MARKETING HOMEWORK

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Part Three

Make marketing value decisions (Part One)

Understand consumers’ value needs (Part Two)

Create the value proposition (Part Three)

Communicate the value proposition (Part Four)

Deliver the value proposition (Part Five)

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Create the Value Proposition Part Three focuses on the value offering a firm brings to the market. This offering— which often is generically referred to as sim-

ply the “product”—can be in the form of an actual physical good, service, or other intangible. It has often been said that among the four elements of the marketing mix—product, price, promotion, and distribution—if the product itself isn’t right, the other three elements of the mix probably won’t overcome that deficiency in the mind of the consumer. Making decisions about developing new products and how individual consumers and organizations decide to adopt those products is critical to any marketer, and that is the topic of Chapter 8. Chapter 9 then addresses important is- sues marketers face in managing products, that is, the product life cycle, branding, packaging, and long-term product management.

Part Three Overview

You’ve no doubt heard the phrase “service economy” to describe today’s marketplace. Services and other intangible offerings comprise a very large percentage of the purchase transactions nowadays throughout the world. In Chapter 10 you have the opportunity to learn about the unique charac- teristics of services and understand what it takes to deliver value to customers through service quality. Finally, a big part of creating the value proposition is making decisions about how to price the offering. Remember that value is like a give/get ratio—the customer gives something up (money, for instance) in the belief that a good or service will have benefits that equal or exceed the price paid. Chapter 11 pro- vides you with great ideas on how to go about pricing your offering.

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Marketing: Real People, Real Choices, Seventh Edition, by Michael R. Solomon, Greg W. Marshall, and Elnora W. Stuart. Published by Prentice Hall. Copyright © 2012, 2009, 2008, 2006, 2003 Pearson Education, Inc.

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Marketing Plan Connection: Tricks of the Trade Recall that the Appendix at the end of the book provides you with an abbreviated marketing plan example for the fictitious S&S Smoothie Company. That plan is flagged to indicate what elements from the plan correspond to each of the Parts within the book. In addition, in Chapter 2 you found a tear-out guide called “Build a Marketing Plan,” which can be used as a tem- plate for marketing planning. It is also cross-referenced to chap- ters by section of the marketing plan.

In the chapters within Part Three, there are major learning el- ements that guide you in developing two critical elements of your marketing plan: your product strategies in which you outline how you will develop and manage the offering (both physical product and service components) and your pricing strategies.

Recall that S&S Smoothie seeks to position its products as the first-choice smoothie beverage for the serious health-conscious consumer, including those who are seeking to lower their carbo- hydrate intake. The justification for this positioning is as follows: Many smoothie beverages are available. The S&S Smoothie for- mula provides superior flavor and nutrition in a shelf-stable form. S&S Smoothie has developed its product (including packaging) and pricing in support of this positioning strategy. Let’s review what they’re doing with these two marketing mix elements to support that positioning.

Product Strategies To increase its leverage in the market and to meet its sales objec- tives, S&S Smoothie needs additional products. Two new prod- uct lines are planned:

1. S&S Smoothie Gold: This product will be similar to the orig- inal S&S Smoothie beverage but will come in six unique flavors: a. Piña Colada b. Chocolate Banana

c. Apricot Nectarine Madness d. Pineapple Berry Crush e. Tropical Tofu Cherry f. Peaches and Dreams

The nutritional content, critical to the success of new products in this category, will be similar to that of the origi- nal S&S Smoothie beverages. The packaging for S&S Smoothie Gold will also be similar to that used for the orig- inal product, utilizing the unique easy-to-hold, hourglass- shaped, frosted glass bottle and providing the new beverage with the same upscale image. But to set the product apart from the original-flavor Smoothie beverages in store refrig- erator cases, labels will include the name of the beverage and the logo in gold lettering. The bottle cap will be black.

2. Low-Carb S&S Smoothie: The Low-Carb S&S Smoothie bev- erage will have approximately 50 percent fewer grams of carbohydrates than the original Smoothie beverage or the S&S Smoothie Gold. Low-Carb S&S Smoothie will come in the following four flavors: a. Strawberry b. Blueberry c. Banana d. Peach Packaging for the Low-Carb S&S Smoothie will be similar to other S&S Smoothie beverages but will include the term “Low-Carb” in large type. The label will state that the bev- erage has 50 percent fewer carbs than regular smoothies.

Pricing Strategies The current pricing strategy will be maintained for existing and new products. This pricing is appropriate for communicating a high-quality product image for all S&S Smoothie products. The company believes that creating different pricing for the new beverages would be confusing and create negative attitudes among consumers. Thus, there is no justification for increasing the price of the new products.

>>You Can Do It Too! Now, if you are working on a marketing plan as part of your course, go to www.mypearsonmarketinglab.com to apply what you learn in Part Three to your own marketing plan project.

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Chapter | 8

Create the Product

Real People Profiles

A Decision Maker at Bossa Nova Superfruit

Company Palo Hawken is co-founder and vice president of research and innovation at Bossa Nova. His dream from an early age was to become an inventor, which led him to pursue both a degree in physics from UC Santa Cruz and a degree in in- dustrial design from the Rhode Island School of Design. When he completed his degree at RISD in 1996, he was in- vited to join his mentor and former professor Stephan Copeland to help de- velop his consulting business. After three

years of working at the Copeland studio, primarily in the contract furniture industry for companies like Steelcase, Knoll, and Innovant, Palo moved to New York to start a furniture company. It was not a very successful venture, but it eventually led him to Los Angeles, where he met Alton Johnson and joined forces to launch Bossa Nova. Palo’s specialty is harnessing the underappreciated power of design from for- mulation, to functionality, to packaging, to maximize any given market opportunity.

Palo’s Info

What do I do when I’m not working? A) Tracking wild cats in Topanga Canyon.

My hero? A) My father, Paul Hawken.

My motto to live by? A) Don’t complain, don’t explain.

What drives me? A) Knowing that there is more to do in this lifetime than I could possibly achieve.

My management style? A) MBA (Management By Absence).

My pet peeve? A) Not doing what you say you are going to do.

Profile Info

Palo Hawken

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Bossa Nova was born out of the founder Alton Johnson’s fascination with the fruits of Brazil.

While visiting there on business, he was constantly served platters of local fruits with unrecognizable flavors and names that invariably were accompa-

nied by intriguing stories of health and heal- ing. Because many of these legends seemed too good to be true, he initiated one of the first university studies to analyze them in greater depth. The results were compelling enough to launch a multiyear R&D effort to find the best way to commercialize the two most promising items: the açai and guarana fruits.

In the summer of 2004, Bossa Nova was completing a regional southern Califor- nia test market of its launch product: a line of premium, guarana-flavored carbonated en- ergy drinks. This line had four SKUs: a rain- forest refresher and an energy drink in both regular and diet versions. At the same time Bossa Nova was also putting the finishing touches on the crowning achievement of its R&D department—the world’s first juice from an unknown Brazilian palm berry called açai. Açai had been overlooked by those out-

side Brazil for decades as it was notoriously hard to work with—spoiling within hours of picking and containing naturally occurring fats that looked and smelled awful. But it was also rumored to be the world’s highest antiox- idant fruit (the company’s university research partners confirmed this find- ing). In the fall of 2004, after years of work, Bossa Nova had finally commercialized a method for extracting the bright purple, antioxidant-rich juice from the brownish pulp.

Palo and his partner had succeeded in creating a compelling (and ex- pensive) new ingredient, but he wasn’t sure how it fit into the product line Bossa Nova was currently selling. If indeed the company had just created the highest antioxidant juice ingredient in the world, what was the product that best took advantage of this opportunity? Palo’s role as head of product de- velopment was to make sure the new company could capitalize on this op- portunity with the right new product strategy.

Palo considered his Options 1 • 2 • 3 Add the new açai juice ingredient to one of the three products Bossa Nova was already making to create a car- bonated “antioxidant superfruit refresher.” This would cre- ate a unique health proposition in the carbonated beverage category, not known for substantive health or functional claims. This option lent itself to an easy and rapid product development

cycle because Bossa Nova would be leveraging its current product platform rather than having to create a new manufacturing process. It would be fairly easy to stimulate sales because the company would be working with the same buyers, making it unnecessary to forge relationships with new retail customers. On the other hand, the powerful health story of açai could get lost in an essentially unhealthy product platform (basically, sugar water). And the new ingredient would only be included in one of the company’s four See what option Palo chose on page 239

SKUs, so it wouldn’t create the splash Palo hoped for. In addition, the dark açai juice looked murky and intimidating in the cobalt blue bottle that gave Bossa Nova’s energy drinks so much life. The company’s technical people weren’t sure how to change that property of the juice.

Go all out: Create a new line of pure açai juices in a new package that would showcase its world-class nutritional features and benefits. Açai would not be an ingredient in an energy drink (as in Option 1); it would be the core ingredient of a whole new product line. At that time the market leader in pre- mium antioxidant juices, POM Wonderful, was pulling in about

$20–$30 million annually in sales by promoting its antioxidant message, and Palo saw Bossa Nova as a fast follower that could grab a piece of that mar- ket. Adding a new product line could diversify the firm’s product portfolio, which would also build brand awareness in two places in the store instead of one (on the carbonated, 4-pack dry shelf, and in the fresh juice case in the produce department). Bossa Nova could help define the emerging beverage category of premium/functional antioxidant juices.

• On the other hand, another product line could overextend Bossa Nova; it would force the company to spread already scarce capital and human resources across two product lines rather than focusing on one. This option would also be risky because the current product line wasn’t yet firmly established in the market. Finally, the brand wasn’t originally de- signed to embody the health message of the new açai juice line. It was too playful and needed more science/credibility, which Palo was unclear on how to achieve.

Rewrite, reraise, rebuild. Rewrite the business plan to focus on developing a single product line that could stake the claim to the title of highest antioxidant juice in the world. This option was the riskiest, because it entailed raising a significant amount of capital, selling off the existing carbonated inventory, rebrand- ing the company, and generally moving back to square one. If

this option were successful, it would result in a strong seductive product con- cept with a radical value proposition (both a “world’s first . . .” and a “world’s highest ...”). The company would also be able to ride the coattails of $5 mil- lion of advertising by POM Wonderful designed to educate consumers about the benefits of antioxidants. Of course, this choice would entail huge risk; it would mean a decision to jettison a small but successful product line and remake/rebrand a new company that had already burned through $500,000 in seed capital. And, although the new açai juice ingredient was the world’s highest antioxidant juice, it was very expensive to produce and the margins were dangerously low.

Now, put yourself in Palo’s shoes: Which option would you pick, and why?

You Choose

Which Option would you choose, and why?

1. YES NO 2. YES NO 3. YES NO

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Option

Things to remember

Bossa Nova makes specialty products; people who are looking for healthy beverages aren’t likely to be turned off by relatively expensive alternatives because quality is more important to them than price.

A new product needs to have a crisp, clear message that shows consumers how it’s different and worth switching to. Most people have never heard of açai juice so Bossa Nova will need to educate them about just what that is and why they should care.

Here’s my problem. . . Real People, Real Choices

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Build a Better Mousetrap—And Add Value “Build a better mousetrap and the world will beat a path to your door.” Although we’ve all heard that adage, the truth is that just because a product is better there is no guarantee it will succeed. For decades, the Woodstream Company built Victor brand wooden mouse-

traps. Then the company decided to build a better one. Woodstream’s product- development people researched the eating, crawling, and nesting habits of mice (hey, it’s a living). They built prototypes of different mousetraps to come up with the best possible design and tested them in homes. Then the com- pany unveiled the sleek-looking “Little Champ,” a black plastic miniature in- verted bathtub with a hole. When the mouse went in and ate the bait a spring snapped upward—and the mouse was history.

Sounds like a great new product (unless you’re a mouse), but the Little Champ failed. Woodstream studied mouse habits, not consumer preferences. The company later discovered that husbands set the trap at night, but in the morning it was the wives who disposed of the trap holding the dead mouse. Unfortunately, many of them thought the Little Champ looked too expensive to throw away, so they felt they should empty the trap for reuse. This was a task most women weren’t willing to do—they wanted a trap they could hap- pily toss into the garbage.1

Woodstream’s failure in the “rat race” underscores the importance of cre- ating products that provide the benefits people want rather than just new giz- mos that sound like a good idea. It also tells us that any number of products, from low-tech cheese to high-tech traps, potentially deliver these benefits. Despite Victor’s claim to be the “World’s Leader in Rodent Control Solu- tions,” in this case cheese and a shoe box could snuff out a mouse as well as a high-tech trap.

We need to take a close look at how products successfully trap con- sumers’ dollars by providing value. Chapter 1 showed us that the value propo- sition is the consumer’s perception of the benefits she will receive if she buys a good or service. So, the marketer’s task is twofold: first, to create a better value than what’s out there already and second, to convince customers that this is true.

As we defined it in Chapter 1, a product is a tangible good, service, idea, or some combination of these that satisfies consumer or business customer needs through the exchange process; it is a bundle of attributes including fea- tures, functions, benefits, and uses. Products can be physical goods, services, ideas, people, or places. A good is a tangible product, something that we can see, touch, smell, hear, taste, or possess. It may take the form of a pack of cook- ies, a digital camera, a house, a fancy new smartphone, or a chic but pricey Coach handbag. In contrast, intangible products—services, ideas, people, places—are products that we can’t always see, touch, taste, smell, or possess. We’ll talk more about intangible products in Chapter 10.

Marketers think of the product as more than just a thing that comes in a package. They view it as a bundle of attributes that includes the packaging, brand name, benefits, and supporting features in addition to a physical good.

Chapter 8

218 PART THREE | CREATE THE VALUE PROPOSITION

Objective Outline 1. Explain how value is derived through

different product layers.

BUILD A BETTER MOUSETRAP—AND ADD VALUE (p. 218)

2. Describe how marketers classify products.

HOW MARKETERS CLASSIFY PRODUCTS (p. 221)

3. Understand the importance and types of product innovations.

“NEW AND IMPROVED!” THE PROCESS OF INNOVATION (p. 225)

4. Show how firms develop new products.

NEW PRODUCT DEVELOPMENT (p. 228)

5. Explain the process of product adoption and the diffusion of innovations.

ADOPTION AND DIFFUSION OF NEW PRODUCTS (p. 233)

(pp. 233–239)

(pp. 228–233)

(pp. 225–227)

(pp. 221–225)

(pp. 218–220)

Check out chapter 8 Study Map on page 240

1 OBJECTIVE

Explain how value is

derived through

different product

layers. (pp. 218–220)

attributes Include features, functions, benefits, and uses of a product. Marketers view products as a bundle of attributes that includes the packaging, brand name, benefits, and supporting features in addition to a physical good.

good A tangible product that we can see, touch, smell, hear, or taste.

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CHAPTER 8 | CREATE THE PRODUCT 219

We are now in Part 3 of this book, “Create the Value Proposition.” The key word here is create, and a large part of the marketer’s role in creating the value proposition is to develop and market products appropriately. In this chapter, we’ll first examine what a product is and see how marketers classify consumer and business-to-business products. Then we’ll go on to look at new products, how marketers develop new products, and how markets accept them (or not). In the chapters that follow, we’ll look at how marketers manage and assign a price to goods and services.

Layers of the Product Concept No doubt you’ve heard someone say, “It’s the thought, not the gift that counts.” This means that the gift is a sign or symbol that the gift giver has remembered you (or possibly it means that you hate the gift but are being polite!). When we evaluate a gift, we may consider the following: Was it presented with a flourish? Was it wrapped in special paper? Was it obvi- ously a “re-gift”—something the gift giver had received as a gift for herself but wanted to pass on to you? These dimensions are a part of the total gift you receive in addition to the actual goodie in the box.

Like a gift, a product is everything that a customer receives in an exchange. As Figure 8.1 shows, we distinguish among three distinct layers of the product—the core product, the ac- tual product, and the augmented product. When they develop product strategies, marketers need to consider how to satisfy customers’ wants and needs at each of these three layers—that is, how they can create value. Let’s consider each layer in turn.

Augmented Product

Warranty Repair/maintenance service after the sale Installation Customer support services Delivery Credit Product-use instruction

Engine size Color Interior design Body size Body style Options available Model name (Camry, Corolla, etc.) Workmanship

Features Package Brand Quality Appearance

Transportation Carrying cargo Excitement Image enhancement

4-year, 50,000-mile, bumper-to-bumper warranty Dealer parts and repair department Dealer preparation prior to delivery Owner instruction manual 2.9% interest auto loan Toll-free customer complaint number Customer problem policies Free lubrication and oil changes

Basic Benefits

The Product Automobile

Actual Product

Core Product

Figure 8.1 Snapshot | Layers of the Product A product is everything a customer receives—the basic benefits, the physical product and its packaging, and the “extras” that come with the product.

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220 PART THREE | CREATE THE VALUE PROPOSITION

The Core Product

The core product consists of all the benefits the product will provide for consumers or busi- ness customers. As we noted in Chapter 1, a benefit is an outcome that the customer receives from owning or using a product. Wise old marketers (and some young ones, too) will tell you, “A marketer may make and sell a half-inch drill bit, but a customer buys a half-inch hole.” This tried-and-true saying tells us that people buy the core product, in this case, the ability to make a hole. If a new product, such as a laser, comes along that provides that out- come in a better way or more cheaply, the drill-bit maker has a problem. The moral of this story? Marketing is about supplying benefits, not attributes.

Many products actually provide multiple benefits. For example, the primary benefit of a car is transportation—all cars (in good repair) provide the ability to travel from point A to point B. But products also provide customized benefits—benefits customers receive because manufacturers add “bells and whistles” to win customers. Different drivers seek different customized benefits in a car. Some simply want economical transportation; others appreci- ate an environmentally friendly hybrid car; and still others want a top-of-the-line, all-terrain vehicle, or perhaps a hot sports car that will be the envy of their friends.

The Actual Product

The second layer—the actual product—is the physical good or the delivered service that supplies the desired benefit. For example, when you buy a washing machine, the core prod- uct is the ability to get clothes clean, but the actual product is a large, square, metal appara- tus. When you get a medical exam, the core service is maintaining your health, but the actual one is a lot of annoying poking and prodding. The actual product also includes the unique features of the product, such as its appearance or styling, the package, and the brand name. Sony makes a wide range of televisions from tiny, battery-powered TVs for camping trips, to massive plasma televisions that can display a resolution rivaling reality—but all offer the same core benefit of enabling you to catch Stewie Griffin’s antics on the latest episode of Family Guy.

The Augmented Product

Finally, marketers offer customers an augmented product— the actual product plus other supporting features such as a warranty, credit, delivery, installation, and repair service af- ter the sale. Marketers know that adding these supporting features to a product is an effective way for a company to stand out from the crowd.

For example, Apple revolutionized the music business when it created its iTunes Music Store that enables con- sumers to download titles directly to their digital music and video libraries. It also conveniently saves you the trouble of correctly inserting, labeling, and sorting new music on your iPod because it does that automatically. Plus, because so many of us tote around an MP3 player, you don’t even have to worry about where to store all those stacks of CDs. Apple’s augmented product (convenience, extensive selection, and ease of use) pays off handsomely for the company in sales and profits, and customers adore the fact that you can do it all on your laptop if you want. You crave a track or video clip and two minutes later you’ve got it.

actual product The physical good or the delivered service that supplies the desired benefit.

Are record albums doomed to the fate of the dinosaur? Maybe, but old-style phonograph records from the ’80s and earlier are something of a cult product on sites like eBay, and connoisseurs of real “albums” swear that the analog sound is “richer” (static and all) than the crisp digital recordings of today.

core product All the benefits the product will provide for consumers or business customers.

augmented product The actual product plus other supporting features such as a warranty, credit, delivery, installation, and repair service after the sale.

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How Marketers Classify Products So far we’ve learned that a product may be a tangible good or an intan- gible service or idea and that there are different layers to the product through which a consumer can derive value. Now we’ll build on these ideas as we look at how products differ from one another. Marketers classify products into categories because they represent differences in how consumers and business customers feel about products and how they purchase different products. Such an understanding helps mar-

keters develop new products and a marketing mix that satisfies customer needs. Generally, products are either consumer products or business-to-business products, al-

though sometimes consumers and businesses buy the same products, such as toilet paper, vacuum cleaners, and light bulbs. In these cases, though, businesses tend to buy a lot more of them at once. Of course, as we saw, customers differ in how they decide on a purchase, depending on whether the decision maker is a consumer or a business purchaser. Let’s first consider differences in consumer products based on how long the product will last and on how the consumer shops for the product. Then we will discuss the general types of business-to-business products.

How Long Do Products Last? Marketers classify consumer goods as durable or nondurable depending on how long the product lasts. You expect a refrigerator to last many years, but a gallon of milk will last only a week or so until it turns into a science project. Durable goods are consumer products that provide benefits over a period of months, years, or even decades, such as cars, furniture, and appliances. In contrast, we consume nondurable goods, such as newspapers and food, in the short term.

We are more likely to purchase durable goods under conditions of high involvement (as we saw in Chapter 5), while nondurable goods are more likely to be low-involvement deci- sions. When consumers buy a computer or a house, they will spend a lot of time and energy on the decision process. When they offer these products, marketers need to understand con- sumers’ desires for different product benefits and the importance of warranties, service, and customer support. So they must be sure that consumers can find the information they need. One way is to provide a “Frequently Asked Questions” (FAQs) section on a company Web site. Another is to host a Facebook page, Twitter feed, message board, or blog to build a com- munity around the product. When a company itself sponsors such forums, odds are the con- tent will be much more favorable and the firm can keep track of what people say about its products. For example, the section of the Microsoft Web site called “Microsoft Technical Communities” allows users to interact with Microsoft employees, experts, and peers in or- der to share knowledge and news about Microsoft products and related technologies.2

In contrast, consumers usually don’t “sweat the details” so much when they choose among nondurable goods. There is little if any search for information or deliberation. Sometimes this means that consumers buy whatever brand is available and reasonably priced. In other instances, they base their decisions largely on past experience. Because a certain brand has performed satisfactorily before, customers see no reason to consider other brands, and they choose the same one out of habit. For example, even though there are other brands available most consumers buy that familiar yellow bottle of French’s Mus- tard again and again. In such cases, marketers can probably be less concerned with devel- oping new product features to attract customers; they should focus more on creating new

durable goods Consumer products that provide benefits over a long period of time, such as cars, furniture, and appliances.

nondurable goods Consumer products that provide benefits for a short time because they are consumed (such as food) or are no longer useful (such as newspapers).

2 OBJECTIVE

Describe how

marketers classify

products. (pp. 221–225)

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222 PART THREE | CREATE THE VALUE PROPOSITION

Convenience Products

Consumer Business

Equipment

Maintenance, Repair, and Operating (MRO)

Raw Materials

Processed Materials and Special Services

Component Parts

Shopping Products

Specialty Products

Unsought Products

Figure 8.2 Snapshot | Classification of Products

Products are classified differently depending on whether they are in the consumer or business market.

uses of the existing product, as well as pricing and distribution strategies. In fact, mustard has had something of a “condiment field day” in recent years as it is extremely low in calo- ries and fat compared to its mayonnaise and ketchup competitors!

How Do Consumers Buy Products? Marketers also classify products based on where and how consumers buy the product. Fig- ure 8.2 portrays product classifications in the consumer and business marketplaces. We’ll con- sider the consumer market first. In these contexts we think of both goods and services as convenience products, shopping products, specialty products, or unsought products. Recall that we talked about how consumer decisions differ in terms of effort they put into habitual decision making to limited problem solving to extended problem solving. We can use this idea when we want to understand why it’s important to classify products. For example, it’s a good guess that shoppers don’t put a lot of thought into buying convenience products, so a company that sells products like white bread might focus its strategy on promoting awareness of a brand name as opposed to providing a detailed “spec sheet” we might expect to find for a smartphone.

A convenience product typically is a nondurable good or service that consumers pur- chase frequently with a minimum of comparison and effort. As the name implies, con- sumers expect these products to be handy and they will buy whatever brands are easy to obtain. In general, convenience products are low-priced and widely available. You can buy a gallon of milk or a loaf of bread at most any grocery store, drug store, or convenience store. Consumers generally already know all they need or want to know about a convenience product, devote little effort to purchases, and willingly accept alternative brands if their pre- ferred brand is not available in a convenient location. Most convenience product purchases are the results of habitual consumer decision making. What’s the most important thing for marketers of convenience products? You guessed it—make sure the product is easily obtain- able in all the places where consumers are likely to look for it.

There are several types of convenience products:

• Staple products such as milk, bread, and gasoline are basic or necessary items that are available almost everywhere. Most consumers don’t perceive big differences among

convenience product A consumer good or service that is usually low-priced, widely available, and purchased frequently with a minimum of comparison and effort.

staple products Basic or necessary items that are available almost everywhere.

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brands. When selling staples, marketers must offer customers a product that consis- tently meets their expectations for quality and make sure it is available at a price com- parable to the competition’s prices. While a staple is something we usually decide to buy in advance (or at least before the fuel needle sits on “E” for too long), we buy impulse products on the spur of the moment. When you throw a copy of People maga- zine into your shopping cart because it has a cool photo of Lady Gaga on the cover, you’re acting on impulse. When they want to promote impulse products, marketers have two challenges: to create a product or package design that is enticing and that “reaches out and grabs the customer,” and to make sure their product is highly visible, for example, by securing prime end-aisle or checkout-lane space.

• As the name suggests, we purchase emergency products when we’re in dire need; ex- amples include bandages, umbrellas, and something to unclog the bathroom sink. Be- cause we need the product badly and immediately, price and sometimes product quality may be irrelevant to our decision to purchase. If you ever go to Disney World in Florida during the summer months, chances are at some point you will get caught in a sudden downpour. When that happens, Disney knows that any umbrella at any price may do and the company stocks its concessions with the product. The company also rolls out the Mickey Mouse ponchos because once the sky opens up everybody’s gotta have one.

• In contrast to convenience products, shopping products are goods or services for which consumers will spend time and effort to gather information on price, product attributes, and product quality. They are likely to compare alternatives before they buy. The pur- chase of shopping products is typically a limited problem-solving decision. Often con- sumers have little prior knowledge about these products. Because they gather new information for each purchase occasion, consumers are only moderately brand loyal; they will typically switch whenever a different brand offers new or better benefits. They may visit several stores and devote considerable effort to comparing products. Laptop computers are a good example of a shopping product because they offer an ever-expanding array of new features and functions. There are trade-offs and decisions to make about a variety of features that can be bundled including speed, screen size, weight, and battery life.

In business-to-consumer e-commerce, consumers sometimes can shop more efficiently when they use intelligent agents or shopbots—computer programs that find sites selling a particular product. Some of these programs also provide information on competitors’ prices, and they may even ask customers to rate the various e-businesses that they have listed on their site so consumers can learn from other shoppers which sellers are good and which are less than desirable. We should note, however, that some sites do not wish to com- pete on price and don’t give shopbots access to their listings.

Specialty products have unique characteristics that are important to buyers at almost any price. You can buy a mop at Target for well under $10, right? Yet the iRobot Corporation has models of its Scooba Floor Washing Robot that sell for upwards of $500! They also make equally pricey robot vacuums, pool cleaners, and gutter cleaners.3 Other examples of spe- cialty products include Rolex watches and Big Bertha golf clubs.

Consumers usually know a good deal about specialty products, and they tend to be loyal to specific brands. Generally, a specialty product is an extended problem-solving pur- chase that requires a lot of effort to choose. That means firms that sell these kinds of prod- ucts need to create marketing strategies that make their product stand apart from the rest.

Unsought products are goods or services (other than convenience products) for which a consumer has little awareness or interest until a need arises. For college graduates with their first “real” jobs, retirement plans and disability insurance are unsought products. It requires a good deal of advertising or personal selling to interest people in these kinds of

impulse products A product people often buy on the spur of the moment.

emergency products Products we purchase when we’re in dire need.

shopping products Goods or services for which consumers spend considerable time and effort gathering information and comparing alternatives before making a purchase.

intelligent agents Computer programs that find sites selling a particular product.

specialty products Goods or services that has unique characteristics and is important to the buyer and for which she will devote significant effort to acquire.

unsought products Goods or services for which a consumer has little awareness or interest until the product or a need for the product is brought to her attention.

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products—just ask any life insurance salesperson. It’s a real challenge to find convincing ways to interest consumers in unsought products. One solution may be to make pricing more attractive; for example, reluctant consumers may be more willing to buy an unsought product for “only pennies a day” than if they have to think about their yearly or lifetime cash outlay.

How Do Businesses Buy Products? Although consumers purchase products for their own use, as we saw in Chapter 6 organi- zational customers purchase items to use in the production of other goods and services or to facilitate the organization’s operation. Marketers classify business-to-business products based on how organizational customers use them. As with consumer products, when mar- keters know how their business customers use a product, they are better able to design prod- ucts and craft the entire marketing mix. Let’s briefly review the five different types of business-to-business products Figure 8.2 depicts.

• Equipment refers to the products an organization uses in its daily operations. Heavy equipment, sometimes called installations or capital equipment, includes items such as buildings and robotics Ford uses to assemble automobiles. Installations are big-ticket items and last for a number of years. Computers, photocopy machines, and water foun- tains are examples of light or accessory equipment; they are portable, cost less, and have a shorter life span than capital equipment. Marketing strategies for equipment usually emphasize personal selling and may mean custom-designing products to meet an in- dustrial customer’s specific needs.

• Maintenance, repair, and operating (MRO) products are goods that a business customer consumes in a relatively short time. Maintenance products include light bulbs, mops, cleaning supplies, and the like. Repair products are items such as nuts, bolts, washers, and small tools. Operating supplies include computer paper and oil to keep machinery running smoothly. Although some firms use a sales force to promote MRO products, others rely on catalog sales, the Internet, and telemarketing in order to keep prices as low as possible.

• Raw materials are products of the fishing, lumber, agricultural, and mining industries that organizational customers purchase to use in their finished products. For example, a food company may transform soybeans into tofu, and a steel manufacturer changes iron ore into large sheets of steel used by other firms to build automobiles, washing ma- chines, and lawn mowers. And turning one industry’s waste materials into another’s raw material is a great business model. Did you know that producers use cotton seeds left over from making textiles to make mayonnaise (check the ingredients on the back for cottonseed oil)?4

• Firms produce processed materials when they transform raw materials from their orig- inal state. Organizations purchase processed materials that become a part of the prod- ucts they make. Abuilder uses treated lumber to add a deck onto a house, and a company that creates aluminum cans for Red Bull buys aluminum ingots for this purpose.

• In addition to tangible materials, some business customers purchase specialized services from outside suppliers. Specialized services may be equipment-based, such as repair- ing a copy machine or fixing an assembly line malfunction, or non-equipment-based, such as market research and legal services. These services are essential to the operation of an organization but are not part of the production of a product.

• Component parts are manufactured goods or subassemblies of finished items that orga- nizations need to complete their own products. For example, a computer manufacturer needs silicon chips to make a computer, and an automobile manufacturer needs batter- ies, tires, and fuel injectors. As with processed materials, marketing strategies for compo-

equipment Expensive goods that an organization uses in its daily operations that last for a long time.

maintenance, repair, and operating (MRO) products Goods that a business customer consumes in a relatively short time.

raw materials Products of the fishing, lumber, agricultural, and mining industries that organizational customers purchase to use in their finished products.

processed materials Products created when firms transform raw materials from their original state.

component parts Manufactured goods or subassemblies of finished items that organizations need to complete their own products.

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nent parts usually involve nurturing relationships with customer firms and on-time delivery of a product that meets the buyer’s specifications.

To review, we now understand what a product is. We also know how marketers classify consumer products based on how long they last and how they are purchased, and we’ve seen how they classify business-to-business products according to how they use them. In the next section we’ll learn about the marketing of new products, or innovations.

“New and Improved!” The Process of Innovation “New and improved!” What exactly do we mean when we use the term new product? The Federal Trade Com- mission says that (1) a product must be entirely new or changed significantly to be called new, and (2) a product may be called new for only six months.

That definition is fine from a legal perspective. From a marketing standpoint, though, a new product or an innovation is anything that cus- tomers perceive as new and different. An innovation may be a game- changing product with cutting-edge style like the Apple iPhone that is a phone and an iPod, or the Gillette Fusion MVP razor that looks like a de- vice from Star Trek. It can also be an innovative communications approach such as Skype VoIP telephony over the Internet, or a new way to power a vehicle such as hydrogen fuel cell cars like the BMW Hydrogen 7, the Ford Focus FCV, or the Honda FCX Clarity. An innovation may be a completely new product that provides benefits never available before, such as personal computers when they were first introduced, or it may simply be an existing product with a new style, in a different color, or with some new feature, like Chocolate Cheerios.

Types of Innovations Innovations differ in their degree of newness, and this helps to determine how quickly the target market will adopt them. Because innovations that are more novel require us to exert greater effort to figure out how to use them, they are slower to spread throughout a population than new products that are similar to what is already available.

As Figure 8.3 shows, marketers classify innovations into three cat- egories based on their degree of newness: continuous innovations, dynam- ically continuous innovations, and discontinuous innovations. However, it is better to think of these three types as ranges along a continuum that goes from a very small change in an existing product to a totally new product. We can then describe the three types of innovations in terms of the amount of change they bring to people’s lives. For example, the first automobiles caused tremendous changes in the lives of people who were used to get- ting places by “horse power.” While a more recent innovation like GPS sys- tems that feed us driving directions by satellite is undoubtedly cool, in a relative sense, we have to make fewer changes in our lives to adapt to them (other than not having to ask a stranger for directions when we’re lost). And how about the Lexus LS 460 that can actually parallel park itself?5

3 OBJECTIVE

Understand the

importance and types

of product

innovations. (pp. 225–227)

innovation A product that consumers perceive to be new and different from existing products.

From a marketing standpoint an innovation is anything that customers perceive as new and different.

A sweet alternative to sugar or chemicals is an innovation.

