributed exclusively. In this instance, the choice isn't so much about applying the scarcity principle as it is about controlling risk. A company that produces a TV series will sign an exclusive deal with a network such as ABC, CBS, or Showtime, and the series will initially appear only on that network. Later, reruns of the shows are often distributed selectively to other networks. That initial exclusive run, however, is intended to protect the network's investment by giving the network sole rights to broadcast the show.

To control the image of their products and the prices at which they are sold, the makers of upscale products often prefer to distribute their products more exclusively. Expensive perfumes and designer purses are an example. During the economic downturn of 2008-2009, the makers of some of these products were disappointed to see retailers had slashed the products' prices, "cheapening" their prestigious brands.

Distributing a product exclusively to a limited number of organizations under strict terms can help prevent a company's brand from deteriorating, or losing value. It can also prevent products from being sold cheaply in gray markets. A gray market is a market in which a producer hasn't authorized its products to be sold (Burrows, 2008). Recognize, though, that the choice to distribute intensively, selectively, or exclusively is a strategic decision based on many factors such as the nature of the brand, the types and number of competitors, and the availability of retail choices.

Key Takeaway

Selecting the best marketing channel is critical because it can mean the success or failure of a product. The type of customer you're selling to will have an impact on the channel selected. In fact, this should be the prime consideration. The type of product, the organization's capabilities versus those of other channel members, the way competing products are marketed, and changes in the business environment and technology can also affect marketing channel decisions. Various factors affect a company's decisions about the intensity of a product's distribution. An intensive distribution strategy involves selling a product in as many outlets as possible. Selective distribution involves selling a product at select outlets in specific locations. Exclusive distribution involves selling a product through one or very few outlets.

Review Questions

1. Why are good channel decisions critical to a product's success?

2. Name the factors that affect channel-selection decisions.

3. Which kinds of products are more likely to be distributed using exclusive marketing strategies?

References

Burrows, P. (2008, February 12). Inside the iPhone gray market. BusinessWeek. Retrieved from http://www.businessweek.com/technology/content/feb2008/tc20080211_152894.htm

Food Channel. (2008, May 21). Pizza Hut's online ordering called "virtual waiter." Retrieved from http://www.foodchannel.com/stories/421-pizza-hut-s-online-ordering-called-virtual-waiter

8.5 Channel Dynamics

Learning Objectives

1. Explain what channel power is and the types of firms that wield it.

2. Describe the types of conflicts that can occur in marketing channels.

3. Describe the ways in which channel members achieve cooperation with one another.

Channel Power

Strong channel partners often wield what's called channel power and are referred to as channel leaders, or channel captains. In the past, big manufacturers like Procter & Gamble and Dell were often channel captains. But that is changing. More often, big retailers like Walmart and Target are commanding more channel power. They have millions of customers and are bombarded with products wholesalers and manufacturers want them to sell. As a result, these retailers increasingly are able to call the shots. In other words, they get what they want.

Category killers are in a similar position. Consumers are gaining marketing channel power, too. Regardless of what one manufacturer produces or what a local retailer has available, you can use the Internet to find what you want at the best price available and have it delivered when, where, and how you want.

Channel Conflict

A dispute among channel members is called a channel conflict. Channel conflicts are common. Part of the reason for this is that each channel member has its own goals, which are unlike those of any other channel member. The relationship among them is not unlike the relationship between you and your boss. Both of you want to serve your organization's customers well. However, your goals are different. Your boss might want you to work on the weekend, but you might not want to because you need to study for a Monday test.

All channel members want to have low inventory levels but immediate access to more products. Who should bear the cost of holding the inventory? What if consumers don't purchase the products? Can they be returned to other channel members, or is the organization in possession of the products responsible for disposing of them? Channel members try to spell out such details in their contracts.

No matter how "airtight" the contracts are, there will still be points of contention among channel members. Channel members are constantly asking their partners, "What have you done (or not done) for me lately?" Wholesalers and retailers frequently lament that the manufacturers aren't doing more to promote products—distributing coupons, running TV ads—so they will move off shelves more quickly. Meanwhile, manufacturers want to know why wholesalers aren't selling their products faster and why retailers are placing them at the bottom of shelves where they are hard to see. Apple opened its own retail stores around the country, in part because it didn't like how its products were being displayed and sold in other companies' stores.

Channel conflicts can also occur when manufacturers sell their products online. When they do, wholesalers and retailers often feel like they are competing for the same customers when they shouldn't have to. Likewise, manufacturers often feel slighted when retailers dedicate more shelf space to their own store brands. Store brands are products retailers produce themselves or pay manufacturers to produce for them. Dr. Thunder is Walmart's store-brand equivalent of Dr. Pepper, for example. Because a retailer doesn't have to promote its store brands to get them on its own shelves like a "regular" manufacturer would, store brands are often priced more cheaply. And some retailers sell their store brands to other retailers, creating competition for manufacturers.

Vertical vs. Horizontal Conflict

The conflicts we've described so far are examples of vertical conflict. A vertical conflict is conflict that occurs between two different types of members in a channel—say, a manufacturer, an agent, a wholesaler, or a retailer. By contrast, a horizontal conflict is conflict that occurs between organizations of the same type—say, two manufacturers that each want a powerful wholesaler to carry only its products.

Horizontal conflict can be healthy because it's competition-driven. But it can create problems. In 2005, Walmart experienced a horizontal conflict among its landline telephone suppliers. The suppliers were in the middle of a price war and cutting the prices to all the retail stores they sold to. Walmart wasn't selling any additional phones due to the price cuts. It was just selling them for less and making less of a profit on them (Hitt, Black, & Porter, 2009).

Channel leaders like Walmart usually have a great deal of say when it comes to how channel conflicts are handled, which is to say that they usually get what they want. But even the most powerful channel leaders strive for cooperation. A manufacturer with channel power still needs good retailers to sell its products; a retailer with channel power still needs good suppliers from which to buy products. One member of a channel can't squeeze all the profits out of the other channel members and still hope to function well. Moreover, because each of the channel partners is responsible for promoting a product through its channel, to some extent they are all in the same situation. Each one of them has a vested interest in promoting the product, and the success or failure of any one of them can affect the others.

In the case of Walmart and its telephone suppliers, because the different brands of landline telephones were so similar, Walmart decided it could consolidate and use fewer suppliers. It then divided its phone products into market segments—inexpensive phones with basic functions, midpriced phones with more features, and high-priced phones with many features. The suppliers chosen were asked to provide products for one of the three segments. This gave Walmart's customers the variety they sought. And because the suppliers selected were able to sell more phones and compete for different types of customers, they stopped undercutting each other's prices (Hitt, Black, & Porter, 2009).

One type of horizontal conflict that is much more difficult to manage is dumping, or the practice of selling a large quantity of goods at a price too low to be economically justifiable in another country. Typically, dumping can be made possible by government subsidies that allow the company to compete on the basis of price against other international competitors who have to operate without government support, but dumping can also occur due to other factors. One goal of dumping is to drive competitors out of a market, then raise the price. Chinese garlic producers were accused of this in the early 2000s, and when garlic prices soared due to problems in China, other countries' producers were unable to cover the demand. US catfish farmers have accused China of the same strategy. While there are global economic agreements that prohibit dumping and specify penalties when it occurs, the process can take so long to right the situation that producers have already left the business.

Achieving Channel Cooperation Ethically

What if you're not Walmart or a channel member with a great deal of power? How do you build relationships with channel partners and get them to cooperate? One way is by emphasizing the benefits of working with your firm. For example, if you are a seller whose product and brand name are in demand, you want to point out how being one of its "authorized sellers" can boost a retailer's traffic and revenues.

Often, companies produce informational materials and case studies showing their partners how they can help boost sales volumes and profits. Channel partners also want to feel assured that the products are genuine and not knockoffs, and that there will be a steady supply. Your goal is to show channel partners that you understand issues such as these and help them generate business. Also, sometimes retailers have to convince the makers of products to do business with them instead of the other way around.

Producing marketing and promotional materials their channel partners can use for sales purposes can also facilitate cooperation among companies. In-store displays, brochures, banners, photos for websites, and advertisements the partners can customize with their own logos and company information are examples.

Educating your channel members' sales representatives is an important part of facilitating cooperation, especially when you're launching a new product. The reps need to be provided with training and marketing materials in advance of the launch, so their activities are coordinated with yours.

In addition, companies run sales contests to encourage their channel partners' sales forces to sell what they have to offer. Offering your channel partners certain monetary incentives, such as discounts for selling your product, can help, too.

What shouldn't you do when it comes to your channel partners? Take them for granted, says John Addison, the author of the book Revenue Rocket: New Strategies for Selling with Partners. Addison suggests creating a dialogue with them via one-on-one discussions and surveys and developing "partner advisory councils" to better understand their needs.

You also don't want to "stuff the channel," says Addison. Stuffing the channel occurs when, in order to meet its sales numbers, a company offers its channel partners deep discounts and unlimited returns to buy a lot of a product. The problem is that such a strategy can lead to a buildup of inventory that gets steeply discounted and dumped on the market and sometimes on gray markets. This can affect people's perceptions of the product and its brand name. And what happens to any unsold inventory? It gets returned back up in the channel in the next accounting period, taking a toll on the "stuffers'" sales numbers. Finally, you don't want to risk breaking the law or engage in unfair business practices when dealing with your channel partners (Addison, 2003).

We have already discussed confidentiality issues. Another issue channel partners sometimes encounter relates to resale price maintenance agreements. A resale price maintenance agreement is an agreement whereby a producer of a product restricts the price a retailer can charge.

The producers of upscale products often want retailers to sign resale price maintenance agreements because they don't want the retailers to deeply discount their products. Doing so would "cheapen" their brands, producers believe. Producers also contend that resale price maintenance agreements prevent price wars from breaking out among their retailers, which can lead to the deterioration of prices for all of a channel's members.

Both large companies and small retail outlets have found themselves in court as a result of price maintenance agreements. Although the US Supreme Court hasn't ruled that all price maintenance agreements are illegal, some states have outlawed them on the grounds that they stifle competition. In some countries, such as the United Kingdom, they are banned altogether. The safest bet for a manufacturer is to provide a "suggested retail price" to its channel partners.

Channel Integration: Vertical and Horizontal Marketing Systems

Another way to foster cooperation in a channel is to establish a vertical marketing system. In a vertical marketing system, channel members formally agree to closely cooperate. A vertical marketing system can also be created by one channel member taking over the functions of another member; this is a form of disintermediation known as vertical integration.

Procter & Gamble (P&G) has traditionally been a manufacturer of household products, not a retailer. But the company's long-term strategy is to compete in every personal-care channel, including salons, where the men's business is underdeveloped. In 2009, P&G purchased The Art of Shaving, a seller of pricey men's shaving products located in upscale shopping malls (Neff, 2009).

Vertical integration can be forward, or downstream, as in the case of P&G just described. Backward integration occurs when a company moves upstream in the supply chain—that is, toward the beginning. An example occurred when Walmart bought McLane, a grocery warehousing and distribution company. As much as physical facilities, Walmart also wanted McLane's operating knowledge in order to improve its own logistics.

Franchises are another type of vertical marketing system. They are used not only to lessen channel conflicts but also to penetrate markets. Recall that a franchise gives a person or group the right to market a company's goods or services within a certain territory or location (Daszkowski, 2009). McDonald's sells meat, bread, ice cream, and other products to its franchises, along with the right to own and operate the stores. And each of the owners of the stores signs a contract with McDonald's agreeing to do business in a certain way.

By contrast, in a conventional marketing system, all the members operate independently. If the sale or the purchase of a product seems like a good deal at the time, an organization pursues it. But there is no expectation among the channel members that they have to work with one another in the future.

A horizontal marketing system is one in which two companies at the same channel level—say, two manufacturers, two wholesalers, or two retailers—agree to cooperate with another to sell their products or to make the most of their marketing opportunities, and is sometimes called horizontal integration. The Internet phone service Skype and the mobile-phone maker Nokia created a horizontal marketing system by teaming up to put Skype's service on Nokia's phones (Gelles, 2009). Skype hoped it will reach a new market (mobile phone users) this way. And Nokia hoped to sell its phones to people who like to use Skype on their personal computers (PCs).

Key Takeaway

Channel partners that wield channel power are referred to as channel leaders. A dispute among channel members is called a channel conflict. A vertical conflict is one that occurs between two different types of members in a channel. By contrast, a horizontal conflict is one that occurs between organizations of the same type. Channel leaders are often in the best position to resolve channel conflicts. Vertical and horizontal marketing systems can help foster channel cooperation, as can creating marketing programs to help a channel's members all generate greater revenues and profits.

Review Questions

1. What gives some organizations more channel power than others?

2. Why do channel conflicts occur?

3. Which organization(s) has the most power to resolve channel conflicts?

4. How can setting up vertical and horizontal marketing systems prevent channel conflicts?

References

Addison, J. (2003). Revenue rocket: New strategies for selling with partners. In IrieAuctions.com. Ten mistakes to avoid with channel partners. Retrieved from http://www.irieauctions.com/Alternate_Distribution_Channel.htm

Daszkowski, D. (2009). What is a franchise? Retrieved from http://franchises.about.com/od/franchisebasics/a/what-franchises.htm

Gelles, D. (2009, March 31). Skype expands mobile push. Financial Times.

Hitt, M., Black, S., & Porter, L. (2009). Chapter 5.40: The ability to influence a channel partner's goals and efforts Management (2nd ed.). Upper Saddle River, NJ: Prentice Hall, 2009.

Neff, J. (2009, June 8). P&G acquires the Upscale Art of Shaving retail chain," Advertising Age, 80(2118), 2.

8.6 Discussion Questions and Activities

Discussion Questions

1. What's the ideal number of marketing channels a firm should have?

2. Is a pull strategy superior in all markets?

3. Is selling power the only source of channel power? From what other sources could an organization derive channel power?

4. The chapter listed a number of scenarios that can cause channel conflicts. What other factors can you think of that might cause channel conflicts?

5. Amazon.com has carved out a unique niche for itself as an intermediary. Amazon sells products on behalf of manufacturers such as Dell, Sony, and Calvin Klein, as well as retailers such as Macy's and Toys"R"Us. How should Amazon be categorized? As a retailer, wholesaler, or broker?

6. What are some reasons for backward integration? For forward integration? Does such integration always benefit the consumer?

7. Direct-to-consumer advertising for pharmaceuticals is a pull strategy, designed to get consumers to ask their doctors to prescribe certain medications. What are the pros and cons of this practice? Are these always pros and cons to pull strategies? What might the pros and cons be for push strategies involving pharmaceuticals?

8. What are some brands that you think use selective or exclusive channels? How does channel choice, in those instances, influence consumer perceptions of value? In what situations might selective or exclusive channels add real value?

9. Of the channel functions described in the chapter, which is the most important and why? The least important? Why?

10. How does disintermediation benefit the consumer? How might it harm the consumer? Can you think of any revolutionary businesses created in the past few years due to disintermediation? Be sure to describe one not mentioned already in the chapter.

Activities

1. Think of some products you currently use. Are there any you would like to buy via different marketing channels? Do you think the products could be successfully marketed this way?

2. Describe a time in which you did business with a company and received conflicting information from its different channels (for example, a store's website versus a visit to the store). How did it affect your buying experience? Have you done business with the company since?

3. Break into groups and make a list of four to five different types of products. Decide which channels should be used to distribute each product. Present your findings to your class and see if they agree with you.

4. Make a list of products you believe failed because of poor marketing channel choices.

Marketing Principles is available under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported license without attribution as requested by the site’s original creator or licensee.

Using Supply Chains to Create Value for Customers

Suppose you have developed a great new product called Ghostbusters: The Video Game. Not only is the game terrific, but you've managed to maximize to get it sold in every marketing channel you can. The product is selling at GameStop, Walmart, Best Buy, and Amazon, and it's slated to come out on Sony's PlayStation Portable console. That's the end of the story, right? Not quite. Sooner rather than later, in addition to focusing on the firms downstream that sell your product, you will also look upstream at your suppliers and sideways at potential firms to partner with.

Your product's supply chain includes not only the downstream companies that actively sell the product, but also all the other organizations that have an impact on it before, during, and after it's produced. Those companies include the providers of the raw materials your firm uses to produce it, the transportation company that physically moves it, and the firm that helped build the webpages to promote it. If you hired a programmer in India to help write computer code for the game, the Indian programmer is also part of the product's supply chain. If you hired a company to process copies of the game returned by customers, that company is part of the supply chain as well. Large organizations with many products can have literally thousands of supply chain partners. Service organizations also need supplies to operate, so they have supply chains, too.

As you learned at the end of the last chapter, the process of designing, monitoring, and altering supply chains to make them as efficient as possible is called supply chain management. The term supply chain management was first coined by an American industry consultant in the early 1980s, but it's an old idea. Part of Henry Ford's strategy in the early 1900s was to extract as much efficiency (and money) as he could by taking ownership of the supply chains for his automobiles. Ford owned the foundries that converted raw iron ore to steel for his cars. He also owned the plantations that grew the rubber for his automobiles' tires, and the ships on which the materials and finished products were transported (Bowersox & Closs, 2000).

Today, many companies still take a narrow view of their supply chains; they look at supply chains mainly in terms of the costs they can save. Cost reduction is definitely an important part of supply chain management. After all, if your competitors can produce their products at a lower cost, they could put you out of business.

Keep in mind, however, that a firm can produce a product so cheaply that no one will buy it because it's shoddy. That's why smart companies view their supply chains as an integral part of their marketing plans. In other words, these companies also look at the ways their supply chains can create value for customers to give their firms a competitive edge.

Today, the term value chain is sometimes used interchangeably with the term supply chain. The idea behind the value chain is that your supply chain partners should do more for you than perform just basic functions; each one should help you create more value for customers as the product travels along the chain—preferably more value than your competitors' supply chain partners can add to their products.

Zara, a trendy but inexpensive clothing chain in Europe, is a good example of a company that has managed to create value for its customers with smart supply chain design and execution. Originally, it took six months for Zara to design a garment and get it delivered to stores. To get the hottest fashions in the hands of customers as sooner, Zara began working more closely with its supply chain partners and internal design teams. It also automated its inventory systems so it could quickly figure out what was selling and what was not. As a result, it's now able to deliver its customers cutting-edge fashion in just two weeks. Not only that, but the company set a new standard for the clothing industry in the process (Smith, 2008).

Sourcing and Procurement

Learning Objectives

1. Explain why sourcing and procurement activities are an important part of supply chain management.

2. Describe the reasons why the use of outsourcing and offshoring has grown.

3. Explain some of the drawbacks companies face when they outsource their activities.

Sourcing is the process of evaluating and hiring individual businesses to supply goods and services to your business. Procurement is the process of actually purchasing those goods and services. Sourcing and procurement have become a bigger part of a supply manager's job in recent years, in part because businesses keep becoming more specialized. Just like Ford's workers became more efficient by performing specialized tasks, so, too have companies.

Ford Motor Company no longer produces its own tires for its cars. It buys them from tire producers like Michelin and Goodyear. It's still possible to own your supply chain, though. The diamond company DeBeers owns its own mines, distributorships, and retail diamond stores. The problem is that it's very costly to own multiple types of companies and difficult to run them all well, too.

Firms look up and down their supply chains and outside them to see which companies can add the most value to their products at the least cost. If a firm can find a company that can add more value than it can to a function, it will often outsource the task to that company. After all, why do something yourself if someone else can do it better or more cost-effectively?

Rather than use their own fleets of trucks, ships, and airplanes, most companies outsource at least some of their transportation tasks to shippers such as Roadway and FedEx. Other companies hire freight forwarders to help them. You can think of freight forwarders as travel agents for freight (McGrath, 2007). Their duties include negotiating rates for shipments and booking space for them on transportation vehicles and in warehouses. A freight forwarder also combines small loads from various shippers into larger loads that can be shipped by more economically. However, freight forwarders don't own their own transportation equipment or warehouses.

Other companies go a step further and outsource their entire order processing and shipping departments to third-party logistics (3PLs) firms. FedEx Supply Chain Services and UPS Supply Chain Solutions (which are divisions of FedEx and UPS, respectively) are examples of 3PLs. A 3PL is one-stop shipping solution for a company that wants to focus on other aspects of its business. Firms that receive and ship products internationally often hire 3PLs so they don't have to deal with the headaches of transporting products abroad and completing import and export paperwork for them.

The Growth of Outsourcing and Offshoring

Beginning in the 1990s, companies began to outsource a lot of other activities besides transportation (McGrath, 2007). Their goal was twofold: (1) to lower their costs and (2) to focus on the activities they do best. You might be surprised by the functions firms outsource. In fact, many "producers" of products no longer produce them at all, but outsource their production instead.

Most clothing companies, including Nike, design products, but they don't make them. Instead, they send their designs to companies in nations with low labor costs. Likewise, many drug companies no longer develop their own drugs. They outsource the task to smaller drug developers, which in recent years have had a better track record of developing best-selling pharmaceuticals. The Crest SpinBrush (toothbrush) wasn't developed by Procter & Gamble, the maker of Crest. A small company called Church & Dwight Co. developed the technology for the SpinBrush, and P&G purchased the right to market and sell the product.

Outsourcing work to companies abroad is called offshoring.

Some of the Ins and Outs of Outsourcing

A company faces a number of tradeoffs when it outsources an activity. The loss of control—particularly when it comes to product quality and safety—is one of them. Just ask Mattel. Beginning in 2007, Mattel was forced to recall tens of millions of toys it had outsourced for production because they were tainted with lead. But Mattel isn't the only company to experience problems. In a recent global survey, more than one-fifth of the companies that outsource their production said they have experienced "frequent" and "serious" quality problems (PRTM Management Consultants, n.d.).

The US Consumer Products Safety Commission randomly inspects products, but there is no way the commission's personnel can begin to test them all. To protect their customers, many companies either test their suppliers' products themselves or contract with independent labs to do so. For example, if you sell a product to Walmart, you need to be prepared to send it to such a lab, should Walmart ask you to ("Quality Assurance through Testing," n.d.). Companies also do on-site audits, or checks, of their suppliers. Other companies station employees with their suppliers on a permanent basis to be sure that the quality of the products they're producing is acceptable.

The loss of control of their technology is another outsourcing risk that companies face. Some countries are better about protecting patented technologies and designs than others, and some supply chain partners are more trustworthy than others. How can you be sure your supply chain partner won't steal your technology? A few years ago, General Motors began working with a Chinese firm to produce a car called the Spark for the Chinese market. But before GM could even get the automobile plant up and running, the US automaker alleged that the design of the car had been stolen, sold to another company, and knockoffs of it were being driven around China's streets (Bureau of International Information Programs, 2005).

Another aspect of outsourcing relates to the social responsibility and environmental sustainability companies exhibit in terms of how they manage their supply chains. Social responsibility is the idea that companies should manage their businesses not just to earn profits, but to advance the well-being of society. Both issues are becoming increasingly important to consumers. Environmental sustainability is the idea that firms should engage in business practices that have the least impact on the environment to protect it for future generations.

Starbucks and other companies have joined the fair trade movement to demonstrate to consumers that they are socially responsible companies. Members of the fair trade movement pay farmers and other third-world producers higher prices for their products so these producers don't have to live in poverty. The prices consumers pay for products with fair-trade labels are often higher, but one Harvard study has showed that consumers expect them to be, and that sales actually increased when the prices went up (Chu, 2009).