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Continuous Innovations A continuous innovation is a modification to an existing product, such as when Crocs reinvigorated the market for clogs by offering a version of the comfy shoe with big holes punched in it. This type of modifica- tion can set one brand apart from its competitors. For example, people associate Volvo cars with safety, and Volvo comes out with a steady stream of safety-related innovations. Volvo was the first car to offer full front and side air bags, and beginning with some of its 2009 models you can get “Low Speed Collision Avoidance” and “Volvo City Safety.” The cars have a radar system that monitors the distance of the car to the car in front of you, and if you get too close, the car’s com- puter automatically applies the brakes.6

The consumer doesn’t have to learn anything new to use a contin- uous innovation. From a marketing perspective, this means that it’s usually pretty easy to convince consumers to adopt this kind of new product. For example, the current generation of high-definition plasma flat-screen monitors didn’t require computer users to change their behaviors. We all know what a computer monitor is and how it works. The system’s continuous innovation simply gives users the

added benefits of taking up less space and being easier on the eyes than old-style monitors. A knockoff is a new product that copies, with slight modification, the design of an

original product. Firms deliberately create knockoffs of clothing and jewelry, often with the intent to sell to a larger or different market. For example, companies may copy the haute couture clothing styles of top designers and sell them at lower prices to the mass market. It’s likely that a cheaper version of the gown Jennifer Aniston wears to the Academy Awards ceremony will be available at numerous Web sites within a few days after the event. It is difficult to legally protect a design (as opposed to a technological invention), be-

cause an imitator can argue that even a very slight change—different but- tons or a slightly wider collar on a dress or shirt—means the knockoff is not an exact copy.

Dynamically Continuous Innovations A dynamically continuous innovation is a pronounced modification to an ex- isting product that requires a modest amount of learning or change in behav- ior to use it. The history of audio equipment is a series of dynamically continuous innovations. For many years, consumers enjoyed listening to their favorite Frank Sinatra songs on record players. In the 1960s they swooned as they listened to the Beatles on a continuous-play eight-track tape (requiring the purchase of an eight-track tape player, of course). Then came cassette tapes to listen to the Eagles (oops, now a cassette player is needed). In the 1980s, consumers could hear Metallica songs digitally mastered on compact discs (that, of course, required the purchase of a new CD player).

In the 1990s, recording technology moved one more step forward with MP3 technology; it allowed Madonna fans to download music from the Inter- net or to exchange electronic copies of the music with others, and when Mobile MP3 players hit the scene in 1998, fans could download the tunes di- rectly into a portable player. Then, in November 2001, Apple Computer intro- duced its first iPod. With the original iPod, music fans could take 1,000 songs with them wherever they went. By 2006, iPods could hold 15,000 songs, 25,000 photos, and 150 hours of video. (In 2010, iPods could hold 40,000 songs, 25,000 photos, and 200 hours of video.)7 Music fans go to the Apple iTunes music store or elsewhere to download songs and to get suggestions for

knockoff A new product that copies, with slight modification, the design of an original product.

Types of Innovations

ContinuousDynamically Continuous

Discontinuous

Figure 8.3 Snapshot | Types of Innovations Three types of innovations are continuous, dynamically continuous, and discontinuous, based on their degree of newness.

The New Aleve Arthritis Soft Grip Cap™ is covered with a rubber-like material to give you extra traction. Only two pills can provide all day relief from arthritis pain*.

And now, with our new arthritis Soft Grip Cap, Aleve feels better than ever.

As always, Aleve is 100% Acetaminophen Free.

A continuous innovation makes the package easier to open.

continuous innovation A modification of an existing product that sets one brand apart from its competitors.

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dynamically continuous innovation A change in an existing product that requires a moderate amount of learning or behavior change.

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new music they might enjoy. Of course, today you can do all this on your smartphone—you don’t even need an iPod to have a portable music player. From radio to smartphone—an amazing journey in dynamically contin- uous innovation!

Discontinuous Innovations To qualify as a discontinuous innovation, the product must create major changes in the way we live. Consumers must learn a great deal to use a discontinuous innovation because no similar product has ever been on the market. Major in- ventions such as the airplane, the car, and the television rad- ically changed modern lifestyles. Another discontinuous innovation, the personal computer—facilitated by the ad- vent of the Internet—changed the way we shop and allowed more people to work from home or anywhere else. What’s the next discontinuous innovation? Is there a product out there already that will gain that distinction? Usually, mar- keters only know for sure through 20–20 hindsight; in other words, it’s tough to plan for the next big one (what the com- puter industry calls “the killer app”).

How Do We Measure Innovation? Innovation is a complicated item to try to measure. This is because it involves not only mar- keting, but the firm’s overall culture, leadership, and processes in place that foster innova- tion. Here’s a short list of measures that when taken as a whole can provide a firm’s “innovation report card”:

Firm Strategy

• How aware are organization members of a firm’s goals for innovation?

• How committed is the firm and its leadership to those goals?

• How actively does the firm support innovation among its organization members? Are there rewards and other incentives in place to innovate? Is innovation part of the per- formance evaluation process?

• To what degree do organization members perceive that resources are available for in- novation (money and otherwise)?

Firm Culture

• Does the organization have an appetite for learning and trying new things?

• Do organization members have the freedom and security to try things, fail, and then go forward to try different things?

Outcomes of Innovation

• Does the organization have an appetite for learning and trying new things?

• Do organization members have the freedom and security to try things, fail, and then go forward to try different things?

• Number of innovations launched in the past three years

• Percentage of revenue attributable to launches of innovations during the past three years8

Convergence is one of the most talked-about forms of dynamically continuous innovations in the digital world. This term means the coming together of two or more technologies to create new systems that provide greater benefit than the original technologies alone. Originally, the phone, organizer, and camera all came together in the Palm Treo and then the Motorola Q. Cable companies now provide cellular service, land phone lines, and high- speed Internet. Today devices like Apple’s iPad integrate numerous functions on one platform.

discontinuous innovation A totally new product that creates major changes in the way we live.

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convergence The coming together of two or more technologies to create a new system with greater benefits than its separate parts.

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New Product Development Building on our knowledge of different types of innovations, we’ll now turn our attention to how firms actually develop new products. There are seven phases in the process of new product development (NPD), as shown in Figure 8.4: idea generation, product concept development and screening, marketing strategy development, business analysis, technical development, test marketing, and commercialization. Let’s take a look at what goes on during each of these phases.

Phase 1: Idea Generation In the initial idea generation phase of product development, marketers use a variety of sources to come up with great new product ideas that provide customer benefits and that are compatible with the company mission. Sometimes ideas come from customers. Ideas also come from salespeople, service providers, and others who have direct customer contact.

Often firms use marketing research activities such as the focus groups we discussed in Chapter 4 in their search for new product ideas. For example, a company such as ESPN that is interested in developing new channels or changing the focus of its existing channels might hold focus-group discussions across different groups of sports-minded viewers to get ideas for new types of programs.

Phase 2: Product Concept Development and Screening The second phase in developing new products is product concept development and screen- ing. Although ideas for products initially come from a variety of sources, it is up to mar- keters to expand these ideas into more complete product concepts. Product concepts describe what features the product should have and the benefits those features will provide for consumers.

Continuing with our Golden Arches theme (hungry yet?), everyone knows that Mc- Donald’s makes the world’s best french fries—a fact that has annoyed archrival Burger King for decades. Unfortunately for BK, the chain achieved technical success but not commercial success when the chain invested heavily to out-fry Mickey D’s. BK’s food engineers came up with a potato stick coated with a layer of starch that makes the fry crunchier and keeps the heat in to stay fresh longer. Burger King created 19 pages of specifications for its new contender, including a requirement that there must be an audible crunch present for seven or more chews. The $70 million rollout of the new product included a “Free Fryday” when BK gave away 15 million orders of fries to customers, placed lavish advertising on the Su- per Bowl, and engineered official proclamations by the governors of three states. Unfortu- nately, the new fry was a “whopper” of a product failure. Burger King blamed the product failure on inconsistent cooking by franchisees and a poor potato crop, but a more likely ex- planation is that consumers simply did not like the fry as well as those they might find at certain (golden) archrivals. Just because it’s new doesn’t always make it better.

On the other hand, did you know that Sony was originally working with archrival Nin- tendo to create a new video game system? Executives from both sides were happy because Nintendo had the market, the intellectual property, and the know-how to do it and Sony had the financial means. However, Nintendo eventually decided not to move forward with the deal and essentially ditched Sony. The man at Sony who would have been the head guy for the joint project approached the company’s president and told him that Sony could enter the market anyway without the big N’s help because of the headway it had already made. Sony’s CEO reportedly felt dishonored by Nintendo’s behavior and approved the project. This rebuff resulted in Sony’s highly regarded Playstation, which went on to seriously chal- lenge Nintendo for gaming supremacy.9

4 OBJECTIVE

Show how firms

develop new

products. (pp. 228–233)

Phase 1: Idea Generation

Phase 2: Product Concept Development and Screening

Phase 3: Marketing Strategy Development

Phase 4: Business Analysis

Phase 5: Technical Development

Phase 6: Test Marketing

Phase 7: Commercialization

Figure 8.4 Process | Phases in New Product Development

New product development generally occurs in seven phases.

new product development (NPD) The phases by which firms develop new products including idea generation, product concept development and screening, marketing strategy development, business analysis, technical development, test marketing, and commercialization.

idea generation The first step of product development in which marketers brainstorm for products that provide customer benefits and are compatible with the company mission.

product concept development and screening The second step of product development in which marketers test product ideas for technical and commercial success.

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In new product development, failures often come as fre- quently (or more so) than successes. BK’s french fry failure il- lustrates the importance of screening ideas for both their technical and their commercial value. When screening, mar- keters and researchers examine the chances that a new prod- uct concept might be successful, while they weed out concepts that have little chance to make it in the market. They estimate technical success when they decide whether the new product is technologically feasible—is it possible to actually build this product? Then they estimate commercial success when they decide whether anyone is likely to buy the prod- uct. And speaking of technology-driven product innovation, take a look at Table 8.1 for some examples of “pushing out the envelope”—new products that have their roots in some pretty old-fashioned ones. But caution: Any new product to- day can easily be obsolete tomorrow!

Phase 3: Marketing Strategy Development The third phase in new product development is to develop a marketing strategy to introduce the product to the mar- ketplace, a process we began to talk about back in Chapter 2. This means that marketers must identify the target mar- ket, estimate its size, and determine how they can effec- tively position the product to address the target market’s needs. And, of course, marketing strategy development includes planning for pricing, distribution, and promo- tion expenditures both for the introduction of the new product and for the long run.

Phase 4: Business Analysis Once a product concept passes the screening stage, the next phase is a business analysis. Even though marketers have evidence that there is a market for the product, they still must find out if the product can make a profitable contribution to the organization’s product mix.

Some companies encourage their designers to “think outside the box” by exposing them to new ideas, people, and places. The director of culinary innovation at McDonald’s is a chef who trained at the Culinary Institute of America. He runs the chain’s test kitchen and he’s challenged with the tricky assignment of finding new menu concepts that work within the context of a McDonald’s store. Recently, he came up with a simple idea: He took the breaded chicken the chain uses in its Chicken Selects strips, topped it with shredded cheddar jack cheese and lettuce, added a few squirts of ranch sauce, and wrapped it in a flour tortilla. McDonald’s dubbed it the “Snack Wrap” and put it on the menu at a starter price of $1.29. A hit was born—the Snack Wrap is one of the most successful new product launches in company history with sales exceeding projections by 20 percent.

The Cutting Edge

Facebook for NPD During Phase Two of the new product development process—product concept development and screening—marketers frequently engage in qualitative re- search approaches such as focus groups to enhance the development process. In the past these have largely been in-person rather than via social network- ing. Today, however, Facebook looms as an effective way to get feedback. Some firms offer free product samples on their Facebook pages, but Splenda (the artificial sweetener folks) took a different approach.The company planned to introduce a pocket-size spray form of the product it called Splenda Mist. It turned to Facebook to gather valuable input from its target, women 25 and older, as well as those outside its target. Splenda used the data to plan the next stages of the product rollout.

“It’s another tool in which to expose a product idea, concept, or actual prod- uct to a particular target in a very efficient way,” said Ivy Brown, group product

director at Splenda. Tom Arrix, VP-U.S. sales at Facebook, said other consumer- products companies are taking note of the ever-expanding possibilities the so- cial network has to offer. “There are conversations on an ongoing basis about brands out there,”Arrix said.“Innovative brand teams can come into a platform like Facebook, glean insights, and make real-time decisions.” Facebook offers marketers the following guidelines for conducting market research on their site:

• The Facebook experience won’t replace a formal focus group, but it can provide plenty of information that you wouldn’t necessarily gather in street sampling.

• As people interact with you in such an engagement, reach of your prod- uct can be extended. Just as in the offline world, if you are giving partic- ipants samples, you want to make sure you don’t run out.

• Once you’ve invited people in, don’t abandon them. Give them regular product updates to encourage a sense of ownership.10

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business analysis The step in the product development process in which marketers assess a product’s commercial viability.

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How much potential demand is there for the product? Does the firm have the resources it will need to successfully develop and introduce the product?

The business analysis for a new product begins with assessing how the new product will fit into the firm’s total product mix. Will the new product increase sales, or will it sim- ply cannibalize sales of existing products? Are there possible synergies between the new product and the company’s existing offerings that may improve visibility and the image of both? And what are the marketing costs likely to be?

Phase 5: Technical Development If it survives the scrutiny of a business analysis, a new product concept then undergoes technical development, in which a firm’s engineers work with marketers to refine the de- sign and production process. For example, when Sharp Electronics began to look into the next big product innovation in home television, it soon settled on the potential of adding a

Table 8.1 | Products Yesterday, Today, and Tomorrow YESTERDAY TODAY TOMORROW

Typewriter Personal Computer

Dragon Naturally Speaking 10 This software for computers, MP3 players, and cell phones allows you to send e-mails and instant messages, and surf the Web with voice commands. $100, www.shop.nuance.com.

Drinking Fountain

Bottled Water AquaSafeStraw This portable, reusable straw removes 99.9 percent of waterborne bacteria from any water. $45, www.aquasafestraw.com.

Wine Cork Synthetic Cork and Screwcap

Skybar Wine Preservation and Optimization System A wine bar that stores, refrigerates, pours, and preserves three bottles of wine for up to 10 days after opening. $1,000, www.skybarhome.com.

Blackboard Dry-Erase Board Interactive Smart Board This whiteboard lets you write in multiple colors, erase, zoom, and move objects around with your fingers or with one of its ink-free pens. From $700 to $4,450, www.smarttech.com.

Payphone Cell Phone Google’s Nexus One This smartphone with a 3.7-inch touchscreen, a 5-megapixel camera, and Wi-Fi connectivity will help you forget the scary parts of the movie Phone Booth. $529, www.google.com/phone.

Mechanical Bell

Electronic Bell (Alarm Clock)

Soleil Sun Alarm Ultima SA-2008 The 10-watt bulb grows brighter as wake-up time approaches, just like the sunrise. $90, www.soleilsunalarm.com.

Boombox Sony Walkman Sony Ericsson Portable Bluetooth Speaker MBS-100 Set the speakers around the room, keep your MP3 player or smartphone in your pocket, and DJ from the dance floor. $64, www.amazon.com.

Hotel Key Electronic Keycard Openways This system sends a series of tones to a cell phone that will unlock doors. The manufacturer planned to install it in three major U.S. hotel chains and two Las Vegas casinos in 2010. www.openways.com.

Road Map GPS Navigation Device

Garmin nüvi 1690 This GPS provides real-time fuel prices, movie times, and Google Local search, along with hands-free calling. $500, www.target.com.

Checkbook Debit Card RedLaser App This iPhone application lets you scan a barcode for an item, comparison-shop online, and purchase with your phone. $2, www.iTunes.com.

Lick-and- Stick Stamp

Peel-and-Press Stamp

Stamps.com Pay a monthly service charge on this site, and you can print official USPS postage directly onto your envelopes. No licking, no peeling, no nothing. $16 per month, www.stamps.com.

Photo Film Digital Camera Sony Cyber-shot DSC-HX5V/B This still camera was the first of its kind to include GPS, a compass, and full advanced video codec high-definition video capability. $350, www.sonystyle.com.

Source: Lauren Parajon, “Last Tech,” Southwest Airlines Spirit Magazine, March 2010, pp. 82–92. Prices are as of this writing.

technical development The step in the product development process in which company engineers refine and perfect a new product.

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fourth color pixel (yellow) to the standard palette of red, green, and blue. The company labeled the innovation “Quattron technology” and introduced it in 2010 via an innovative promotional campaign that featured actor George Takei (Sulu in the original Star Trek series) dressed in an engineer’s lab coat talking in very scientific terms about the distinct advantages of Quattron over competitors’ mere four-pixel sets. The translation of technical developments into terms that consumers can easily understand and respond to is a critical marketing function, and Sharp did this brilliantly without ever attempting to show the new screen in its ads (after all, how could you view the fourth color if you don’t already have a Quattron set?). But the reaction on Takei’s face when he sees the picture and says “Oh man, you have to see it” was enough to drive consumers into Best Buy and other electronics retail- ers in droves to see if they could tell the difference between Quattron and all the other sets lined up on the wall.11

The better a firm understands how customers will react to a new prod- uct, the better its chances of commercial success. For this reason, typically, a company’s research-and-development (R&D) department usually develops one or more physical versions or prototypes of the product. Prospective cus- tomers may evaluate these mockups in focus groups or in field trials at home.

Prototypes also are useful for people within the firm. Those involved in the technical development process must determine which parts of a finished good the company will make and which ones it will buy from other suppli- ers. If it will be manufacturing goods, the company may have to buy new pro- duction equipment or modify existing machinery. Someone has to develop work instructions for employees and train them to make the product. When it’s a matter of a new service process, technical development includes decisions such as which activities will occur within sight of customers versus in the “backroom,” and whether the company can au- tomate parts of the service to make delivery more efficient.

Technical development sometimes requires the company to apply for a patent. Because patents legally prevent competitors from producing or selling the invention, this legal mech- anism may reduce or eliminate competition in a market for many years so that a firm gains some “breathing room” to recoup its investments in technical development.

Phase 6: Test Marketing The next phase of new product development is test marketing. This means the firm tries out the complete marketing plan—the distribution, advertising, and sales promotion—in a small geographic area that is similar to the larger market it hopes to enter.

There are both pluses and minuses to test marketing. On the negative side, test market- ing is extremely expensive. It can cost over a million dollars to conduct a test market even in a single city. A test market also gives the competition a free look at the new product, its introductory price, and the intended promotional strategy—and an opportunity to get to the market first with a competing product. On the positive side, when they offer a new product in a limited area marketers can evaluate and improve the marketing program. Sometimes test marketing uncovers a need to improve the product itself. At other times, test marketing indicates product failure; this advanced warning allows the firm to save millions of dollars by “pulling the plug.”

For years, Listerine manufacturer Warner-Lambert (now owned by McNeil-PPC) wanted to introduce a mint-flavored version of the product to compete with Procter & Gam- ble’s Scope (it originally introduced this alternative under the brand Listermint). Unfortu- nately, every time Warner-Lambert tried to run a test market, P&G found out and poured

prototypes Test versions of a proposed product.

New flavors need to undergo rigorous technical development so companies can be sure they will satisfy consumers’ expectations.

patent A legal mechanism to prevent competitors from producing or selling an invention, aimed at reducing or eliminating competition in a market for a period of time.

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test marketing Testing the complete marketing plan in a small geographic area that is similar to the larger market the firm hopes to enter.

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232 PART THREE | CREATE THE VALUE PROPOSITION

substantial extra advertising and coupons for Scope into the test market cities. This coun- terattack reduced the usefulness of the test market results for Warner-Lambert when its market planners tried to decide whether to introduce Listermint nationwide. Because P&G’s aggressive response to Listermint’s test marketing actually increased Scope’s market share in the test cities, there was no way to determine how well Listermint would actually do under normal competitive conditions. Warner-Lambert eventually introduced Listermint nation- ally, but achieved only marginal success, so the company ultimately pulled it from the mar- ket. Today, Listerine itself is available in mint flavor as well as several other choices.12

As we saw in Chapter 4, because of the potential problems and expense of test market- ing, marketers instead may use special computer software to conduct simulated tests that imitate the introduction of a product into the marketplace. These simulations allow the com- pany to see the likely impact of price cuts and new packaging—or even to determine where in the store it should try to place the product. The process entails gathering basic research data on consumers’ perceptions of the product concept, the physical product, the advertis- ing, and other promotional activity. The test market simulation model uses that information to predict the product’s success much less expensively (and more discreetly) than a tradi- tional test market. As this simulated test market technology improves, traditional test mar- kets may become a thing of the past.

Phase 7: Commercialization The last phase in new product development is commercialization. This means the launch- ing of a new product, and it requires full-scale production, distribution, advertising, sales promotion—the works. For this reason, commercialization of a new product cannot happen overnight. A launch requires planning and careful preparation. Marketers must implement trade promotion plans that offer special incentives to encourage dealers, retailers, or other members of the channel to stock the new product so that customers will find it on store shelves the very first time they look. They must also develop consumer sales promotions such as coupons. Marketers may arrange to have point-of-purchase displays designed, built, and delivered to retail outlets. If the new product is especially complex, customer ser- vice employees must receive extensive training and preparation.

As launch time nears, preparations gain a sense of urgency—like countdown to blastoff at NASA. Sales managers explain special incentive programs to salespeople. Soon the me- dia announce to prospective customers why they should buy and where they can find the new product. All elements of the marketing program—ideally—come into play like a care- fully planned lift-off of a Delta rocket.

Innovation genius and Apple CEO Steve Jobs has never been one to squelch pre- commercialization hype about his new product introductions. It has been estimated that Apple achieved prelaunch publicity worth over $500 million on the iPhone before it spent a penny on any advertising. The introduction of the iPad in 2010 was no exception to the Apple hype-creation machine. Jobs claimed that the iPad would offer an experience supe- rior to that of netbooks, and that the 75� million people who already owned iPhones and iPod Touches already knew how to use the iPad, which uses the same operating system and touch-screen interface. But some analysts thought the iPad would be a tougher sell than its prior product brethren in part because it is a more complex innovation than those before. Critical questions driving the long-term success of the iPad include: What apps ultimately will be made for it and how quickly will they come out? Over time, how much will the iPad cannibalize, or take sales away from, other Apple products and in particular the MacBook laptop or (more likely) the iPod Touch? How long will the iPad be available only from Apple’s own stores and Best Buy? And how aggressively will Apple ultimately lower the price or introduce new models with additional features like a built-in camera?13 The ques- tions raised about the iPad’s introduction here provide a perfect segue to the next section on adoption and diffusion of innovation.

commercialization The final step in the product development process in which a new product is launched into the market.

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Adoption and Diffusion of New Products In the previous section, we talked about the steps marketers take to de- velop new products from generating ideas to launch. Now we’ll look at what happens after that new product hits the market—how an innova- tion spreads throughout a population.

A painting is not a work of art until someone views it. A song is not music until someone sings it. In the same way, new products do not sat- isfy customer wants and needs until the customer uses them. Product

adoption is the process by which a consumer or business customer begins to buy and use a new good, service, or idea.

The term diffusion describes how the use of a product spreads throughout a popula- tion. One way to understand how this process works is to think about a new product as if it were a computer virus that spreads from a few computers to infect many machines. A brand like Hush Puppies, for example, might just slog around—sometimes for years and years. At first only a small number of people buy it, but change happens in a hurry when the process reaches the moment of critical mass. This moment of truth is called the tipping point.14 For example, Sharp created the low-price, home/small-office fax market in 1984 and sold about 80,000 in that year. There was a slow climb in the number of users for the next three years. Then, suddenly, in 1987 enough people had faxes that it made sense for everyone to have one—Sharp sold a million units that year as it reached its tipping point. Along with such dif- fusion almost always come steep price declines—today you can buy a Sharp fax machine at Amazon for about $35.15 The question, of course, is how long a market for traditional fax machines can be sustained, given all the other document transmission possibilities today in- cluding scan and send via e-mail attachment. That’s a question we’ll take up in the next chapter.

After they spend months or even years to develop a new product, the real challenge to firms is to get consumers to buy and use the product and to do so quickly so they can re- cover the costs of product development and launch. To accomplish this, marketers must

5 OBJECTIVE

Explain the process of

product adoption and

the diffusion of

innovations. (pp. 233–239)

Ethical/Sustainable Decisions in the Real World When P&G’s breakthrough new Pampers Dry Max diaper was introduced in 2009, it was hailed by company executives as “the iPod of baby care.” It was supposed to be a breakthrough innovation: a diaper that could legitimately claim to be 20 percent thinner and way more absorbent than its Pampers pred- ecessors or the competition based on credible consumer tests. Dry Max uses revamped, more permeable material, which allowed P&G to eliminate the tra- ditional mesh liner and a considerable amount of wood-based fiber that was in the old Pampers, resulting in considerably less environmental impact.

But after the introduction, a group of mostly Internet-centered critics have been increasingly vocal—review boards like www.diapers.com quickly lit up with highly negative comments by users (one source says the online reviews are 5 to 1 negative). Anti–Dry Max Facebook pages quickly cropped up; the main page for critics boasts more than 7,000 members, The noise is undercut- ting what P&G had expected to be positive buzz about the most significant in- novation in 24 years for Pampers, P&G’s largest global brand that has sales approaching $9 billion.

So what is the “big rub,” so to speak? Basically, according to information released from a $5 million class-action lawsuit on the matter filed against P&G in mid-2010, the key issue is increased cases of diaper rash, sometimes severe, among babies who wear Dry Max. P&G is “shifting blame to parents” for the rashes, according to the complaint, “implying that [the parents] fail to change their children’s diapers with sufficient frequency.” In general, P&G has taken a tough stance; it denies that Dry Max contributes to increased cases of diaper rash and cites data that the malady affects more than 2.5 million babies, or one in four, at any given moment, and of those, 250,000 cases typically are severe. The company claims that a small number of vocal critics dominate the online ac- tivity and cites evidence that one person has posted complaints on at least 75 sites, with more than 50 posts on P&G’s own PampersVillage.

The marketers at P&G for Dry Max need to get on top of this situation quickly in order to avoid broad and long-term damage to the Pam- pers brand new product introduction.

If you were in charge of marketing for Dry Max at P&G, would you recall all the new Pampers Dry Max diapers?

YES NO

ETHICS CHECK: Find out what other students taking this course would do and why on www .mypearsonmarketinglab .com

Ripped from the Headlines

product adoption The process by which a consumer or business customer begins to buy and use a new good, service, or idea.

diffusion The process by which the use of a product spreads throughout a population.

tipping point In the context of product diffusion, the point when a product’s sales spike from a slow climb to an unprecedented new level, often accompanied by a steep price decline.

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understand the product adoption process. In the next section, we’ll discuss the stages in this process. We’ll also see how consumers and businesses differ in their eagerness to adopt new products and how the characteristics of a product affect its adoption (or “infection”) rate.

Stages in Consumers’ Adoption of a New Product Whether the innovation is better film technology or a better mousetrap, individuals and or- ganizations pass through six stages in the adoption process. Figure 8.5 shows how a per- son goes from being unaware of an innovation through the stages of awareness, interest, evaluation, trial, adoption, and confirmation. At every stage, people drop out of the process, so the proportion of consumers who wind up using the innovation on a consistent basis is a fraction of those who are exposed to it.

Awareness

Awareness that the innovation exists at all is the first step in the adoption process. To educate consumers about a new product, marketers may conduct a massive advertising campaign: a media blitz. For example, let’s revisit our discussion of Sharp’s new Quattron technology: To raise awareness that it was going to incorporate this new attribute in its AQUOS TV line the company fed bits and pieces about the product into a variety of outlets, including pre- views of George Takei’s “Oh, my!” commercial on Twitter, Facebook, and YouTube. Within three days the ad had been viewed more than 100,000 times via Sharp’s dedicated YouTube channel—remember, that’s FREE promotion for Sharp!16

At this point, some consumers will say, “So there’s a new television set out there. So what?” Many of these consumers, of course, will fall by the wayside and thus drop out of the adoption process. But this strategy works for new products when at least some con- sumers see a new product as something they want and need and just can’t live without.

Interest

For some of the people who become aware of a new product, a second stage in the adop- tion process is interest. In this stage, a prospective adopter begins to see how a new prod- uct might satisfy an existing or newly realized need. Interest also means that consumers look for and are open to information about the innovation. Volkswagen’s Jetta, for in- stance, developed panache with the young 20s crowd around 2000 or so. But, as today’s 20- and 30-something car buyers started having families and needed bigger cars with more carrying space, they began to lose interest in the Jetta. To get the lucrative young-parent group interested in the product again, Volkswagen reverted to a stronger emphasis on safety and also touted the quality and reliability virtues of German engineering. Today the

Adoption

Confirmation

Trial

Evaluation

Interest

Awareness

Make the product available Provide product use information

Reinforce the customer’s choice through advertising, sales promotion, and other communications

Demonstrations, samples, trial-size packages

Provide information to customers about how the product can benefit them

May use teaser advertising

Massive advertising

Figure 8.5 Process | Adoption Pyramid

Consumers pass through six stages in the adoption of a new product—from being unaware of an innovation to becoming loyal adopters. The right marketing strategies at each stage help ensure a successful adoption.

media blitz A massive advertising campaign that occurs over a relatively short time frame.

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brand has become successful in its positioning, which takes advantage of German mechanical prowess but at a lower price point than the other cars from Deutschland.17 Marketers often design teaser advertisements that give prospective customers just enough information about the new product to make them curious and to stimulate their interest. Despite marketers’ best efforts, however, some more consumers drop out of the process at this point.

Evaluation

In the evaluation stage, we weigh the costs and benefits of the new product. On the one hand, for complex, risky, or expensive products, people think about the innovation a great deal before they will try it. For example, a firm will carefully evaluate spending hundreds of thousands of dollars on man- ufacturing robotics prior to purchase. Marketers for such products help prospective customers see how such products can benefit them.

But as we’ve seen in the case of impulse products, sometimes little eval- uation may occur before someone decides to buy a good or service. A per- son may do very little thinking before she makes an impulse purchase, like the virtual Tamagotchi (Japanese for “cute little egg”) pets. For these goods, marketers design the product to be eye-catching and appealing to get con- sumers to notice the product quickly. Tamagotchis certainly did grab the at- tention of consumers—40 million of them bought the first generation of them. Toymaker Bandai Co. has since come out with a new generation of Tamagotchis—the current version allows the pet owner to control aspects of the Tamagotchi’s life such as career choices and who they eventually be- come. Bandai’s newest tagline for the product is “Start livin’ the Tamagotchi life!”—a not-too-veiled reference to virtual worlds such as Second Life.18 Some potential adopters will evaluate an innovation positively enough to move on to the next stage. Those who do not think the new product will provide adequate benefits drop out at this point.

Trial

Trial is the stage in the adoption process when potential buyers will actually experience or use the product for the first time. Often marketers stimulate trial when they provide opportunities for consumers to sample the product. Even if the trial is satisfactory, how- ever, some prospective buyers still won’t actually adopt the new product because it costs too much. Initially, this was the case with GPS systems in cars. Consumers could try out the system in rental cars from Hertz and Avis, but the price (over $2,000) understandably put off most prospective customers. Today, as prices dip below $100 at Walmart and else- where, many more consumers buy the units for their own cars and order them with new vehicles.19

Travel through some U.S. airports and you’ll see Dell demonstration kiosks—a big de- parture from the company’s usual focus on online direct marketing. That’s because there is a drawback to online direct marketing: Some consumers just can’t stand to buy without first touching, holding, and using a product—in short, conducting a “trial.” Interestingly, people also buy Dells right at the kiosks. In retrospect, this is not too surprising, given that the pas- senger demographics tend toward 24 to 49 years of age, most with annual household in- comes above $70,000—just the type of people who want the latest computer. Dell also showcases the PC gaming power of its higher-end computers kiosks at Gamestop locations around the country, in part because of its acquisition of Alienware—a long-time champion of high-powered PC gaming. For gamers, it’s really important to touch, feel, and experience the product first-hand before they buy.20

In the interest stage, a prospective adopter begins to see how a new product might satisfy an existing or newly realized need. This juice drinks bills itself as “a new way to eat fruit.”

impulse purchase A purchase made without any planning or search effort.

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Adoption

In the adoption stage, a prospect actually buys the product (Hallelujah!). If the product is a consumer or business-to-business good, this means buying the product and learning how to use and maintain it. If the product is an idea, this means that the individual agrees with the concept.

Does this mean that all individuals or organizations that first choose an innovation are permanent customers? That’s a mistake many firms make. Marketers need to provide follow-up contacts and communications with adopters to ensure they are satisfied and re- main loyal to the new product over time.

Confirmation

After she adopts an innovation, a customer weighs expected versus actual benefits and costs. Favorable experiences make it more likely that she will become a loyal adopter as her initially positive opinions result in confirmation. Of course, nothing lasts forever—even a loyal customer may decide that a new product no longer meets her expectations and reject it (sort of like dropping a boyfriend). Some marketers feel that reselling the customer in the confirmation stage is important. They provide advertisements, sales presentations, and other communications to reinforce a customer’s choice.

Innovator Categories As we saw earlier, diffusion describes how the use of a product spreads throughout a pop- ulation. Of course, marketers prefer their entire target market to immediately adopt a new product, but this is not the case. Consumers and business customers differ in how eager or willing they are to try something new, lengthening the diffusion process by months or even years. Based on adopters’ roles in the diffusion process, experts classify them into five categories.

Some people like to try new products. Others are so reluctant you’d think they’re afraid of anything new (do you know anyone like that?). As Figure 8.6 shows, there are five categories of adopters: innovators, early adopters, early majority, late majority, and lag- gards.21 To understand how the adopter categories differ, we’ll focus on an example of the adoption of one specific technology from the past that has had a big impact on all of us today— Wi-Fi (wireless fidelity).

Innovators

Innovators make up roughly the first 2.5 percent of adopters. This segment is extremely ad- venturous and willing to take risks with new products. Innovators are typically well educated, younger, better off financially than others in the population, and worldly. Innovators who

Early Majority

34%

Early Adopters

13.5% Laggards

16%2.5%

Late Majority

34%

Innovators

Figure 8.6 Snapshot | Categories of Adopters Because consumers differ in how willing they are to buy and try a new product, it often takes months or years for most of the population to adopt an innovation.

innovators The first segment (roughly 2.5 percent) of a population to adopt a new product.