The push for environmental sustainability is also having an impact on supply chains, partly because the stricter environmental laws in many counties are demanding it. But companies are seeing the upside of producing green products and disposing of them in ethical ways. First, green products improve a company's image and make it stand out among its competitors. Second, many consumers are willing to pay more for green products, even during a recession (Birchall, 2009). Walmart recently announced that it's planning to require its suppliers to measure the environmental costs of producing their products. The "green" ratings will then be put on the products labels (Rosen, 2009).

The outdoor clothing company Patagonia takes both social responsibility and environmental sustainability seriously. Patagonia tries to design, source, produce, and recycle its products so they cause the least environmental damage possible. The company also audits it supply chain partners to ensure they treat workers fairly.

One of the drawbacks of outsourcing is the time it takes for products to make their way to the United States and into the hands of consumers. The time it takes is a big issue because it affects how responsive a company is to its customers. Retailers don't like to wait for products. Waiting might mean their customers will shop elsewhere if they can't find what they want. For this reason and others, some companies are outsourcing their activities closer to home.

When firms that can't resolve their supplier problems, they find other suppliers to work with or they move the activities back in-house, which is a process called insourcing. Insourcing can actually help set your company apart. The credit card company Discover doesn't outsource its customer service to companies abroad. Perhaps that helps explain why one survey ranked Discover number one in customer loyalty.

Matching a Company's Sourcing Strategies with the Needs of Its Customers

Your customer should ultimately be the focus of any insourcing and outsourcing decision you make. After all, unless the product gets recycled, the customer is the last link in the supply chain. Not all customers have the same product and service requirements, though. It might be acceptable for a company that sells PCs to individual consumers to outsource its tech support, perhaps to a firm in India that can perform the function at lower cost. However, a company that buys an expensive, customized computer network is probably going to want to deal directly with the maker of the product if the network goes down—not another company in another country.

Similarly, if you're producing an expensive car for Ferrari-type buyers, purchasing bargain-basement-priced parts could leave your customers dissatisfied—especially if the parts fail and the cars break down. Conversely, if you're designing a low-end automobile, top-of-the-line parts could make it too expensive for low-end buyers. High-end car buyers are likely to demand better after-sales service than low-end car buyers, too.

Key Takeaway

Sourcing is the process of evaluating and hiring individual businesses to supply goods and services to your business. Procurement is the process of actually purchasing those goods and services. Sourcing and procurement have become a bigger part of a supply manager's job in recent years, in part because businesses keep becoming more specialized. Companies outsource activities to lower their costs to focus on the activities they do best. Companies face numerous tradeoffs when they outsource activities, which can include a loss of control and product-quality and safety problems. When firms can't resolve their supplier problems, they find other suppliers to work with or they move the activities back in-house, which is a process called insourcing. Customer should be the focus of any insourcing and outsourcing decisions companies make.

Review Questions

1. What are some of the supply chain functions firms outsource and offshore?

2. How does outsourcing differ from offshoring?

3. Why might a company be better off insourcing an activity?

Demand Planning and Inventory Control

Learning Objectives

1. Explain why demand planning adds value to products.

2. Describe the role inventory control plays when it comes marketing products.

3. List the reasons why firms collaborate with another for the purposes of inventory control and demand planning.

Demand Planning

Imagine you are a marketing manager who has done everything in your power to help develop and promote a product—and it's selling well. But now your company is running short of the product because the demand forecasts for it were too low. Recall that this is the scenario Nintendo faced when the Wii first came out. The same thing happened to IBM when it launched the popular ThinkPad laptop in 1992.

Not only is the product shortage going to adversely affect the profitably of your company, but it's going to adversely affect you, too. Why? Because you, as a marketing manager, probably earn either a bonus or commission from the products you work to promote, depending on how well they sell. And, of course, you can't sell what you don't have.

The best marketing decisions and supplier selections aren't enough if your company's demand forecasts are wrong. Demand planning is the process of estimating how much of a good or service customers will buy from you. If you're a producer of a product, this will affect not only the amount of goods and services you have to produce but also the materials you must purchase to make them. It will also affect your production scheduling, or the management of the resources, events, and processes need to create an offering. For example, if demand is heavy, you might need your staff members to work overtime. Lead times are closely related to demand forecasting. A product's lead time is the amount of time it takes for a customer to receive a good or service once it's been ordered. Lead times also have to be taken into account when a company is forecasting demand.

Sourcing decisions—deciding which suppliers to use—are made periodically. Forecasting decisions must be made more frequently—sometimes daily. One way for you to predict the demand for your product is to look at your company's past sales. This is what most companies do. But they don't stop there. Why? Because changes in many factors—the availability of materials to produce a product and their prices, global competition, oil prices (which affect shipping costs), the economy, and even the weather—can change the picture.

For example, when the economy hit the skids in 2008, the demand for many products fell. If you had based your production, sales, and marketing forecasts on 2007 data alone, chances are your forecasts would have been wildly wrong. Do you remember when peanut butter was recalled in 2009 because of contamination? If your firm were part of the supply chain for peanut butter products, you would have needed to quickly change your forecasts.

The promotions you run will also affect demand for your products. Consider what happened to KFC when it first came out with its new grilled chicken product. As part of the promotion, KFC gave away coupons for free grilled chicken via Oprah.com. Just 24 hours after the coupons were uploaded to the website, KFC risked running out of chicken. Many customers were turned away. Others were given "rain checks" (certificates) they could use to get free grilled chicken later (Weisenthal, 2009).

In addition to looking at the sales histories of their firms, supply chain managers also consult with marketing managers and sales executives when they are generating demand forecasts. Sales and marketing personnel know what promotions are being planned because they work more closely with customers and know what customers' needs are and if those needs are changing.

Firms also look to their supply chain partners to help with their demand planning. Collaborative planning, forecasting, and replenishment (CPFR) is a practice whereby supply chain partners share information and coordinate their operations. Walmart has developed a web-based CPFR system called Retail Link. Retailers can log into Retail Link to see how well their products are selling at various Walmart stores, how soon more products need to be shipped to the company and where and how any promotions being run are affecting the profitability of their products.

Not all firms are wild about sharing every piece of information they can with their supply chain partners. Some retailers view their sales information as an asset—something they can sell to information companies like Information Resources, Inc., which provide competitive data to firms that are willing to pay for it (Bowersox & Closs, 2000). By contrast, other firms go so far as to involve their suppliers before even producing a product so they can suggest design changes, material choices, and production recommendations.

The trend is clearly toward more shared information, or what businesspeople refer to as supply chain visibility. After all, it makes sense that a supplier will be more reliable and in a better position to add value to your products if it knows what your sales, operations, and marketing plans are—and what your customers want. By sharing more than just basic transaction information, companies can see how well operations are proceeding, how products are flowing through the chain, how well the partners are performing and cooperating with one another, and the extent to which value is being built in to the product.

Demand-planning software can also be used to create more accurate demand forecasts. Demand-planning software can synthesize a variety of factors to better predict a firm's demand—for example, the firm's sales history, point-of-sale data, warehouse, suppliers, promotion information, and economic and competitive trends. To ensure that a company's demand forecasts are as up-to-date as possible, some of the systems allow sales and marketing personnel to input purchasing information into their mobile devices after consulting with customers.

Litehouse Foods, a salad dressing manufacturer, was able to improve its forecasts dramatically by using demand-planning software. Originally the company was using a traditional sales database and spreadsheets to do the work. "It was all pretty much manual calculations. We had no engine to do the heavy lifting for us," says John Shaw, the company's information technology director. In a short time, the company was able to reduce its inventory by about one-third while still meeting its customers' needs (Casper, 2008).

Inventory Control

Demand forecasting is part of a company's overall inventory control activities. Inventory control is the process of ensuring your firm has an adequate supply of products and a wide enough assortment of them meet your customers' needs. One of the goals of inventory management is to avoid stockouts. A stockout occurs when you run out of a product a customer wants to buy. Customers will simply look elsewhere to buy the product—a process the Internet has made easier than ever.

When the attack on the World Trade Center occurred, many Americans rushed to the store to buy batteries, flashlights, American flags, canned goods, and other products in the event that the emergency signaled a much bigger attack. Target sold out of many items and could not replenish them for several days, partly because its inventory tracking system only counted up what was needed at the end of the day. Walmart, on the other hand, took count of what was needed every five minutes. Before the end of the day, Walmart had purchased enough American flags, for example, to meet demand and in so doing, completely locked up all their vendors' flags. Meanwhile, Target was out of flags and out of luck—there were no more to be had.

To help avoid stockouts, most companies keep a certain amount of safety stock on hand. Safety stock is backup inventory that serves as a buffer in case the demand for a product surges or the supply of it drops off for some reason. Maintaining too much inventory, though, ties up money that could be spent other ways—perhaps on marketing promotions. Inventory also has to be insured, and in some cases, taxes must be paid on it. Products in inventory can also become obsolete, deteriorate, spoil, or shrink. Shrinkage is a term used to describe a reduction or loss in inventory due to shoplifting, employee theft, paperwork errors, or supplier fraud.

When the economy went into a slide, many firms found themselves between a rock and a hard place in terms of their inventory levels. On the one hand, because sales were low, firms were reluctant to hold much safety stock. Many companies, including Walmart, cut the number of brands they sold in addition to holding a smaller amount of inventory. On the other hand, because they didn't know when business would pick up, they ran the risk of running out of products. Many firms dealt with the problem by maintaining larger amounts of key products. Companies also watched their supply chain partners struggle to survive. Forty-five percent of firms responding to one survey about a downturn reported providing financial help to their critical supply chain partners—often in the form of credit and revised payment schedules (PRTM Management Consultants, n.d).

Just-in-Time Inventory Systems

To lower the amount of inventory and still maintain the stock they need to satisfy their customers, some organizations use just-in-time inventory systems in both good times and bad. Firms with just-in-time inventory systems keep very little inventory on hand. Instead, they contract with their suppliers to ship them inventory as they need it—and even sometimes manage their inventory for them—a practice called vendor-managed inventory (VMI). Dell is an example of a company that utilizes a just-in-time inventory system that's vendor managed. Dell carries very few component parts. Instead, its suppliers carry them. They are located in small warehouses near Dell's assembly plants worldwide and provide Dell with parts "just-in-time" for them to be assembled (Kumar & Craig, 2007).

Dell's inventory and production system allows customers to get their computers built exactly to their specifications, a production process that's called mass customization. This helps keep Dell's inventory levels low. Instead of a huge inventory of expensive, already-assembled computers consumers may or may not buy, Dell simply has the parts on hand, which can be configured or reconfigured should consumers' preferences change. Dell can more easily return the parts to its suppliers if at some point it redesigns its computers to better match what its customers want. And by keeping track of its customers and what they are ordering, Dell has a better idea of what they might order in the future and the types of inventory it should hold. Because mass customization lets buyers "have it their way," it also adds value to products.

Product Tracking

Some companies, including Walmart, are beginning to experiment with new technologies such as electronic product codes in an effort to better manage their inventories. An electronic product code (EPC) is similar to a barcode, only better, because the number on it is truly unique. You have probably watched a checkout person scan a barcode off of a product identical to the one you wanted to buy—perhaps a pack of gum—because the barcode on your product was missing or wouldn't scan. Electronic product codes make it possible to distinguish between two identical packs of gum. The codes contain information about when the packs of gum were manufactured, where they were shipped from, and where they were going. Being able to tell the difference between seemingly identical products can help companies monitor their expiration dates if they are recalled for quality of safety reasons. EPC technology can also be used to combat knockoff products in the marketplace.