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were into new technology knew all about Wi-Fi before other people had heard of it. Because innovators pride themselves on trying new products, they pur- chased laptops with Wi-Fi cards way back in 1999 when Apple Computer first introduced them in its laptops.

Early Adopters

Early adopters, approximately 13.5 percent of adopters, buy product innova- tions early in the diffusion process but not as early as innovators. Unlike in- novators, early adopters are very concerned about social acceptance, so they tend to gravitate toward products they believe will make others think they are cutting-edge or fashionable. Typically, they are heavy media users and often are heavy users of the product category. Others in the population often look to early adopters for their opinions on various topics, making early adopters key to a new product’s success. For this reason, marketers often tar- get them in their advertising and other communications efforts.

Columnists who write about personal technology for popular maga- zines like Time were testing Wi-Fi in mid-2000. They experienced some prob- lems (like PCs crashing when they set up a wireless network at home), but still they touted the benefits of wireless connectivity. Road warriors adopted the technology as Wi-Fi access spread into airports, hotels, city parks, and other public spaces. Intel, maker of the Centrino mobile platform, launched a major campaign with Condé Nast’s Traveler magazine and offered a loca- tion guide to T-Mobile hotspots nationwide.

Early Majority

The early majority, roughly 34 percent of adopters, avoid being either first or last to try an innovation. They are typically middle-class consumers and are deliberate and cautious. Early majority consumers have slightly above-average education and income levels. When the early majority adopts a product, we no longer consider it new or different—it is, in essence, already established. By 2002, Wi-Fi access was available in over 500 Starbucks cafés, and monthly subscription prices were dropping rapidly (from $30 to $9.95 per month).

Late Majority

Late majority adopters, about 34 percent of the population, are older, even more conserva- tive, and typically have lower-than-average levels of education and income. The late ma- jority adopters avoid trying a new product until it is no longer risky. By that time, the product has become an economic necessity or there is pressure from peer groups to adopt. By 2004, Wi-Fi capability was being bundled into almost all laptops and you could connect in mainstream venues like McDonald’s restaurants and sports stadiums. Cities across the country began considering blanket Wi-Fi coverage throughout the entire town through WiMax technology.

Laggards

Laggards, about 16 percent of adopters, are the last in a population to adopt a new prod- uct. Laggards are typically lower in social class than other adopter categories and are bound by tradition. By the time laggards adopt a product, it may already be superseded by other innovations. By 2006, it would have seemed strange if Wi-Fi or a similar capability was not part of the standard package in even the lowest-priced laptop computer, and peo- ple began to become annoyed if Wi-Fi access wasn’t available just about everywhere they might go.22

Understanding these adopter categories allows marketers to develop strategies that will speed the diffusion or widespread use of their products. For example, early in the diffusion

Early adopters like to try new products soon after a company introduces them into the market.

early adopters Those who adopt an innovation early in the diffusion process, but after the innovators.

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late majority The adopters who are willing to try new products when there is little or no risk associated with the purchase, when the purchase becomes an economic necessity, or when there is social pressure to purchase.

early majority Those whose adoption of a new product signals a general acceptance of the innovation.

laggards The last consumers to adopt an innovation.

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process, marketers may put greater emphasis on advertising in special- interest magazines to attract innovators and early adopters. Later they may lower the product’s price or come out with lower-priced models with fewer “bells and whistles” to attract the late majority. We will talk more about strategies for new and existing products in the next chapter.

Product Factors That Affect the Rate of Adoption Not all products are successful, to say the least. Let’s see if you’ve ever heard of these classic boo-boos in new product introduction:

• Crystal Pepsi—Same Pepsi taste but clear in color. Consumers didn’t equate the look with the flavor.

• Clairol Look of Buttermilk shampoo—Consumers pondered what ex- actly was the “Look of Buttermilk” and why would they want it?

• Betamax video player—Sony refused to allow anyone else to make the players and the rest of the industry went to VHS format.

• Snif-T-Panties—Yes, women’s underwear that smelled like bananas, popcorn, whiskey, or pizza. What were they thinking!23

The reason for most product failures is really pretty simple—consumers did not perceive that the products satisfied a need better than competitive products already on the market. If you could predict which new products will succeed and which will fail, you’d quickly be in high demand as a market- ing consultant by companies worldwide. That’s because companies make large investments in new products, but failures are all too frequent. Experts suggest that between one-third and one-half of all new products fail. As you

might expect, a lot of people try to develop research techniques that enable them to predict whether a new product will be hot or not.

Researchers identify five characteristics of innovations that affect the rate of adoption: relative advantage, compatibility, complexity, trialability, and observability.24 The degree to which a new product has each of these characteristics affects the speed of diffusion. It may take years for a market to widely adopt a new product. Let’s take a closer look at the hum- ble microwave oven—a product that was highly innovative in its early days but now is gen- erally a low-priced staple of every kitchen (and every college apartment and dorm)—as an example to better understand why each of these five factors is important.

• Relative advantage describes the degree to which a consumer perceives that a new product provides superior benefits. In the case of the microwave oven, consumers in the 1960s did not feel that the product provided important benefits that would improve their lives. But by the late 1970s, that perception had changed because more women had entered the workforce. The 1960s woman had all day to prepare the evening meal, so she didn’t need the microwave. In the 1970s, however, when many women left home for work at 8:00 A.M. and returned home at 6:00 P.M., an appliance that would “magi- cally” defrost a frozen chicken and cook it in 30 minutes provided a genuine advantage.

• Compatibility is the extent to which a new product is consistent with existing cultural values, customs, and practices. Did consumers see the microwave oven as being com- patible with existing ways of doing things? Hardly. Cooking on paper plates? If you put a paper plate in a conventional oven, you’ll likely get a visit from the fire depart- ment. By anticipating compatibility issues early in the new-product development stage, marketing strategies can address such problems in planning communications programs, or there may be opportunities to alter product designs to overcome some consumer objections.

relative advantage The degree to which a consumer perceives that a new product provides superior benefits.

compatibility The extent to which a new product is consistent with existing cultural values, customs, and practices.

“Classic” brands appeal to consumers who value consistency and predictability.

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Palo Hawken APPLYING Complexity

Palo and his colleagues realized they were better off with a simple, focused message to make it more likely that consumers would adopt their new Bossa Nova beverage product.

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• Complexity is the degree to which consumers find a new product or its use difficult to understand. Many microwave users today haven’t a clue about how a microwave oven cooks food. When appliance manufacturers introduced the first microwaves, they ex- plained that this new technology causes molecules to move and rub together, which creates friction that produces heat. Voilà! Cooked pot roast. But that explanation was too complex and confusing for the homemaker of the Ozzie and Harriet days back in the 1950s.

• Trialability is the ease of sampling a new product and its benefits. Marketers took a very important step in the 1970s to speed up adoption of the microwave oven—product trial. Just about every store that sold microwaves invited shoppers to visit the store and sam- ple an entire meal a microwave cooked.

• Observability refers to how visible a new product and its benefits are to others who might adopt it. The ideal innovation is easy to see. For example, for a generation of kids, scooters like the Razor became the hippest way to get around as soon as one preteen saw her friends flying by. That same generation observed its friends trading Pokémon cards and wanted to join in. In the case of the microwave, it wasn’t quite so readily ob- servable for its potential adopters—only close friends and acquaintances who visited someone’s home would likely see an early adopter using it. But the fruits of the mi- crowave’s labors—tasty food dishes—created lots of buzz at office water coolers and social events and its use spread quickly.

Now that you’ve learned the basics of creating a product, read “Real People, Real Choices: How It Worked Out” to see which strategy Palo Hawken selected for Bossa Nova.

complexity The degree to which consumers find a new product or its use difficult to understand.

trialability The ease of sampling a new product and its benefits.

observability How visible a new product and its benefits are to others who might adopt it.

Real People, Real Choices

Here’s my choice. . .

To learn the whole story, visit www.mypearsonmarketinglab.com.

Why do you think Palo chose option 3?

Option Option

How It Worked Out at Bossa Nova Bossa Nova clung to Options 1 and 2 for many months. Then Palo and his colleagues took the leap and chose Option 3. They created Bossa Nova Açai juice in three flavors. Bossa Nova took its first order from Whole Foods Market and went on to be picked up by most other major grocery retailers in the United States.

Option

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Brand You! Companies don’t just hire people—they hire people who pro- duce results.

Show prospective employers how you can deliver results by identifying your features, benefits, and extras in Chapter 8 of Brand You.

Objective Summary Key Terms Apply Study Map CHAPTER 8

1. Objective Summary Explain how value is derived through different product layers. Products can be physical goods, services, ideas, people, or places. A good is a tangible product, something that we can see, touch, smell, hear, taste, or possess. In contrast, intangible products—services, ideas, people, places—are products that we can’t always see, touch, taste, smell, or possess. Marketers think of the product as more than just a thing that comes in a package. They view it as a bundle of attributes that includes the packaging, brand name, benefits, and supporting features in addition to a physical good. The key issue is the marketer’s role in creating the value proposition in order to develop and mar- ket products appropriately.

A product may be anything tangible or intangible that sat- isfies consumer or business-to-business customer needs. Prod- ucts include goods, services, ideas, people, and places. The core product is the basic product category benefits and customized benefit(s) the product provides. The actual product is the phys- ical good or delivered service, including the packaging and brand name. The augmented product includes both the actual product and any supplementary services, such as warranty, credit, delivery, installation, and so on.

Key Terms good, p. 218

attributes p. 218

core product, p. 220

(pp. 218–220) actual product, p. 220

augmented product, p. 220

2. Objective Summary Describe how marketers classify products. Marketers generally classify goods and services as either con- sumer or business-to-business products. They further classify consumer products according to how long they last and by how they are purchased. Durable goods provide benefits for months or years, whereas nondurable goods are used up quickly or are useful for only a short time. Consumers purchase convenience products frequently with little effort. Customers carefully gather information and compare different brands on their at- tributes and prices before buying shopping products. Specialty products have unique characteristics that are important to the buyer. Customers have little interest in unsought products un- til a need arises. Business products are for commercial uses by organizations. Marketers classify business products according to how they are used, for example, equipment; maintenance, repair, and operating (MRO) products; raw and processed ma- terials; component parts; and business services.

Key Terms durable goods, p. 221

nondurable goods, p. 221

convenience product, p. 222

staple products, p. 222

(pp. 221–225)

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impulse products, p. 223

emergency products, p. 223

shopping products, p. 223

intelligent agents, p. 223

specialty product, p. 223

unsought products, p. 223

equipment, p. 224

maintenance, repair, and operating (MRO) products, p. 224

raw materials, p. 224

processed materials, p. 224

component parts, p. 224

3. Objective Summary Understand the importance and types of product innovations. Innovations are anything consumers perceive to be new. Un- derstanding new products is important to companies because of the fast pace of technological advancement, the high cost to companies for developing new products, and the contributions to society that new products can make. Marketers classify in- novations by their degree of newness. A continuous innovation is a modification of an existing product, a dynamically continu- ous innovation provides a greater change in a product, and a discontinuous innovation is a new product that creates major changes in people’s lives.

Key Terms innovation, p. 225

continuous innovation, p. 226

knockoff, p. 226

dynamically continuous innovation, p. 226

discontinuous innovation, p. 227

convergence, p. 227

4. Objective Summary Show how firms develop new products. In new product development, marketers generate product ideas from which product concepts are first developed and then screened. Next they develop a marketing strategy and conduct a business analysis to estimate the profitability of the new product. Technical development includes planning how the product will be manufactured and may mean ob- taining a patent. Next, the effectiveness of the new product may be assessed in an actual or a simulated test market. Fi- nally, the product is launched, and the entire marketing plan is implemented.

(pp. 228–233)

(pp. 225–227)

Key Terms new product development (NPD) p. 228

idea generation, p. 228

product concept development and screening, p. 228

business analysis, p. 229

technical development, p. 230

prototypes, p. 231

patent p. 231

test marketing, p. 231

commercialization, p. 232

5. Objective Summary Explain the process of product adoption and the diffusion of innovations. Product adoption is the process by which an individual begins to buy and use a new product, whereas the diffusion of inno- vations is how a new product spreads throughout a population. The stages in the adoption process are awareness, interest, trial, adoption, and confirmation. To better understand the dif- fusion process, marketers classify consumers—according to their readiness to adopt new products—as innovators, early adopters, early majority, late majority, and laggards.

Five product characteristics that have an important effect on how quickly (or if) a new product will be adopted by con- sumers are relative advantage, compatibility, product complexity, trialability, and observability. Similar to individual consumers, organizations differ in their readiness to adopt new products based on characteristics of the organization, its management, and characteristics of the innovation.

Key Terms product adoption, p. 233

diffusion, p. 233

tipping point, p. 233

media blitz, p. 234

impulse purchase, p. 235

innovators, p. 236

early adopters, p. 237

early majority, p. 237

late majority, p. 237

laggards, p. 237

relative advantage, p. 238

compatibility, p. 238

complexity, p. 239

trialability, p. 239

observability, p. 239

(pp. 233–239)

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Chapter Questions and Activities Concepts: Test Your Knowledge

1. What is the difference between the core product, the ac- tual product, and the augmented product?

2. What is the difference between a durable good and a non- durable good? What are the main differences among con- venience, shopping, and specialty products?

3. What is an unsought product? How do marketers make such products attractive to consumers?

4. What types of products are bought and sold in business- to-business markets?

5. What is a new product? Why is understanding new prod- ucts so important to marketers? What are the types of in- novations?

6. List and explain the steps marketers undergo to develop new products.

7. What is a test market? What are some pros and cons of test markets?

8. Explain the stages a consumer goes through in the adop- tion of a new product.

9. List and explain the categories of adopters. 10. What product factors affect the rate of adoption of inno-

vations? 11. Explain how organizations may differ in their willingness to

buy and use new industrial products.

Activities: Apply What You’ve Learned

1. Assume that you are the director of marketing for the com- pany that has developed a smartphone to outdo the iPhone. How would you go about convincing the late ma- jority to go ahead and adopt it—especially since they still haven’t quite caught onto the iPhone yet?

2. Assume that you are employed in the marketing depart- ment of a firm that is producing a hybrid automobile. In developing this product, you realize that it is important to provide a core product, an actual product, and an aug- mented product that meets the needs of customers. De- velop an outline of how your firm might provide these three product layers in the hybrid car.

3. Firms go to great lengths to develop new product ideas. Sometimes new ideas come from brainstorming, in which groups of individuals get together and try to think of as many different, novel, creative—and hopefully profitable— ideas for a new product as possible. With a group of other students, participate in brainstorming for new product ideas for one of the following (or some other product of your choice): • An exercise machine with some desirable new features • A combination shampoo and body wash • A new type of university Then, with your class, screen one or more of the ideas for possible further product development.

4. As a member of a new product team with your company, you are working to develop an electric car jack that would make changing tires for a car easier. You are considering conducting a test market for this new product. Outline the

pros and cons for test marketing this product. What are your recommendations?

Marketing Metrics Exercise

The chapter provides a discussion on measuring innovation and outlines some important metrics related to firm strategy, firm culture, and outcomes of innovation—an “Innovation Report Card.” Apple is often cited as an example of a highly innova- tive firm that is highly engaged in new product development and continuous product innovation. Their success, both with consumers and in the financial markets, has been incredible in recent years. Between the unveiling of the iPad in late January 2010 and its first sale in early April, Apple’s stock rose more than 10 percent by riding on the hype around the new prod- uct. Most firms would like to come even close to the success Apple achieves through innovation.

Review the questions in the chapter section “Measuring Innovation.” Your job is to go to the Apple Web site and also to review some articles and news stories online about Apple’s new product introductions. Look for evidence to be able to an- swer these metrics questions related to innovation as applied to Apple. How does Apple score on the “Innovation Report Card”?

Choices: What Do You Think?

1. Technology is moving at an ever-increasing speed, and this means that new products enter and leave the market faster than ever. What are some products you think tech- nology might be able to develop in the future that you would like? Do you think these products could add to a company’s profits?

2. In this chapter, we talked about the core product, the ac- tual product, and the augmented product. Does this mean that marketers are simply trying to make products that are really the same seem different? When marketers under- stand these three layers of the product and develop prod- ucts with this concept in mind, what are the benefits to consumers? What are the hazards of this type of thinking?

3. Discontinuous innovations are totally new products— something seldom seen in the marketplace. What are some examples of discontinuous innovations introduced in the past 50 years? Why are there so few discontinuous innovations? What products have companies recently introduced that you believe will end up being regarded as discontinuous innovations?

4. Consider the differences in marketing to consumer mar- kets versus business markets. Which aspects of the processes of product adoption and diffusion apply to both markets? Which aspects are unique to one or the other? Provide evidence of your findings.

5. In this chapter, we explained that knockoffs are slightly modified copies of original product designs. Should knock- offs be illegal? Who is hurt by knockoffs? Is the marketing of knockoffs good or bad for consumers in the short run? In the long run?

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6. It is not necessarily true that all new products benefit con- sumers or society. What are some new products that have made our lives better? What are some new products that have actually been harmful to consumers or to society? Should there be a way to monitor or “police” new prod- ucts that are introduced to the marketplace?

Miniproject: Learn by Doing

What product characteristics do consumers think are important in a new product? What types of service components do they demand? Most important, how do marketers know how to de- velop successful new products? This miniproject is designed to let you make some of these decisions.

1. Create (in your mind) a new product item that might be of interest to college students such as yourself. Develop a written description and possibly a drawing of this new product.

2. Show this new product description to a number of your fellow students who might be users of the product. Ask them to tell you what they think of the product. Some of the questions you might ask them are the following: • What is your overall opinion of the new product? • What basic benefits would you expect to receive from

the product? • What about the physical characteristics of the product?

What do you like? Dislike? What would you add? Delete? Change?

• What do you like (or would you like) in the way of prod- uct packaging?

• What sort of services would you expect to receive with the product?

• Do you think you would try the product? How could marketers influence you to buy the product?

Develop a summary based on what you found. Include your recommendations for changes in the product and your be- liefs about the potential success of the new product.

Marketing in Action Case Real Choices at KFC

If there is no bread, is it really a sandwich? That’s the question that many customers have been asking the Kentucky Fried Chicken (KFC) fast-food retail chain. In 2010, KFC released its latest addition to its menu, the “Double Down.” KFC promotes the new item in its advertisements, stating that it is “so much 100-per-cent premium chicken, we didn’t have room for a bun.” The sandwich is an attempt to grow revenue in a very competitive business. The United States has the largest fast- food market in the world. Many competitors offer products that are considered the same, and the rivalry compels prices that constrain profit margins.

KFC began in a gas station in North Corbin, Kentucky, dur- ing the Great Depression. The success of the eating establish- ment called Sanders Court & Café led to expansion. The first Kentucky Fried Chicken retail store opened in 1952 in South Salt Lake, Utah. Eventually expanding to Canada, by the early 1960s, Kentucky Fried Chicken was sold in over 600 franchised outlets. Since that time, the fast-food restaurant has changed ownership multiple times. Today the brand is owned by Yum! Brands and is based in Louisville, Kentucky. There are more than 14,000 KFC outlets in more than 80 countries and territories around the world, serving some 12 million customers each day.

According to KFC.com, the Double Down “features two thick and juicy boneless white meat chicken filets (Original Recipe® or Grilled), two pieces of bacon, two melted slices of Monterey Jack and pepper jack cheese and Colonel’s Sauce.” Although it was initially offered on a limited-time basis, KFC de- cided to add the item to its menu permanently. The company’s change of course was related to strong sales driven in part by people eating the sandwich on YouTube and popular television personality Stephen Colbert consuming one on The Colbert Re- port television show. KFC reports that the launch is one of their most successful ever.

From a nutritional standpoint, the Double Down is 540 calories, 32 grams of fat, and 1,380 milligrams of sodium. The grilled version is 460 calories, 23 grams of fat and 1,430 mil- ligrams of sodium. The level of sodium in the sandwich is draw-

ing a great deal of concern from customers and health advo- cacy organizations. Many critics are questioning why KFC intro- duced this option in the midst of building its brand image as a fast-food restaurant offering healthier menu choices. Lona San- don, a registered dietitian and spokesperson for the American Dietetic Association, says, “You are getting large amounts of total fat and saturated fat by eating a sandwich like this, and this is very detrimental to your overall heart health.”

The fast-food retail market is in a constant state of com- petitive fervor. Are sandwiches like the Double Down the future of fast-food chains? The dilemma for companies like KFC is, how do you appeal to both the healthy market and the indul- gent market? Many customers prefer healthy choices when considering fast food. However, there are also numerous diners to whom the appeal of fat, salt, and processed carbs is irre- sistible. But the general issue of obesity as an epidemic leading to major health problems has become front page news. The choice of menu items must lead to long-term profitability and competitive market advantage, but KFC will have to find a way to balance potential public relations concerns and still maintain its bottom line.

You Make the Call 1. What is the decision facing KFC? 2. What factors are important in understanding this decision

situation? 3. What are the alternatives? 4. What decision(s) do you recommend? 5. What are some ways to implement your recommendation?

Based on: Sam Sifton, “On Ingesting KFC’s New Product, the ‘Double Down,’” The New York Times, April 12, 2010 (http://dinersjournal .blogs.nytimes.com/2010/04/12/on-ingesting-kfcs-new-product-the-double-down/ ?scp51&sq5new%20product&st5cse); KFC, Wikipedia, http://en.wikipedia.org/wiki/Kfc (accessed June 25, 2010); Double Down (sandwich), Wikipedia, http://en.wikipedia .org/wiki/Double_Down_(sandwich) (accessed June 25, 2010); Rosemary Black, “KFC’s New ‘Double Down’ Sandwich Swaps Bun for Two Deep-Fried Chicken Breasts, Extra Calories,” New York Daily News, August 26, 2009; Gerrick D. Kennedy, “KFC’s Double Down: A Cheesy, Sodium-Filled Sandwich—Will You Be Buying?” Los Angeles Times, April 12, 2010 (http://dinersjournal.blogs.nytimes.com/2010/04/12/ on-ingesting-kfcs-new-product-the-double-down/ ?scp51&sq5new%20product&st5cse).

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Chapter | 9

Manage the Product

Real People Profiles

A Decision Maker at General Mills David Clark is vice president, Big G Adult Cereals at General Mills. Since July 2007, he has been responsible for leading the development and execution of growth strategies for several iconic brands includ- ing Wheaties, Total, Chex, and Fiber One. In November 2008, he was recognized as being among the Marketing Top 50 by Advertising Age.

Prior to his responsibilities in the Big G division, David was the marketing direc- tor for General Mills Foodservice from November 2003 to July 2007. In this as-

signment, David led the Brand Marketing, Channel Marketing, and Promotions Mar- keting teams in driving growth across 13 product platforms within the Foodservice Distributor channel.

From June 1997 to November 2003, David held various marketing roles includ- ing marketing manager for Progresso Soup, marketing manager for Green Giant Frozen Vegetables, and associate marketing manager for Old El Paso Mexican Food.

Although David has spent the majority of his career in marketing and general management leadership positions, his early career experience in marketing research, category management, and sales were instrumental in building a foundational un- derstanding of consumer behavior and the consumer packaged goods industry.

David holds a bachelor’s degree from the University of Tennessee, Knoxville, and an MBA from the University of Minnesota Carlson School. He currently resides in Minneapolis, Minnesota, with his wife, Molly, and three children.

David’s Info

What do I do when I’m not working? A) Tennis, running, and all things digital.

Career high? A) Leading the Wheaties brand and working with five top athletes (Peyton Manning, Albert Pujols, Kevin Garnett, Bryan Clay, and Hunter Kemper) to co-create a new Breakfast of Champions, Wheaties Fuel.

A job-related mistake I wish I hadn’t made? A) Thinking that it’s easier to gain new consumers than keep current ones. A lesson no one wants to learn twice.

My hero? A) My mom, who taught me that honest, hard work and treating others with respect are the real secrets to success.

My motto to live by? A) See what everyone sees; think what no one has thought.

What drives me? A) The possibilities that can come from a great idea.

Profile Info

David Clark

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Fiber One cereal was launched in 1985. One of the first high-fiber cereals on the market, the product

delivered 57 percent of one’s daily value of fiber per bowl. It gained a small but intensely loyal following of older consumers who often learned about the brand from a doctor or pharmacist.

Fiber One sat quietly on the shelf as an average performer until 2002. Then the Atkins Diet generated a lot of interest in fiber as a tool to offset carbohydrate levels in foods. Fiber One sales started to grow. In the years following, increased coverage in the media and medical community about the ben- efits of fiber increased consumer awareness and interest in the nutrient.

Due to the boom in consumer interest in fiber, Fiber One was uniquely positioned for growth from increased marketing invest- ment that would build awareness about the brand. General Mills launched new brand ex- tensions including Fiber One Honey Clusters Cereal and Fiber One Oats and Chocolate Snack Bars. The brand took on a fresh, more contemporary look with a packaging re- design. Now, the big question was how the core Fiber One brand should be positioned

and grow as it matured through its life cycle.

David considered his Options 1 • 2 • 3 Own the position of “Fiber Superiority.” Fiber One is very high in fiber. For example, it takes 3.5 cups of broccoli to get the same fiber as one bowl of Fiber One Original Cereal. Bringing this comparison to life could make a powerful marketing visual on which to build a campaign. The cereal’s heaviest users tend to be older consumers (age 55�) who have the greatest desire

See what option David chose on page 267

to add fiber to their diets. A superiority message would appeal to their great- est need. However, products in the fiber supplement category (Benefiber, Metamucil) already advertised their superiority over other high-fiber foods. And younger consumers who were just beginning to seek more fiber in their diets were less willing to trade off taste; they often described the taste of fiber products as “cardboard.” They thought high-fiber products were “old people food,” and this was a turnoff.

Own the position of “Great Tasting High Fiber.” Consumers pointed to the poor taste of fiber as the number-one barrier to getting more fiber in their diets. They rated the taste of recent new product launches like Fiber One Honey Clusters Cereal and Oats and Chocolate Snack Bars as surprisingly good given their high fiber content. On the other hand, fiber delivers many im-

portant health benefits to consumers (weight management, heart health, di- gestive health). Failure to position against the health benefits of fiber could be an opportunity lost to competition. In addition, consumers might have such a negative association with fiber products that they might not believe a message that stressed its good taste.

Own the position of “Digestive Health.” Consumers pri- marily think about fiber in terms of its digestive benefits. This is particularly appealing to the growing baby boomer demo- graphic. They were already snapping up products in other cate- gories (especially yogurt) because of their digestive health benefits. However, other cereal brands already were talking

about digestive health benefits. And this topic tended to polarize shoppers. While older consumers valued digestive efficiency, younger consumers found this a turnoff or even comical.

Now, put yourself in David’s shoes: Which option would you choose, and why?

You Choose

Which Option would you choose, and why?

1. YES NO 2. YES NO 3. YES NO

Here’s my problem. . . Real People, Real Choices

245

Option

Things to remember

David needed to define a strategy that would reinforce a consistent and desirable brand meaning for Fiber One as it “aged” through its product life-cycle.

Consumers already had strong feelings about fiber— basically it’s good for you but it tastes bad.

Fiber’s positive relationship to digestive health is attractive to older consumers, but this link is a turnoff to younger ones.

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Product Planning: Use Product Objectives to Decide on a Product Strategy What makes one product fail and another succeed? It’s worth re-emphasizing what you learned in Chapter 2: Firms that plan well succeed. Product planning plays a big role in the firm’s marketing planning. Strategies the prod- uct plan outlines spell out how the firm expects to de-

velop a value proposition that will meet marketing objectives. Product planning is guided by the continual process of product management, which is the systematic and usually team-based approach to coordinating all aspects of a product’s marketing initiative including all elements of the marketing mix. In some companies, product management is sometimes also called brand management, and the terms refer to essentially the same thing. The organiza- tion members that coordinate these processes are called product managers or brand managers. We’ll discuss the role of these individuals in more detail later in the chapter.

As more and more competitors enter the global marketplace and as tech- nology moves forward at an ever-increasing pace, firms create products that grow, mature and then decline at faster and faster speeds. This means that smart product management strategies are more critical than ever. Marketers just don’t have the luxury of trying one thing, finding out it doesn’t work, and then trying something else.

In Chapter 8, we talked about how marketers think about products— both core and augmented—and about how companies develop and introduce new products. In this chapter, we’ll finish the product part of the story as we see how companies manage products, and then we’ll examine the steps in product planning as Figure 9.1 outlines. These steps include developing product objectives and the strategies required to successfully market prod- ucts as they evolve from “new kids on the block” to tried-and-true favorites— and in some cases finding new markets for these favorites. Next, we’ll discuss branding and packaging, two of the more important tactical decisions prod- uct planners make. Finally, we’ll examine how firms organize for effective product management. Let’s start with how firms develop product-related objectives.

When marketers develop product strategies, they make decisions about product benefits, features, styling, branding, labeling, and packaging. But what do they want to accomplish? Clearly stated product objectives provide focus and direction. They should support the broader marketing objectives of the business unit in addition to being consistent with the firm’s overall mis- sion. For example, the objectives of the firm may focus on return on invest- ment (ROI). Marketing objectives then may concentrate on building market share and/or the unit or dollar sales volume necessary to attain that return on investment. Product objectives need to specify how product decisions will contribute to reaching a desired market share or level of sales.

To be effective, product-related objectives must be measurable, clear, and unambiguous—and feasible. Also, they must indicate a specific time frame.

Chapter 9

246 PART THREE | CREATE THE VALUE PROPOSITION

Objective Outline 1. Explain the different product

objectives and strategies a firm may choose.

PRODUCT PLANNING: USE PRODUCT OBJECTIVES TO DECIDE ON A PRODUCT STRATEGY (p. 246)

2. Understand how firms manage products throughout the product life cycle.

MARKETING THROUGHOUT THE PRODUCT LIFE CYCLE (p. 252)

3. Discuss how branding strategies create product identity.

CREATE PRODUCT IDENTITY: BRANDING DECISIONS (p. 255)

4. Explain how packaging and labeling contribute to product identity.

CREATE PRODUCT IDENTITY: THE PACKAGE AND LABEL (p. 262)

5. Describe how marketers structure organizations for new and existing product management.

ORGANIZE FOR EFFECTIVE PRODUCT MANAGEMENT (p. 266)

(pp. 266–267)

(pp. 262–265)

(pp. 255–262)

(pp. 252–255)

(pp. 246–251)

Check out chapter 9 Study Map on page 268

1 OBJECTIVE

Explain the different

product objectives

and strategies a firm

may choose. (pp. 246–251)

product management The systematic and usually team-based approach to coordinating all aspects of a product’s marketing initiative including all elements of the marketing mix.

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Consider, for example, how Amy’s, a popular organic and health-conscious frozen ethnic entrée manufacturer, might state its product objectives:

• “In the upcoming fiscal year, reduce the fat and calorie content of our products to satisfy consumers’ health concerns.”

• “Introduce three new items this quarter to the product line to take advantage of increased consumer interest in Mexican foods.”

• “During the coming fiscal year, improve the chicken entrées to the extent that consumers will rate them better-tasting than the competition.”

Planners must keep in touch with their customers so that their objectives accu- rately respond to their needs. An up-to-date knowledge of competitive product inno- vations also is important to develop product objectives. Above all, these objectives should consider the long-term implications of product decisions. Planners who sacrifice the long-term health of the firm to reach short-term sales or financial goals choose a risky course. Product planners may focus on one or more individual products at a time, or they may look at a group of product offerings as a whole. In this section, we’ll briefly examine both of these approaches. We’ll also look at one important product ob- jective: product quality.

Objectives and Strategies for Individual Products Everybody loves the MINI Cooper. But it wasn’t just luck or happenstance that turned this product into a global sensation. Just how do you launch a new car that’s only 142 inches long and makes people laugh when they see it? BMW deliberately called attention to the small size and poked fun at the car. The original launch of the MINI Cooper a few years back in- cluded bolting the MINI onto the top of a Ford Excursion with a sign, “What are you doing for fun this weekend?” BMW also mocked up full-size MINIs to look like coin-operated kid- die rides you find outside grocery stores with a sign proclaiming: “Rides $16,850. Quarters only.” The advertising generated buzz in the 20- to 34-year-old target market and today the MINI is no joke.

As a smaller brand, the MINI didn’t have a huge advertising budget—in fact it was the first launch of a new car in modern times that didn’t include TV advertising. Instead, the MINI launched with print, outdoor billboards, and Web ads. The aim wasn’t a heavy car launch but more of a “discovery process.” Ads promoted “motoring” instead of driving, and magazine inserts included MINI-shaped air fresheners and pullout games. Wired magazine ran a cardboard foldout of the MINI suggesting readers assemble and drive it around their desks making “putt-putt” noises. Playboy came up with the idea of a six-page MINI “center- fold” complete with the car’s vital statistics and hobbies. By the end of its first year on the market, the MINI was the second most memorable new product of the year!

Some product strategies focus on a single new product. (As an interesting sidebar, enough customers have complained about the cramped quarters in the MINI’s back seat— it is, after all, a “mini”—that BMW has since introduced a larger MINI. Now that’s an oxymoron—something like a “jumbo shrimp”!)1 Strategies for individual products may be quite different for new products, for regional products, or for mature products. For new products, not surprisingly, the objectives relate to successful introduction. After a firm ex- periences success with a product in a local or regional market, it may decide to introduce it nationally. Coors, for example, started out in 1873 as a regional beer you could buy only in Colorado. It didn’t move east of the Mississippi until 1981 and took another decade to move into all 50 states.

For mature products like cheddar Goldfish snack crackers that Campbell’s Soup Company manufactures under its Pepperidge Farm label, product objectives may focus on bringing

Develop Product Objectives

• For individual products • For product lines and mixes

Design Product Strategies

Make Tactical Product Decisions

• Product branding • Packaging and labeling design

Figure 9.1 Process | Steps to Manage Products

Effective product strategies come from a series of orderly steps.