Electronic product codes are stored on radio-frequency identification (RFID) tags. A radio-frequency identification (RFID) tag emits radio signals that can record and track a shipment as it comes in and out of a facility. If you have unlocked your car door remotely, microchipped your dog, or waved a tollway tag at a checkpoint, you have used RFID technology ("FAQs," 2009). Because each RFID tag can cost anywhere from $0.50 to $50 each, they are generally used to track larger shipments, such as cases and pallets of goods rather than individual items.

Some consumer groups worry that RFID tags and electronic product codes could be used to track their consumption patterns or for other nefarious purposes. But keep in mind that like your car-door remote, the codes and tags are designed to work only within short ranges. (If you try to unlock your car from a mile away using such a device, it won't work.)

Proponents of electronic product codes and RFID tags believe they can save both consumers and companies time and money. These people believe consumers benefit because the information embedded in the codes and tags help prevent stockouts and out-of-date products from remaining on store shelves. In addition, the technology doesn't require cashiers to scan barcodes item by item. An electronic product reader can automatically tally up the entire contents of a shopping cart—much like a wireless network can detect your computer within seconds. As a customer, wouldn't that add value to your shopping experience?

Key Takeaway

The best marketing decisions and supplier selections aren't enough if your company's demand forecasts are wrong. Demand forecasting is the process of estimating how much of a good or service a customer will buy from you. If you're a producer of a product, this will affect not only the amount of goods and services you have to produce but also the materials you must purchase to make them. Demand forecasting is part of a company's overall inventory control activities. Inventory control is the process of ensuring your firm has an adequate amount of product and a wide enough assortment of them meet your customers' needs. One of the goals of inventory control is to avoid stockouts without keeping too much of a product on hand. Some companies are experimenting with new technologies such as electronic product codes and RFID tags in an effort to better manage their inventories and meet their customers' needs.

Review Questions

1. Why are demand forecasts made more frequently than sourcing decisions?

2. How can just-in-time and vendor-managed inventories add value to products for customers?

3. Why and how do companies track products?

Warehousing and Transportation

Learning Objectives

1. Understand the role warehouses and distribution centers play in the supply chain.

2. Outline the transportation modes firms have to choose from and the advantages and disadvantages of each.

Warehousing

At times, the demand and supply for products can be unusually high. At other times, it can be unusually low. That's why companies generally maintain a certain amount of safety stock, oftentimes in warehouses. As a business owner, it would be great if you didn't have excess inventory you had to store in a warehouse. In an ideal world, materials or products would arrive at your facility just in time for you to assemble or sell them. Unfortunately, we don't live in an ideal world.

Toys are a good example. Most toymakers work year-round to be sure they have enough toys available for sale during the holidays. However, retailers don't want to buy a huge number of toys in July. They want to wait until November and December to buy large amounts of them.

Consequently, toymakers warehouse them until that time. Likewise, during the holiday season, retailers don't want to run out of toys, so they maintain a certain amount of safety stock in their warehouses.

Some firms store products until their prices increase. Oil is an example. Speculators, including investment banks and hedge funds, have been known to buy, and hold, oil if they think its price is going to rapidly rise. Sometimes they go so far as to buy oil tankers and even entire oil fields (Winnett, 2004).

A distribution center is a warehouse or storage facility where the emphasis is on processing and moving goods on to wholesalers, retailers, or consumers. A few years ago, companies were moving toward large, centralized warehouses to keep costs down. In 2005, Walmart opened a 4,000,000-square-foot distribution center in Texas. (Four million square feet is about the size of 18 football fields.)

Today, however, the trend has shifted back to smaller warehouses. Using smaller warehouses is a change that's being driven by customer considerations rather than costs. The long lead times that result when companies transport products from Asia, the Middle East, and South America are forcing international manufacturers and retailers to shorten delivery times to consumers (Specter, 2009). Warehousing products regionally, closer to consumers, can also help a company tailor its product selection to better match the needs of customers in different regions.

How Warehouses and Distribution Centers Function

So how do you begin to find a product or pallet of products in a warehouse or distribution center the size of 18 football fields? To begin with, each type of product that is unique because of some characteristic—say, because of its manufacturer, size, color, or model—must be stored and accounted for separate from other items. To help distinguish it, its manufacturer gives it its own identification number, called an SKU (stock-keeping unit). When the product enters the warehouse, it is scanned and given an address, or location, in the warehouse where it is stored until it is plucked from its shelf and shipped.

Warehouses and distribution centers are also becoming increasingly automated and wired. Some warehouses use robots to pick products from shelves. At other warehouses, employees use voice-enabled headsets to pick products. Via the headsets, the workers communicate with a computer that tells them where to go and what to grab off the shelves. As a result, the employees are able to pick products more accurately than they could by looking at a sheet of paper or computer screen.

It's pretty amazing when you think about how the thousands of products that come in and out of Amazon's distribution centers every day ultimately end up in the right customer's hands. After all, how many times have you had to look really hard to find something you put in your own closet or garage? Processing orders—order fulfillment—is a key part of the job in supply chains. Why? Because delivering what was promised, when it was promised, and the way it was promised are key drivers of customer satisfaction (Thirumalai and Sinha, 2005).

One of the ways companies are improving their order fulfillment and other supply chain processes is by getting rid of paper systems and snail mail. So, for instance, instead of companies receiving paper orders and sending paper invoices to one another, they send and receive the documents via electronic data interchange (EDI).

Electronic data interchange (EDI) is a special electronic format that companies use to exchange business documents from computer to computer. It also makes for greater visibility among supply chain partners because they can all check the status of orders electronically rather than having to fax or e-mail documents back and forth.

Another new trend is cross-docking. Products that are cross-docked spend little or no time in warehouses. A product being cross-docked will be delivered via truck to a dock at a warehouse where it is unloaded and put on other trucks bound for retail outlets.

Transportation

Not all goods and services need to be physically transported. When you get a massage, oil change, or a manicure, the services pass straight from the provider to you. Other products can be transported electronically via electronic networks, computers, phones, or fax machines. Downloads of songs, software, and books are an example. So are cable and satellite television and psychic hotline readings delivered over the phone.

Other products, of course, have to be physically shipped. Logistics refers to the physical flow of materials in the supply chain. You might be surprised by some of physical distribution methods that companies use. To get through crowded, narrow streets in Tokyo, Seven-Eleven Japan delivers products to its retail stores via motorcycles. In some countries, Coca-Cola delivers syrup to its bottlers via camelback. More commonly, though, products that need to be transported physically to get to customers are moved via air, rail, truck, water, or pipeline.

Trucks

More products are shipped by truck than by another means. Trucks can go anywhere there are roads, including straight to customer's homes. By contrast, planes, trains, and ships are limited as to where they can go. Shipping by truck is also fast relative to other modes (except for air transportation). However, it's also fairly expensive. Some goods—especially those that are heavy or bulky—would require so many trucks and drivers that it would be economically unfeasible to use them over long distances. Coal is a good example of such a product. It would take 400 or 500 trucks and drivers to haul the amount of freight that one coal train can. The amount of CO2 emitted by trucks is also high relative to some of the other transportation modes, so it's not the greenest solution.

Water

International trade could scarcely be conducted without cargo shipping. Cargo ships transport loose cargo such as grain, coal, ore, petroleum, and other mined products. But they also transport consumer products—everything from televisions to toys. Consumer goods are often shipped in intermodal containers. Intermodal containers are metal boxes. The largest containers are 53 feet long and 100 inches tall. The biggest cargo ships are huge and carry as many 15,000 containers. By contrast, the maximum a train can carry is around 250 containers stacked on top of each other. The good news about shipping via waterway is that it is inexpensive. The bad news is that it's very slow. In addition, many markets aren't accessible by water, so another method of transportation has to be utilized.

Air

Air freight is the fastest way to ship goods. However, it can easily cost 10 times as much to ship a product by air as by sea (Thompson & Brecht, n.d.). High-dollar goods and a small fraction of perishable goods are shipped via air. Freshly cut flowers and fresh seafood bound for sushi markets are examples of the latter. Keeping perishable products at the right temperature and humidity levels as they sit on runways and planes can be a challenge. They often have to be shipped in special containers with coolants. Freight forwarders are often hired to arrange the packing for perishables traveling by air and to ensure they don't deteriorate while they are in transit. Despite the fact that it is expensive, air transportation is growing faster than any other transportation mode, thanks to companies like FedEx.

Railroads

Railroads carry many of the same products as cargo ships—only over land. A significant percentage of intermodal containers offloaded from ships end up on railcars bound for inland destinations. The containers are then are trucked shorter distances to distribution centers, warehouses, and stores. Businesses that need to ship heavy, bulky goods often try to locate their facilities next to railroads. Lumber mills are an example.

In terms of speed and cost, shipping by rail falls somewhere between truck and water transportation. It's not as slow and inexpensive as moving goods by water. However, it's not as fast as shipping them by truck. Nor is it as expensive. So, when the price of gasoline rose in to record highs in 2008, shippers that traditionally used trucks began to look at other transportation alternatives such as rail.

Pipelines

Pipelines are used to transport oil, natural gas, and chemicals. Two-thirds of petroleum products are transported by pipeline, including heating oil, diesel, jet fuel, and kerosene. Pipelines are costly to build, but once they are constructed, they can transport products cheaply. For example, for about one dollar you can transport a barrel of petroleum products via pipeline from Houston to New York. The oil will move three to eight miles per hour and arrive in two to three weeks depending on the size of the pipe, its pressure, and the density of the liquid ("Oil Pipelines: Small Price, Big Value," 2005). Like other products, products shipped via pipelines often have to be moved using two different transportation modes. Once your barrel of oil has made it to New York, to get it to service stations, you will need to move it by rail or truck. The material in pipelines can also be stolen like other products can. In Mexico, for example, drug gangs have tapped into pipelines in remote areas and stolen millions of dollars in oil (Mendoza, 2009).

Companies face different tradeoffs when choosing transportation methods. Which is most important? Speed? Cost? Frequency of delivery? The flexibility to respond to different market conditions? Again, it depends on your customers.

Goya Foods has many challenges due to the variety of customers it serves. The company sells more than 1,600 canned food products. Because the types of beans people prefer often depends on their culture—whether they are of Cuban, Mexican, or Puerto Rican descent, and so forth—Goya sells 38 varieties of beans alone. Almost daily, Goya's truck drivers deliver products to tens of thousands of US food stores, from supermarket chains in Texas to independent mom-and-pop bodegas in New York City. Delivering daily is more costly than dropping off jumbo shipments once a week and letting stores warehouse goods, says the company's CEO Peter Unanue. However, the just-in-time method lets Goya offer stores a greater variety and ensure that products match each store's demographics. "Pink beans might sell in New York City but not sell as well in Texas or California," says Unanue (De Lollis, n.d.).

Key Takeaway

Some firms store products until their prices increase. A distribution center is a warehouse or storage facility where the emphasis is on processing and moving goods on to other parts of the supply chain. Warehousing products regionally can help a company tailor its product selection to better match the needs of customers in different regions. Logistics refers to the physical flow of materials in the supply chain. Not all goods and services need to be physically transported. Some are directly given to customers or sent to them electronically. Products that need to be transported physically to get to customers are moved via, air, rail, truck, water, and pipelines. The transportation modes a firm uses should be based on what its customers want and are willing to pay for.

Review Questions

1. How do warehouses and distribution centers differ?

2. What is cross-docking, and why might a company choose to cross-dock a product?

3. What kinds of products can be delivered electronically? What products need to be physically transported?

Track and Trace Systems and Reverse Logistics

Learning Objectives

1. Understand why being able to trace products is important to organizations and their customers.

2. Explain what reverse logistics is and why firms utilize it.

As we have explained, shippers are highly anxious when their products are in transit because the merchandise is valuable and it is exposed to more risks when it's traveling across the country than when it's sitting in a warehouse or store. Shippers want to know where the goods are, when they will arrive, and what kind of shape they are in. After all, they can end up in the wrong place, be damaged, or stolen. (Do you remember the 2008 incident in which when Somali pirates captured the Maersk Alabama and held its captain hostage? The cargo ship was carrying seventeen thousand metric tons of freight at the time.) The result can be unhappy customers and lost sales and profits.

Track and Trace Systems

In recent years, track and trace systems that electronically record the paths shipments take has become almost as important to businesses as shipping costs themselves. Being able to help trace products helps a company anticipate and possibly avoid events that could disrupt the supply chain, including order shipping mistakes, bad weather, and accidents.

Today most product shipments can be traced. GPS devices are sometimes placed on containers, railcars, and trucks to track the movement of expensive shipments. Tracing individual products is harder, though. Systems that utilize electronic product codes and RFID tags are not yet in widespread use. Produce is a product that's hard to trace. You have probably noticed that bananas, peaches, and other types of produce don't have barcodes slapped on them. Products that are combined to make other products are also hard to trace.

Being able to trace products is important not only to businesses but also to consumers. Consumers are more interested than ever in knowing where their products come from—particularly when there is a contamination problem with an offering. Products containing salmonella infested peanuts, tomatoes, and contaminated milk have sickened and caused the deaths of consumers and their pets across the globe. Even if the source of the contaminated product is known, consumers can't tell exactly where the products originated from, so they stop buying them altogether. This can devastate the livelihood of producers whose products aren't to blame.

Companies are working to develop systems that may one day make it possible to trace all products. The Chinese government is working toward that goal in conjunction with a Norwegian company called TraceTracker. TraceTracker is testing an online service that can identify and track each batch of every product that is merged together in the global food chain, from raw ingredients to products on supermarket shelves (Schenker, 2008).

Reverse Logistics

So what happens if products end up broken or unusable as they travel through their supply chains? And what do companies do with scrap materials and other junk produced, such as packaging? Increasingly, firms now run products and materials such as these backward through the supply chain to extract value from them. The process is known as reverse logistics.

Patagonia developed a reverse logistics systems for environmental reasons. After garments made by Patagonia are worn out, consumers can mail them to the company or return them to a Patagonia store. Patagonia then sends them to Japan to be recycled into usable fibers that are later made into new garments. The company has also convinced other clothing makers to do the same, even though it can add to the cost of products.

Most companies set up reverse logistics systems to "turn trash into cash." Pittsburgh-based Genco is firm that specializes in reverse logistics. Companies like Best Buy, Sears, and Target hire Genco to find buyers for defective or broken products. A recent study suggests companies can recover up to 0.3 percent of their annual sales this way, which for Best Buy would amount to $100 million a year ("Reverse Logistics: From Trash to Cash," 2008).

TerraCycle is a company dedicated to extracting value from waste and using it to create new products—a process that's being called upcycling. In addition to selling fertilizer in used (but relabeled) plastic bottles, TerraCycle makes backpacks and pencil cases out of the metallic juice pouches used in drink boxes. The company also creates tote bags out of plastic bags and has contracted with Target to make clocks out of old vinyl records.

Key Takeaway

Being able to trace products helps a company anticipate events that could disrupt the supply chain, including shipping mistakes, bad weather, and accidents. Most shippers have track and trace systems that can track product loads. Tracking individual products, especially after they are combined to make other products, is more difficult.

Consumers are more interested than ever in knowing where their products come from—particularly when there is a contamination problem with an offering. Reverse logistics is the process of running damaged and defective products and scrap materials backward through the supply chain to extract value from them. Companies are increasingly employing reverse logistics not only to save money but also for environmental reasons.

Review Questions

1. Why is being able to track products important to companies? Why is it important to consumers? How can it add value to products?

2. What place does reverse logistics have in a company's supply chain?

Discussion Questions and Activities

Discussion Questions

1. Why do marketing professionals care about and participate in supply chain decisions?

2. What criteria do you think companies look at when evaluating the performance of their supply chain partners? Make a list of them.

3. Is the electronic delivery of products always better? To what extent does it depend on the customer?

4. Discuss the supply chain for education at your college. What elements does it consist of? What aspects of delivery could be improved? What sort of alternate sourcing and delivery methods might be used? Can education be warehoused? How?

Activities

1. Research the distribution system for Coca-Cola. What elements of Coca-Cola's supply chain were you unaware of?

2. Choose a product and outline the supply chain for it. If you need to, use the web to research the product. How do you believe the supply chain could be used to create additional value for customers?

References

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Casper, C. (2008). Demand planning comes of age. Food Logistics 101 (January/February), 19–24.

Chu, J. (2009, March 29). Are fair-trade goods recession proof? Fast Company. Retrieved from http://www.organicconsumers.org/articles/article_17395.cfm (accessed December 2, 2009).

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Kumar, S. & Craig, S. (2007). Dell, Inc.'s closed loop supply chain for computer assembly plants. Information Knowledge Systems Management 6(3): 197–214.

Mendoza, M. (2009, April 11). Millions of dollars in stolen Mexican oil sold to U.S. refineries. Fort Worth Star-Telegram, 6A.

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Thirumalai, S. & Sinha, K. K. (2005). Customer satisfaction with order fulfillment in retail supply chains: Implications of product type in electronic B2C transactions. Journal of Operations Management 23(3–4), 291–303.

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Thompson, J. F., Bishop, C. F. H., & Brecht, P. E. (n.d.). Air transport of perishable products. Division of Agriculture and Natural Resources, University of California, Publication 2168 (Oakland: ANR Communication Services).

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Integrated Marketing Communication

The American Association of Advertising Agencies (AAAA) defines Integrated Marketing Communication (IMC) as a strategic communications approach that acknowledges the added value of a comprehensive marketing plan. This approach combines various communications disciplines, such as advertising, sales promotion, direct response, and public relations, to communicate the brand and the company's message to target customers in a clear, concise, and seamless manner that is consistent, yet customizable enough to maximize its intended impact (Kotler & Keller, 2015; Marshall & Johnston, 2011).

An IMC approach allows a company to better integrate its communication elements, "hence the term integrated marketing communications" (Marshall & Johnston, 2011, p. 316). To execute this approach, a company should have complete knowledge of its customers so it can understand how different communication methods affect their buying behavior. IMC can help a company produce more consistent and powerful messages that can increase sales and build brand equity (Kotler & Keller, 2015).

References

Kotler, P., & Keller, K. (2015). Marketing management (15th ed.). Upper Saddle River, NJ. Pearson.

Marshall, G. W., & Johnston, M. W. (2011). Essentials of marketing management. New York, NY: McGraw-Hill

Marketing Principlesis available under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported license without attribution as requested by the site’s original creator or licensee.

Integrated Marketing Communications and the Changing Media Landscape

Communication helps businesses grow and prosper, creates relationships, strengthens the effectiveness of organizations, and allows people to learn about one another. Technology such as the Internet, mobile phones, and social media affects the way we communicate and changes the media landscape and the type of messaging strategy organizations can and should use.

Do you feel lost without your cell phone? Are you more likely to respond to text messages than phone calls? Do you use the print publications (magazines, newspapers, references) at the library or do you find all your references online? Do your grandparents prefer different methods of communication? Think about how you get information and then think about how organizations can communicate with you and other target markets about their products, services, or causes. As we find new sources of information, the media and messaging strategies used by businesses must also change. However, organizations still want consumers to get consistent messages regardless of how they receive the information.

Integrated Marketing Communications (IMC)

Learning Objectives

1. Understand what integrated marketing communications (IMC) are.

2. Understand why organizations may change their promotional strategies to reach different audiences.

Once companies have developed products and services, they must communicate the value and benefits of the offerings to current and potential customers in both business-to-business (B2B) and business-to-consumer (B2C) markets. Integrated marketing communications (IMC) provide an approach designed to deliver one consistent message to buyers through an organization's promotions that may span all different types of media such as TV, radio, magazines, the Internet, mobile phones, professional selling, and social media. For example, Campbell's Soup Company typically includes the "Mm, mm good" slogan in the print ads it places in newspapers and magazines, in ads on the Internet, and in commercials on television and radio. Delivering consistent information about a brand or an organization helps establish it in the minds of consumers and potential customers across target markets.

Integrated marketing communications have become important because of changes in communications technology and instant access to information through tools such as the Internet and social media. Consumers are also changing. Consumers may collect more product information on their own because they have access to so many sources of information. Marketers must organize and assemble available information to build a consistent brand message and make it relevant. With IMC, organizations can coordinate their messages to build the brand and develop strong customer relationships while also helping customers satisfy their needs.

FedEx's two recent campaigns—"We Understand" launched in 2009 and "Solutions that Matter" launched in 2011—are examples of IMC campaigns used to deliver a consistent message across media channels, including television commercials, e-mail, social media, mobile marketing, direct mail, and the FedEx channel on YouTube (Dilworth, 2010).

Changing Media

Many consumers and business professionals use their computers and phones to seek information and connect with other people and businesses. Work and social environments are changing, with more people having virtual offices and communicating through texting or through social media sites such as Facebook, LinkedIn, Pinterest, and Twitter. As the media landscape changes, the money that organizations spend on different types of communication will change as well. Some forecasts indicate that companies will spend almost 27 percent of their total promotional budgets, or $160 billion, on electronic or nontraditional media by 2012 ("PQ Media: New Media Spend to Hit $160B in 2012," 2008).

Many college students are part of the millennial generation, and it is consumers from this generation (people like you, perhaps) who are driving the change toward new communications technologies. You might opt to get promotions via mobile marketing (marketing media that is available in different places such as cell phones or on forms of transportation)—say, from stores on your cell phone as you walk by them or via a mobile gaming device that allows you to connect to the web. Likewise, advertisements on Facebook are popular. For example, when Honda let people on Facebook use the Honda logo to give heart-shaped virtual gifts on Valentine's Day, over one and a half million people participated in the event and viewed the Honda Fit online in the process.

Traditional media (magazines, newspapers, television) compete with the Internet, texting, mobile phones, social media, user-generated content such as blogs, and YouTube as well as out-of-home advertising. You might have noticed that the tray tables on airplanes sometimes have ads on them. You have probably also seen ads inside subway cars, in trains and buses, and even in bathroom stalls. These, too, are examples of out-of-home advertising.

Key Takeaway

As the media landscape changes, marketers may change the type of promotions they use in order to reach their target markets. With changing technology and social media (e.g., Facebook), less money is being budgeted for traditional media like magazines and more money is budgeted for nontraditional media. Regardless of the type of media used, marketers use integrated marketing communications (IMC) to deliver one consistent message to buyers.

Review Questions

1. Explain the concept of integrated marketing communications.

2. How are organizations using different and new forms of media? What age group is driving the change?

3. What factors are causing the media landscape to change?

4. What are some different types of online media? Which types are most popular with college students?

The Promotion (Communication) Mix

Although the money organizations spend promoting their offerings may go to different media channels, a company still wants to send its customers and potential consumers a consistent message (i.e., IMC). The different types of marketing communications an organization uses make up its promotion or communication mix, which consists of advertising, sales promotions, direct marketing, public relations and publicity, sponsorships (events and experiences), social media and interactive marketing, and professional selling. The importance of IMC will be demonstrated throughout the discussion of traditional media as well as newer, more targeted, and often interactive online media.

Advertising involves paying to disseminate a message that identifies a brand (product or service) or an organization to many people at one time. The typical media that organizations utilize for advertising include television, magazines, newspapers, the Internet, direct mail, and radio. Businesses also advertise on mobile devices and social media such as Facebook, blogs, and Twitter.

Consumer sales promotions consist of short-term incentives such as coupons, contests, games, rebates, and mail-in offers that supplement the advertising and sales efforts. Sales promotions include promotions that are not part of another component of the communication mix and are often developed to get customers and potential customers to take action quickly, make larger purchases, and/or make repeat purchases.