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new life to a product while holding on to the traditional brand personality. For Goldfish, “The snack that smiles back,” this means introducing a host of spin-offs—peanut butter–flavored, giant-sized, multicolored, and color-changing, to name a few. The Goldfish brand has been around since 1962 but it continues to stay fresh with 25 varieties it sells in more than 40 coun- tries. In fact, people eat over 75 billion Goldfish per year—if strung together, enough to wrap around the earth 30 times!2

Objectives and Strategies for Multiple Products Although a small firm might get away with a focus on one product, a larger firm often sells a set of related products. This means that strategic decisions affect two or more products simultaneously. The firm must think in terms of its entire portfolio of products. As Figure 9.2 shows, product planning means developing product line and product mix strategies to encompass multiple offerings.

A product line is a firm’s total product offering to satisfy a group of target customers. For example, Procter & Gamble’s (P&G’s) line of cleaning products includes three different liquid dish detergent brands: Dawn stresses grease-cutting power, Ivory emphasizes mild- ness, and Joy is for people who want shiny dishes. To do an even better job of meeting vary- ing consumer needs, each of the three brands comes in more than one formulation. In addition to regular Dawn, you can also buy Dawn with Bleach Alternative, Dawn Simple Pleasures (smells nice with botanicals), Dawn Direct Foam (detergent comes out already foaming so “One pump and my dishes are done”), and Dawn Plus with Power Scrubbers (“Finally, an answer to tough, stuck-on food”).3 The product line length is determined by the number of separate items within the same category.

We describe a large number of variations in a product line as a full line that targets many customer segments to boost sales potential. A limited-line strategy, with fewer product vari- ations, can improve the firm’s image if consumers perceive it as a specialist with a clear, spe-

David Clark

product line A firm’s total product offering designed to satisfy a single need or desire of target customers.

Mature product: Increase consumer enthusiasm for the product

Regional product: Introduce nationally

Introduce new products

Individual Products

Downward

Upward

Two-way

Stretching: Adding new items to line

Filling: Adding sizes

or styles

Contracting a product line:

Dropping items

Product Line Extensions

Multiple Products

Increase width of product mix

Product Mix

Figure 9.2 Process | Objectives for Single and Multiple Products Product objectives provide focus and direction for product strategies. Objectives can focus on a single product or a group of products.

product line length Determined by the number of separate items within the same category.

APPLYING Product Strategy

A major part of defining a brand’s strategy is to decide on how to position it relative to competing brands. David needs to decide how to emphasize the healthy aspects of fiber while still attracting young consumers who don’t identify with this benefit.

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cific position in the market. A great example is Rolls-Royce Motor Cars, which BMW now owns. Rolls-Royce makes expensive, handcrafted cars built to each customer’s exact speci- fications, and for decades maintained a unique position in the automobile industry. Every Rolls Phantom that rolls out the factory door is truly a unique work of art.4

Organizations may decide to extend their product line by adding more brands or mod- els when they develop product strategies. For example, Patagonia, Gap, and Lands’ End extended their reach when they added children’s clothing. When a firm stretches its prod- uct line, it must decide on the best direction to go. If a firm’s current product line includes middle and lower-end items, an upward line stretch adds new items—higher priced entrants that claim better quality or that offer more bells and whistles. Hyundai decided it could tap the market for bigger, more luxurious cars and SUVs, and stretched its line upward in the form of models such as the Azera sedan, Tucson and Santa Fe SUVs, and the Entourage minivan. It positions each of these against top-end products by Toyota and Honda but prices its cars thousands of dollars less. Hyundai does the same thing in the sedan category; it offers its popular Sonata alternative to the pricier Accord and Camry. These product line changes positioned Hyundai for considerable success with value-conscious consumers during the recent recession, and Hyundai (and its sister firm Kia) took away considerable market share from Toyota and other brands—even before Toyota ran into problems with its faulty accelerators.5

Conversely, a downward line stretch augments a line when it adds items at the lower end. Here the firm must take care not to blur the images of its higher-priced, upper-end offerings. Rolex, for example, may not want to run the risk of cheapening its image with a new watch line to compete with Timex or Swatch.

In some cases, a firm may decide that its target is too small a market. In this case, the product strategy may call for a two-way stretch that adds products at both the upper and lower ends. Marriott Hotels, for example, added Fairfield Inns and Courtyard at the lower end and J.W. Marriott and Ritz-Carlton at the upper end to round out its product line.

A filling-out strategy adds sizes or styles not previously available in a product category. Nabisco did this when it introduced “bite-size” versions of its popular Oreo and Nutter But- ter cookies. In other cases, the best strategy may be to contract a product line, particularly when some of the items are not profitable. For example, Heinz scrapped its “Bite Me” brand of frozen pizza snacks because of poor sales. The product, targeted to teens, failed to meet company expectations.6

We’ve seen that there are many ways a firm can modify its product line to meet the com- petition or take advantage of new opportunities. To further explore these strategic decisions, let’s return to the “glamorous” world of dish detergents. What does P&G do if the objec- tive is to increase market share? One possibility would be to expand its line of liquid dish detergents—as the company did with its Dawn brand when it introduced Dawn Direct Foam and other extensions. If the line extension meets a perceived consumer need the com- pany doesn’t currently address, this would be a good strategic objective.

But whenever a manufacturer extends a product line or a product family, there is risk of cannibalization. This occurs when the new item eats up sales of an existing brand as the firm’s current customers simply switch to the new product. That may explain why P&G met consumer demands for an antibacterial dish liquid by creating new versions of the existing brands Joy and Dawn.

Product Mix Strategies A firm’s product mix describes its entire range of products. For example, in addition to a deep line of shaving products, P&G’s acquisition of Gillette a few years back gave P&G Oral B toothbrushes, Braun oral care products, and Duracell batteries.

When they develop a product mix strategy, planners usually consider the product mix width: the number of different product lines the firm produces. If it develops several different

cannibalization The loss of sales of an existing brand when a new item in a product line or product family is introduced.

product mix The total set of all products a firm offers for sale.

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product lines, a firm reduces the risk of putting all its eggs in one basket. Normally, firms develop a mix of product lines that have some things in common.

Wine and spirits distributor Constellation Brands’ entry into the main- stream supermarket wine space through its acquisition of Robert Mondavi is an example of a successful product mix expansion strategy. Americans drink more wine (and hard liquor) of late (perhaps to help them forget the reces- sion), and the Mondavi brand gives Constellation the crown jewel in the $4� billion supermarket wine channel (i.e., mass market wines that people buy in large volume where they shop for groceries rather than at specialty wine shops).7

Quality as a Product Objective: The Science of TQM Product objectives often focus on product quality, which is the overall abil- ity of the product to satisfy customers’ expectations. Quality is tied to how customers think a product will perform, and not necessarily to some techno- logical level of perfection. Product quality objectives coincide with market- ing objectives for higher sales and market share and to the firm’s objectives for increased profits.

In 1980, just when the economies of Germany and Japan were finally re- built from World War II and were threatening American markets, an NBC documentary on quality titled If Japan Can Do It, Why Can’t We? demon- strated to the American public—and to American CEOs—the poor quality of American products.8 So began the total quality management (TQM) revolu-

tion in American industry. TQM is a business philosophy that calls for company-wide dedication to the develop-

ment, maintenance, and continuous improvement of all aspects of the company’s opera- tions. Indeed, some of the world’s most admired, successful companies—top-of-industry firms such as Nordstrom, 3M, Boeing, and Coca-Cola—endorse a total quality focus.

Product quality is one way that marketing adds value to customers. However, TQM as an approach to doing business is far more sophisticated and effective than simply paying attention to product quality. TQM firms promote the attitude among employees that everybody working there serves its customers—even employees who never interact with people outside the firm. In such cases, employees’ customers are internal customers—other employees with whom they interact. In this way, TQM maximizes customer satisfaction by involving all employees, regardless of their function, in efforts to continually improve qual- ity. For example, TQM firms encourage all employees, even the lowest-paid factory work- ers, to suggest ways to improve products—and then reward them when they come up with good ideas.

Quality Guidelines Around the world, many companies look to the uniform standards of the International Or- ganization for Standardization (ISO) for quality guidelines. This Geneva-based organization developed a set of criteria in 1987 to improve and standardize product quality in Europe. The ISO 9000 is a broad set of guidelines that establishes voluntary standards for quality management. These guidelines ensure that an organization’s products conform to the cus- tomer’s requirements. In 1996, the ISO developed ISO 14000 standards, which concentrate on “environmental management.” This means the organization works to minimize any harmful effects it may have on the environment. Because members of the European Union and other European countries prefer suppliers with ISO 9000 and ISO 14000 certification, U.S. companies must comply with these standards to be competitive there.9

product quality The overall ability of the product to satisfy customers’ expectations.

TAKE IT ALL ON™

Timberland uses a patriotic message to underscore an emphasis on quality.

total quality management (TQM) A management philosophy that focuses on satisfying customers through empowering employees to be an active part of continuous quality improvement.

ISO 9000 Criteria developed by the International Organization for Standardization to regulate product quality in Europe.

ISO 14000 Standards of the International Organization for Standardization concerned with “environmental management” aimed at minimizing harmful effects on the environment.

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One way that companies can improve quality is to use the Six Sigma method. The term Six Sigma comes from the statistical term sigma, which is a standard deviation from the mean. Six Sigma refers to six standard deviations from a normal distribution curve. In practical terms, that translates to no more than 3.4 defects per million—getting it right 99.9997 percent of the time. As you can imagine, achieving that level of quality requires a very rigorous approach (try it on your term papers—even when you use spell-check!), and that’s what Six Sigma offers. The method involves a five-step process called “DMAIC” (define, measure, analyze, improve, and control). The company trains its employees in the method, and as in karate they progress toward “black belt” status when they successfully complete all the levels of training. Employees can use Six Sigma processes to remove defects from services, not just products. In these cases a “defect” means failing to meet customer ex- pectations. For example, hospitals use Six Sigma processes to reduce medical errors, and air- lines use the system to improve flight scheduling.

It’s fine to talk about product quality, but exactly what is it? Figure 9.3 summarizes the many meanings of product quality. In some cases, product quality means durability. For example, athletic shoes shouldn’t develop holes after their owner shoots hoops for a few weeks. Reliability also is an im- portant aspect of product quality—just ask Maytag and the “lonely repairman” it featured in its commercials for years. For many customers, a product’s versatility and its ability to satisfy their needs are central to product quality.

For other products, quality means a high degree of pre- cision. For example, purists compare HDTVs in terms of the number of pixels and their refresh rate. Quality, especially in business-to-business products, also relates to ease of use, maintenance, and repair. Yet another crucial dimension of quality is product safety. Finally, the quality of products such as a painting, a movie, or even a wedding gown relates to the degree of aesthetic pleasure they provide. Of course, evaluations of aesthetic quality differ dramatically among people: To one person, the quality of a mobile device may mean simplicity, ease of use, and a focus on reliability in voice signal (think a basic Samsung or LG flip phone), while to another it’s the cornucopia of applications and multiple communication modes available (think Apple iPhone).

Degree of Pleasure

Product Safety

Ease of Use

Reliable

Durable

Versatile

Product Quality

The overall ability of the product to satisfy

customer expectations.

Precision Satisfies Needs

Figure 9.3 Snapshot | Product Quality

Some product objectives focus on quality, which is the ability of a product to satisfy customer expectations—no matter what those expectations are.

Six Sigma A process whereby firms work to limit product defects to 3.4 per million or fewer.

In 2009, the five most memorable new products were KFC’s Grilled Chicken, McDonald’s McCafe, the Beatles Rock Band video game, the Blackberry Storm from Research in Motion—and the “Snuggie” blanket. Each of these products owes its success largely to exceptionally well-executed product planning and management.11

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Marketing throughout the Product Life Cycle Many products have very long lives, while others are “here today, gone tomorrow.” The product life cycle (PLC) is a useful way to explain how the market’s response to a product and marketing activities change over the life of a product. In Chapter 8, we talked about how marketers go about introducing new products, but the launch is only the begin- ning. Product marketing strategies must evolve and change as they continue through the product life cycle.

Alas, some brands don’t have long to live. Who remembers the Nash car or Evening in Paris perfume? In contrast, other brands seem almost immortal. For example, Coca-Cola has been the number-one cola brand for more than 120 years, General Electric has been the num- ber-one light bulb brand for over a century, and Kleenex has been the number-one tissue brand

for over 80 years.10 Let’s take a look at the stages of the PLC.

The Introduction Stage Like people, products are born, they “grow up” (well, most people grow up, anyway), and eventually they die. We di- vide the life of a product into four separate stages. The first stage we see in Figure 9.4 is the introduction stage. Here customers get the first chance to purchase the good or service. During this early stage, a single company usually produces the product. If it clicks and is profitable, competitors usually follow with their own versions.

During the introduction stage, the goal is to get first-time buyers to try the product. Sales (hopefully) increase at a steady but slow pace. As is also evident in Figure 9.4, the com- pany usually does not make a profit during this stage. Why? Research and development (R&D) costs and heavy spending for advertising and promotional efforts cut into revenue.

2 OBJECTIVE

Understand how

firms manage

products throughout

the product life cycle. (pp. 252–255)

Celebrities (like singer Amy Winehouse), need to manage their image just as other brands do throughout their product life cycle. This Israeli ad reminds us of that.

product life cycle (PLC) A concept that explains how products go through four distinct stages from birth to death: introduction, growth, maturity, and decline.

introduction stage The first stage of the product life cycle in which slow growth follows the introduction of a new product in the marketplace.

Introduction Stage

No profits because the company is recovering R&D costs

$ Sales

and Profits

Growth Stage

Profits increase and peak

Maturity Stage

Sales peak

Decline Stage

Market shrinks: Sales fall

Profit margins narrow

Profits fall

Sales

Time

Profits

Figure 9.4 Snapshot | The Product Life Cycle (PLC)

The PLC helps marketers understand how a product changes over its lifetime and suggests how to modify their strategies accordingly.

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Characteristic Introduction Growth Maturity Decline

Product

Single company produces single product

New competitors enter the market creating new variations of the product

New features added; sales are mostly replacement products

Number of variations reduced

Goals

Get first-time buyers to try the new product

Encourage brand loyalty

Attract new users Remain profitable; decide whether to keep or phase out product

Sales Increase at a steady but slow pace

Rapid increase Peak, then level off, often decline

Continue to decline

Profits Negative Increase and peak Profit margins

narrow Declining

Pricing High: recover R&D costs Low: attract large numbers of customers

May need to reduce because of increased competition

Price to maintain market share

May reduce if product can remain profitable

Marketing Communications

Informing customers

Heavy advertising to counter new competition

Reminder advertising

Decreased to maintain profitability

Figure 9.5 Snapshot | Marketing Mix Strategies through the Product Life Cycle Marketing mix strategies—the Four Ps—change as a product moves through the life cycle.

As Figure 9.5 illustrates, during the introduction stage pricing may be high to re- cover the R&D costs (demand permitting) or low to attract a large numbers of consumers. For example, the introductory base price of the Lexus GS450h was $54,900, nearly the same as the BMW 550i’s base price of $57,400 at the time. Lexus intended the price to appeal to consumers who are willing to pay for the GS450h’s unique combination of comfort, great gas mileage, and superb performance. The high price is also necessary so that Lexus can recover its R&D costs for this revolutionary new engineering design, and ultimately develop more hy- brid products like the LS 600h L, which hit the market at $104,000.

How long does the introduction stage last? As we saw in Chapter 8’s microwave oven example, it can be quite long. A number of factors come into play, including marketplace acceptance and the producer’s willingness to support its product during start-up. Sales for hybrid cars started out pretty slowly except for the Prius, but now with gas prices at astronomical levels and sales reaching new heights, hybrids are well past the introduction stage. Now, electric cars like the Chevy Volt and the Tesla have replaced them.

It is important to note that many products never make it past the introduction stage. For a new product to succeed, consumers must first know about it. Then they must believe that it is something they want or need. Marketing during this stage often focuses on informing consumers about the product, how to use it, and its promised benefits. However, this isn’t nearly as easy as it sounds: Would you believe that the most recent data indicate that as many as 95 percent of new products introduced each year fail? Shocking as that number is, it’s true. Ever heard of Parfum Bic, Pierre Cardin frying pans, or Jack Daniels mustard? These prod- uct blunders—which must have seemed good to some product manager at the time but sound crazy now—certainly didn’t last on shelves very long. Ever heard of the Microsoft “Kin” mobile phone, positioned as a product for teens and tweens? It was both introduced

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and subsequently withdrawn from the market in 2010—sales were abysmal (if you have one, keep it—it could be worth a fortune as a collector’s item). It’s noteworthy that these (as are many) product failures were backed by big companies and attached to already well-known brands. Just think of the product introduction risks for startups and unknown brands!12

The Growth Stage In the growth stage, sales increase rapidly while profits increase and peak. Marketing’s goal here is to encourage brand loyalty by convincing the mar- ket that this brand is superior to others. In this stage, marketing strategies may include the introduction of product variations to attract market seg- ments and increase market share. The smartphone is an example of a prod- uct that is still in its growth stage, as worldwide sales continue to increase. Continual new product introductions (Droid, iPhone, and others) fuel what seems for now to be an endless growth opportunity due to relentless prod- uct innovation as manufacturers continue to build in more and more com- munication features and developers create more useful apps.

When competitors appear on the scene, marketers must heavily rely on advertising and other forms of promotion. Price competition may develop, which drives profits down. Some firms may seek to capture a particular seg- ment of the market by positioning their product to appeal to a certain group. And, if it initially set the price high, the firm may now reduce it to meet in- creasing competition.

The Maturity Stage The maturity stage of the product life cycle is usually the longest. Sales peak and then be- gin to level off and even decline while profit margins narrow. Competition gets intense when remaining competitors fight for their share of a shrinking pie. Firms may resort to price reductions and reminder advertising (“Did you brush your teeth today?”) to maintain market share. Because most customers have already accepted the product, they tend to buy to replace a “worn-out” item or to take advantage of product improvements. For example, almost everyone in the United States owns a TV (there are still more homes without indoor toilets than without a TV set), which means most people who buy a new set replace an older one—especially when television stations nationwide stopped using analog signals and be- gan to broadcast exclusively in a digital format in February 2009. TV manufacturers hope that a lot of the replacements will be sets with the latest and greatest new technology— Samsung would love to sell you a 3D television to replace that worn-out basic model. Dur- ing the maturity stage, firms try to sell their product through as many outlets as possible because availability is crucial in a competitive market. Consumers will not go far to find one particular brand if satisfactory alternatives are close at hand.

To remain competitive and maintain market share during the maturity stage, firms may tinker with the marketing mix in order to extend this profitable phase for their product. Food manufacturers constantly monitor consumer trends, which of late have been heavily skewed toward more healthy eating. This has resulted in all sorts of products that trum- pet their low-carb, organic, or no trans-fat credentials.

The Decline Stage We characterize the decline stage of the product life cycle by a decrease in product cate- gory sales. The reason may be obsolescence forced by new technology—where (other than in a museum) do you see a typewriter today? Although a single firm may still be profitable, the market as a whole begins to shrink, profits decline, there are fewer variations of the

David Clark

maturity stage The third and longest stage in the product life cycle, during which sales peak and profit margins narrow.

decline stage The final stage in the product life cycle, during which sales decrease as customer needs change.

New products often have an advantage at the starting gate if they are offshoots of a well-known brand.

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growth stage The second stage in the product life cycle, during which consumers accept the product and sales rapidly increase.

APPLYING The Maturity Stage of the Product Life Cycle

As Fiber One starts to enter the maturity stage, David needs to consider how to use the marketing mix to tweak its position in the market for the long-term.

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product, and suppliers pull out. In this stage there are usually many com- petitors but none has a distinct advantage.

A firm’s major product decision in the decline stage is whether to keep the product at all. An unprofitable product drains resources that it could use to develop newer products. If the firm decides to keep the product, it may decrease advertising and other marketing communications to cut costs, and reduce prices if the product can still remain profitable. If the firm decides to drop the product, it can eliminate it in two ways: (1) phase it out by cutting production in stages and letting existing stocks run out, or (2) simply dump the product immediately. If the established market leader anticipates that there will be some residual demand for the product for a long time, it may make sense to keep the product on the market. The idea is to sell a limited quantity of the product with little or no support from sales, merchandising, advertising, and distribution and just let it “wither on the vine.”

Now that e-commerce is a significant factor for marketing, some prod- ucts that would have died a natural death in brick-and-mortar stores con- tinue to sell online to a cadre of fans, backed by zero marketing support (translation: high profits for the manufacturer). Online purveyors such as candydirect.com sell Beeman’s gum direct to consumers. In the “old days” (that is, B.I.—Before the Internet), a brand like Beeman’s would have been doomed by aggressive marketing budgets for all the crazy and continuous new product introductions in the category by behemoth gum competitors Wrigley and American Chicle. eBay has certainly helped proliferate the life cycle of many products—yes, you can buy Beeman’s there too (as well as oc- casionally its sister products Clove and Blackjack gum), hopefully with cur- rent expiration dates for freshness!

Create Product Identity: Branding Decisions Successful marketers keep close tabs on their products’ life cycle status, and they plan accordingly. Equally important, though, is to give that product an identity and a personality. For example, the word “Disney” evokes positive emotions around fun, playfulness, family, and casting day-to-day cares out the window. Folks pay a whole lot of money at Disney’s theme parks in Florida and California to act on those emo-

tions. Disney achieved its strong identity through decades of great branding. Branding is an extremely important (and expensive) element of product strategies. In this section, we’ll ex- amine what a brand is and how certain laws protect brands. Then we’ll discuss the impor- tance of branding and how firms make branding decisions.

What’s in a Name (or a Symbol)? How do you identify your favorite brand? By its name? By the logo (how the name ap- pears)? By the package? By some graphic image or symbol, such as Nike’s swoosh? A brand is a name, a term, a symbol, or any other unique element of a product that identifies one firm’s product(s) and sets it apart from the competition. Consumers easily recognize the Coca-Cola logo, the Jolly Green Giant (a trade character), and the triangular red Nabisco logo (a brand mark) in the corner of the box. Branding provides the recognition factor products need to succeed in regional, national, and international markets.

A brand name is probably the most used and most recognized form of branding. Smart marketers use brand names to maintain relationships with consumers “from the cradle to

Disposable razor blades are a mature product, so companies like Gillette need to keep introducing new variations to maintain consumers’ interest.

3 OBJECTIVE

Discuss how branding

strategies create

product identity. (pp. 255–262)

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brand A name, a term, a symbol, or any other unique element of a product that identifies one firm’s product(s) and sets it apart from the competition.

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the grave.” McDonald’s would like nothing better than to bring in kids for their Happy Meal and then convert them over time to its more adult Southwest Salad (hopefully followed by a Mocha Frappé). A good brand name may position a product because it conveys a certain image (Ford Mustang) or describes how it works (Drano). Brand names such as Caress and Shield help position these different brands of bath soap by saying different things about the benefits they promise. Irish Spring soap provides an unerring image of freshness (can’t you just smell it now?). The Nissan Xterra combines the word terrain with the letter X, which many young people associate with extreme sports, to give the brand name a cutting-edge, off-road feel. Apple’s use of “i-everything” is a brilliant branding strategy, as it conveys in- dividuality and personalization—characteristics that Gen Y buyers prize.

How does a firm select a good brand name? Good brand designers say there are four “easy” tests: easy to say, easy to spell, easy to read, and easy to remember—like P&G’s Tide, Cheer, Dash, Bold, Gain, Downy, and Ivory Snow (P&G is probably the undisputed branding king of all time). And the name should also “fit” four ways:

1. Fit the target market

2. Fit the product’s benefits

3. Fit the customer’s culture, and

4. Fit legal requirements.

When it comes to graphics for a brand symbol, name, or logo, the rule is that it must be rec- ognizable and memorable. No matter how small or large, the triangular Nabisco logo in the cor- ner of the box is a familiar sight. And it should have visual impact. That means that from across a store or when you quickly flip the pages in a magazine, the brand will catch your attention.

A trademark is the legal term for a brand name, brand mark, or trade character. The symbol for legal registration in the United States is a capital “R” in a circle ®. Marketers reg- ister trademarks to make their use by competitors illegal. Because trademark protection ap-

The Cutting Edge

iPad’s Branding Strategy Had Some “Bugs” In its inimitable way, Apple generated an amazing amount of buzz in 2010 with its new iPad tablet. But this time, some of it might not have been quite the conversation it wanted. Many women immediately tweeted, posted, and blogged that the name evokes awkward associations with feminine hygiene products. In the hours after the iPad launch announcement, “iTampon” be- came one of the most popular trending topics on Twitter. Apple’s communica- tion team fielded a wave of queries on the subject but characteristically declined to comment.

Various marketing experts and pundits quickly weighed in that a lot of women, when they hear the word “pad,” are automatically going to associate it with feminine hygiene products. Michael Cronan, a naming consultant in Berke- ley, Calif., whose company has helped come up with brands like TiVo and Kindle, said many naming experiments show that women tend to reflexively relate words like “pad” and “flow” to bodily concerns. He’s not sure Apple could have found an alternative that ties in as perfectly to its famous brands. “I think we’re going to get over this fairly quickly and we’ll get on with enjoying the experience.”

If this wasn’t enough drama for Apple in its iPad’s first few days out of the chute, it turns out folks of both sexes from Boston to Ireland complained that the verbalization of “iPad,” in their regional brogue sounds almost indistin- guishable from “iPod,” Apple’s music player. In addition, there were more se-

rious conflicts. It turns out two other high-tech companies already market products—albeit relatively obscure ones—called iPad and laid claim to the trademark. Fujitsu, the Japanese technology firm, applied for the iPad trade- mark in the United States and already was selling a $2,000 hand-held de- vice that shop clerks use to check inventory. Swiss semiconductor company STMicroelectronics owned the iPad trademark in Europe, where it uses the name as an acronym for integrated passive and active devices—which sounds less fun than playing games on a tablet.

Naming conflicts have not stopped Apple before. In 2007, on the eve of the introduction of the iPhone, technology giant Cisco Systems pointed out that it already sold an Internet handset called the iPhone. Legend has it that Apple CEO Steve Jobs personally strong-armed Cisco into submission by peppering Cisco executives with calls at all hours and telling them he was prepared to claim that Cisco was underutilizing the trademark (he’s a persuasive guy— Cisco surrendered the trademark with a vague promise to market their products jointly—a partnership that never materialized). “Jobs is a very tough business- man and tough negotiator,” said Charles Giancarlo, a former Cisco executive who dealt directly with him on the issue. “I feel sorry for the poor guy at Fujitsu who is going to be negotiating with Steve directly.” As for the “iTampon” crowd—likely by now the technological wonders of the tablet have long since erased any confusion about what product category the brand represents.13

trademark The legal term for a brand name, brand mark, or trade character; trademarks legally registered by a government obtain protection for exclusive use in that country.

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plies only in individual countries where the owner registers the brand, unauthorized use of marks on counterfeit products is a huge headache for many companies.

A firm can claim protection for a brand even if it has not legally registered it. In the United States, common-law protection exists if the firm has used the name and established it over a period of time (sort of like a common-law marriage). Although a registered trade- mark prevents others from using it on a similar product, it may not bar its use for a product in a completely different type of business. Consider the range of “Quaker” brands: Quaker Oats (cereals), Quaker Funds (mutual funds), Quaker State (motor oil), Quaker Bonnet (gift food baskets), and Quaker Safety Products Corporation (firemen’s clothing). A court ap- plied this principle when Apple Corp., the Beatles’ music company, sued Apple Computers in 2006 over its use of the Apple logo. The plaintiff wanted to win an injunction to prevent Apple Computer from using the Apple logo in connection with its iPod and iTunes prod- ucts; it argued that the application to music-related products came too close to the Beatles’ musical products. The judge didn’t agree; he ruled that Apple Computer clearly used the logo to refer to the download service, not to the music itself.14 Of course, now that Apple Corp. and Apple Computer have agreed to make Beatles songs available on iTunes, all bets are off.

Why Brands Matter Abrand is a lot more than just the product it represents—the best brands build an emotional con- nection with their customers. Think about the most popular diapers—they’re branded Pampers and Luvs, not some functionally descriptive name like Absorbency Master or Dry Bottom. The point is that Pampers and Luvs evoke the joys of parenting, not the utility of the diaper.

Marketers spend huge amounts of money on new-product development, advertising, and promotion to develop strong brands. When they succeed, this investment creates brand equity. This term describes a brand’s value over and above the value of the generic version of the product. For example, how much extra will you pay for a golf shirt with a Ralph Lau- ren or Lacoste logo on it than for the same shirt with no logo? The difference reflects the polo player or gator’s brand equity in your mind.

Brand equity means that a brand enjoys customer loyalty because people believe it is superior to the competition. For a firm, brand equity provides a competitive advantage be- cause it gives the brand the power to capture and hold on to a larger share of the market and to sell at prices with higher profit margins. For example, among pianos the Steinway name has such powerful brand equity that its market share among concert pianists is 95 percent.15

Marketers identify different levels of loyalty, or lack thereof, by observing how cus- tomers feel about the product. At the lowest level, customers really have no loyalty to a brand and they will change brands for any reason—often they will jump ship if they find something else at a lower price. At the other extreme, some brands command fierce devo- tion, and loyal users will go without rather than buy a competing brand.

Escalating levels of attachment to a brand begin when consumers become aware of a brand’s existence. Then, they might look at the brand in terms of what it literally does for them or how it performs relative to competitors. Next, they may think more deeply about the product and form beliefs and emotional reactions to it. The truly successful brands, however, are those that truly “bond” with their customers so that people feel they have a real relationship with the product. Here are some of the types of relationships a person might have with a product:

• Self-concept attachment: The product helps establish the user’s identity. (For example, do you feel better in Ralph Lauren or Sean John clothing?)

• Nostalgic attachment: The product serves as a link with a past self. (Does eating the in- side of an Oreo cookie remind you of childhood? How about a vintage T-shirt with a picture of Strawberry Shortcake or Mayor McCheese—both recent fashion hits?)16

brand equity The value of a brand to an organization.

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• Interdependence: The product is a part of the user’s daily routine. (Could you get through the day without a Starbucks coffee?

• Love: The product elicits emotional bonds of warmth, passion, or other strong emotion. (Hershey’s Kiss, anyone?)17

Ultimately, the way to build strong brands is to forge strong bonds with customers— bonds based on brand meaning. This concept encompasses the beliefs and associations that a consumer has about the brand. In many ways, the practice of brand management revolves around the management of meanings. Brand managers, advertising agencies, package de- signers, name consultants, logo developers, and public relations firms are just some of the collaborators in a global industry devoted to the task of meaning management. Table 9.1 sum- marizes some important dimensions of brand meaning.

Nowadays, for many consumers brand meaning builds virally as people spread its story online. “Tell to sell,” once a mantra of top Madison Avenue ad agencies, is making a come- back as marketers seek to engage consumers with compelling stories rather than peddle products in hit-and-run fashion with interruptive advertising like 30-second commercials— which Gen Y and younger largely block out anyway. The method of brand storytelling cap- tures the notion that powerful ideas do self-propagate when the audience is connected by digital technology. It conveys the constant reinvention inherent in interactivity in that whether it’s blogging, content creation through YouTube or other means, or social media, there will always be new and evolving perceptions and dialogues about a brand real-time. A cadre of start-up firms have emerged over the last few years to aid companies in storytelling about their brand (we’ll meet one of them, Campfire, in a later chapter).18

If we could name the key elements that make a brand successful, what would they be? Here is a list of 10 characteristics of the world’s top brands:19

1. The brand excels at delivering the benefits customers truly desire.

2. The brand stays relevant.

3. The pricing strategy is based on consumers’ perceptions of value.

brand meaning The beliefs and associations that a consumer has about the brand.

brand storytelling Marketers seek to engage consumers with compelling stories about brands.

Table 9.1 | Dimensions of Brand Meaning Dimension Example

Brand identification markers Coca-Cola’s red and white colors, the Nike swoosh logo, Harley-Davidson’s characteristic sound

Product attribute and benefit Starbucks as good coffee; BMW as “The Ultimate Driving Machine”

Gender NASCAR, Harley-Davidson, Marlboro and masculinity; Laura Ashley and femininity

Social class Mercedes and the old-guard elite; Jell-O and the lower-middle class

Age Facebook, MySpace, Skechers, iPod, Adult Swim

Reference group Dockers and the casual workforce; Williams-Sonoma and the serious cook

Life stage Dewar’s and the coming of age; Parent’s Soup and new mothers

Lifestyles and taste subcultures BMW and the yuppie; Red Bull and the club culture

Place Coke and America; Ben & Jerry’s and rural Vermont

Time and decade Betty Crocker and the 1950s; VW and the 1960s countercultural revolution

Trends Pottery Barn and cocooning; Starbucks and small indulgences

Traditions and rituals Häagen-Dazs ice cream and the pampering of self

Source: Parts of the table are adapted from Fournier, Susan G., Michael R. Solomon, and Basil G. Englis, “Brand Resonance,” in ed. Bernd Schmitt, Handbook on Brand and Experience Management, Elgar Publishing, 2009.

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4. The brand is properly positioned.

5. The brand is consistent.

6. The brand portfolio and hierarchy make sense.

7. The brand makes use of and coordinates a full repertoire of marketing activities to build equity.

8. The brand’s managers understand what the brand means to consumers.

9. The brand is given proper support, and that support is sustained over the long run.

10. The company monitors sources of brand equity.

Products with strong brand equity provide exciting opportunities for marketers. A firm may leverage a brand’s equity via brand extensions—new products it sells with the same brand name. Because of the existing brand equity, a firm is able to sell its brand extension at a higher price than if it had given it a new brand, and the brand extension will attract new customers immediately. Of course, if the brand extension does not live up to the quality or attractiveness of its namesake, brand equity will suffer, as will brand loyalty and sales.