In business-to-business marketing, sales promotions are typically called trade promotions because they are targeted to channel members who conduct business or trade with consumers. Trade promotions include trade shows and special incentives given to retailers to market particular products and services, such as extra money, in-store displays, and prizes.

Direct marketing involves the delivery of personalized and often interactive promotional materials to individual consumers via channels such as mail, catalogs, Internet, e-mail, telephone, and direct-response advertising. By targeting consumers individually, organizations hope to get consumers to take action.

Professional selling is an interactive, paid approach to marketing that involves a buyer and a seller. The interaction between the two parties can occur in person, by telephone, or via another technology. Whatever medium is used, most sellers hope to develop a relationship with the buyer.

When you interview for internships or full-time positions and try to convince potential employers to hire you, you are engaging in professional selling. The interview is very similar to a buyer-seller situation. Both the buyer and seller have objectives they hope to achieve. Business-to-business marketers generally utilize professional selling more often than most business-to-consumer marketers. If you have ever attended a Pampered Chef party or purchased something from an Amway or Mary Kay representative, you've been exposed to professional selling.

Public relations (PR) involves communication designed to help improve and promote an organization's image and products. PR is often perceived as more neutral and objective than other forms of promotion because much of the information is tailored to sound as if it has been created by an organization independent of the seller. Public relations materials include press releases, publicity, and news conferences. While other techniques such as product placement and sponsorships (especially for events and experiences) tend to generate a lot of PR, the growth of expenditures and importance of sponsorships are so critical for so many companies that it is often considered a separate component in the communication mix. Many companies have internal PR departments or hire PR firms to find and create public relations opportunities for them. As such, PR is part of a company's promotion budget and their integrated marketing communications.

Sponsorships typically refer to financial support for events, venues, or experiences and provide the opportunity to target specific groups. Sponsorships enhance a company's image. With an increasing amount of money spent on sponsorships, they have become an important component of the promotion mix.

Key Takeaway

Technology is changing the way businesses and individuals communicate. Organizations use Integrated Marketing Communications (IMC) to deliver a consistent message across all components of the promotion mix. The promotion (communication) mix is composed of advertising, professional selling, public relations, sponsorships (events and experiences), sales promotion, direct marketing, and online media, including social media.

Review Questions

1. Define each component of the promotion (communication) mix.

2. Why is public relations considered a key part of the promotion mix?

Factors Influencing the Promotion Mix, Communication Process, and Message Problems

Learning Objectives

1. Understand that different factors can affect the promotion mix.

2. Understand the communication process.

3. Understand different types of message problems.

Factors Influencing the Promotion Mix

A marketing manager from one company might decide to focus on social media, whereas a marketing manager from another company might decide to focus on television commercials. Why do companies select different types of media for what may be perceived as similar messages? A number of factors affect the choice of promotion mix elements.

Budget Available

For many companies, the budget available to market a product determines what elements of the promotion mix are utilized. The budget affects a promotion's reach (number of people exposed to the message) and frequency (how often people are exposed). For example, many smaller companies may lack the money to create and run commercials on top-rated television shows or during the Super Bowl. As a result, they may not get the exposure they need to be successful. Other firms may come up with creative ways to reach different target markets. For example, McDonald's targeted college students with a special promotion that it filmed live in a Boston University lecture.

Stage in the Product Life Cycle

The stage in the product life cycle also affects the type and amount of promotion used. Products in the introductory stages typically need more promotional dollars to create awareness in the marketplace. Consumers and businesses won't buy a product if they do not know about it. More communication is needed in the beginning of the product life cycle to build awareness and trial.

Type of Product and Type of Purchase Decision

Different products also require different types of promotion. Very technical products and very expensive products (high involvement) often need professional selling so the customer understands how the product operates and its different features. By contrast, advertising is often relied upon to sell convenience goods and products purchased routinely (low involvement) since customers are familiar with the products and they spend relatively little time making purchase decisions.

Target Market Characteristics and Consumers' Readiness to Purchase

In order to select the best methods to reach different target markets, organizations need to know what types of media different targets use, how often they make purchases, where they make purchases, and what their readiness to purchase is as well as characteristics such as age, gender, and lifestyle. Some people are early adopters and want to try new things as soon as they are available, and other groups wait until products have been on the market for a while. Some consumers might not have the money to purchase different products, although they will need the product later. For example, are most college freshmen ready to purchase new cars?

Consumers' Preferences for Various Media

We've already explained that different types of consumers prefer different types of media. In terms of target markets, college-aged students may prefer online, cell phone, mobile marketing, and social media more than older consumers do. Media preferences have been researched extensively by academics, marketing research companies, and companies to find out how consumers want to be reached.

Regulations, Competitors, and Environmental Factors

Regulations can affect the type of promotion used. For example, laws in the United States prohibit tobacco products from being advertised on television. In some Asian countries, controversial products such as alcohol cannot be advertised during Golden (prime) time on television. The hope is that by advertising late at night, young children do not see the advertisements. The strength of the economy can have an impact as well. In a weak economy, some organizations use more sales promotions such as coupons to get consumers into their stores. The risk is that consumers may begin to expect coupons and not want to buy items without a special promotion.

Availability of Media

Organizations must also plan their promotions based on availability of media. The top-rated television shows and Super Bowl ad slots, for example, often sell out quickly. Magazines tend to have a longer lead time, so companies must plan far in advance for some magazines. By contrast, because of the number of radio stations and the nature of the medium, organizations can often place radio commercials the same day they want them aired. Social media and online media may be immediate, but users must be careful about what they post and their privacy. Uncontrollable events can affect a company's promotions, too. For example, when a disaster occurs, TV stations often cut advertisements to make way for continuous news coverage. If there is a crisis or disaster and your company is in the middle of a promotion, you will likely have to scramble to reach consumers via a medium that isn't TV.

The Communication Process

Do you use TiVo or a digital video recorder (DVR) to record movies or television shows so you can watch them when you want without television commercials? Do you ever use the remote to skip the commercials or change channels to look at different shows? Think about which television shows you choose to watch, which magazines you read, which radio stations you select. The perceptual process is how a person decides what to pay attention to and how to interpret and remember different things, including information in advertising. By selecting a magazine, a television show, or even an elective class in school, you're selecting what you're exposed to and deciding what gets your attention. However, your selection does not ensure you'll either pay attention or remember or correctly interpret what you see or hear.

Think about what else you are doing when you watch television, when you are studying, or when you are listening to the radio. Imagine that it's a hot day in July and you're enjoying a day at the beach. Your friends brought a radio and the volume is turned up so you can hear all the music. If you're listening to the music or talking to a friend at the beach while you're listening to the radio, do you hear or pay attention to the commercials? Do you remember which products were advertised? If you're with a friend and hear someone else say your name, do you pay more attention to the person talking about you than to your friend?

The same thing happens when you are watching a television show, reading a magazine, or studying for a test. The phone rings or your friends show up, and your attention shifts to them. With so many different types of distractions and technology (such as recording devices), imagine how difficult it is for an advertiser to get you to pay attention, much less remember the message. Do you remember the terms you memorized for a test a day later? Do you know your friends' phone numbers and e-mail addresses? Or do you just find their names on your contact list? To increase retention, advertisers may repeat the same message multiple times in different places, but they must be careful that consumers don't get so tired of the message that there is a negative effect.

The communication process illustrates how messages are sent and received. The source (or sender) encodes, or translates, a message so that it's appropriate for the message channel—say, for a print advertisement, TV commercial, or store display—and shows the benefits and value of the offering. The receiver (customer or consumer) then decodes, or interprets, the message. For effective communication to occur, the receiver must interpret the message as the sender intended.

Message Problems

You're ready to go home on a Friday afternoon and you hear someone mention an upcoming event on Saturday. However, you did not listen to all the details and assume the event is the next day, not the following Saturday. Since you already made other plans for the next day, you don't even consider showing up the following Saturday. Has this ever happened to you? You don't show up at an event because you didn't interpret the message correctly? If you do not hear someone correctly, misread information, or misinterpret a message, you might think a product or service provides different benefits or is easier or harder to use than it really is.

Interference, or noise, can distort marketing messages. Factors such as poor reception, poor print quality, problems with a server, or a low battery can interfere with your getting messages. Interference includes any distractions receivers and senders face during the transmission of a message. Imagine that you're studying for an exam while you're talking on the phone. The conversation interferes with your ability to remember what you have read. If a friend tells you a story, then you tell another friend, and that person tells someone else, will the message be the same after it has been relayed to multiple people? If you miss class and borrow someone else's notes, do you understand what they mean? Not only must advertisers try to present consistent messages (IMC), they must also try to ensure that you interpret the message as they intended.

Purchasing a product provides the sender with feedback: You saw information and wanted to try the product. If you use any coupons or promotions when you buy a product, the advertiser knows which vehicle you used to get the information. Market research and warranty registration also provide feedback.

We tend to purchase products and remember information about products that have some relevance to our personal situation or beliefs. If you have no need for a product or service, you might not pay attention to or remember the messages used to market it. Advertisers also want you to remember their brands, so that you'll think of their products/services when you need to make a purchase.

Key Takeaway

Many factors, such as a firm's marketing budget, the type of product, regulations, target customers, and competitors, influence what composes the promotion mix. Depending on what medium is used, marketers use the communication process to encode or translate ideas into messages that can be correctly interpreted (decoded) by buyers. However, marketers must determine how to get consumers' attention and avoid as much interference and noise as possible. Perceptual processes include how a person decides what to pay attention to and how to interpret and remember different things.

Review Questions

1. Explain the communication process and factors that can interfere with interpretation of messages.

2. What is the perceptual process and how does it relate to promotion?

3. What is the difference between encoding and decoding a message?

Advertising and Direct Marketing

Learning Objectives

1. Understand the difference between media and vehicles.

2. Explain the similarities and differences between advertising and direct marketing.

3. Understand the benefits of direct marketing and what types of direct marketing organizations use.

Advertising

Advertising is paid promotion with an identified sponsor that reaches many people at one time and can be repeated many times. One of the biggest issues an organization must address is which medium or media provides the biggest bang for the buck, given a product's characteristics and target market. For example, a 30-second ad aired during Super Bowl XLII cost $2.7 million. Since 97.5 million people watched the game, the cost per ad was less than three cents per viewer. For Super Bowl XLVI, the cost for a 30-second spot increased to $3.5 million, and approximately 111.3 million viewers watched. However, do the ads pay off in terms of sales? Many advertising professionals believe many of the ads don't, yet the ads probably do create brand awareness or a public relations type of effect since many people tune in and then talk about Super Bowl commercials.

Whether it's a commercial on the Super Bowl or an ad in a magazine, each medium (e.g., television, magazines, mobile phones, social media) has different advantages and disadvantages. Mobile phones provide continuous access to people on the go, although reception may vary in different markets. Radios, magazines, and newspapers are also portable. People tend to own more than one radio, but there are so many radio stations in each market that it may be difficult to reach all target customers. People are also typically doing another activity (e.g., driving or studying) while listening to the radio, and without visuals, radio relies solely on audio. Both television and radio must get a message to consumers quickly. Although many people change channels or leave the room during commercials, television does allow for visual demonstrations. For years, advertisers raised the volume of television commercials in an effort to get attention. However, the Federal Trade Commission passed a regulation effective in 2010 prohibiting advertisers from changing the volume of commercials on television, although consumers still notice that some commercials are louder than the regular shows.

People save magazines for a long time, but advertisers must plan in advance to have ads in certain issues. With the Internet, both magazines and newspapers are suffering in terms of readership and advertising dollars. Many major newspapers, such as papers in Seattle and Chicago, have gone out of business. Other newspapers, such as USA Today are free online, although printed copies are also available. The fact that local retailers get cheaper rates for advertising in local newspapers may encourage both local businesses and consumers to support newspapers in some markets.