One other related approach is sub-branding, or creating a secondary brand within a main brand that can help differentiate a product line to a desired target group. Dodge, like many U.S. automobile brands, has had its problems recently. Although the brand features a line of sedans, Dodge is by far best known for the Ram truck. To help clarify things for con- sumers, in 2009 Dodge made Ram a sub-brand (minus the Dodge name) that is marketed separately from all other Dodge products. Now the Dodge name is all about cars, which sport a new Dodge logo to clearly differentiate them from Ram, which has the same Ram symbol as before but now displayed more prominently than ever on the trucks. In terms of future positioning, the trucks will focused on hard-core commercial and recreational users and the cars on young attitudes and lifestyles rather than age groups or price classes.20

Sometimes a brand’s meaning simply becomes so en- trenched with a particular consumer group that it can be tough to find ways to branch out and achieve new users through extensions. Take, for example, Quiksilver, whose original line of wetsuits and swimwear was aimed squarely at teenage boys who identified with the surf and skate cul- tures. But now, Quiksilver hopes to appeal to women who may have never hit the waves with items from sweaters to jeans. The new line is in Quiksilver’s 650� stores as well as Nordstrom and other high-end retail outlets. The competi- tion will be fierce, though—Urban Outfitters’ Anthropolo- gie and Liz Claiborne’s Lucky Brand Jeans are formidable in the 20-something female market and are aimed at the same genre of retailer as Quiksilver uses for its new line.21

Branding Strategies Because brands contribute to a marketing program’s suc- cess, a major part of product planning is to develop and ex- ecute branding strategies. Marketers have to determine which branding strategy approach(es) to use. Figure 9.6 illustrates the options: individual or family brands, na- tional or store brands, generic brands, licensing, and co- branding. This decision is critical but it is not always an easy or obvious choice.

brand extensions A new product sold with the same brand name as a strong existing brand.

sub-branding Creating a secondary brand within a main brand that can help differentiate a product line to a desired target group.

Individual Brands

versus Family Brands

National and Store Brands

Generic Brands

Licensing

Cobranding

Branding Strategies

Figure 9.6 Snapshot | Branding Strategies Marketing managers have several options for which branding strategy or strategies to employ.

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Individual Brands versus Family Brands Part of developing a branding strategy is to decide whether to use a sepa- rate, unique brand for each product item—an individual brand strategy—or to market multiple items under the same brand name—a family brand or umbrella brand strategy. Individual brands may do a better job of communi- cating clearly and concisely what the consumer can expect from the prod- uct, while a well-known company like Apple may find that its high brand equity in other categories (like computers) can sometimes “rub off” on a new brand (like the iPod and iPhone). The decision often depends on char- acteristics of the product and whether the company’s overall product strat- egy calls for introduction of a single, unique product or for the development of a group of similar products. For example, Microsoft serves as a strong umbrella brand for a host of diverse, individually branded products like Windows 7, Office, Xbox 360, and Bing, while P&G prefers to brand each of its household products separately.

But there’s a potential dark side to having too many brands, particu- larly when they become undifferentiated in the eyes of the consumer due to poor positioning. Over the last decade, venerable General Motors continu- ally suffered from muddy differentiation among the eight brands in its port- folio—namely, Chevrolet, GMC, Pontiac, Saturn, Cadillac, Buick, Hummer, and Saab. The brands often competed with each other—both for customers and a slice of GM’s marketing budget. For example, at one time GM had

four mainstream midsize sedans. It backed its top-selling Chevy Malibu with an aggressive ad campaign, while the Buick LaCrosse, Pontiac G6, and

Saturn Aura struggled to build the awareness and recognition these lines need to compete. Fast forward to today: When GM got into financial difficulty and was “bailed out” by the government, one of the first moves for the leaner, meaner GM was to cut out all the fat in its product lines. Of the models listed above, only the Malibu is still around!22

National and Store Brands Retailers today often are in the driver’s seat when it comes to deciding what brands to stock and push. In addition to choosing from producers’ brands, called national or manufacturer brands, retailers decide whether to offer their own versions. Private-label brands, also called store brands, are the retail store’s or chain’s exclusive trade name. Walmart, for example, sells store brand Sam’s Cola and Sam’s cookies along with national brands such as Coke and Oreos. During the recent recession store brands gained substantially in popularity for many value-conscious shoppers, and the projection is that many consumers will not switch back to the parallel national brands as the economy rebounds because they are satisfied with the private labels.

In addition, if you stock a unique brand that consumers can’t find in other stores, it’s much harder for shoppers to compare “apples to apples” across stores and simply buy the brand where they find it sold for the lowest price. Loblaws, Canada’s largest supermarket chain, sells over 4,000 food items under the “premium quality” President’s Choice label, from cookies to beef, olive oil, curtains, and kitchen utensils. Sales of President Choice items run from 30 to 40 percent of total store volumes. Under the private label, Loblaws can introduce new products at high quality but for lower prices than brand names. It can also keep entire categories profitable by its mix of pricing options. Competitors that sell only national brands can cut prices on those brands, but that hurts their overall profitabil- ity. Loblaws can bring prices down on national brands but still make money on its private- label products.23

national or manufacturer brands Brands that the product manufacturer owns.

private-label brands Brands that a certain retailer or distributor owns and sells.

Campbell’s uses a family branding strategy to identify its Chunky line of soups.

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Generic Brands An alternative to either national or store branding is generic branding, which is basically no branding at all. Generic branded products are typically packaged in white with black letter- ing that names only the product itself (for example, “Green Beans”). Generic branding is one strategy to meet customers’ demand for the lowest prices on standard products such as dog food or paper towels. Generic brands first became popular during the inflationary period of the 1980s when consumers became especially price conscious because of rising prices. Lately, they have experienced a resurgence with the soft economy. Walmart has set the phar- macy business on end by offering some types of generic prescriptions, such as basic antibi- otics, for $4.00.24

Licensing Some firms choose to use a licensing strategy to brand their products. This means that one firm sells another firm the right to use a legally protected brand name for a specific pur- pose and for a specific period of time. Why should an organization sell its name? Licens- ing can provide instant recognition and consumer interest in a new product, and this strategy can quickly position a product for a certain target market as it trades on the high recognition of the licensed brand among consumers in that segment. For example, distiller Brown-Forman licensed its famous Jack Daniel’s bourbon name to T.G.I. Friday’s to use on all sorts of menu items from shrimp to steak to chicken. In addition to this “Jack Daniel’s Grill,” Friday’s features menu items inspired by the popular Food Network reality show Ultimate Recipe Showdown.25

A familiar form of licensing occurs when movie producers license their properties to manufacturers of a seemingly infinite number of products. Each time a blockbuster Harry Potter movie hits the screens, a plethora of Potter products packs the stores. In addition to toys and games, you can buy Harry Potter candy, clothing, all manner of back-to-school items, home items, and even wands and caul- drons. And in 2010, Harry and the gang showed up in the form of an attrac- tion at Universal Orlando called “The Wizarding World of Harry Potter.”26

Cobranding Frito-Lay sells K.C. Masterpiece–flavored potato chips, and Post sells Oreo O’s cereal. Strange marriages? Not at all! Actually, these are examples of a great strategy called cobranding, as are the Jack Daniel’s and Food Network combinations with T.G.I. Friday’s that we already mentioned. Cobranding benefits both partners when combining the two brands provides more recog- nition power than either enjoys alone. For example, Panasonic markets a line of digital cameras that use Leica lenses, which are legendary for their superb image quality. Panasonic is known for its consumer electronics. Combining the best in traditional camera optics with a household name in consumer electronics helps both brands.

A new and fast-growing variation on cobranding is ingredient branding, in which branded materials become “component parts” of other branded products.27 This was the strategy behind the classic “Intel inside” campaign that convinced millions of consumers to ask by name for a highly technical computer part (a processor) that they wouldn’t otherwise recognize if they fell over it.28 Today, consumers can buy Breyer’s Ice Cream with Reese’s Peanut Butter Cups or M&M’s candies, Twix cookies or Snickers bars. Van De Camp’s Fish & Dips come with Heinz ketchup dipping cups.

generic branding A strategy in which products are not branded and are sold at the lowest price possible.

licensing An agreement in which one firm sells another firm the right to use a brand name for a specific purpose and for a specific period of time.

Jelly Belly cobrands with several soft drink brands to offer new flavor options.

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cobranding An agreement between two brands to work together to market a new product.

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The practice of ingredient branding has two main benefits. First, it attracts customers to the host brand because the ingredient brand is familiar and has a strong brand reputation for quality. Second, the ingredient brand’s firm can sell more of its product, not to mention the additional revenues it gets from the licensing arrangement.29

Brand Metrics Recall from our earlier discussion that brand equity represents the value of a product with a particular brand name compared to what the value of the product would be without that brand name (think Coca-Cola versus generic supermarket soda). Companies, marketing re- search firms, and creative agencies create metrics of brand equity because this is an important way to assess whether a branding strategy has been successful. For example, Harris Inter- active conducts its EquiTrend® study twice a year to measure the brand equity of over 1,000 brands. The company interviews over 25,000 consumers to determine how they feel about competing brands.30 Each year, BusinessWeek applies its brand equity formulas to come up with a list of its top 100 global brands. In 2009, the top 10 in order of brand value were Coca- Cola, Microsoft, IBM, GE, Nokia, McDonald’s, Google, Toyota, Intel, and Disney. Of these, McDonald’s and Google moved up in the rankings versus 2008 while Toyota, Intel, and Disney moved down. The estimated brand value for Coca-Cola was $68.7 billion (with a “b”) in 2009.31

If consumers have strong, positive feelings about a brand and are willing to pay extra to choose it over others, you are in marketing heaven. Each of the following approaches to measuring brand equity has some good points and some bad points:

1. Customer mind-set metrics focus on consumer awareness, attitudes, and loyalty toward a brand. However, these metrics are based on consumer surveys and don’t usually provide a single objective measure that a marketer can use to assign a financial value to the brand.

2. Product-market outcomes metrics focus on the ability of a brand to charge a higher price than the one an unbranded equivalent charges. This usually involves asking consumers how much more they would be willing to pay for a certain brand compared to others. These measures often rely on hypothetical judgments and can be complicated to use.

3. Financial market metrics consider the purchase price of a brand if it is sold or acquired. They may also include subjective judgments about the future stock price of the brand.

4. Ateam of marketing professors proposed a simpler measure that they claim reliably tracks the value of a brand over time. Their revenue premium metric compares the revenue a brand generates with the revenue generated by a similar private-label product (that doesn’t have any brand identification). In this case, brand equity is just the difference in revenue (net price times volume) between a branded good and a corresponding private label.32

Create Product Identity: The Package and Label How do you know if the soda you are drinking is “regular” or “caffeine- free”? How do you keep your low-fat grated cheese fresh after you have used some of it? Why do you always leave your bottle of new “fresh, sexy, enticing” blue Glow by JLO perfume out on your dresser so every- one can see it? The answer to all these questions is effective packaging and labeling. So far, we’ve talked about how marketers create product identity with branding. In this section, we’ll learn that packaging and

labeling decisions also help to create product identity. We’ll also talk about the strategic functions of packaging and some of the legal issues that relate to package labeling.

4 OBJECTIVE

Explain how

packaging and

labeling contribute to

product identity. (pp. 262–265)

package The covering or container for a product that provides product protection, facilitates product use and storage, and supplies important marketing communication.

Universal Product Code (UPC) The set of black bars or lines printed on the side or bottom of most items sold in grocery stores and other mass-merchandising outlets. The UPC, readable by scanners, creates a national system of product identification.

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What Packages Do A package is the covering or container for a product, but it’s also a way to create a competitive advantage. So, the important functional value of a pack- age is that it protects the product. For example, packaging for computers, TV sets, and stereos protects the units from damage during shipping and ware- housing. Cereal, potato chips, or packs of grated cheese wouldn’t be edible for long if packaging didn’t provide protection from moisture, dust, odors, and insects. The multilayered, soft box you see in Figure 9.7 prevents the chicken broth inside from spoiling. In addition to protecting the product, effec- tive packaging makes it easy for consumers to handle and store the product.

Figure 9.7 shows how packaging serves a number of different functions. Over and above these utilitarian functions, however, the package com-

municates brand personality. Effective product packaging uses colors, words, shapes, designs, and pictures to provide brand and name identifica- tion for the product. In addition, packaging provides product facts including flavor, fragrance, directions for use, suggestions for alternative uses (for ex- ample, recipes), safety warnings, and ingredients. Packaging may also in- clude warranty information and a toll-free telephone number for customer service.

A final communication element is the Universal Product Code (UPC), which is the set of black bars or lines printed on the side or bottom of most

Pour spout: easy to use Recognizable brand name and logo

Recipes for alternative uses

Package material protects product from spoilage and is environmentally friendly

Photo of actual product Photo of

product in use

Package shape easy to store in cabinet and refrigerator

Directions for use

Warnings

Product benefits

Nutritional information

Ingredients

Toll-free number

UPC code

Figure 9.7 Snapshot | Functions of Packaging Great packaging provides a covering for a product, and it also creates a competitive advantage for the brand.

A range of package sizes allows a company to expand its product line.

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items sold in grocery stores and other mass-merchandising outlets. The UPC is a national system of product identification. It assigns each product a unique 10-digit number. These numbers supply specific information about the type of item (grocery item, meat, produce, drugs, or a discount coupon), the manufacturer (a five-digit code), and the specific product (another five- digit code). At checkout counters, electronic scanners read the UPC bars and automatically transmit data to a computer in the cash register so that retail- ers can easily track sales and control inventory.

Design Effective Packaging Should the package have a zip-lock, feature an easy-to-pour spout, be com- pact for easy storage, be short and fat so it won’t fall over, or be tall and skinny so it won’t take up much shelf space? Effective package design in- volves a multitude of decisions.

Planners must consider the packaging of other brands in the same prod- uct category. For example, when P&G introduced Pringles potato chips, it packaged them in a cylindrical can instead of in bags like Lay’s and others. This was largely out of necessity, since P&G doesn’t have all the local trucks to deliver to stores that Frito-Lay does, and the cans keep the chips fresher much longer. However, P&G discovered that not all customers will accept a radical change in packaging, and retailers may be reluctant to adjust their shelf space to accommodate such packages. To partly answer the concern, Pringles now comes in an amazing array of products and package types and sizes including Stix, Snack Stacks, Grab & Go, and 100 Calorie (apportioned for those who want a snack while they also watch their weight).33

Who says people don’t judge a book by its cover? NXT, a new brand of shaving gel targeted at younger men, makes a glitzy statement on the shelf. It’s sold in an arresting triangular container that lights up from the bottom to illuminate air bubbles suspended in the clear gel. The plastic is tinted blue, and when its base lights up (yes, this package requires batteries!), the whole thing looks like a miniature lava lamp or tiny fishless aquarium. How does NXT afford such a fancy container? It doesn’t spend a dime on tradi- tional advertising—the brand counts on its innovative package to sell the gel in the grocery aisle. What’s NXT? NXT body wash and NXT deodorant, of course.34

Firms that wish to act in a socially responsible manner must also con- sider the environmental impact of packaging. Shiny gold or silver packag- ing transmits an image of quality and opulence, but certain metallic inks are not biodegradable. Some firms are developing innovative green packaging that is less harmful to the environment than other materials. Of course, there is no guarantee that consumers will accept such packaging. They didn’t take to plastic pouch refills for certain spray bottle products even though the pouches may take up less space in landfills than the bottles do. They didn’t like pouring the refill into their old spray bottles. Still, customers have ac- cepted smaller packages of concentrated products such as laundry deter- gent, dishwashing liquid, and fabric softener.

What about the shape: Square? Round? Triangular? Hourglass? How about an old-fashioned apothecary jar that consumers can reuse as an attractive storage container? What color should it be? White to communicate purity? Yellow because it re- minds people of lemon freshness? Brown because the flavor is chocolate? Sometimes we can trace these decisions back to personal preferences. The familiar Campbell’s Soup label—

A waterproof camera is a packaging innovation—and a differential advantage—for Fuji.

A next-generation bar code called an Aztec code is starting to pop up on everything from cereal boxes to airline boarding passes. It holds much more data and can be read by cellphones that have the necessary software.

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immortalized as art by Andy Warhol—is red and white because a company executive many years ago liked the football uniforms at Cornell University!

Finally, there are many specific decisions brand managers must make to ensure a prod- uct’s packaging reflects well on its brand and appeals to the intended target market. What graphic information should the package show? Should there be a picture of the product on the package? Should cans of green beans always show a picture of green beans? Should there be a picture that demonstrates the results of using the product, such as beautiful hair? Should there be a picture of the product in use, perhaps a box of crackers that shows them with delicious-looking toppings arranged on a silver tray? Should there be a recipe or coupon on the back? Of course, all these decisions rest on a marketer’s understanding of consumers, ingenuity, and perhaps a little creative luck.

Labeling Regulations The Federal Fair Packaging and Labeling Act of 1966 controls package communications and labeling in the United States. This law aims to make labels more helpful to consumers by providing useful information. More recently, the require- ments of the Nutrition Labeling and Education Act of 1990 forced food marketers to make sweeping changes in how they label products. Since August 18, 1994, the U.S. Food and Drug Administration (FDA) requires most foods sold in the United States to have labels telling, among other things, how much fat, saturated fat, cholesterol, calories, carbohydrates, protein, and vitamins are in each serving of the product. These regulations force marketers to be more accurate when they describe the contents of their products. Juice makers, for example, must state how much of their product is real juice rather than sugar and water.

As of January 1, 2006, the FDA also requires that all food labels list the amount of trans fats in the food, directly under the line for saturated fat content. The new labeling reflects scientific evidence showing that consumption of trans fat, saturated fat, and dietary cholesterol raises “bad” cholesterol levels, which increase the risk of coronary heart disease. The new information is the first significant change on the Nutri- tion Facts panel since it was established.36

Some store brands opt for copycat packaging, mimicking the look of the national branded product they want to knock off. Walgreen’s is a master of such copycat packaging—look on any shelf in its medicinal categories and you will see a Walgreen’s brand proudly merchandised on the shelf right next to the leading national brand in that category, with the package design and colors so similar that you have to look carefully to discern what you are actually buying.35

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Ethical/Sustainable Decisions in the Real World Because of the power of branding, marketers constantly are on the lookout for new trends and ways they can connect to those trends through their packaging and labeling. One of the hottest consumer trends now is organic”food, as in or- ganically grown agricultural products. A lot of products use the word “organic” on their product labels. Unfortunately for consumers, there is no precise defini- tion of organic, so a lot of food products that carry this label may really be stretch- ing it. Recently, the U.S. Department of Agriculture (USDA) has addressed this controversial topic as it tries to categorize ingredients as organic or not organic.

Also, unfortunately for consumers, the big food companies are pressuring the USDA to add a whole bunch of ingredients to the organic list; these include nu-

merous nonorganic ingredients they want to use in products that qualify to bear the “USDA Organic” seal. Remarkably, some of these are artificial food colorings that will ensure your organic food has pleasing eye appeal.

Assume you are a retailer like Whole Foods whose business (and reputation) is built around giving consumers true healthy choices. You have to decide whether to feature the “USDA Organic” designation as part of your product strategy. Under the circumstances, what would you do?

ETHICS CHECK: Find out what other students taking this course would do and why on www .mypearsonmarketinglab .com

Would you describe products labeled USDA Organic as organic to your customers even if they may contain nonorganic ingredients?

YES NO

Ripped from the Headlines

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Organize for Effective Product Management Of course, firms don’t create great packaging, brands, or products— people do. Like all elements of the marketing mix, product strategies are only as effective as their managers make them and carry them out. In this section, we’ll talk about how firms organize to manage existing products and to develop new products.

Manage Existing Products In small firms, a single marketing manager usually handles the market-

ing function. She is responsible for new-product planning, advertising, working with the company’s few sales representatives, marketing research, and just about everything else. But in larger firms, there are a number of managers who are responsible for different brands, product categories, or markets. As illustrated in Figure 9.8, depending on the organiza- tion’s needs and the market situation, product management may include brand managers, product category managers, and market managers. Let’s take a look at how each operates.

Brand Managers Sometimes a firm sells several or even many different brands within a single product category. Take the detergent aisle in the supermarket, for example. P&G manufactures and markets all these brands: Bounce, Cheer, Downy, Dreft, Era, Febreze, Gain, Ivory, and Tide. In such cases, each brand may have its own brand manager who coordinates all marketing activities for a brand; these duties include positioning, identifying target markets, research, distribution, sales promotion, packaging, and evaluating the success of these decisions.

While this job title and assignment is still common throughout industry, some big firms are changing the way they allocate responsibilities. For example, today P&G’s brand managers function more like internal consultants to cross-functional teams located in the

field that have responsibility for managing the complete business of key re- tail clients across all product lines. Brand managers still are responsible for positioning of brands and developing brand equity, but they also work heavily with folks from sales, finance, logistics, and others to serve the needs of the major retailers that comprise the majority of P&G’s business.

By its very nature, the brand management system is not without poten- tial problems. Acting independently and sometimes competitively against each other, brand managers may fight for increases in short-term sales for their own brand. They may push too hard with coupons, cents-off packages, or other price incentives to a point at which customers will refuse to buy the product when it’s not “on deal.” Such behavior can hurt long-term prof- itability and damage brand equity.

Product Category Managers Some larger firms have such diverse product offerings that they need more extensive coordination. Take IBM, for example. Originally known as a com- puter manufacturer, IBM now generates much of its revenue from a wide range of consulting and related client services across the spectrum of IT ap- plications (and the company doesn’t even sell personal computers anymore!). In cases such as IBM, organizing for product management may include product category managers, who coordinate the mix of product lines within the more general product category and who consider the addition of new- product lines based on client needs.

brand manager An individual who is responsible for developing and implementing the marketing plan for a single brand.

APPLYING Brand Manager

David is responsible for coordinating all the marketing activities for Fiber One to ensure that it continues to attract customers and even expand its market share.

David Clark

product category managers Individuals who are responsible for developing and implementing the marketing plan for all the brands and products within a product category.

Three Types of Product Management

Product Category Managers

Brand Managers

Market Managers

Figure 9.8 Snapshot | Types of Product Management

Product management can take several forms: brand managers, product category managers, and market managers, depending on the firm's needs and the market situation.

5 OBJECTIVE

Describe how

marketers structure

organizations for new

and existing product

management. (pp. 266–267)

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Market Managers Some firms have developed a market manager structure in which different people focus on specific customer groups rather than on the products the company makes. This type of or- ganization can be useful when firms offer a variety of products that serve the needs of a wide range of customers. For example, Raytheon, a company that specializes in consumer electronics products, special-mission aircraft, and business aviation, sells some products directly to consumer markets, others to manufacturers, and still others to the government. It serves its customers best when it focuses separately on each of these very different markets.

Organize for New-Product Development You read in Chapter 8 about the steps in new-product development, and learned earlier in this chapter about the importance of the Introductory Phase of the Product Life Cycle. Be- cause launching new products is so important, the management of this process is a serious matter. In some instances, one person handles new-product development, but within larger organizations new-product development almost always requires many people. Often espe- cially creative people with entrepreneurial skills get this assignment.

The challenge in large companies is to enlist specialists in different areas to work to- gether in venture teams. These teams focus exclusively on the new-product development effort. Sometimes the venture team is located away from traditional company offices in a re- mote location called a “skunk works.” This colorful term originated with the Skunk Works, an illicit distillery in the comic strip Li’l Abner. Because illicit distilleries were bootleg oper- ations, typically located in an isolated area with minimal formal oversight, organizations adopted the colorful description “skunk works” to refer to a small and often isolated depart- ment or facility that functions with minimal supervision (not because of its odor).37

market manager An individual who is responsible for developing and implementing the marketing plans for products sold to a particular customer group.

venture teams Groups of people within an organization who work together to focus exclusively on the development of a new product.

Real People, Real Choices

Here’s my choice. . .

To learn the whole story, visit www.mypearsonmarketinglab.com.

Why do you think David chose option #2?

OptionOption Option

How It Worked Out at General Mills David chose to position Fiber One as a great-tasting, high-fiber product. By emphasizing Fiber One’s great taste, General Mills would offer a solution to the biggest obstacle people associated with eating fiber.

Under the “Surprisingly Great-Tasting High-Fiber” campaign, Fiber One has expanded to over eight prod- uct categories, and sales have increased tenfold over four years. The brand now exceeds $500 million in retail sales annually.

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268 PART THREE | CREATE THE VALUE PROPOSITION

Brand YOU! What makes you special? What makes your brand unique? For example, do you describe yourself as “good with people” or do you make the description into a compelling advantage by saying you are a “collaborative problem solver”? Turn your features into benefits that a company wants by creating your personal brand value proposition. Chapter 9 in the Brand You supplement takes you through this important process, which creates the framework for your resume.

Objective Summary Key Terms Apply Study Map CHAPTER 9

1. Objective Summary Explain the different product objectives and strategies a firm may choose. Objectives for individual products may be related to intro- ducing a new product, expanding the market of a regional product, or rejuvenating a mature product. For multiple products, firms may decide on a full- or a limited-line strategy. Often companies decide to extend their product line with an upward, downward, two-way stretch or with a filling-out strategy, or they may decide to contract a product line. Firms that have multiple product lines may choose a wide product mix with many different lines or a narrow one with few. Product quality objectives refer to the durability, reliability, degree of precision, ease of use and repair, or degree of aes- thetic pleasure.

Key Terms product management, p. 246

product line, p. 248

product line length, p. 248

cannibalization, p. 249

product mix, p. 249

product mix width, p. 249

product quality, p. 250

total quality management (TQM), p. 250

ISO 9000, p. 250

ISO 14000, p. 250

Six Sigma, p. 251

(pp. 246–251) 2. Objective Summary Understand how firms manage products throughout the product life cycle. The product life cycle explains how products go through four stages from birth to death. During the introduction stage, mar- keters seek to get buyers to try the product and may use high prices to recover research and development costs. During the growth stage, characterized by rapidly increasing sales, mar- keters may introduce new-product variations. In the maturity stage, sales peak and level off. Marketers respond by adding desirable new-product features or market-development strate- gies. During the decline stage, firms must decide whether to phase a product out slowly, to drop it immediately, or, if there is residual demand, to keep the product.

Key Terms product life cycle (PLC), p. 252

introduction stage, p. 252

growth stage, p. 254

maturity stage, p. 254

decline stage, p. 254

3. Objective Summary Discuss how branding strategies create product identity. A brand is a name, term, symbol, or other unique element of a product used to identify a firm’s product. A brand should be se- lected that has a positive connotation and is recognizable and

(pp. 255–262)

(pp. 252–255)

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memorable. Brand names need to be easy to say, spell, read, and remember, and should fit the target market, the product’s ben- efits, the customer’s culture, and legal requirements. To protect a brand legally, marketers obtain trademark protection. Brands are important because they help maintain customer loyalty and because brand equity or value means a firm is able to attract new customers. Firms may develop individual brand strategies or market multiple items with a family or umbrella brand strat- egy. National or manufacturer brands are owned and sold by producers, whereas private-label or store brands carry the retail or chain store’s trade name. Licensing means a firm sells another firm the right to use its brand name. In a cobranding strategy, two brands form a partnership to market a new product.

Key Terms brand, p. 255

trademark, p. 256

brand equity, p. 257

brand meaning, p. 258

brand storytelling, p. 258

brand extensions, p. 259

sub-branding, p. 259

family brand, p. 260

national or manufacturer brands, p. 260

private-label brands, p. 260

generic branding, p. 261

licensing, p. 261

cobranding, p. 261

4. Objective Summary Explain how packaging and labeling contribute to product identity.

(pp. 262–265)

Packaging is the covering or container for a product and serves to protect a product and to allow for easy use and storage of the product. The colors, words, shapes, designs, pictures, and materials used in package design communicate a product’s identity, benefits, and other important product information. Package designers must consider cost, product protection, and communication in creating a package that is functional, aes- thetically pleasing, and not harmful to the environment. Prod- uct labeling in the United States is controlled by a number of federal laws aimed at making package labels more helpful to consumers.

Key Terms package, p. 263

Universal Product Code (UPC), p. 263

5. Objective Summary Describe how marketers structure organizations for new and existing product management. To successfully manage existing products, the marketing orga- nization may include brand managers, product category man- agers, and market managers. Large firms, however, often give new-product responsibilities to new-product managers or to venture teams, groups of specialists from different areas who work together for a single new product.

Key Terms brand manager, p. 266

product category managers, p. 266

market manager, p. 267

venture teams, p. 267

(pp. 266–267)

Chapter Questions and Activities Concepts: Test Your Knowledge

1. What are some reasons a firm might determine it should expand a product line? What are some reasons for con- tracting a product line? Why do many firms have a prod- uct mix strategy?

2. Why is quality such an important product strategy objec- tive? What are the dimensions of product quality? How has e-commerce affected the need for quality product objectives?

3. Explain the product life cycle concept. What are the stages of the product life cycle?

4. How are products managed during the different stages of the product life cycle?

5. What is a brand? What are the characteristics of a good brand name? How do firms protect their brands?

6. What is a national brand? A store brand? Individual and family brands?

7. What does it mean to license a brand? What is cobranding? 8. What are the functions of packaging? What are some im-

portant elements of effective package design? 9. What should marketers know about package labeling?

10. Describe some of the ways firms organize the marketing function to manage existing products. What are the ways firms organize for the development of new products?

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270 PART THREE | CREATE THE VALUE PROPOSITION

Activities: Apply What You’ve Learned

1. The Internet allows consumers to interact directly through blogs and other means with other people so they can praise products they like and slam those they don’t. With several of your classmates, conduct a brief survey of stu- dents and of older consumers. Find out if consumers com- plain to each other about poor product quality. Have they ever used a Web site to express their displeasure over prod- uct quality? Make a report to your class.

2. You may think of your college or university as an organiza- tion that offers a line of different educational products. As- sume that you have been hired as a marketing consultant by your university to examine and make recommendations for extending its product line. Develop alternatives that the university might consider: a. Upward line stretch b. Downward line stretch c. Two-way stretch d. Filling-out strategy

Describe how each might be accomplished. Evaluate each alternative.

3. Assume that you are the vice president of marketing for a firm that markets a large number of specialty food items (gourmet sauces, marinades, relishes, and so on). Your firm is interested in improving its marketing management struc- ture. You are considering several alternatives: using a brand manager structure, having product category man- agers, or focusing on market managers. Outline the advan- tages and disadvantages of each type of organization. What is your recommendation?

4. Assume that you are working in the marketing department of a major manufacturer of athletic shoes. Your firm is in- troducing a new product, a line of disposable sports cloth- ing. That’s right—wear it once and toss it! You wonder if it would be better to market the line of clothing with a new brand name or use the family brand name that has already gained popularity with your existing products. Make a list of the advantages and disadvantages of each strategy. De- velop your recommendation.

5. Assume that you have been recently hired by Kellogg, the cereal manufacturer. You have been asked to work on a plan for redesigning the packaging for Kellogg’s cereals. In a role-playing situation, present the following report to your marketing superior: a. Discussion of the problems or complaints customers

have with current packaging b. Several different package alternatives c. Your recommendations for changing packaging or for

keeping the packaging the same

Marketing Metrics Exercise

The chapter introduces you to the concept of brand equity, an important measurement of the value vested in a product’s brand in and of itself. Different formulas for calculating brand equity exist. One well-publicized approach is that of Interbrand, which annually publishes its Best 100 Global Brands list. Go to the location on the Interbrand Web site where they provide these rankings for the present and past years (http://www .interbrand.com/best_global_brands.aspx). Peruse the list of

brands and select any five in which you have interest. For each, observe whether brand equity has been trending up or down over the past few years. How does Interbrand explain the changes (or stability) in each? Do you agree with Interbrand’s assessment or do you have another opinion about why your brand’s equity is what it is?

Choices: What Do You Think?

1. Brand equity means that a brand enjoys customer loyalty, perceived quality, and brand name awareness. To what brands are you personally loyal? What is it about the prod- uct that creates brand loyalty and, thus, brand equity?

2. Quality is an important product objective, but quality can mean different things for different products, such as dura- bility, precision, aesthetic appeal, and so on. What does quality mean for the following products? a. Automobile b. Pizza c. Running shoes d. Hair dryer e. Deodorant f. College education

3. Many times firms take advantage of their popular, well- known brands by developing brand extensions because they know that the brand equity of the original or parent brand will be transferred to the new product. If a new product is of poor quality, it can damage the reputation of the parent brand, while a new product that is of superior quality can enhance the parent brand’s reputation. What are some examples of brand extensions that have dam- aged and that have enhanced the parent brand equity?

4. Sometimes marketers seem to stick with the same packag- ing ideas year after year regardless of whether they are the best possible design. Following is a list of products. For each one, discuss what, if any, problems you have with the package of the brand you use. Then think of ways the package could be improved. Why do you think marketers don’t change the old packaging? What would be the re- sults if they adopted your package ideas? a. Dry cereal b. Laundry detergent c. Frozen orange juice d. Gallon of milk e. Potato chips f. Loaf of bread

5. You learned in this chapter that it’s hard to legally protect brand names across product categories—Quaker and Ap- ple, for example, and also Delta—which is an airline and a faucet. But what about the ethics of borrowing a name and applying it to some unrelated products? Think of some new business you might like to start up. Now consider some possible names for the business that are already in use as brands in other unrelated categories. Do you think it would be ethical to borrow one of those names? Why or why not?

Miniproject: Learn by Doing

In any supermarket in any town, you will surely find examples of all the different types of brands discussed in this chapter: in- dividual brands, family brands, national brands, store brands,

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and cobranded and licensed products. This miniproject is de- signed to give you a better understanding of branding as it ex- ists in the marketplace.

1. Go to a typical supermarket in your community. 2. Select two product categories of interest to you: ice cream,

cereal, laundry detergent, soup, paper products, and so on. 3. Make a list of the brands available in each product cate-

gory. Identify what type of brand each is. Count the num- ber of shelf facings (the number of product items at the front of each shelf) for each brand.

4. Arrange to talk with the store manager at a time that is convenient with him or her. Ask the manager to discuss the following: a. How the store decides which brands to carry

b. Whether the store is more likely to carry a new brand that is an individual brand versus a family brand

c. What causes a store to drop a brand d. The profitability of store brands versus national brands e. Other aspects of branding that the store manager sees

as important from a retail perspective 5. Present a summary to your class on what you learned

about the brands in your two product categories.

Marketing in Action Case Real Choices at Starbucks

Starbucks began as a local coffee bean roaster and retailer of whole bean and ground coffee, tea, and spices. From 1971, a lone store in Seattle’s Pike Place Market has grown into the largest coffeehouse company in the world. The Seattle-based Starbucks Corporation is an international coffee and coffee- house chain with 16,635 stores in 49 countries, including 11,068 in the United States, nearly 1,000 in Canada and more than 800 in Japan. The Starbucks product selection in- cludes drip brewed coffee, espresso-based hot drinks, other hot and cold drinks, coffee beans, salads, hot and cold sand- wiches and paninis, pastry, snacks, and items such as mugs and tumblers.

One of Starbuck’s prominent brands that suffered in the re- cession at the beginning of the 21st century is the Frappuc- cino™”. At its height, annual sales of this specialty drink exceeded $2 billion annually. However, sales have declined over the past few years. In 2010 the Frappuccino™ brand was esti- mated to represent between 15 percent and 20 percent of an- nual sales at Starbucks retail outlets. Dunkin’ Donuts and McDonald’s, along with many other smoothie chains are gear- ing up to snatch market share away from Starbucks with their own coffee drinks. Since the Frappuccino™ plays such an impor- tant role in Starbucks’ product mix, the company takes these challenges very seriously.

Frappuccino™ is a registered trademark of the Starbucks Corporation and it has been a brand for over 15 years. The blended ice beverage is a mixture of frappé and cappuccino, an Italian-style coffee with a topping of frothed milk. Starbucks sells it at the counter and also in bottles. Like the terms “Kleenex” and “Band-Aid,” the word “Frappuccino” has be- come almost generic and many customers think the product is also available at other coffee purveyors.

Starbucks has tried various strategies to extend the brand name. Two new Frappuccino-flavored ice creams are available on supermarket shelves. Vanilla Frappuccino Light, a bottled beverage, was created in a joint venture with PepsiCo. In addi- tion, Starbucks globally introduced new blends, such as Black Sesame Frappuccino in China, and Red Bean Frappuccino in other Asian markets. Still other plans are in the works including new bottled versions, new “wacky” ingredients, and other products under the same brand banner.

The chain also is looking closely at a “however-you-want- it-Frappuccino” customization program at a premium price. Customization empowers the consumer to co-create value by beginning with an empty slate and personalizing the beverage with his or her own choice of milk, coffee intensity, syrup, and any optional toppings. Annie Young-Scrivner, global chief mar- keting officer for Starbucks, observes that one of the target markets for the Frappuccino™ is an 18- to 24-year-old woman. The customization option allows calorie-counting customers to create nonfat milk, light syrup, and no whipped cream version with only 160 calories. According to Young-Scrivner, this mar- ket is ideal for the custom-made Frappuccino™. She told the Wall Street Journal, “Millennials (otherwise known as Gen Y) are the iPod age group . . . accustomed to selecting exactly what they want. Now, they can choose an extra shot of espresso, no whipped cream, or a dab more caramel, for in- stance.”

With any product extension strategy, there are inevitable challenges. The Frappuccino has an involved preparation process and takes longer to produce than other Starbucks bev- erages. This may present a problem if the new program is suc- cessful. The extra time needed for baristas to customize each drink may lead to long lines, customer irritation, more compli- cated employee training, and slower-than-expected sales growth. Starbucks has questions to answer concerning, among other things, pricing, training, and competition.

You Make the Call 1. What is the decision facing Starbucks? 2. What factors are important in understanding this decision

situation? 3. What are the alternatives? 4. What decision(s) do you recommend? 5. What are some ways to implement your recommendation?

Based on: Bruce Horovitz, “Starbucks’ Strategy: Whip It Good,” USA Today, April 27, 2010, p. 3B; Starbucks Corporation Official Web site, “Company Profile” (http://www.starbucks.com/about-us/company-information); Starbucks, Wikipedia, http://en.wikipedia.org/wiki/ Starbucks (accessed April 28, 2010); Kevin Helliker, “At Long Last, Customized Frappuccino,” Wall Street Journal (Eastern Edition), New York, March 17, 2010 p. D.3.

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You’re almost there! Your remaining deci- sions involve choices about how to deliver the value proposition to your market.

Chapter 15 explains the main options related to the supply chain for your value offering, different types of distribution channels

Part Five Overview

Make marketing value decisions (Part One)

Understand consumers’ value needs (Part Two)

Create the value proposition (Part Three)

Communicate the value proposition (Part Four)

Deliver the value proposition (Part Five)

Pr o

ce ss

You are here

that are available, and how to select and plan a channel strategy. You’ll also learn some interesting things about logistics and transportation. Then, in Chapter 16 you have the opportunity to focus on all types of retailing from traditional stores to direct selling to e-commerce.

Deliver the Value Proposition

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To increase leverage in larger health clubs, S&S Smoothie will offer free refrigerated display units. This will encourage the facility to maintain a high level of inventory of S&S Smoothie beverages.

Implementation Now that all the marketing mix elements have been brought to bear to establish S&S Smoothie’s new positioning, the next step of the marketing plan identifies the all-important Action Plan. As you saw in Chapter 2, Table 2.4, an Action Plan systemati- cally details the activities necessary to implement all marketing strategies. In addition, the Action Plan includes the individual(s) responsible for each item, timing, budget, and measurement and control. Table A.4 from the S&S Smoothie Appendix in the back of the book shows an example of one objective (to increase dis- tribution venues) and the action items S&S Smoothie will use to accomplish this objective.

Measurement and Control Strategies For S&S Smoothie, a variety of activities will ensure effective measurement of the success of the marketing plan and allow the firm to make adjustments as necessary. These include targeted market research and trend analysis.

Research Firms need continuous market research to understand brand awareness and brand attitudes among their target markets. S&S Smoothie will therefore continue its program of focus group re- search and descriptive studies of its target consumer and reseller markets.

Trend Analysis S&S Smoothie will do a monthly trend analysis to examine sales by reseller type, geographic area, chain, agent, and distributor. These analyses will allow S&S Smoothie to take corrective action when necessary.

Marketing Plan Connection: Tricks of the Trade Supply Chain Strategies Recall that the Appendix at the end of the book provides you with an abbreviated marketing plan example for the fictitious S&S Smoothie Company. That plan is flagged to indicate what elements from the plan correspond to each of the Parts within the book. In addition, in Chapter 2 you found a tear-out guide called “Build a Marketing Plan,” which can be used as a tem- plate for marketing planning. It is also cross-referenced to chap- ters by section of the marketing plan.

In the chapters within Part Five, the key learning elements deal with the place “P” of the marketing mix 4Ps—physical dis- tribution or, using the term more common today, the supply chain. Retailing as a particular supply chain element is also fea- tured. Like most firms, S&S the success of S&S Smoothie’s mar- keting plan weighs heavily on how effectively they can deliver value through their supply chain.

Recall that S&S Smoothie seeks to position its products as the first-choice smoothie beverage for the serious health-conscious consumer, including those who are seeking to lower their carbo- hydrate intake. The justification for this positioning is as follows: Many smoothie beverages are available. The S&S Smoothie for- mula provides superior flavor and nutrition in a shelf-stable form. S&S Smoothie has developed its product (including pack- aging) and pricing in support of this positioning strategy. As noted earlier, S&S Smoothie’s physical distribution approach is primarily through health clubs and gyms, and small upscale specialty food stores. S&S Smoothie plans to expand its target re- seller market to include the following:

1. Hotels and resorts in the United States and in targeted in- ternational markets

2. Golf and tennis clubs 3. College campuses

>>You Can Do It Too! Now, if you are working on a marketing plan as part of your course, go to www.mypearsonmarketinglab.com to apply what you learn in Part Five to your own marketing plan project.IS

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Chapter | 15

Deliver Value through Supply Chain Management, Channels of Distribution, and Logistics

Real People Profiles

A Decision Maker at Sam’s Club With over 16 years of operations and merchandising experience in the ware- house club industry, Heather Mayo has responsibility for Sam’s Club grocery business with sales of over $5 billion. As vice president of merchandising, she fo- cuses on creating solutions to meet the needs of the 47 million members Sam’s serves in over 600 locations across the country. Additionally, she represented

the company as a supplier diversity lead on Walmart’s Supplier Diversity Internal Steering Committee and was captain of Walmart’s Packaging Sustainable Value Net- work. Most recently, she has added the role of executive sponsor of the Wood and Paper Sustainable Value Network. In February 2009, she was honored as Divisional Merchandise Manager of the Year for Sam’s Club.

Prior to joining Sam’s in 2004, Heather was an executive consultant/associate partner focusing on business strategy for IBM. In this capacity, she provided busi- ness advice and counsel to C-level executives of Fortune 500 companies regarding strategic direction and operational capability of their business, marketplace, and partners. Notable clients included REI, Godiva, Hallmark, the United States Mint, and Coca-Cola.

Additionally, Heather has 10 years’ experience with a wholesale club competi- tor where she successfully managed 33 businesses representing the petroleum, fi- nancial, travel, communications, automotive, insurance and foodservice industries. In this capacity as assistant vice president of specialty business, she identified, devel- oped, and implemented entrepreneurial business concepts and lucrative strategic partnerships for increased revenue, visibility, and customer satisfaction. Heather suc- cessfully negotiated multimillion-dollar contracts with both local and national com- panies, resulting in significant mutually rewarding financial gain.

She holds a bachelor of science degree in business management from Bentley College in Waltham, Massachusetts.

Heather’s Info

First job out of school? A) After my junior year in college, I had an internship with Honeywell scheduling production of mainframe computer systems. Two weeks into the job, I was asked to stay on full time and they paid for me to complete my senior year at night. I also entered their management development program at that time.

Career high? A) Becoming an officer at Walmart.

My motto to live by? A) If it is to be, it’s up to me.

What drives me? A) The opportunity to make a positive difference both personally and professionally.

My management style? A) Open, inclusive, collaborative, supportive, and results-driven.

Don’t do this when interviewing with me? A) Don’t come in unprepared. Do your homework on the company, competition, and the position you are applying for. Also, be prepared to interview me. You need to make sure the position and company culture are in alignment with your personal and professional values and goals in order to be truly successful.

Profile Info

Heather Mayo

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Like other high-volume retailers that operate on razor-thin margins, Sam’s Club always looks for

ways to shave costs and improve efficiency in order to distribute large amounts of grocery and other items to its hundreds of stores quickly and in- expensively. Heather, at the time, oversaw the dairy category along with eight other merchandise categories for Sam’s Club. Collectively, her team had the responsibility to source over 600 items, negotiate costs, and specify delivery methods and prices for the chain’s more than 47 million club mem- bers across the United States.

Ironically, milk is one of the most basic staple items the team stocks in its stores, but it is difficult to supply economically because it takes up a lot of space and is highly perish- able. Heather and her team tried to address the problem of the high cost of shipping milk using traditional distribution methods. Ship- pers and end consumers tend to stick with what they know, and what they know is that the milk people use every day will come out of familiar gallon jugs just as it always has— the jug’s design has not changed since 1953!

But Heather knew that something had to give. Competitors were cutting costs and using milk as a loss leader (where they delib- erately sold the product below cost) in order to drive traffic into their stores. Sam’s was at a competitive disadvantage, and it was los- ing market share on an important staple item. Sam’s had to look closely at every step in the supply chain to look for ways to trim costs. Heather realized that the tried-and-

true method of shipping milk to stores is inefficient and that this could be a link in the chain that she might tighten.

Typically a dairy truck will “weight out” before it “cubes out”; this means it hits the maximum weight it can carry well before it’s full of jugs. In early 2007 the company was approached by one of its supplier partners that had devel- oped a simple change to the design of the gallon milk jug that would allow it to palletize the product. This means that the supplier ships the item on a 40� � 48� platform (pallet), and a forklift or pallet jack moves the entire pallet from warehouse to truck and then from truck to cooler in the store.

The design modification also would eliminate the need to back haul empty racks and cases (milk crates) to the supplier to clean and reload; typ- ically the empties need to be trucked back where they came from at great expense. This innovation promised to make milk cheaper to ship, so Sam’s Club could reduce its food miles (an industry term that refers to how far the product has to travel from supplier to retailer). The company could deliver fresher milk to its stores so the product had a longer shelf life when it was put out in the dairy case. And this change would allow the company to pass the cost savings on to its members to the tune of 10 to 20 cents per gallon.

These new square or case-less milk jugs did not require crates or racks for shipping and storage. Instead, the newly designed milk gallon was self- stacking; the spout is flatter and each gallon can rest on another during transport, as well as while on display in the store. The company estimated that trucks used for shipping from the processor to a club could accommo- date 9 percent more product—a total of 4,704 gallons per truck or approx-

See what option Heather chose on page 473

imately 384 more containers—without any metal racks. In addition, the flat top and wider spout do not come in contact with equipment during the fill process. This reduces the risk of possible contamination or the introduction of bacteria that shortens shelf life. To be sure, the new-and-improved tech- nique had a lot of advantages over the tried-and-true, but Heather knew she would have to swim against the tide if she advocated the change. You al- ways have to think twice before you mess with such an important and tradi- tional product!

Heather considered her Options 1 • 2 • 3 Continue doing business as usual and don’t make any changes. Sam’s Club’s distribution network was very familiar with the current system so workers would not have to be re- trained to handle a different process. Similarly, the club man- agers wouldn’t have to learn a new way to receive and merchandise a staple product. Club members would continue to

find what they expected to see on the dairy shelves. However, storage space is at a premium in the packed Sam’s Club stores.

Under the current system the club has to store empty milk crates and racks un- til the milk supplier picks them up. Racks and crates tend to get stolen when they are placed outside for suppliers to pick up. The receiving process is slow because an employee needs to physically lift every crate and count it to verify the correct amount of product is there. In addition, floor space in the cooler is very tight as this is where product is stored and sold. Workers need to carefully maneuver milk rack “bossies” around in order to be able to stock other dairy items and get to needed stock for replenishment.

Sam’s Club’s parent, Walmart, maintains large perishable distribution centers where full trucks of milk could be de- livered and then reshipped to the appropriate locations. Walmart’s fleet of trucks could help realize economies of scale as deliveries to stores would be made 24/7. Since the trucks deliver many other dairy products as well as milk, the

trucks could be loaded more efficiently if the warehouse workers loaded dif- ferent kinds of refrigerated products together—the heavier milk jugs could be intermingled with lighter, smaller containers of butter, and so forth, so the trucks could be more tightly packed without exceeding weight restrictions. On the other hand, this process would involve shipping the milk products twice: once to the distribution center and then to the Sam’s Club stores. Each time the product is touched adds cost to the process. And multiple touches also multiply the opportunities for product damage.

Change Sam’s Club product and pallet configuration to embrace the new case-less design. This change would result in delivery of better quality milk products with a longer shelf life and reduce the retail price members paid for gallons of milk. The net result would be 9 percent more product on a truck, a 50 per- cent cut in the number of weekly deliveries each store would

You Choose

Which option would you choose, and why?

1. YES NO 2. YES NO 3. YES NO

447

Option

Real People, Real Choices

Here’s my problem. . .

Things to remember

Every link in the distribution chain adds cost to the final product.

Big companies like Sam’s Club operate with very high volumes, so shaving a few cents off at different stages in a distribution process can result in significant savings.

Distribution processes are entrenched and it’s costly to make changes. Also, consumers are reluctant to accept changes to products like milk cartons that they buy on a regular basis over a long period of time.

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Place: The Final Frontier Sam’s Club and its sister company, Walmart, are models of global supply chain effectiveness. Walmart is increas- ing the proportion of goods that it buys directly from manufacturers, rather than through third-party procure- ment companies or suppliers. As part of its effort to com- bine purchasing for the 15 countries in which it operates, Walmart has established four global merchandising cen-

ters for general goods and clothing. These include a center in Mexico City fo- cused on emerging markets and a center in the UK to serve its George brand. It is also shifting to direct purchasing of its fresh fruit and vegetables on a global basis, and it plans to do the same for sheets and towels for its stores in the United States, Canada, and Mexico: its Faded Glory clothing line: licensed Disney character clothing: and eventually through other categories, including seafood, frozen food, and dry packaged groceries.1

Walmart clearly understands the potential for supply chain practices to enhance organizational performance and profits, and other firms benchmark against them for best practices. The truth is distribution may be the “final frontier” for marketing success. After years of hype, many consumers no longer believe that “new and improved” products really are new and im- proved. Nearly everyone, even upscale manufacturers and retailers, tries to gain market share through aggressive pricing strategies. Advertising and other forms of promotion are so commonplace they have lost some of their impact. Even hot new social media strategies can’t sell overpriced or unavail- able products, at least for long. Marketers have come to understand that place (the “distribution P”) may be the only one of the Four Ps to offer an opportu- nity for really long-term competitive advantage—especially since many con- sumers now expect “instant gratification” by getting just what they want when the urge strikes.

That’s why savvy marketers are always on the lookout for novel ways to distribute their products. This chapter is about the science and art of getting goods and services to customers. A large part of the marketer’s ability to de- liver a value proposition rests on the ability to understand and develop effec- tive supply chain strategies, which is the major first topic in the chapter. The supply chain includes all the activities necessary to turn raw materials into a good or service and put it into the hands of the consumer or business cus- tomer. Often, of course, firms may decide to bring in outside companies to accomplish these activities—this is outsourcing, which as we learned about

Chapter 15

448 PART FIVE | DELIVER THE VALUE PROPOSITION

Objective Outline 1. Understand the concept of a supply

chain.

PLACE: THE FINAL FRONTIER (p. 448)

2. Explain what a distribution channel is and what functions distribution channels perform.

DISTRIBUTION CHANNELS: GET IT THERE (p. 450)

3. Discuss the types of wholesaling intermediaries found in distribution channels.

WHOLESALING INTERMEDIARIES (p. 453)

4. Describe the types of distribution channels and how place fits in with the other three Ps in the marketing mix.

TYPES OF DISTRIBUTION CHANNELS (p. 457)

5. List the steps to plan a distribution channel strategy.

PLAN A CHANNEL STRATEGY (p. 461)

6. Explain logistics and how it fits into the supply chain concept.

LOGISTICS: IMPLEMENT THE SUPPLY CHAIN (p. 467)

(pp. 467–472)

(pp. 461–467)

(pp. 457–461)

(pp. 453–457)

(pp. 450–453)

(pp. 448–450)

Check out chapter 15 Study Map on page 474

require, and elimination of 32,000 deliveries in one year. On the green front, the supplier would save 100,000 gallons of water every day because it wouldn’t have to clean and san- itize returnable milk crates. The new container is recyclable; pallets are used for other prod- ucts, while shrink wrap and cardboard are recycled at each club location. And less labor is required at the club store to restock the milk jugs.

On the other hand, change can be difficult: The store managers would have to learn a new way to merchandise the product. Club shoppers would have to accept a radically differ- ent container in place of their beloved milk jug. And if Sam’s Club converted to this process, it would be dependent on the supplier that invented it to stay in business and maintain its ca- pacity to supply the needs of the business.

Now, put yourself in Heather’s shoes. Which option would you choose, and why?

1 OBJECTIVE

Understand the

concept of a supply

chain. (pp. 448–450)

supply chain All the activities necessary to turn raw materials into a good or service and put it in the hands of the consumer or business customer.

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Heather Mayo APPLYING Supply Chain Management

Heather’s decision regarding how Sam’s Club gets its milk into consumers’ refrigerators has ramifications for the chain’s price competitiveness, the impact on the environment, and customer loyalty.

back in Chapter 6 occurs when firms obtain outside vendors to provide goods or services that might otherwise be supplied in-house. In the case of supply chain functions, outsource firms are most likely organizations with whom the company has developed some form of partnership or cooperative business arrangement.

Next, we talk about distribution channels and the wholesaling intermediaries therein. Dis- tribution channels are a subset of the supply chain and are important because a large part of the marketer’s ability to deliver the value proposition rests on the ability to understand and develop effective distribution strategies. Finally, we look at different channels of distribution and then logistics management, which is the process of actually moving goods through the supply chain. We will define each of these terms in greater detail in subsequent sections of this chapter, but for now let’s look at the broader activities of the supply chain.

Supply Chain Management The supply chain also encompasses all activities necessary to convert raw materials into a good or service and put it in the hands of the consumer or business customer. Thus, supply chain management is the coordination of flows among the firms in a supply chain to maxi- mize total profitability. These “flows” include not only the physical movement of goods but also the sharing of information about the goods—that is, supply chain partners must syn- chronize their activities with one another. For example, they need to communicate informa- tion about which goods they want to purchase (the procurement function), about which marketing campaigns they plan to execute (so that the supply chain partners can ensure there will be enough product to supply the increased demand that results from the promo- tion), and about logistics (such as sending advance shipping notices to alert their partners that products are on their way). Through these information flows, a company can effectively manage all the links in its supply chain, from sourcing to retailing.

In his book The World Is Flat: A Brief History of the Twenty-First Century, which we dis- cussed way back in Chapter 3, Thomas Friedman addresses a number of high-impact trends in global supply chain management.2 One such development is the trend whereby compa- nies we traditionally know for other things remake themselves as specialists who take over the coordination of clients’ supply chains for them. UPS is a great example of this trend. UPS, which used to be “just” a package delivery service, today is much, much more because it specializes in insourcing. This process occurs when companies contract with a specialist who services their supply chains. Unlike the outsourcing process where a company delegates nonessential tasks to subcontractors, insourcing means that the client company brings in an external company to run its essential operations. Although we tend to associate UPS with those little brown trucks zipping around town delivering boxes, the company now also per- forms the following functions for some of its clients:

• If your Toshiba laptop needs repair, you drop it off at a UPS store. It’s shipped to a UPS unit where UPS employees (not Toshiba technicians) actually get your machine booted back up.

• When you order a pizza from Papa John’s, it’s UPS that dispatches the drivers and schedules the delivery of pizza sauce, dough, and so on that the local store uses to make your “everything except anchovies.”

• Order a pair of shoes at Nike.com and a UPS employee fills the order, bags it, labels it, and delivers it to your house.

The major difference between a supply chain and a channel of distribution is the num- ber of members and their functions. A supply chain is broader; it consists of those firms that supply the raw materials, component parts, and supplies necessary for a firm to produce a good or service plus the firms that facilitate the movement of that product to the ultimate users of the product. This last part—the firms that get the product to the ultimate users—is the channel of distribution. (There will be more on channels of distribution in a bit.)

supply chain management The management of flows among firms in the supply chain to maximize total profitability.

insourcing A practice in which a company contracts with a specialist firm to handle all or part of its supply chain operations.

channel of distribution The series of firms or individuals that facilitates the movement of a product from the producer to the final customer.

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Now, let’s take a closer look at one company’s supply chain—Hewlett-Packard’s (HP) line of laptop computers we show in Figure 15.1. HP use hundreds of suppliers to man- ufacture its laptops, and it sells them through online and brick-and-mortar retailers world- wide. And it’s noteworthy that the role of individual firms within the supply chain depends on your perspective. If we look at HP’s supply chain, Intel is a supplier, and Best Buy is a member of its channel of distribution. From Intel’s perspective, however, HP is a customer. From the perspective of Best Buy, HP is a supplier.

In our example, Intel takes raw materials such as silicon and adds value when it turns them into chips, which it brands with names such as “Core,” “Centurion,” “Celeron,” and “Pentium.” Intel then ships chips to HP, which combines them with the other components of a computer (and places the famous “Intel Inside” stickers on the outside), again adding value. Best Buy takes the finished product and adds value when it provides display, sales support, repair service, and financing for the customer.

Now that you understand the basics of the value chain and the supply chain, let’s dig into the nitty-gritty and understand how products actually get from point A to point B.

Distribution Channels: Get It There So you’ve created your product—priced it, too. And you’ve done the re- search to understand your target market—you’ve even set up a Facebook page to attract legions of brand fans. Sorry, you’re still not done—now you need to get what you make out into the marketplace. As we noted earlier, a channel of distribution is a series of firms or individuals that fa- cilitates the movement of a product from the producer to the final cus- tomer. In many cases, these channels include an organized network of producers (or manufacturers), wholesalers, and retailers that develop re-

lationships and work together to make products conveniently available to eager buyers. Distribution channels come in different shapes and sizes. The bakery around the corner

where you buy your cinnamon rolls is a member of a channel, as is the baked goods section at the local supermarket, the Starbucks that sells biscotti to go with your double mocha cap- puccino, and the bakery outlet store that sells day-old rolls at a discount.

A channel of distribution consists of, at a minimum, a producer—the individual or firm that manufactures or produces a good or service—and a customer. This is a direct channel. For

Plastic

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Copper

Silicon

Intel Chips

Sony CD-ROM

Microsoft Software

Seagate Hard Drives

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ManufacturerParts Suppliers

CompUSA

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CDW

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Paula

Raw Materials

Supplier Network Channel of Distribution

Resellers Consumers

David

Angela

Ann

The Supply Chain

Figure 15.1 Process | HP’s Supply Chain The supply chain for computer maker HP’s line of notebooks includes firms that supply component parts for the machines as well as retailers such as Best Buy. Each firm in the chain adds value through its inputs to provide the notebook the consumer wants at the lowest cost.

2 OBJECTIVE

Explain what a

distribution channel

is and what functions

distribution channels

perform. (pp. 450–453)

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Heather Mayo APPLYING Utility

Sam’s Club’s dairy distribution channel provides utility to shoppers who no longer need to obtain milk directly from farms.

example, when you buy a loaf of bread at a mom-and-pop bakery, you’re buying through a direct channel. Firms that sell their own products through Web sites, cata- logs, toll-free numbers, or factory outlet stores use direct channels.

But life (and marketing) usually isn’t that simple: Channels often are indirect be- cause they include one or more channel intermediaries—firms or individuals such as wholesalers, agents, brokers, and retailers who in some way help move the product to the consumer or business user. For example, a baker may choose to sell his cinna- mon buns to a wholesaler that will in turn sell boxes of buns to supermarkets and restaurants that in turn sell them to consumers. Another older term for intermediaries is middlemen.

Functions of Distribution Channels Channels that include one or more organizations or intermediaries often can accom- plish certain distribution functions more effectively and efficiently than can a single organization. As we saw in Chapter 3, this is especially true in international distribu- tion channels where differences among countries’ customs, beliefs, and infrastruc- tures can make global marketing a nightmare. Even small companies can succeed in complex global markets when they rely on distributors that know local customs and laws.

Overall, channels provide the time, place, and ownership utility we described in Chapter 1. They make desired products available when, where, and in the sizes and quantities that customers desire. Suppose, for example, you want to buy that perfect bouquet of flowers for a special someone. You could grow them yourself or even “lib- erate” them from a cemetery if you were really desperate (very classy!). Fortunately, you can probably accomplish this task with just a simple phone call or a few mouse clicks, and “like magic” a local florist delivers a bouquet to your honey’s door.

Distribution channels provide a number of logistics or physical distribution functions that increase the efficiency of the flow of goods from producer to customer. How would we buy groceries without our modern system of supermarkets? We’d have to get our milk from a dairy, our bread from a bakery, our tomatoes and corn from a local farmer, and our flour from a flour mill. And forget about specialty items such as Twinkies or Coca-Cola. The com- panies that make these items would have to handle literally millions of transactions to sell to every individual who craves a junk-food fix.

Distribution channels create efficiencies because they reduce the number of transactions necessary for goods to flow from many different manufacturers to large numbers of cus- tomers. This occurs in two ways. The first is breaking bulk. Wholesalers and retailers purchase large quantities (usually cases) of goods from manufacturers but sell only one or a few at a time to many different customers. Second, channel intermediaries reduce the number of trans- actions when they create assortments—they provide a variety of products in one location— so that customers can conveniently buy many different items from one seller at one time.

Figure 15.2 provides a simple example of how distribution channels work. This sim- plified illustration includes five producers and five customers. If each producer sold its prod- uct to each individual customer, 25 different transactions would have to occur—not exactly an efficient way to distribute products. But with a single intermediary who buys from all five manufacturers and sells to all five customers, we quickly cut the number of transactions to 10. If there were 10 manufacturers and 10 customers, an intermediary would reduce the number of transactions from 100 to just 20. Do the math: Channels are efficient.

The transportation and storage of goods is another type of physical distribution function. Retailers and other channel members move the goods from the production point to other lo- cations where they can hold them until consumers want them. Channel intermediaries also perform a number of facilitating functions that make the purchase process easier for cus- tomers and manufacturers. For example, intermediaries often provide customer services such

Sometimes firms “delegate” part of the distribution function to the customer. And many customers are happy to cooperate when they can save on shipping charges and get that 60� LCD TV set up immediately.

channel intermediaries Firms or individuals such as wholesalers, agents, brokers, or retailers who help move a product from the producer to the consumer or business user. An older term for intermediaries is middlemen.

breaking bulk Dividing larger quantities of goods into smaller lots in order to meet the needs of buyers.

creating assortments Providing a variety of products in one location to meet the needs of buyers.

facilitating functions Functions of channel intermediaries that make the purchase process easier for customers and manufacturers.

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452 PART FIVE | DELIVER THE VALUE PROPOSITION

as offering credit to buyers. Many of us like to shop at department stores because if we are not happy with the product we can take it back to the store where cheerful customer service personnel are happy to give us a refund (at least in theory). These same cus- tomer services are even more important in business-to-business markets where customers purchase larger quantities of higher- priced products. And channel members perform a risk-taking function. If a retailer buys a product from a manufacturer and it just sits on the shelf because no customers want it, he is stuck with the item and must take a loss. Perishable items present an even greater risk of spoilage.

Finally, intermediaries perform communication and transac- tion functions. Wholesalers buy products to make them available for retailers and they sell products to other channel members. Re- tailers handle transactions with final consumers. Channel mem-

bers can provide two-way communication for manufacturers. They may supply the sales force, advertising, and other types of marketing communication necessary to inform con- sumers and persuade them that a product will meet their needs. And the channel members can be invaluable sources of information on consumer complaints, changing tastes, and new competitors in the market.

The Internet in the Distribution Channel Obviously, many consumers choose the Internet to shop for everything from tulip bulbs to exotic vacations. By using the Internet, even small firms with limited resources enjoy the same market opportunities as their largest competitors to make their products available to customers around the globe.

E-commerce creates radical changes in distribution strategies. Manufacturing firms like Dell, HP, and Apple in the personal computer space rely heavily on Internet-driven direct-

Some wholesalers and retailers assist the manufacturer when they provide setup, repair, and maintenance service for products they handle. Best Buy’s Geek Squad is a perfect example.

Clairol (Shampoo)

Duracell (Batteries)

Kleenex (Tissues)

Rubbermaid (Plasticware)

Number of Transactions without Intermediaries

Scott’s (Lawn care products)

Susan

Tom

Megan

Will

Bruce

Clairol (Shampoo)

Duracell (Batteries)

Kleenex (Tissues) Wal-Mart

Rubbermaid (Plasticware)

Number of Transactions with Intermediary

Scott’s (Lawn care products)

Susan

Tom

Megan

Will

Bruce

Figure 15.2 Process | Reducing Transactions via Intermediaries One of the functions of distribution channels is to provide an assortment of products. Because the customers can buy a number of different products at the same location, this reduces the total costs of obtaining a product.

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to-end-user distribution strategies, although all three are very active outside this channel (consider Apple Stores and Dell Kiosks). In most cases, though, end users still don’t obtain products directly from manufacturers. Rather, goods flow from manufacturers to interme- diaries and then on to the final customers.

With the Internet, this need for intermediaries and much of what we assume about the need and benefits of channels changes. As you know, an increasing number of consumers buy (or pirate?) their music as an Internet download, making retail music stores less neces- sary. Then too, as more and more consumers have access to faster broadband Internet ser- vice, downloadable movies soon will become the norm.3

In the future, channel intermediaries that physically handle the product may become obsolete. Already companies are eliminating many traditional intermediaries because they find that they don’t add enough value in the distribution channel—a process we call disintermediation (of the channel of distribution). For marketers, disintermediation reduces costs in many ways: fewer employees, no need to buy or lease expensive retail property in high-traffic locations, and no need to furnish a store with fancy fixtures and decor. You can also see this process at work when you pump your own gas, withdraw cash from an ATM, or use your electronic pass for expressway tolls instead of forking over your money to a flesh-and-blood attendant who sits in a toll booth. Are there any full-service gas stations left?

Some companies use the Internet to make coordination among members of a supply chain more effective in ways that end consumers never see. These firms develop better ways to implement knowledge management, which refers to a comprehensive approach that col- lects, organizes, stores, and retrieves a firm’s information assets. These assets include both databases and company documents and the practical knowledge of employees whose past experience may be relevant to solving a new problem. If a firm shares this knowledge with other supply chain members, this more strategic management of information results in a win-win situation for all the partners.

But as with most things cyber, the Internet as a distribution channel brings pain with plea- sure. One of the more vexing problems with Internet distribution is the potential for online dis- tribution piracy, which is the theft and unauthorized repurposing of intellectual property via the Internet. The college textbook industry has high potential for online piracy. It’s not uncom- mon for U.S.-produced textbooks to make their way to unscrupulous individuals outside the country who translate the core content into the native language and post it online for distribu- tion. And obviously, unauthorized downloads of music is a predominant issue for the “record- ing” industry—to the point where the whole nature of the industry has turned topsy-turvy. Many in the music business are rethinking exactly what—and where—is the value-added for what they do. If the value is just to sell CDs in plastic cases, the industry is likely doomed. More and more musical artists opt to defect from traditional record labels and introduce their tunes online, where they can control some or all of the channel of distribution.4

So far, we’ve learned what a distribution channel is and about some of the functions it per- forms. Now let’s find out about different types of channel intermediaries and channel structures.

Wholesaling Intermediaries How can you get your hands on a new Lady Gaga T-shirt? You could pick one up at your local music store, at a trendy clothing store like Hot Topic or maybe at its online store. You might join hoards of other “lit- tle monsters” and buy an “official Lady Gaga concert T-shirt” from vendors during a show. Alternatively, you might get a “deal” on a bootlegged, unauthorized version of the same shirt a shady guy who stands outside the concert venue sells from a battered suitcase. Perhaps you shop online at www.ladygaga.com. Each of these distribution al- ternatives traces a different path from producer to consumer. Let’s look

disintermediation (of the channel of distribution) The elimination of some layers of the channel of distribution in order to cut costs and improve the efficiency of the channel.

knowledge management A comprehensive approach to collecting, organizing, storing, and retrieving a firm’s information assets.

online distribution piracy The theft and unauthorized repurposing of intellectual property via the Internet.