Within each different medium, an organization might select a different vehicle. A vehicle is the specific means within a medium to reach a selected target market. For example, if a company wants to develop television commercials to reach teenagers, it might select Gossip Girl on the CW as the best vehicle. If an organization wants to use magazines to reach males interested in sports, it might use Sports Illustrated. Sports Illustrated launched SI.com so readers could get up-to-date information on the web. On SI.com, readers can also access links to popular articles and  SIVault, where they can search articles and pictures that have run in the magazine since it was launched in 1954. The printed Sports Illustrated swimsuit edition continues to be one of the most popular issues of any magazine. Over 67 million consumers saw the 2010 SI swimsuit franchise (via magazine, mobile, SIVault, etc.).

Direct Marketing

Direct marketing allows organizations to target a specific set of customers, measure the return on investment (ROI), and test different strategies before implementing them to all targeted consumers. It can be personalized as a call for consumers to take action (which is what marketers hope they will do). However, direct marketing is very intrusive, and many consumers may ignore attempts to reach them. Catalogs and direct mail provide popular alternatives for many marketers, although the volume of mail sent may drop significantly in a weak economy.

Telemarketing involves direct marketing by phone. You may have just sat down for dinner when the phone rings with a local charity calling to raise money. The calls always seem to come at dinner or at other inconvenient times (when marketers know consumers will be home). Although expensive, telemarketing can be extremely effective for charitable organizations and different service firms and retailers. However, because some consumers have negative perceptions of telemarketers, many organizations do not use it. The Do Not Call Registry, which was established in 2008, prevents organizations from calling any numbers registered with the Federal Trade Commission.

Direct response advertising includes an offer and a call to action. You may be watching television when an interesting product is shown. The announcer says, "Call now and receive a bonus package." They want consumers to call to purchase the product or to get more information. The Internet provides the preferred direct response medium for direct marketing because it is less expensive and easier for the organization to utilize.

Key Takeaway

Advertising is communication that has an identified sponsor and reaches many people at one time. Once companies decide on different media (e.g., magazines or television), they must also select specific vehicles (e.g., Sports Illustrated or the Super Bowl), Direct marketing allows organizations to target specific individuals and use direct response advertising. Telemarketing, the Internet, direct mail, and catalogs are popular direct marketing methods.

Review Questions

1. Why do you think so many organizations rely on advertising to communicate with customers and potential customers?

2. What is the difference between a medium and a vehicle? Give examples of each.

3. Why is direct marketing successful even though some consumers may not like it?

Message Strategies

Learning Objectives

1. Understand what a unique selling proposition is and how it is used.

2. Understand different types of promotion objectives.

3. Identify different message strategies.

Utilizing a Product's Unique Selling Proposition (USP)

When organizations want to communicate value, they must determine what message strategies work best for them. Smart organizations determine a product's unique selling proposition (USP), or specific benefit consumers will remember. Domino's "Pizza delivered in 30 minutes or it's free" is a good example of a unique selling proposition. Likewise, Nike's global slogan "Just Do It" helps athletes and other consumers realize their potential, and many consumers may think of all the things that they do when they use Nike products.

Nike and Coca-Cola have been extremely successful in adapting their promotions to different international markets. Both companies have very popular global brands. Sometimes the same promotions work in different cultures (countries), but others must be adapted for different international audiences—similar to the way products may be adapted for international markets. Companies must be careful of how words translate, how actions are interpreted, how actors (or models) look, and what different colors in ads may mean.

When deciding on a message strategy, organizations must consider the audience, the objectives of the promotion, the media, and the budget, as well as the USP and the product. Knowing your audience and whom you are trying to reach is critical.

The more advertisers know about the consumers (or businesses) exposed to the message, the better. Commercials for golf products shown during golf tournaments focus specifically on golfers. Other commercials, such as several recent ones for the fast-food chain Hardee's, are on the risqué side. They may appeal to some college students but may offend other consumers. What do you think? Do you think Hardee's is trying to reach a younger demographic? Do the ads make you more inclined to purchase fast food from Hardee's?

The Organization's Promotion Objectives

Advertisers must also examine their promotion objectives. What are they trying to accomplish with their promotions? Are they trying to build awareness for a new product, are they wanting to get people to take action immediately, or are they interested in having people remember their brand in the future? Building primary demand, or demand for a product category, such as orange juice, might be one objective, but a company also wants to build selective demand, or demand for its specific brand(s), such as Tropicana orange juice.

Other common objectives follow the AIDA model (attention, interest, desire, and action). AIDA objectives typically are achieved in steps. First, companies focus on attention and awareness of a product or service, which is especially important for new offerings. If a consumer or business is not aware of a product or service, they won't buy it. Once consumers or businesses are aware of products or services, organizations try to get consumers interested and persuade them that their brands are best. Ultimately, companies want consumers to take action or purchase their products or services.

Message Characteristics

Organizations must also determine what type of appeal to use and how to structure their messages. Some of the common advertising appeals are humorous, emotional, frightening (fear), rational (informative), and environmentally conscious. If you were asked to name your favorite commercial, would it be one with a humorous appeal? Many people like commercials that use humor because they are entertaining and memorable. Humor sells, but firms must be careful that the brand is remembered. Some commercials are very entertaining, but consumers cannot remember the brand or product.

Each year, some of the most talked-about commercials take place during the Super Bowl. Many people watch the game just to see the commercials. Think about some of the most popular Super Bowl commercials you have seen. What do they have in common? Notice how many of them use humor. Do you think some are more effective than others? In other words, will viewers actually buy the product(s)?

Companies must also be careful when using fear that consumers don't get too alarmed or frightened. A few years ago, Reebok had to discontinue a TV ad because it upset so many people. The ad showed a bungee jumper diving off a bridge, followed by a shot of just his shoes hanging from the bridge by the bungee cord. That ad provoked people because it implied the jumper had fallen to his death.

Firms also decide whether to use strategies such as an open-ended or closed-ended message; whether to use a one-sided or two-sided message; and whether to use slogans, characters, or jingles. An open-ended message allows the consumer to draw his or her own conclusion, such as a commercial for perfume or cologne. A closed-ended message draws a logical conclusion. Most messages are one sided, stressing only the positive aspects, similar to what you include on your résumé. However, two-sided messages are often utilized as well. Pharmaceutical companies often show both the positive aspects (benefits) of using a drug and the negative aspects of not using it. (Of course, US laws require companies to list the side effects of prescriptions—hence the long warnings that accompany drug ads.)

The order of presentation also affects how well consumers remember a brand. If you forgot about a 25-page term paper that you had to write before the next day of class, which sections of the paper would be the strongest? Would the beginning, the end, or the middle be the best section? Many students argue that either the beginning or the end is most important, hoping that the instructor does not read the entire paper carefully. The same strategy is true for commercials and advertisements. The beginning and the end of the message should be strong and include the brand name. That way, if consumers hear or read only part of the message, they will hopefully remember the brand name.

Some companies use characters or mascots and/or jingles or slogans. Although media is changing, many of the characters and jingles have stayed the same for decades. When you think of Campbell's soup, do you think "Mm, mm good"? Campbell's has used the same slogan since the early 1900s, and the Campbell Soup Kids were created in 1904. Although Campbell's changed its slogan in 1998, the company still uses the "Mm, mm good" slogan in most of its promotions across different media. Apparently, the slogan still resonates with consumers. Other jingles, characters (mascots), or symbols you may be familiar with include the Jolly Green Giant, the Wienermobile, and the Pillsbury Doughboy (known as Poppin' Fresh).

Do you remember the Oscar Mayer jingles? The jingle was originally developed in 1963 and is now recorded in many different languages. In 2006, Oscar Mayer promoted a singing contest for the jingle, which still remains popular. Kraft's promotions are also consistent across media, using the visuals from commercials as pictures in their print ads in both English and Spanish versions, following the IMC concept.

Key Takeaway

Organizations must determine promotion objectives, or what they want to accomplish with their promotions. For example, if a company has a new brand they may want to generate awareness or attention. Later, they may focus on persuading customers to buy their brand. Each brand needs to have a unique selling proposition (USP) for customers to remember and want their product. Depending on their objectives and their USP, marketers must develop a messaging strategy, whether humor, rational or fear-based.

Review Questions

1. Identify the different promotion objectives companies may use.

2. What are some of the message strategies organizations use?

3. What is the difference between an open-ended and a closed-ended message?

The Promotion Budget

Learning Objectives

1. Understand different ways in which promotion budgets can be set.

2. Understand how the budget can be allocated among different media.

An offering's budget is a critical factor when it comes to deciding which message strategies to pursue. Several methods can be used to determine the promotion budget. The simplest method for determining the promotion budget is often merely using a percentage of last year's sales or the projected sales for the next year. This method does not take into account any changes in the market or unexpected circumstances. However, many firms use this method because it is simple and straightforward.

The affordable method, or what you think you can afford, is a method used often by small businesses. Unfortunately, things often cost more than anticipated, and you may not have enough money. Many small businesses think they're going to have money for promotion, but they run out and cannot spend as much on promotion as they had hoped. Such a situation may have happened to you when you planned a weekend trip based on what you thought you could afford, and you did not have enough money. As a result, you had to modify your plans and not do everything you planned.

Other companies may decide to use competitive parity—that is, they try to keep their promotional spending comparable to the competitors' spending level. This method is designed to keep a brand in the minds of consumers. During a recession, some firms feel like they must spend as much—if not more—than their competitors to get customers to buy from them. Other companies are forced to cut back on their spending or pursue more targeted promotions. When Kmart faced bankruptcy, they cut back on expenditures, yet they kept their advertising inserts (free-standing inserts, or FSI) in Sunday newspapers to remain competitive with other businesses that had an FSI.

A more rational and ideal approach is the objective and task method, whereby marketing managers first determine what they want to accomplish (objectives) with their communication. Then they determine what activities—commercials, sales promotions, and so on—are necessary to accomplish the objectives. Finally, they conduct research to figure out how much the activities, or tasks, cost in order to develop a budget.

Part of the budgeting process includes deciding how much money to allocate to different media. Although most media budgets are still spent predominantly on traditional media, shifts in spending are occurring as the media landscape continues to change. Mobile marketing continues to become more popular as a way to reach specific audiences. Over one-third of cell phone users were exposed to mobile advertising in 2009, and 16 percent of the people exposed to mobile advertising responded to the ads via text messaging. Younger people are typically the most accepting of mobile advertising (Loechner, 2009). Spending on mobile ads is expected to grow 80 percent from $1.45 billion in 2011 to $2.61 billion in 2012. A big part of the growth is due to the mobile search business of Google (Cotton, 2012).

Mobile marketing allows advertisers to communicate with consumers and businesses on the go. Over half of Chinese, Korean, Indian, and Thai Internet users access social media sites through their phones rather than through computers ("Social Network Site Users Ready to Go Mobile," 2009). While many marketers plan to use electronic devices for their mobile-marketing strategies, other firms may use movable or mobile promotions that, as discussed earlier, are also considered out-of-home advertising.

Key Takeaway

Companies can determine how much to spend on promotion through several different methods. The percent of sales method, in which companies use a set percentage of sales for their promotion, is often the easiest method. Small companies may focus on what they think they can afford while other organizations may try to keep their promotions relatively equal to their competitors'. The objective and task approach takes objectives into consideration and the costs of the tasks necessary to accomplish objectives in order to determine the promotion budget.

Review Questions

1. Explain four different ways to set a product's promotion budget.

2. What is mobile marketing?

Sales Promotions

Learning Objectives

1. Learn about different types of sales promotions companies use to get customers to buy their products.

2. Understand the different types of sales promotions companies use with their business customers.

3. Understand why sales promotions have become such an integral part of an organization's promotion mix.

4. Differentiate between push and pull strategies.

Sales promotions are activities that supplement a company's advertising, public relations, and professional selling efforts. They create incentives for customers to buy products more quickly and make larger purchases. Sales promotions are often temporary, but when the economy is weak, sales promotions become even more popular for consumers and are used more frequently by organizations.

Consumer Sales Promotions

Samples, coupons, premiums, contests, and rebates are examples of consumer sales promotions. Do you like free samples? Most people do. A free sample allows consumers to try a small amount of a product with the hope that they will purchase it. The strategy encourages trial and builds awareness. You have probably purchased a product that included a small free sample with it—for example, a small amount of conditioner packaged with your shampoo. Have you ever gone to a store that provided free samples of different food items? Although sampling is an expensive strategy, it is usually very effective for food products. People try the product, and the person providing the sample tells them about the product and mentions any special prices for it.

In many retail grocery stores, coupons are given to consumers with the samples. Coupons provide an immediate price reduction off an item. The amount of the coupon is later reimbursed to the retailer by the manufacturer. The retailer gets a handling fee for accepting coupons. When the economy is weak, more consumers cut out coupons and look for special bargains such as double coupons and buy-one-get-one-free (BOGO) coupons. They may also buy more store brands.

While many consumers cut coupons from the inserts in Sunday newspapers, other consumers find coupons online or on their cell phones. Point-of-purchase displays, including coupon machines placed next to products in stores, encourage consumers to buy a brand or product immediately. When a consumer sees a special display or can get a coupon instantly, manufacturers hope the sales promotion increases sales. Stores may also provide coupons for customers with loyalty cards to encourage them to select particular brands and products.

Mobile marketing and the Internet provide consumers in international markets access to coupons and other promotions. In India, the majority of coupons used are digital, while paper coupons have the largest share in the United States. Over 80 percent of diapers are purchased with coupons; imagine how much easier and less wasteful digital coupons scanned from a mobile phone are for both organizations and consumers.

Other sales promotions may be conducted online and include incentives such as free items, free shipping, coupons, and sweepstakes. For example, many online merchants such as Shoe Station and Zappos offer free shipping and free return shipping to encourage consumers to shop online. Some firms have found that the response they get to their online sales promotions is better than response they get to traditional sales promotions.

Another very popular sales promotion for consumers is a premium. A premium is something you get either for free or for a small shipping and handling charge with your proof of purchase (sales receipt or part of package). Remember wanting your favorite cereal because there was a toy in the box? The toy is an example of a premium. Sometimes you might have to mail in a certain number of proofs of purchase to get a premium. The purpose of a premium is to motivate you to buy a product multiple times. What many people don't realize is that when they pay the shipping and handling charges, they may also be paying for the premium.

Contests or sweepstakes also attract a lot of people. Contests are sales promotions people enter or participate in to have a chance to win a prize. The Publisher's Clearing House Sweepstakes and the Monopoly Game at McDonald's are both examples. The organization that conducts the sweepstakes or contest hopes you will not only enter its contest but buy some magazines (or more food) when you do.

Loyalty programs are sales promotions designed to get repeat business. Loyalty programs include things such as frequent flier programs, hotel programs, and shopping cards for grocery stores, drugstores, and restaurants. Sometimes point systems are used in conjunction with loyalty programs. After you accumulate so many miles or points, an organization might provide you with a special incentive such as a free flight, free hotel room, or free sandwich. Many loyalty programs, especially hotels and airlines, have partners to give consumers more ways to accumulate and use miles and points.

Rebates are popular with both consumers and the manufacturers that provide them. When you get a rebate, you are refunded part (or all) of the purchase price of a product back after completing a form and sending it to the manufacturer with your proof of purchase. The trick is completing the paperwork on time. Although different types of sales promotions work best for different organizations, rebates are very profitable for companies because many consumers forget or wait too long to send in their rebate forms. Consequently, they do not get any money back. Rebates sound great to consumers until they forget to send them back.

Trade Promotions

In business-to-business (B2B) marketing, sales promotions are typically called trade promotions because they are targeted to channel members who conduct business or "trade" with consumers. Trade promotions include trade shows, conventions, event marketing, trade allowances, training, and special incentives given to retailers to market particular products and services, such as extra money, in-store displays, and prizes.

Trade shows are one of the most common types of sales promotions in B2B markets. A trade show is an event in which firms in a particular industry display and demonstrate their offerings to other organizations they hope will buy them. There are typically many different trade shows in which one organization can participate. Using displays, brochures, and other materials, representatives at trade shows can identify potential customers (prospects), inform customers about new and existing products, and show them products and materials. Representatives can also get feedback from prospects about their company's products and materials and perhaps about competitors.

Companies also gather competitive information at trade shows because they can see the products other firms are exhibiting and how they are selling them. While approximately 75 percent of representatives attending trade shows actually buy the product(s) they see, 93 percent of attendees are influenced by what they see at the trade shows. However, only 20 percent of organizations follow up on leads obtained at trade shows and only 17 percent of buyers are called upon after they express interest in a particular company's products (Tanner & Pitta, 2009).

Trade shows can be very successful, although the companies that participate in them need to follow-up on the leads generated at the shows. With changing technology, Webinars are being used to reach businesses that may not be able to attend trade shows. Follow-up after a Webinar is also essential.

Conventions, or meetings, with groups of professionals also provide a way for sellers to show potential customers different products. For example, a medical convention might be a good opportunity to display a new type of medical device. Sales representatives and managers often attend conventions to market their products.

Sales contests, which are often held by manufacturers or vendors, provide incentives for salespeople to increase their sales. Often, the contests focus on selling higher-profit or slow-moving products. The sales representative with the most sales wins a prize such as a free vacation, company recognition, or cash.

Trade allowances give channel partners—for example, manufacturers wholesalers, distributors, retailers, and so forth—different incentives to push a product. One type of trade allowance is an advertising allowance (money) to advertise a seller's products in local newspapers. An advertising allowance benefits both the manufacturer and the retailer. Typically, the retailer can get a lower rate than manufacturers on advertising in local outlets, saving the manufacturer money. The retailer benefits by getting an allowance from the manufacturer.

Another sales promotion that manufacturers, such as those in the tool or high-tech industries, offer businesses is training to help their salespeople understand how the manufacturers' products work and how consumers can be enticed to buy them. Many manufacturers also provide in-store product demonstrations to show a channel partner's customers how products work and answer any questions they might have. Demonstrations of new video game systems and computers are extremely popular and successful in generating sales.

Free merchandise, such as a tool, television, or other product produced by the manufacturer, can also be used to get retailers to sell products to consumers. In other words, a manufacturer of televisions might offer the manager of a retail electronics store a television to push its products. If a certain number of televisions are sold, the manager gets the television. Have you ever been to an electronics store or a furniture store and felt like the salesperson was pushing one particular television or one particular mattress? Perhaps the salesperson was getting push money, or a cash incentive from the manufacturer to push a particular item. The push to sell the item might be because there is a large amount of inventory of it, it is being replaced by a new model, or the product is not selling well.

Push Versus Pull Strategy

Businesses must also decide whether to use a push strategy, a pull strategy, or both push and pull strategies. A push strategy involves promoting a product to businesses (middlemen), like wholesalers and retailers, who then push the product through the channel promoting it to final consumers. Manufacturers may set up displays in retail outlets for new products or provide incentives such as price discounts to the retailer so the retailer can promote or push the product to consumers.

Companies use a pull strategy when they target final consumers with promotions. In other words, a company promotes it products and services to final consumers to pull consumers into the stores or get the consumers asking for the product. If a company sends coupons to the consumers, hopefully the consumers will take the coupons (sales promotion) to the store and buy the product. A manufacturer promotes its new product on television to consumers and places coupons in the newspaper inserts, hoping consumers will demand the product. Their pull causes wholesalers and retailers to buy the product to try to meet the demand.

Many manufacturers use both a push strategy and a pull strategy, promoting their products and services to final consumers and their trade partners (e.g., retailers and wholesalers).

Key Takeaway

Companies use sales promotions to get customers to take action (make purchases) quickly. Sales promotions increase the awareness of products, help introduce new products, and often create interest in the organizations that run the promotions. Coupons, contests, samples, and premiums are among the types of sales promotions aimed at consumers. Trade promotions, or promotions aimed at businesses, include trade shows, sales contests, trade allowances, and push money.

Review Questions

1. What are the objectives of sales promotions?

2. What is a trade promotion?

3. Identify and provide an example of three sales promotion tools targeted at consumers.

4. Identify and provide an example of three sales promotion tools targeted at businesses.

5. Explain the difference between a push strategy and a pull strategy.

Discussion Questions and Activities

Discussion Questions

1. Provide an example of how an organization, such as your university, uses different media to present a consistent message using integrated marketing communications (IMC). Who is their target, what is their message, and what media should they use?

2. In your opinion, what are the advantages and disadvantages of advertising on the radio, in magazines, on television, through direct marketing, and on the Internet?

3. Give an example of an organization's promotional strategy and how it gets consumers to select it, pay attention to it, and retain it as intended.

4. Give an example of the unique selling proposition for one of your favorite brands. What is your unique selling proposition?

5. Explain why companies might use different budgeting methods to set their promotional budgets.

6. Think about and provide examples of two different message strategies you've seen in commercials in the last year. Why do you think they were or were not effective?

7. As the manufacturer of small appliances, explain how you might plan to use both a push strategy and pull strategy.

8. What type of sales promotions do you feel are most effective for college students?

Activities

1. Identify your three favorite and least favorite commercials and explain why you do or don't like each one. Notice whether there are similarities in your preferences. In other words, are your favorite commercials humorous? Are your least favorite commercials annoying?

2. Create a message strategy for a cover letter to go with your résumé.

3. Outline three message strategies that you feel would get consumers' attention in television commercials and in print ads.

4. Create a sales promotion you think will attract a lot of students to your favorite fast-food restaurant.

5. You are applying for a job in an advertising agency. Write an ad about yourself, explaining your unique selling proposition and why they should hire you.

6. Watch television at three different times (late night, mid-day, and prime time). What types of commercials were shown at each time? Did you notice a difference in quality, products/services advertised, or creativity? Why do you think there was a variance?

7. What media do you think would be most (and least) effective for college students? Why?

References

Cotton, D. (2012, January 26). Mobile-ad spending projected to reach $2.61B in 2012. Ad Age Digital. Retrieved from http://adage.com/article/digital/mobile-ad-spending-projected-reach-2-61b-2012/232334/

Dilworth, D. (2010, January 7). FedEx launches fully integrated campaign, featuring e-mail, direct mail. Direct Marketing News. Retrieved from http://www.dmnews.com/fedex-launches-fully-integrated-campaign-featuring-e-mail-direct-mail/article/160829/

Loechner, J. (2009, May 27). Advertising growth spreads in all mobile formats. Research Brief, MediaPost Blogs. Retrieved from http://www.mediapost.com/publications/article/106675/advertising-growth-spreads-in-all-mobile-formats.html (accessed March 12, 2012).

PQ Media: New media spend to hit $160B in 2012. (2008, March 26). MarketingVOX. Retrieved from http://www.marketingvox.com/pq-media-new-media-spend-to-hit-160b-in-2012-037592 (accessed December 15, 2009).

Social network site users ready to go mobile but telecom carriers need to set the stage for mass adoption, says IDC. IDC, November 17, 2009, Retrieved http://www.idc.com/AP/pressrelease.jsp?containerId=prSG22084309 (accessed January 20, 2010).

Tanner, John F., Jr., & Pitta, D. (2009). Identifying and creating customer value. Special session presentation, Summer Educators' Conference, Chicago.

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