3 OBJECTIVE

Discuss the types

of wholesaling

intermediaries found

in distribution

channels. (pp. 453–457)

Recording artist Aimee Mann licenses her music rather than work with a major record label in order to retain creative control over her product.

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independent intermediaries Channel intermediaries that are not controlled by any manufacturer but instead do business with many different manufacturers and many different customers.

merchant wholesalers Intermediaries that buy goods from manufacturers (take title to them) and sell to retailers and other business-to-business customers.

take title To accept legal ownership of a product and assume the accompanying rights and responsibilities of ownership.

at the different types of wholesaling intermediaries and at different chan- nel structures. We’ll hold off focusing on retailers, which are usually the last link in the chain, until the next chapter.

Wholesaling intermediaries are firms that handle the flow of products from the manufacturer to the retailer or business user. There are many dif- ferent types of consumer and business-to-business wholesaling interme- diaries. Some of these are independent, but manufacturers and retailers can own them, too. Figure 15.3 portrays key intermediary types and Table 15.1 summarizes the important characteristics of each.

Independent Intermediaries Independent intermediaries do business with many different manufactur- ers and many different customers. Because no manufacturer owns or con- trols them, they make it possible for many manufacturers to serve customers throughout the world while they keep prices low.

Merchant wholesalers are independent intermediaries that buy goods from manufacturers and sell to retailers and other business-to- business customers. Because merchant wholesalers take title to the goods

(that is, they legally own them), they assume certain risks and can suffer losses if products are damaged, become outdated or obsolete, are stolen, or just don’t sell. On the other hand, because they own the products, they are free to develop their own marketing strategies in- cluding setting the prices they charge their customers. Wait, it gets better: There are several different kinds of merchant wholesalers:

• Full-service merchant wholesalers provide a wide range of services for their customers, in- cluding delivery, credit, product-use assistance, repairs, advertising, and other promo- tional support—even market research. Full-service wholesalers often have their own sales force to call on businesses and organizational customers. Some general merchan- dise wholesalers carry a large variety of different items, whereas specialty wholesalers carry an extensive assortment of a single product line. For example, a candy wholesaler carries only candy and gum products, but he stocks enough different varieties to give your dentist nightmares for a year.

• In contrast, limited-service merchant wholesalers provide fewer services for their customers. Like full-service wholesalers, limited-service wholesalers take title to merchandise but are less likely to provide services such as delivery, credit, or marketing assistance to re- tailers. Specific types of limited-service wholesalers include the following:

• Cash-and-carry wholesalers provide low-cost merchandise for retailers and industrial customers that are too small for other wholesalers’ sales representatives to call on. Customers pay cash for products and provide their own delivery. Some popular cash-and-carry product categories include groceries, office supplies, and building materials.

• Truck jobbers carry their products to small business customer locations for their in- spection and selection. Truck jobbers often supply perishable items such as fruit and vegetables to small grocery stores. For example, a bakery truck jobber calls on super- markets, checks the stock of bread on the shelves, removes outdated items, and sug- gests how much bread the store needs to reorder.

• Drop shippers are limited-function wholesalers that take title to the merchandise but never actually take possession of it. Drop shippers take orders from and bill retail- ers and industrial buyers, but the merchandise is shipped directly from the manu- facturer. Because they take title to the merchandise, they assume the same risks as

Intermediaries

Independent Intermediaries

Manufacturer-Owned Intermediaries

• Merchant Wholesalers • Merchandise Agents or Brokers

Figure 15.3 Snapshot | Key Types of Intermediaries Intermediaries can be independent or manufacturer-owned.

wholesaling intermediaries Firms that handle the flow of products from the manufacturer to the retailer or business user.

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other merchant wholesalers. Drop shippers are important to both the producers and the customers of bulky products, such as coal, oil, or lumber.

• Mail-order wholesalers sell products to small retailers and other industrial customers, often located in remote areas, through catalogs rather than a sales force. They usually carry products in inventory and require payment in cash or by credit card before shipment. Mail-order wholesalers supply products such as cosmetics, hardware, and sporting goods.

• Rack jobbers supply retailers with specialty items such as health and beauty products and magazines. Rack jobbers get their name because they own and maintain the product display racks in grocery stores, drugstores, and variety stores. These whole- salers visit retail customers on a regular basis to maintain levels of stock and refill

Table 15.1 | Types of Intermediaries Intermediary Type Description Advantages

Independent Intermediaries Do business with many different manufacturers and many different customers

Used by most small- to medium-sized firms

• Merchant Wholesalers Buy (take title to) goods from producers and sell to organizational customers; either full or limited function

Allow small manufacturers to serve customers throughout the world with competitive costs

• Cash-and-carry wholesalers Provide products for small-business customers who purchase at wholesaler’s location

Distribute low-cost merchandise for small retailers and other business customers

• Truck jobbers Deliver perishable food and tobacco items to retailers

Ensure perishable items are delivered and sold efficiently

• Drop shippers Take orders from and bill retailers for products drop-shipped from manufacturer

Facilitate transactions for bulky products

• Mail-order wholesalers Sell through catalogs, telephone, or mail order Provide reasonably priced sales options to small organizational customers

• Rack jobbers Provide retailers with display units, check inventories, and replace merchandise for the retailers

Provide merchandising services to retailers

• Merchandise Agents and Brokers

Provide services in exchange for commissions Maintain legal ownership of product by the seller

• Manufacturers’ agents Use independent salespeople; carry several lines of noncompeting products

Supply sales function for small and new firms

• Selling agents, including export/import agents

Handle entire output of one or more products Handle all marketing functions for small manufacturers

• Commission merchants Receive commission on sales price of product Provide efficiency primarily in agricultural products market

• Merchandise brokers, including export/import brokers

Identify likely buyers and bring buyers and sellers together

Enhance efficiency in markets where there are many small buyers and sellers

Manufacturer-Owned Intermediaries

Limit operations to one manufacturer Create efficiencies for large firms

• Sales branches Maintain some inventory in different geographic areas (similar to wholesalers)

Provide service to customers in different geographic areas

• Sales offices Carry no inventory; availability in different geographic areas

Reduce selling costs and provide better customer service

• Manufacturers’ showrooms Display products attractively for customers to visit Facilitate examination of merchandise by customers at a central location

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their racks with merchandise. Think about how quickly magazines turn over on the rack—without an expert who pulls old titles and inserts new ones, retailers would have great difficulty ensuring you can buy the current issue of US magazine on the first day it hits the streets.

Merchandise Agents or Brokers Merchandise agents or brokers are a second major type of independent intermediary. Agents and brokers provide services in exchange for commissions. They may or may not take possession of the product, but they never take title; that is, they do not accept legal own- ership of the product. Agents normally represent buyers or sellers on an ongoing basis, whereas clients employ brokers for a short period of time.

• Manufacturers’ agents, or manufacturers’ reps, are independent salespeople who carry several lines of noncompeting products. They have contractual arrangements with manufacturers that outline territories, selling prices, and other specific aspects of the re- lationship but provide little if any supervision. Manufacturers normally compensate agents with commissions based on a percentage of what they sell. Manufacturers’ agents often develop strong customer relationships and provide an important sales function for small and new companies.

• Selling agents, including export/import agents, market a whole product line or one man- ufacturer’s total output. They often work like an independent marketing department because they perform the same functions as full-service wholesalers but do not take title to products. Unlike manufacturers’ agents, selling agents have unlimited territo- ries and control the pricing, promotion, and distribution of their products. We find sell- ing agents in industries such as furniture, clothing, and textiles.

• Commission merchants are sales agents who receive goods, primarily agricultural prod- ucts such as grain or livestock, on consignment—that is, they take possession of products without taking title. Although sellers may state a minimum price they are willing to take for their products, commission merchants are free to sell the product for the highest price they can get. Commission merchants receive a commission on the sales price of the product.

• Merchandise brokers, including export/import brokers, are intermediaries that facilitate transactions in markets such as real estate, food, and used equipment, in which there are lots of small buyers and sellers. Brokers identify likely buyers and sellers and bring the two together in return for a fee they receive when the transaction is completed.

Manufacturer-Owned Intermediaries Sometimes manufacturers set up their own channel intermediaries. In this way, they can op- erate separate business units that perform all the functions of independent intermediaries while at the same time they can still maintain complete control over the channel.

• Sales branches are manufacturer-owned facilities that, like independent wholesalers, carry inventory and provide sales and service to customers in a specific geographic area. We find sales branches in industries such as petroleum products, industrial ma- chinery and equipment, and motor vehicles.

• Sales offices are manufacturer-owned facilities that, like agents, do not carry inventory but provide selling functions for the manufacturer in a specific geographic area. Be- cause they allow members of the sales force to locate close to customers, they reduce selling costs and provide better customer service.

merchandise agents or brokers Channel intermediaries that provide services in exchange for commissions but never take title to the product.

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channel levels The number of distinct categories of intermediaries that populate a channel of distribution.

• Manufacturers’ showrooms are manufacturer-owned or leased facilities in which products are permanently displayed for customers to visit. Merchandise marts are often multiple buildings in which one or more industries hold trade shows and many manufacturers have permanent showrooms. Retailers can visit either during a show or all year long to see the manufacturer’s merchandise and make business-to-business purchases.

Types of Distribution Channels Firms face many choices when they structure distribution channels. Should they sell directly to consumers and business users? Would they benefit if they included wholesalers, retailers, or both in the channel? Would it make sense to sell directly to some customers but use retailers to sell to others? Of course, there is no single best channel for all prod- ucts. The marketing manager must select a channel structure that cre- ates a competitive advantage for the firm and its products based on the size and needs of the target market. Let’s consider some of the factors these managers need to think about.

When they develop distribution (place) strategies, marketers first consider different channel levels. This refers to the number of distinct

categories of intermediaries that make up a channel of distribution. Many factors have an impact on this decision. What channel members are available? How large is the market? How frequently do consumers purchase the product? What services do consumers require?

Figure 15.4 summarizes the different structures a distribution channel can take. The pro- ducer and the customer are always members, so the shortest channel possible has two lev- els. Using a retailer adds a third level, a wholesaler adds a fourth level, and so on. Different channel structures exist for both consumer and business-to-business markets.

And what about services? As we saw in Chapter 11, services are intangible, so there is no need to worry about storage, transportation, and the other functions of physical distribution. In most cases, the service travels directly from the producer to the cus- tomer. However, an intermediary we call an agent can enhance the distribution of some services when he helps the parties complete the transaction. Examples of these agents include insurance agents, stockbrokers, and travel agents (no, not everyone books their travel online).

Consumer Channels As we noted earlier, the simplest channel is a direct channel. Why do some producers sell directly to customers? One reason is that a direct channel may allow the producer to serve its customers better and at a lower price than is possible if it included a retailer. A baker who uses a direct channel makes sure his customers chew on fresher bread than if he sells the loaves through a local supermarket. Furthermore, if the baker sells the bread through a su- permarket, the price will be higher because of the supermarket’s costs of doing business and its need to make its own profit on the bread. In fact, sometimes this is the only way to sell the product, because using channel intermediaries may boost the price above what con- sumers are willing to pay.

Another reason to use a direct channel is control. When the producer handles distribu- tion, it maintains control of pricing, service, and delivery—all elements of the transaction. Because distributors and dealers carry many products, it can be difficult to get their sales forces to focus on selling one product. In a direct channel, a producer works directly with customers so it gains insights into trends, customer needs and complaints, and the effective- ness of its marketing strategies.

4 OBJECTIVE

Describe the types

of distribution

channels and how

place fits in with the

other three Ps in the

marketing mix. (pp. 457–461)

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Major Types of Channels of Distribution

Producer Customer

Producer Retailer Customer

Producer Wholesaler Retailer Customer

Producer Wholesaler Wholesaler Retailer Customer

Typical Consumer Channels

The Bagel Shop Consumer

Wonder Bread

Publix Supermarket Consumer

Wrigley’s Gum

Candy and Tobacco Wholesaler

Mom & Pop’s Country Convenience Store

Consumer

Liz Claiborne Fashions

Clothing Sales Agent

Dillard’s Consumer

Business-to-Business Channels

Xerox Copiers IBM

Caterpillar Tractors

Caterpillar Dealers

Tom’s Earth Moving Company

White Uniform Company

Sales Agent Restaurant Supply Company

Sister Rachel’s Diner

Delco Batteries

Automotive Wholesaler

Auto Parts Distributor

Buck’s Garage and Auto Repair

Figure 15.4 Snapshot | Different Types of Channels of Distribution Channels differ in the number of channel members that participate.

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The Cutting Edge

Google Sells Adroid Phones Direct to Consumers The wireless industry sells phones through several channels: company-owned stores, third-party retailers like Best Buy and RadioShack, and online, where customer telephone service is an option. Google thought it could sell phones in a new way—without retail stores or customer-service reps to hold shoppers’ hands through the experience. Think again: Just eight days after Google opened its online store to sell the new Nexus One Smartphone (which runs their Android operating system) directly to customers, its support forums be- came overloaded with complaints. Customers vented about coverage and de- livery problems, network compatibility, dropped calls, and operation woes.

Even though the Nexus One was initially offered at a discounted $179 with a two-year contract from T-Mobile, T-Mobile wasn’t involved in the marketing, delivery, or customer service, beyond wireless service issues. Issues were posted on a support forum, where Google promised an e-mail response within

48 hours. Based on the volume on Google’s message forums the first week, Google no doubt had a lot of e-mail to reply to. “This is an epic failure for Google,” says Rob Enderle, an independent analyst. “t tried to create an Apple-like experience, but it’s so far off from the Apple experience, it’s not even on the same planet.” In a statement, Google said it works “quickly to solve any customer-support issues as they come up.” It said phone manufacturer HTC would provide telephone support for “device troubleshooting and warranty, repairs and returns.”

Charles Golvin, an analyst at Forrester Research, says Google “clearly neg- lected” to realize what was involved in being a retailer. “It needs to make sure the experience gets better going forward.” Google, says Enderle, has a mas- sive Web presence, and if it doesn’t want to offer phone support as the carri- ers do, it could have used Web tools and social networking to better communicate with customers. Clearly, intermediaries can add a great deal of value to customers within a channel.6

Why do producers choose to use indirect channels to reach consumers? A reason in many cases is that customers are familiar with certain retailers or other intermediaries— it’s where they always go to look for what they need. Get- ting customers to change their normal buying behavior— for example, convincing consumers to buy their laundry detergent or frozen pizza from a catalog or over the Internet instead of from the corner supermarket—can be difficult.

In addition, intermediaries help producers in all the ways we described earlier. By creating utility and transac- tion efficiencies, channel members make producers’ lives easier and enhance their ability to reach customers. The producer–retailer–consumer channel in Figure 15.4 is the shortest indirect channel. Panasonic uses this chan- nel when it sells flat-screen TVs through large retailers such as Best Buy. Because the retailers buy in large vol- ume, they can obtain inventory at a low price and then pass these savings on to shoppers (this is what gives them a competitive advantage over smaller, more specialized stores that don’t order so many items). The size of these re- tail giants also means they can provide the physical distri- bution functions such as transportation and storage that wholesalers handle for smaller retail outlets.

The producer–wholesaler–retailer–consumer channel is a common distribution channel in consumer marketing. A single ice-cream factory supplies, say, four or five regional wholesalers. These wholesalers then sell to 400 or more re- tailers such as grocery stores. The retailers, in turn, each sell the ice cream to thousands of customers. In this channel, the regional wholesalers combine many manufacturers’ products to supply grocery stores. Because the grocery stores do business with many wholesalers, this arrangement results in a broad selection of products.

Entrepreneurs Richie Lodico and Vinny Barbieri, owners of Eastern Meat Farms, Inc., discovered in the very early days of the Internet (they started their online business in 1995) that an online direct channel is a great way to continually expand their business globally. For years prior to going online, Lodico and Barbieri shipped sausages and cheeses across the country, but they didn’t feel there was enough volume to justify the expense of direct marketing. However, with the advent of the Internet, www.salami.com was born (the URL alone must be worth a fortune today!). The company ships each order using Styrofoam and ice packs to ensure that customers from around the globe receive high-quality, fresh products, often for less than half the price they would have to pay for similar delicacies locally. Hot dog!5

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hybrid marketing system A marketing system that uses a number of different channels and communication methods to serve a target market.

B2B Channels B2B distribution channels, as the name suggests, facilitate the flow of goods from a producer to an organizational or business customer. Generally, business-to-business channels paral- lel consumer channels in that they may be direct or indirect. For example, the simplest indi- rect channel in industrial markets occurs when the single intermediary—a merchant wholesaler we refer to as an industrial distributor rather than a retailer—buys products from a manufacturer and sells them to business customers.

Direct channels are more common to business-to-business markets than to consumer markets. As we saw in Chapter 6, this is because B2B marketing often means a firm sells high-dollar, high-profit items (a single piece of industrial equipment may cost hundreds of thousands of dollars) to a market made up of only a few customers. In such markets, it makes sense financially for a company to develop its own sales force and sell directly to customers—in this case the investment in an in-house sales force pays off.

Dual and Hybrid Distribution Systems Figure 15.4 illustrates how simple distribution channels work. But, once again we are

reminded that life (or marketing) is rarely that simple: Producers, dealers, wholesalers, re- tailers, and customers alike may actually participate in more than one type of channel. We call these dual or multiple distribution systems.

The pharmaceutical industry provides a good example of multiple-channel usage. Pharmaceutical companies distribute their products in at least three types of channels. First, they sell to hospitals, clinics, and other organizational customers directly. These cus- tomers buy in quantity, and they purchase a wide variety of products. Because hospitals and clinics dispense pills one at a time rather than in bottles of 50, these outlets require different product packaging than when the manufacturer sells medications to other types of customers. Pharmaceuticals’ second channel is an indirect consumer channel where the manufacturer sells to large drug store chains, like Walgreens, that distribute the medicines to their stores across the country. Alternatively, some of us would rather purchase our pre- scriptions in a more personal manner from the local independent drugstore where we can still get an ice-cream soda while we wait. In this version of the indirect consumer chan- nel, the manufacturer sells to drug wholesalers that, in turn, supply these independents. Finally, third-party payers such as HMOs, PPOs, and insurance companies represent a third type of channel to which pharmaceutical companies also sell directly. After health care reform in the United States fully kicks in, who knows what the channel configuration might be!

Instead of serving a target market with a single channel, some companies combine channels—direct sales, distributors, retail sales, and direct mail—to create a hybrid market- ing system.7 For example, at one time you could buy a Xerox copier only directly through a Xerox salesperson. Today, unless you are a very large business customer, you likely will pur- chase a Xerox machine from a local Xerox authorized dealer, or possibly through the Xerox “Online Store.” Xerox turned to an enhanced dealer network for distribution because such hybrid marketing systems offer companies certain competitive advantages, including in- creased coverage of the market, lower marketing costs, and a greater potential for cus- tomization of service for local markets.

Distribution Channels and the Marketing Mix How do decisions regarding place relate to the other three Ps? For one, place decisions affect pricing. Marketers that distribute products through low-priced retailers such as Walmart, T.J. Maxx, and Marshalls will have different pricing objectives and strategies than will those that sell to specialty stores or traditional department stores. And of course the nature of the product itself influences the retailers and intermediaries that we use. Manufacturers select

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slotting allowance A fee paid in exchange for agreeing to place a manufacturer’s products on a retailer’s valuable shelf space.

mass merchandisers to sell mid-price-range products while they distribute top-of-the-line products such as expensive jewelry through high-end department and specialty stores.

Distribution decisions can sometimes give a product a distinct position in its market. For example, Enterprise Rent-a-Car avoids being overly dependent on the cutthroat airport rental car market as it opens retail outlets in primary locations in residential areas and local business centers. This strategy takes advantage of the preferences of customers who are not flying and who want short-term use of a rental vehicle, such as when their primary vehicle is in the repair shop. Enterprise built such a successful following around this business model that loyal customers began to clamor for more Enterprise counters at airports, which the company is all too happy to provide. Now Enterprise is a rising competitive threat to tradi- tional airport car rental agencies such as Hertz and Avis.

Ethics in the Distribution Channel Companies’ decisions about how to make their products available to consumers through distribution channels can create ethical dilemmas. For example, because their size gives them great bargaining power when they negotiate with manufacturers, many large retail chains force manufacturers to pay a slotting allowance—a fee in exchange for agreeing to place a manufacturer’s products on a retailer’s valuable shelf space. Although the retailers claim that such fees pay the cost of adding products to their inventory, many manufactur- ers feel that slotting fees are more akin to highway robbery. Certainly, the practice prevents smaller manufacturers that cannot afford the slotting allowances from getting their products into the hands of consumers.

Another ethical issue involves the sheer size of a particular channel intermediary—be it manufacturer, wholesaler, retailer, or other intermediary. Giant retailer Walmart, increas- ingly criticized for forcing scores of independent competitors (i.e., “mom-and-pop stores”) to go out of business, has begun a very visible program to help its smaller rivals. The pro- gram offers financial grants to hardware stores, dress shops, and bakeries near its new ur- ban stores, training on how to survive with a Walmart in town, and even free advertising in Walmart stores. Of course, Walmart hopes to benefit from the program in cities like Los An- geles and New York, where its plan to build new stores in urban neighborhoods has met high resistance from local communities.8

Overall, it is important for all channel intermediaries to behave and treat each other in a professional, ethical manner—and to do no harm to consumers (financially or otherwise) through their channel activities. Every intermediary in the channel wants to make money, but behavior by one to maximize its financial success at the expense of others’ success is a doomed approach, as ultimately cooperation in the channel will break down. Instead, it be- hooves intermediaries to work cooperatively in the channel to distribute products to con- sumers in an efficient manner—making the channel a success for everybody participating in it (including consumers)!

Plan a Channel Strategy Do customers want products in large or small quantities? Do they insist on buying them locally, or will they purchase from a distant supplier? How long are they willing to wait to get the product? Inquiring mar- keters want to know!

Distribution planning works best when marketers follow the steps in Figure 15.5. In this section, we will first look at how manufactur- ers decide on distribution objectives and then examine what influences

distribution decisions. Finally, we’ll talk about how firms select different distribution strate- gies and tactics.

5 OBJECTIVE

List the steps to plan

a distribution channel

strategy. (pp. 461–467)

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Firms that operate within a channel of distribution—manufacturers, whole- salers, and retailers—do distribution planning. In this section, our perspective focuses on distribution planning by producers and manufacturers rather than intermedi- aries because they, more often than intermediaries, take a leadership role to create a successful distribution channel.

Step 1: Develop Distribution Objectives The first step to decide on a distribution plan is to develop objectives that support the organization’s overall marketing goals. How can distribution work with the other elements of the marketing mix to increase profits? To increase market share? To increase sales volume? In general, the overall objective of any distribution plan is to make a firm’s product available when, where, and in the quantities customers want at the minimum cost. More specific distribution objectives, however, depend on the characteristics of the product and the market.

For example, if the product is bulky, a primary distribution objective may be to minimize shipping costs. If the product is fragile, a goal may be to develop a channel that minimizes handling. In introducing a new product to a mass market, a channel objective may be to provide maximum product exposure or to make the product avail- able close to where customers live and work. Sometimes marketers make their prod- uct available where similar products are sold so that consumers can compare prices.

Step 2: Evaluate Internal and External Environmental Influences After they set their distribution objectives, marketers must consider their internal and external environments to develop the best channel structure. Should the channel be long or short? Is intensive, selective, or exclusive distribution best? Short, often direct channels may be better suited for business-to-business marketers for whom cus- tomers are geographically concentrated and require high levels of technical know-

how and service. Companies frequently sell expensive or complex products directly to final customers. Short channels with selective distribution also make more sense with perishable products, since getting the product to the final user quickly is a priority. However, longer channels with more intensive distribution are generally best for inexpensive, standardized consumer goods that need to be distributed broadly and that require little technical expertise.

The organization must also examine issues such as its own ability to handle distribu- tion functions, what channel intermediaries are available, the ability of customers to access these intermediaries, and how the competition distributes its products. Should a firm use the same retailers as its competitors? It depends. Sometimes, to ensure customers’ undi- vided attention, a firm sells its products in outlets that don’t carry the competitors’ prod- ucts. In other cases, a firm uses the same intermediaries as its competitors because customers expect to find the product there. For example, you will find Harley-Davidson bikes only in selected Harley “boutiques” and Piaggio’s Vespa scooters only at Vespa deal- ers (no sales through Walmart for those two!), but you can expect to find Coca-Cola, Colgate toothpaste, and a Snickers bar in every possible outlet that sells these types of items.

Finally, when they study competitors’ distribution strategies, marketers learn from their successes and failures. If the biggest complaint of competitors’ customers is delivery speed, de- veloping a system that allows same-day delivery can make the competition pale in comparison.

Step 3: Choose a Distribution Strategy Planning a distribution strategy means making at least three decisions. First, of course, dis- tribution planning includes decisions about the number of levels in the distribution chan- nel. We discussed these options in the earlier section on consumer and business-to-business

Step 1: Develop distribution objectives

Step 3: Choose a distribution strategy

• Number of channel levels • Conventional, vertical, or horizontal marketing system • Intensive, exclusive, or selective distribution

Step 4: Develop Distribution Tactics

• Select channel partners • Manage the channel • Develop logistics strategies – Order processing – Warehousing – Materials handling – Transportation – Inventory control

Step 2: Evaluate internal and external environmental influences

Figure 15.5 Process | Steps in Distribution Planning

Distribution planning begins with setting channel objectives and includes developing channel strategies and tactics.

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conventional marketing system A multiple-level distribution channel in which channel members work independently of one another.

vertical marketing system (VMS) A channel of distribution in which there is formal cooperation among members at the manufacturing, wholesaling, and retailing levels.

channels, illustrated by Figure 15.4. Beyond the number of levels, distribution strategies also involve decisions about channel relationships—that is, whether a conventional system or a highly integrated system will work best—and the distribution intensity or the number of intermediaries at each level of the channel.

Conventional, Vertical, or Horizontal Marketing System?

Participants in any distribution channel form an interrelated system. In general, these mar- keting systems take one of three forms: conventional, vertical, or horizontal.

1. A conventional marketing system is a multilevel distribution channel in which mem- bers work independently of one another. Their relationships are limited to simply buy- ing and selling from one another. Each firm seeks to benefit, with little concern for other channel members. Even though channel members work independently, most conven- tional channels are highly successful. For one thing, all members of the channel work toward the same goals—to build demand, reduce costs, and improve customer satisfac- tion. And each channel member knows that it’s in everyone’s best interest to treat other channel members fairly.

2. A vertical marketing system (VMS) is a channel in which there is formal cooperation among channel members at two or more different levels: manufacturing, wholesaling, and retailing. Firms develop vertical marketing systems as a way to meet customer needs better by reducing costs incurred in channel activities. Often, a vertical market- ing system can provide a level of cooperation and efficiency not possible with a conven- tional channel, maximizing the effectiveness of the channel while also maximizing efficiency and keeping costs low. Members share information and provide services to other members; they recognize that such coordination makes everyone more success- ful when they want to reach a desired target market.

In turn there are three types of vertical marketing systems: administered, corporate, and contractual:

a. In an administered VMS, channel members remain independent but voluntarily work together because of the power of a single channel member. Strong brands are able to manage an administered VMS because resellers are eager to work with the manufacturer so they will be allowed to carry the product.

b. In a corporate VMS, a single firm owns manufacturing, wholesaling, and retailing operations. Thus, the firm has complete control over all channel operations. Retail giant Macy’s, for example, owns a nationwide network of distribution centers and retail stores.

c. In a contractual VMS, cooperation is enforced by contracts (legal agreements) that spell out each member’s rights and responsibilities and how they will cooperate. This arrangement means that the channel members can have more impact as a group than they could alone. In a wholesaler-sponsored VMS, wholesalers get retailers to work together under their leadership in a voluntary chain. Retail members of the chain use a common name, cooperate in advertising and other promotion, and even develop their own private-label products. Examples of wholesaler-sponsored chains are IGA (Independent Grocers’ Alliance) food stores and Ace Hardware stores.

In other cases, retailers themselves organize a cooperative marketing channel system. A retailer cooperative is a group of retailers that establish a wholesaling operation to help them compete more effectively with the large chains. Each retailer owns shares in the whole- saler operation and is obligated to purchase a certain percentage of its inventory from the cooperative operation. Associated Grocers and True Value Hardware stores are examples of retailer cooperatives.

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horizontal marketing system An arrangement within a channel of distribution in which two or more firms at the same channel level work together for a common purpose.

intensive distribution Selling a product through all suitable wholesalers or retailers that are willing to stock and sell the product.

exclusive distribution Selling a product only through a single outlet in a particular region.

Franchise organizations are a third type of contractual VMS. Franchise organizations in- clude a franchiser (a manufacturer or a service provider) who allows an entrepreneur (the franchisee) to use the franchise name and marketing plan for a fee. In these organizations, contractual arrangements explicitly define and strictly enforce channel cooperation. In most franchise agreements, the franchiser provides a variety of services for the franchisee, such as helping to train employees, giving access to lower prices for needed materials, and select- ing a good location. In return, the franchiser receives a percentage of revenue from the fran- chisee. Usually the franchisees are obligated to follow the franchiser’s business format very closely in order to maintain the franchise.

From the manufacturer’s perspective, franchising a business is a way to develop wide- spread product distribution with minimal financial risk while at the same time maintaining control over product quality. From the entrepreneur’s perspective, franchises are a helpful way to get a start in business.

3. In a horizontal marketing system, two or more firms at the same channel level agree to work together to get their product to the customer. Sometimes unrelated businesses forge these agreements. Most airlines today are members of a horizontal alliance that allows them to co- operate when they provide passenger air service. For example, American Airlines is a mem- ber of the oneworld® alliance, which also includes British Airways, Cathay Pacific, Finnair, Iberia, JAL, LAN, Malev, Mexicana, Qantas, and Royal Jordanian Airways. These alliances increase passenger volume for all airlines because travel agents who book passengers on one of the airline’s flights will be more likely to book a connecting flight on the other airline. To increase customer benefits, they also share frequent-flyer programs and airport clubs.9

Intensive, Exclusive, or Selective Distribution? How many wholesalers and retailers should carry the product within a given market? This may seem like an easy decision: Distribute the product through as many intermediaries as possible. But guess again. If the product goes to too many outlets, there may be inefficiency and duplication of efforts. For example, if there are too many Honda dealerships in town, there will be a lot of unsold Hondas sitting on dealer lots and no single dealer will be suc- cessful. But if there are not enough wholesalers or retailers to carry a product, this will fail to maximize total sales of the manufacturer’s products (and its profits). If customers have to drive hundreds of miles to find a Honda dealer, they may instead opt for a Toyota, Mit- subishi, Mazda, or Nissan. Thus, a distribution objective may be to either increase or de- crease the level of distribution in the market.

The three basic choices are intensive, exclusive, and selective distribution. Table 15.2 sum- marizes five decision factors—company, customers, channels, constraints, and competition— and how they help marketers determine the best fit between distribution system and marketing goals.

Intensive distribution aims to maximize market coverage by selling a product through all wholesalers or retailers that will stock and sell the product. Marketers use intensive dis- tribution for products such as chewing gum, soft drinks, milk, and bread that consumers quickly consume and must replace frequently. Intensive distribution is necessary for these products because availability is more important than any other consideration in customers’ purchase decisions.

In contrast to intensive distribution, exclusive distribution means to limit distribution to a single outlet in a particular region. Marketers often sell pianos, cars, executive training programs, television programs, and many other products with high price tags through ex- clusive distribution arrangements. They typically use these strategies with products that are high-priced and have considerable service requirements, and when a limited number of buyers exist in any single geographic area. Exclusive distribution enables wholesalers and retailers to better recoup the costs associated with long-selling processes for each customer and, in some cases, extensive after-sale service.

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Table 15.2 | Characteristics That Favor Intensive versus Exclusive Distribution Decision Factor Intensive Distribution Exclusive Distribution

Company Oriented toward mass markets Oriented toward specialized markets

Customers High customer density Low customer density

Price and convenience are priorities Service and cooperation are priorities

Channels Overlapping market coverage Nonoverlapping market coverage

Constraints Cost of serving individual customers is low Cost of serving individual customers is high

Competition Based on a strong market presence, often through advertising and promotion

Based on individualized attention to customers, often through relationship marketing

Of course, not every situation neatly fits a category in Table 15.2. (You didn’t really think it would be that simple, did you?) For example, consider professional sports. Customers might not shop for games in the same way they shop for pianos. They might go to a game on impulse, and they don’t require much individualized service. Nevertheless, professional sports use exclusive distribution. A team’s cost of serving customers is high because of those million-dollar player salaries and multimillion-dollar stadiums.

The alert reader (and/or sports fan) may note that there are some exceptions to the ex- clusive distribution of sports teams. New York has two football teams and two baseball teams, Chicago fields two baseball teams, and so on. We call market coverage that is less than intensive distribution but more than exclusive distribution selective distribution. This model fits when demand is so large that exclusive distribution is inadequate, but selling costs, service requirements, or other factors make intensive distribution a poor fit. Although a White Sox baseball fan may not believe that the Cubs franchise is necessary (and vice versa), Major League Baseball and even some baseball fans think the Chicago market is large enough to support both teams.

Selective distribution strategies are suitable for so-called shopping products, such as household appliances and electronic equipment for which consumers are willing to spend time visiting different retail outlets to compare alternatives. For producers, selective dis- tribution means freedom to choose only those wholesalers and retailers that have a good credit rating, provide good market coverage, serve customers well, and cooperate effec- tively. Wholesalers and retailers like selective distribution because it results in higher profits than are possible with intensive distribution, in which sellers often have to com- pete on price.

Step 4: Develop Distribution Tactics As with planning for the other marketing Ps, the final step in distribution planning is to de- velop the distribution tactics necessary to implement the distribution strategy. These deci- sions are usually about the type of distribution system to use, such as a direct or indirect channel or a conventional or an integrated channel. Distribution tactics relate to the imple- mentation of these strategies, such as how to select individual channel members and how to manage the channel.

These decisions are important because they often have a direct impact on customer satisfaction—nobody wants to have to wait for something they’ve bought! When Toyota first introduced the now wildly successful Scion, the company wisely came up with a new approach to distribute this youth-oriented vehicle that differs from its traditional Toyota distribution system. The company’s overall goal was to cut delivery time to its impatient young customers to no more than a week by offering fewer model variations and doing

selective distribution Distribution using fewer outlets than intensive distribution but more than exclusive distribution.

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more customization at the dealer rather than at the factory. The continuing resounding suc- cess of the Scion brand shows the power of tailoring distribution tactics differently for dif- ferent markets.10

Select Channel Partners

When firms agree to work together in a channel relationship, they become partners in what is normally a long-term commitment. Like a marriage, it is important to both manufactur- ers and intermediaries to select channel partners wisely, or they’ll regret the match-up later (and a divorce can be really expensive!). In evaluating intermediaries, manufacturers try to answer questions such as the following: Will the channel member contribute substantially to our profitability? Does the channel member have the ability to provide the services cus- tomers want? What impact will a potential intermediary have on channel control?

For example, what small to midsize firm wouldn’t jump at the chance to have retail gi- ant Walmart distribute its products? With Walmart as a channel partner, a small firm could double, triple, or quadruple its business. Actually, some firms that recognize size means power in the channel actually decide against selling to Walmart because they are not will- ing to relinquish control of their marketing decision making. There is also a downside to choosing one retailer and selling only through that one retailer. If that retailer stops carry- ing the product, for example, the company will lose its one and only customer (perhaps af- ter relinquishing other smaller customers), and it will be back to square one.

Another consideration in selecting channel members is competitors’ channel partners. Because people spend time comparing different brands when purchasing a shopping prod- uct, firms need to make sure they display their products near similar competitors’ products. If most competitors distribute their electric drills through mass merchandisers, a manufac- turer has to make sure its brand is there also.

A firm’s dedication to social responsibility may also be an important determining factor in the selection of channel partners. Many firms run extensive programs to recruit minority-owned channel members. Starbucks’ famous organizational commitment to good corporate citizenship translates in one way into its “supplier diversity program” that works to help minority-owned business thrive.11

Ripped from the Headlines

Ethical/Sustainable Decisions in the Real World Walmart announced in early 2010 that it would cut some 20 million metric tons of greenhouse gas emissions from its supply chain by the end of 2015— the equivalent of removing more than 3.8 million cars from the road for a year. The company plans to achieve that goal in part by pressing its suppliers to rethink how they source, manufacture, package, and transport their goods. Essentially, the chain is asking suppliers to examine the carbon lifecycle of their products, from the raw materials used in manufacturing all the way through to the recycling phase. Walmart’s sustainability executives will work with suppliers to help them figure out what measures to take. But any

costs related to making products more energy- efficient—redesigning packaging or using a dif- ferent fertilizer—will be the responsibility of each supplier, not of Walmart.

The initiative is good for the environment, but it’s also good for Walmart as it follows the sustainability mantra of “doing well by doing

good.” Driving costs out of the supply chain could result in savings for Walmart that the stores can pass along to consumers—enabling the company to en- hance its reputation as a destination for rock-bottom prices.Walmart said sup- plier participation in its effort to reduce greenhouse gas emissions would not be mandatory. But the giant retailer—with sales of more than $400 billion— made it clear that it was interested in doing business only with suppliers that share its goals. Critics argue, though, that rather than change its business model,Walmart pressures suppliers to change theirs—which can lead them to cut corners and produce shoddier products.

For its part, Walmart has started many environmental initiatives in recent years that include improving the efficiency of its truck fleet; creating a global index to measure the environmental impact of products; and changing the la- bels on clothing it sells to indicate the products can be washed in cold water (therefore lowering customers’ electricity bills). The company said the 20 mil- lion metric tons of greenhouse gas emissions it intends to cut from its supply chain by the end of 2015 is 150 percent of the estimated growth in carbon emissions from its own operations over the next five years.

ETHICS CHECK: Find out what other students taking this course would do and why on www .mypearsonmarketinglab .com

Should Walmart aggressively force its suppliers to comply with its green goals?

YES NO

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channel leader A firm at one level of distribution that takes a leadership role, establishing operating norms and processes based on its power relative to other channel members.

Manage the Channel

Once a manufacturer develops a channel strategy and aligns channel members, the day-to- day job of managing the channel begins. The channel leader, sometimes called a channel cap- tain, is the dominant firm that controls the channel. A firm becomes the channel leader because it has power relative to other channel members. This power comes from different sources:

• A firm has economic power when it has the ability to control resources.

• A firm such as a franchiser has legitimate power if it has legal authority to call the shots.

• A producer firm has reward or coercive power if it engages in exclusive distribution and has the ability to give profitable products and to take them away from the channel intermediaries.

In the past, producers traditionally held the role of channel captain. Procter & Gamble, for example, developed customer-oriented marketing programs, tracked market trends, and advised retailers on the mix of products most likely to build sales. As large retail chains evolved, giant retailers such as Best Buy, Home Depot, Target, and Walmart began to assume a leadership role because of the sheer size of their operations. Today it is much more com- mon for the big retailers to dictate their needs to producers instead of producers controlling what products they offer to retailers.

Because producers, wholesalers, and retailers depend on one another for success, channel cooperation helps everyone. Channel cooperation is also stimulated when the channel leader takes actions that make its partners more successful. High intermediary profit margins, training programs, cooperative advertising, and expert marketing advice are invisible to end customers but are motivating factors in the eyes of wholesalers and retailers.

Of course, relations among members in a channel are not always full of sweetness and light. Because each firm has its own objectives, channel conflict may threaten a manufac- turer’s distribution strategy. Such conflict most often occurs between firms at different levels of the same distribution channel. Incompatible goals, poor communication, and disagreement over roles, responsibilities, and functions cause conflict. For example, a producer is likely to feel the firm would enjoy greater success and profitability if intermediaries carry only its brands, but many intermediaries believe they will do better if they carry a variety of brands.

In this section, we’ve been concerned with the distribution channels firms use to get their products to customers. In the next section, we’ll look at the area of logistics—physically mov- ing products through the supply chain.

Logistics: Implement the Supply Chain Some marketing textbooks tend to depict the practice of marketing as 90 percent planning and 10 percent implementation. Not so! In the “real world” (our world) many managers argue that this ratio should be re- versed. Marketing success is very much the art of getting the timing right and delivering on promises—implementation.

That’s why marketers place so much emphasis on efficient logistics: the process of de- signing, managing, and improving the movement of products through the supply chain. Lo- gistics includes purchasing, manufacturing, storage, and transport. From a company’s viewpoint, logistics takes place both inbound to the firm (raw materials, parts, components, and supplies) and outbound from the firm (work-in-process and finished goods). Logistics is

6 OBJECTIVE

Explain logistics and

how it fits into the

supply chain concept. (pp. 467–472)

logistics The process of designing, managing, and improving the movement of products through the supply chain. Logistics includes purchasing, manufacturing, storage, and transport.

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physical distribution The activities that move finished goods from manufacturers to final customers, including order processing, warehousing, materials handling, transportation, and inventory control.

order processing The series of activities that occurs between the time an order comes into the organization and the time a product goes out the door.

enterprise resource planning (ERP) systems A software system that integrates information from across the entire company, including finance, order fulfillment, manufacturing, and transportation and then facilitates sharing of the data throughout the firm.

also a relevant consideration regarding product returns, recycling and material reuse, and waste disposal—reverse logistics.12 As we saw in earlier chapters, that’s becoming even more important as firms start to more seriously consider sustainability as a competitive advantage and put more effort into maximizing the efficiency of recycling to save money and the envi- ronment at the same time. So you can see logistics is an important issue across all elements of the supply chain. Let’s examine this process more closely.

The Lowdown on Logistics Have you ever heard the saying, “An army travels on its stomach”? Logistics was originally a term the military used to describe everything needed to deliver troops and equipment to the right place, at the right time, and in the right condition. In business, logistics is similar in that its objective is to deliver exactly what the customer wants—at the right time, in the right place, and at the right price. The application of logistics is essential to the efficient man- agement of the supply chain.

The delivery of goods to customers involves physical distribution, which refers to the activities that move finished goods from manufacturers to final customers. Physical distri- bution activities include order processing, warehousing, materials handling, transportation, and inventory control. This process impacts how marketers physically get products where they need to be, when they need to be there, and at the lowest possible cost. Effective phys- ical distribution is at the core of successful logistics.

When a firm does logistics planning, however, the focus also should be on the customer. When managers thought of logistics as physical distribution only, the objective was to de- liver the product at the lowest cost. Today, forward-thinking firms consider the needs of the customer first. The customer’s goals become the logistics provider’s goals. And this means that when they make most logistics decisions, firms must decide on the best trade-off be- tween low costs and high customer service. The appropriate goal is not just to deliver what the market needs at the lowest cost but rather to provide the product at the lowest cost pos- sible as long as the firm meets delivery requirements. Although it would be nice to transport all goods quickly by air, that is certainly not practical. But sometimes air transport is necessary to meet the needs of the customer, no matter the cost.

Logistics Functions

When they develop logistics strategies, marketers must make decisions related to the five functions of logistics Figure 15.6 depicts: order processing, warehousing, materials han- dling, transportation, and inventory control. For each decision, managers need to consider how to minimize costs while maintaining the service customers want.

Order Processing

Order processing includes the series of activities that occurs between the time an order comes into the organization and the time a product goes out the door. After a firm receives an order it typically sends it electronically to an office for record keeping and then on to the warehouse to fill it. When the order reaches the warehouse, personnel there check to see if the item is in stock. If it is not, they put the order on back-order status. That information goes to the office and then to the customer. If the item is available, the company locates it in the warehouse, packages it for shipment, and schedules it for pickup by either in-house or external shippers.

Fortunately, many firms automate this process with enterprise resource planning (ERP) systems. An ERP system is a software solution that integrates information from across the entire company, including finance, order fulfillment, manufacturing, and transportation. Data need to be entered into the system only once, and then the organization automatically shares this information and links it to other related data. For example, an ERP system ties information on product inventories to sales information so that a sales representative can immediately tell a customer whether the product is in stock.

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Logistics Functions

Order Processing

Warehousing

Materials Handling

Transportation

Inventory Control

Figure 15.6 Process | The Five Functions of Logistics

When they develop logistics strategies, marketers must make decisions related to order processing, warehousing, materials handling, transportation, and inventory control.

warehousing Storing goods in anticipation of sale or transfer to another member of the channel of distribution.

Warehousing

Whether we deal with fresh-cut flowers, canned goods, or computer chips, at some point goods (unlike services) must be stored. Storing goods allows marketers to match supply with demand. For example, toys and other gift items are big sellers at Christmas, but toy factories operate 12 months of the year. Warehousing—storing goods in antici- pation of sale or transfer to another member of the channel of distribution—enables marketers to provide time utility to consumers by holding on to products until con- sumers need them.

Part of developing effective logistics means making decisions about how many ware- houses we need and where and what type of warehouse each should be. A firm determines the location of its warehouse(s) by the location of customers and access to major highways, airports, or rail transportation. The number of warehouses often depends on the level of ser- vice customers require. If customers generally demand fast delivery (today or tomorrow at the latest), then it may be necessary to store products in a number of different locations from which the company can quickly ship the goods to the customer.

Firms use private and public warehouses to store goods. Those that use private ware- houses have a high initial investment, but they also lose less of their inventory due to dam- age. Public warehouses are an alternative; they allow firms to pay for a portion of warehouse space rather than having to own an entire storage facility. Most countries offer public ware- houses in all large cities and many smaller cities to support domestic and international trade. A distribution center is a warehouse that stores goods for short periods of time and that provides other functions, such as breaking bulk.

Materials Handling

Materials handling is the moving of products into, within, and out of warehouses. When goods come into the warehouse, they must be physically identified, checked for dam- age, sorted, and labeled. Next they are taken to a location for storage. Finally, they are recovered from the storage area for packaging and shipment. All in all, the goods may be handled over a dozen separate times. Procedures that limit the number of times a product must be handled decrease the likelihood of damage and reduce the cost of ma- terials handling.

Heather Mayo APPLYING Materials Handling

Heather needs to consider whether a new process that reduces the times a milk carton is handled is worth the hassles it may create if Sam’s Club changes its distribution strategy for milk.

materials handling The moving of products into, within, and out of warehouses.

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transportation The mode by which products move among channel members.

Table 15.3 | A Comparison of Transportation Modes Transportation Mode Dependability Cost

Speed of Delivery Accessibility Capability Traceability

Most Suitable Products

Railroads Average Average Moderate High High Low Heavy or bulky goods, such as automobiles, grain, and steel

Water Low Low Slow Low Moderate Low Bulky, nonperishable goods, such as automobiles

Trucks High High for long distances; low for short distances

Fast High High High A wide variety of products, including those that need refrigeration

Air High High Very fast Low Moderate High High-value items, such as electronic goods and fresh flowers

Pipeline High Low Slow Low Low Moderate Petroleum products and other chemicals

Internet High Low Very fast Potentially very high

Low High Services such as banking, information, and entertainment

Transportation

Logistics decisions take into consideration options for transportation, the mode by which products move among channel members. Again, making transportation decisions entails a compromise between minimizing cost and providing the service customers want. As Table 15.3 shows, modes of transportation, including railroads, water transportation, trucks, airways, pipelines, and the Internet, differ in the following ways:

• Dependability: The ability of the carrier to deliver goods safely and on time

• Cost: The total transportation costs to move a product from one location to another, in- cluding any charges for loading, unloading, and in-transit storage

• Speed of delivery: The total time to move a product from one location to another, includ- ing loading and unloading

• Accessibility: The number of different locations the carrier serves

• Capability: The ability of the carrier to handle a variety of different products such as large or small, fragile, or bulky

• Traceability: The ability of the carrier to locate goods in shipment

Each mode of transportation has strengths and weaknesses that make it a good choice for different transportation needs. Table 15.3 summarizes the pros and cons of each mode.

• Railroads: Railroads are best to carry heavy or bulky items, such as coal and other min- ing products, over long distances. Railroads are about average in their cost and provide moderate speed of delivery. Although rail transportation provides dependable, low- cost service to many locations, trains cannot carry goods to every community.

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inventory control Activities to ensure that goods are always available to meet customers’ demands.

radio frequency identification (RFID) Product tags with tiny chips containing information about the item’s content, origin, and destination.

• Water: Ships and barges carry large, bulky goods and are very important in interna- tional trade. Water transportation is relatively low in cost but can be slow.

• Trucks: Trucks or motor carriers are the most important transportation mode for con- sumer goods, especially for shorter hauls. Motor carrier transport allows flexibility be- cause trucks can travel to locations missed by boats, trains, and planes. Trucks also carry a wide variety of products, including perishable items. Although costs are fairly high for longer-distance shipping, trucks are economical for shorter deliveries. Because trucks provide door-to-door service, product handling is minimal, and this reduces the chance of product damage.

• Air: Air transportation is the fastest and also the most expensive transportation mode. It is ideal to move high-value items such as important mail, fresh-cut flowers, and live lobsters. Passenger airlines, air-freight carriers, and express delivery firms, such as FedEx, provide air transportation. Ships remain the major mover of international cargo, but air transportation networks are becoming more important as international markets continue to develop.

• Pipeline: Pipelines carry petroleum products such as oil and natural gas and a few other chemicals. Pipelines flow primarily from oil or gas fields to refineries. They are very low in cost, require little energy, and are not subject to disruption by weather.

• The Internet: As we discussed earlier in this chapter, marketers of services such as bank- ing, news, and entertainment take advantage of distribution opportunities the Internet provides.

Inventory Control: JIT, RFID, and Fast Fashion Another component of logistics is inventory control, which means developing and imple- menting a process to ensure that the firm always has sufficient quantities of goods available to meet customers’ demands—no more and no less. That explains why firms work so hard to track merchandise so they know where their products are and where they are needed in case a low-inventory situation appears imminent.

Some companies are even phasing in a sophisticated technology (similar to the EZ Pass system many drivers use to speed through tollbooths) known as radio frequency identifica- tion (RFID). RFID lets firms tag clothes, pharmaceuticals, or virtually any kind of product with tiny chips that contain information about the item’s content, origin, and destination. This technology has the potential to revolutionize inventory control and help marketers en- sure that their products are on the shelves when people want to buy them. Great for manu- facturers and retailers, right? But some consumer groups are creating a backlash against RFID, which they refer to as “spy chips.” Through blogs, boycotts, and other anti-company initiatives, these groups proclaim RFID a personification of the privacy violations George Orwell predicted in his classic book 1984.13

Firms store goods (that is, they create an inventory) for many reasons. For manufactur- ers the pace of production may not match seasonal demand. It may be more economical to produce snow skis year-round than to produce them only during the winter season. For channel members that purchase goods from manufacturers or other channel intermediaries, it may be economical to order a product in quantities that don’t exactly parallel demand. For example, delivery costs make it prohibitive for a retail gas station to place daily orders for just the amount of gas people will use that day. Instead, stations usually order truck- loads of gasoline, holding their inventory in underground tanks. The consequences of stockouts may be very negative. Hospitals must keep adequate supplies of blood, IV fluids, drugs, and other supplies on hand to meet emergencies, even if some items go to waste.

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just in time (JIT) Inventory management and purchasing processes that manufacturers and resellers use to reduce inventory to very low levels and ensure that deliveries from suppliers arrive only when needed.

perfect order measurement A supply chain metric that tracks multiple steps in getting a product from a manufacturer to a customer.

have to make expensive emergency deliveries or lose customers to competitors. If invento- ries are above demand, unnecessary storage expenses and the possibility of damage or de- terioration occur. To balance these two opposing needs, manufacturers turn to just in time (JIT) inventory techniques with their suppliers. JIT sets up delivery of goods just as they are needed on the production floor. This minimizes the cost of holding inventory while it en- sures the inventory will be there when customers need it.

A supplier’s ability to make on-time deliveries is the critical factor in the selection process for firms that adopt this kind of system. JIT systems reduce stock to very low levels, or even zero, and time deliveries very carefully to maintain just the right amount of inven- tory. The advantage of JIT systems is the reduced cost of warehousing. For both manufac- turers and resellers that use JIT systems, the choice of supplier may come down to one whose location is nearest. To win a large customer, a supplier may even have to be willing to set up production facilities close to the customer to guarantee JIT delivery.14

Supply Chain Metrics Companies track a wide range of metrics within the supply chain area. Some of the most common ones are the following:

• On-time delivery

• Forecast accuracy

• Value-added productivity per employee

• Returns processing cost as a percentage of product revenue

• Customer order actual cycle time

• Perfect order measurement

Let’s take a look at the last measure in more detail. The perfect order measurement cal- culates the error-free rate of each stage of a purchase order.15 This measure helps managers track the multiple steps involved in getting a product from a manufacturer to a customer so that they can pinpoint processes they need to improve. For example, a company can calcu- late its error rate at each stage and then combine these rates to create an overall metric of or- der quality. Suppose the company identifies the following error rates:

• Order entry accuracy: 99.95 percent correct (five errors per 1,000 order lines)

• Warehouse pick accuracy: 99.2 percent

• Delivered on time: 96 percent

• Shipped without damage: 99 percent

• Invoiced correctly: 99.8 percent

The company can then combine these individual rates into an overall perfect order measurement by multiplying them together: 99.95 � 99.2 � 96 � 99 � 99.8 � 94.04 percent.

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Brand YOU! Special delivery.

Deliver value to your prospective employer starting with your interview. Uncover some of the best secrets to a success- ful interview from employers and executives. Impress your in- terviewer with the exact balance of research, preparation, personality, and all the right questions. Get the inside track in Chapter 15 of Brand You.

Real People, Real Choices

Here’s my choice. . .

To learn the whole story, visit www.mypearsonmarketinglab.com.

Why do you think Heather chose option #3?

How It Worked Out at Sam’s Club Sam’s Club launched the caseless program. But Sam’s had to teach shoppers how to use the new jug—if they lifted and poured as they did with the old container, the milk would dribble down the side. Since the initial launch, the jug has gone through numerous versions to improve “pourability,” so the spillage problem has been eliminated. The switch was so large-scale and innovative that more than 1,000 news stories about it ran around the world.

OptionOption Option

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474 PART FIVE | DELIVER THE VALUE PROPOSITION

CHAPTER 15

1. Objective Summary Understand the concept of a supply chain. The value chain consists of five primary activities (inbound logis- tics, operations, outbound logistics, marketing and sales, and service) and four support activities (procurement, technology development, human resource management, and firm infra- structure). The process is called a value chain because each of these activities adds value to the product the customer eventu- ally buys. Whereas the value chain is an overarching concept of how firms create value, the supply chain also encompasses com- ponents external to the firm itself, including all activities that are necessary to convert raw materials into a good or service and put it in the hands of the consumer or business customer.

Key Terms supply chain, p. 448

supply chain management, p. 449

insourcing, p. 449

channel of distribution, p. 449

2. Objective Summary Explain what a distribution channel is and what functions distribution channels perform. A distribution channel is a series of firms or individuals that fa- cilitates the movement of a product from the producer to the final customer. Channels provide time, place, and ownership utility for customers and reduce the number of transactions necessary for goods to flow from many manufacturers to large numbers of customers by breaking bulk and creating assort- ments. Channel members make the purchasing process easier by providing important customer services. Today the Internet is becoming an important player in distribution channels.

Key Terms channel intermediaries, p. 451

breaking bulk, p. 451

create assortments, p. 451

facilitating functions, p. 451

disintermediation (of the channel of distribution), p. 453

knowledge management, p. 453

online distribution piracy, p. 453

(pp. 450–453)

(pp. 448–450) 3. Objective Summary Discuss the types of wholesaling intermediaries found in distribution channels. Wholesaling intermediaries are firms that handle the flow of products from the manufacturer to the retailer or business user. Merchant wholesalers are independent intermediaries that take title to a product and include both full-function whole- salers and limited-function wholesalers. Merchandise agents and brokers are independent intermediaries that do not take ti- tle to products. Manufacturer-owned channel members in- clude sales branches, sales offices, and manufacturers’ showrooms.

Key Terms wholesaling intermediaries, p. 454

independent intermediaries, p. 454

merchant wholesalers, p. 454

take title, p. 454

merchandise agents or brokers, p. 456

4. Objective Summary Describe the types of distribution channels and how place fits in with the other three Ps in the marketing mix. Distribution channels vary in length from the simplest two-level channel to longer channels with three or more channel levels. Distribution channels include direct distribution in which the producer sells directly to consumers, and indirect channels, which may include a retailer, wholesaler, or other intermediary. Decisions on what channels to utilize affect the price you can charge as well as overall positioning strategy for a product. The marketing mix is called a “mix” because each ingredient im- pacts the others as well as the whole marketing strategy.

Key Terms channel levels, p. 457

hybrid marketing system, p. 460

slotting allowance, p. 461

(pp. 457–461)

(pp. 453–457)

Objective Summary Key Terms Apply Study Map

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CHAPTER 15 | DELIVER VALUE THROUGH SUPPLY CHAIN MANAGEMENT, CHANNELS OF DISTRIBUTION, AND LOGISTICS 475

5. Objective Summary List the steps to plan a distribution channel strategy. Marketers begin channel planning by developing channel ob- jectives and considering important environmental factors. The next step is to decide on a distribution strategy, which involves determining the type of distribution channel that is best. Distri- bution tactics include the selection of individual channel mem- bers and management of the channel.

Key Terms conventional marketing system, p. 463

vertical marketing system (VMS), p. 463

horizontal marketing system, p. 464

intensive distribution, p. 464

exclusive distribution, p. 464

selective distribution, p. 465

channel leader, p. 467

6. Objective Summary Explain logistics and how it fits into the supply chain concept. Logistics is the process of designing, managing, and improving supply chains, including all the activities that are required to move products through the supply chain. Logistics contributes

(pp. 467–472)

(pp. 461–467) to the overall supply chain through activities including order processing, warehousing, materials handling, transportation, and inventory control.

Key Terms logistics, p. 467

physical distribution, p. 468

order processing, p. 468

enterprise resource planning (ERP) systems, p. 468

warehousing, p. 469

materials handling, p. 469

transportation, p. 470

inventory control, p. 471

radio frequency identification (RFID), p. 471

just in time (JIT), p. 472

perfect order measurement, p. 472

Chapter Questions and Activities Concepts: Test Your Knowledge

1. What is a value chain? 2. What is a supply chain, and how is it different from a chan-

nel of distribution? 3. What is a channel of distribution? What are channel

intermediaries? 4. Explain the functions of distribution channels. 5. List and explain the types of independent and manufacturer-

owned wholesaling intermediaries. 6. What factors are important in determining whether a man-

ufacturer should choose a direct or indirect channel? Why do some firms use hybrid marketing systems?

7. What are conventional, vertical, and horizontal marketing systems?

8. Explain intensive, exclusive, and selective forms of distribution. 9. Explain the steps in distribution planning.

10. What is logistics? Explain the functions of logistics. 11. What are the advantages and disadvantages of shipping by

rail? By air? By ship? By truck?

Activities: Apply What You’ve Learned

1. Assume that you have recently been hired by a firm that manufactures furniture. You feel that marketing should have an input into supplier selection for the firm’s prod- ucts, but the purchasing department says that should not be a concern for marketing. You need to explain to the department head the importance of the value chain per- spective. In a role-playing exercise, explain to the pur- chasing agent the value chain concept, why it is of concern to marketing, and why the two of you should work together.

2. Assume that you are the director of marketing for a firm that manufactures cleaning chemicals used in industries. You have traditionally sold these products through manu- facturer’s reps. You are considering adding a direct Internet channel to your distribution strategy, but you aren’t sure whether this will create channel conflict. Make a list of the pros and cons of this move. What do you think is the best decision?

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3. As the one-person marketing department for a candy man- ufacturer (your firm makes high-quality, hand-dipped chocolates using only natural ingredients), you are consid- ering making changes in your distribution strategy. Your products have previously been sold through a network of food brokers that call on specialty food and gift stores. But you think that perhaps it would be good for your firm to develop a corporate vertical marketing system (that is, ver- tical integration). In such a plan, a number of company- owned retail outlets would be opened across the country. The president of your company has asked that you present your ideas to the company executives. In a role-playing sit- uation with one of your classmates, present your ideas to your boss, including the advantages and disadvantages of the new plan compared to the current distribution method.

4. Assume that your firm recently gave you a new marketing assignment. You are to head up development of a distribu- tion plan for a new product line—a series of do-it-yourself instruction videos for home gardeners. These videos would show consumers how to plant trees, shrubbery, and bulbs; how to care for their plants; how to prune; and so on. You know that as you develop a distribution plan it is essential that you understand and consider a number of internal and external environmental factors. Make a list of the in- formation you will need before you can begin to write the distribution plan. How will you adapt your plan based on each of these factors?

5. Visit the Web site for UPS (www.ups.com). UPS has posi- tioned itself as a full-service provider of logistics solu- tions. After reviewing its Web site, answer the following questions: a. What logistics services does UPS offer its customers? b. What does UPS say to convince prospective cus-

tomers that its services are better than those of the competition?

Marketing Metrics Exercise

Companies track a wide range of metrics within the supply chain area. Some of the most common ones are the following:

• On-time delivery • Forecast accuracy • Value-added productivity per employee • Returns processing cost as a percentage of product revenue • Customer order actual cycle time • Perfect order measurement

Let’s take a look at the last measure in more detail. The per- fect order measurement calculates the error-free rate of each stage of a purchase order—basically you are looking for a per- fect order process (or at least as close to one as you can get)! It helps managers track the multiple steps involved in getting a product from a manufacturer to a customer in order to pinpoint processes that need improvement—a bit like TQM we learned about earlier. For example, a company can calculate its error rate at each stage and then combine these rates to create an overall metric of order quality. As an example, let’s suppose the company identifies the following error rates:

• Order entry accuracy: 99.95 percent correct (five errors per 1,000 order lines)

• Warehouse pick accuracy: 99.2 percent • Delivered on time: 96 percent • Shipped without damage: 99 percent • Invoiced correctly: 99.8 percent

The company can then combine these individual rates into an overall perfect order measurement by multiplying them to- gether: 99.95 � 99.2 � 96 � 99 � 99.8 � 94.04 percent.

Given this particular example, what are some things the manufacturer might work on to bring the overall perfect order measurement higher? What would be the advantages to the firm of investing in making this already good number even bet- ter for customers?

Choices: What Do You Think?

1. The supply chain concept looks at both the inputs of a firm and the firms that facilitate the movement of the product from the manufacturer to the consumer. Do you think marketers should be concerned with the total supply chain concept? Why or why not?

2. Sometimes people will say, “The reason products cost so much is because of all the intermediaries.” Do intermedi- aries increase the cost of products? Would consumers be better off or worse off without intermediaries?

3. Many entrepreneurs choose to start a franchise business rather than “go it alone.” Do you think franchises offer the typical businessperson good opportunities? What are some positive and negative aspects of purchasing a franchise?

4. As colleges and universities are looking for better ways to satisfy their customers, an area of increasing interest is the distribution of their product—education. Describe the characteristics of your school’s channel(s) of distribution. What types of innovative distribution might make sense for your school to try?

5. ”Music, video, or textbook downloading (even when done clandestinely) is just a way to create a more efficient sup- ply chain because it ‘cuts out the middleman’ (stores that sell music, video, and books, for example).” Do you agree? Why or why not?

Miniproject: Learn by Doing

In the United States, the distribution of most products is fairly easy. There are many independent intermediaries (wholesalers, dealers, distributors, and retailers) that are willing to cooperate to get the product to the final customer. Our elaborate interstate highway system combines with rail, air, and water transporta- tion to provide excellent means for moving goods from one part of the country to another. In many other countries, the means for distribution of products are far less efficient and effective.

For this miniproject, you should first select a consumer product, probably one you normally purchase. Then use either library sources or other people or both (retailers, manufactur- ers, dealers, classmates, and so on) to gather information to do the following:

1. Describe the path the product takes to get from the pro- ducer to you. Draw a model to show each of the steps the product takes. Include as much as you can about trans- portation, warehousing, materials handling, order process- ing, inventory control, and so on.

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Marketing in Action Case Real Choices at Walmart

Walmart began as “Walton’s Five and Dime” in Bentonville, Arkansas, operated by Sam Walton. Walton was able to be suc- cessful against the market by achieving higher sales volume through competitive pricing. In 1962, the first Wal-Mart Dis- count City store opened in Rogers, Arkansas. Through careful expansion and effective merchandising, Wal-Mart Stores, Inc. (branded as Walmart since 2008), has become the world’s largest public corporation by revenue according to Forbes mag- azine. While beginning as a discount general merchandise store, it has also become the largest grocery retailer in the United States. In addition, Walmart is the largest majority pri- vate employer in the United States.

In the past, Walmart has requested and was granted differ- ent concessions from members of its supply chain, such as en- vironmentally friendly packaging, cooperative advertising, and radio frequency identification tags on products. Due to its enor- mous size and purchasing power, Walmart is able to make bur- densome demands on its suppliers. This allows the company to achieve its main customer objective of providing the lowest possible price for its general merchandise and groceries. One of the challenges of this type of strategy is that it may be impos- sible to obtain because it has no endpoint. Therefore, Walmart is constantly pressuring suppliers to continually lower their price to the firm.

In its latest efforts to reduce its costs, Walmart wants to provide transportation services for its domestic suppliers. Wal- mart searches for those situations where it believes that it can provide delivery services for less money than the supplier charges. The company intends to use its scale to take advantage of shipping efficiencies that will ultimately lead to lower prices offered to customers. This process will lead to lower margins for the suppliers by eliminating an opportunity to provide services. Since Walmart generally represents a notable part of the suppli- ers’ sales, they may offer little resistance. For instance, Walmart accounts for over 30 percent of Vlasic’s pickle business. It is un- likely that Vlasic will not go along with the new policies.

When it comes to handling, moving, and tracking merchan- dise, Walmart has a reputation that includes continuous im- provement in its methods. Walmart has a fleet of 6,500 trucks and 55,000 trailers that would be supplemented with contrac- tors to pick up products from the manufacturer and deliver the items to its regional centers and individual stores. Walmart would receive lower wholesale prices from the manufacturer as compensation for its transportation services. However, some re- tailers are complaining that the discount requested by Walmart is more than the cost of transporting goods by the manufac- turer. This new arrangement represents another point of tension in its supplier relationships.

Walmart is not able to provide transportation services for all of its business partners’ products. Therefore, Walmart still has to effectively manage these relationships. Having a relationship with Walmart affords each supplier an opportunity for increased sales and market share growth. Does this potential success come at too high a cost to the supplier? For many companies, they will have to pass on the additional costs from Walmart to partners in other supply chains in which they participate. Nev- ertheless, for many suppliers, they believe that they may have no choice in the matter. It has been stated before that “For many suppliers, though, the only thing worse than doing busi- ness with Wal-Mart may be not doing business with Wal-Mart.”

You Make the Call 1. What is the decision facing Walmart? 2. What factors are important in understanding this decision

situation? 3. What are the alternatives? 4. What decision(s) do you recommend? 5. What are some ways to implement your recommendation?

Based on: Chris Burritt, Carol Wolf, and Matthew Boyle, “Why Wal-Mart Wants to Take the Driver’s Seat,” Bloomberg BusinessWeek, May 27, 2010, pp. 17–18; Walmart, Wikipedia, http://en.wikipedia.org/wiki/Wal-Mart (accessed June 28, 2010); Charles Fishman, “The Wal-Mart You Don’t Know,” Fast Company, December 1, 2003 (http://www.fastcompany.com/magazine/77/walmart.html.

2. Select another country in which the same or a similar prod- uct is sold. Describe the path the product takes to get from the producer to the customer in that country.

3. Determine if the differences between the two countries cause differences in price, availability, or quality of the product.

4. Prepare and present a summary of your findings.

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