marketing project

A Preface to Marketing Management

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A Preface to Marketing Management

Fourteenth Edition

J. Paul Peter University of Wisconsin–Madison

James H. Donnelly Jr. Gatton College of Business and

Economics University of Kentucky

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A PREFACE TO MARKETING MANAGEMENT, FOURTEENTH EDITION

Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2015 by McGraw-Hill

Education. All rights reserved. Printed in the United States of America. Previous editions © 20 13, 2011, and

2008. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a

database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not

limited to, in any network or other electronic storage or transmission, or broadcast for distance learning.

Some ancillaries, including electronic and print components, may not be available to customers outside the

United States.

This book is printed on acid-free paper.

1 2 3 4 5 6 7 8 9 0 DOW/DOW 1 0 9 8 7 6 5 4

ISBN 978-0-07-786106-3

MHID 0-07-786106-X

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All credits appearing on page or at the end of the book are considered to be an extension of the copyright page.

Library of Congress Cataloging-in-Publication Data

Peter, J. Paul.

A preface to marketing management / J. Paul Peter, University of Wisconsin-Madison, James H. Donnelly,

Jr., Gatton College of Business and Economics, University of Kentucky.–Fourteenth edition.

pages cm

ISBN 978-0-07-786106-3 (alk. paper)

1. Marketing–Management. I. Donnelly, James H. II. Title.

HF5415.13.P388 2013

658.8–dc23

2013046644

The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does

not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not

guarantee the accuracy of the information presented at these sites.

www.mhhe.com

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To Rose and Angie

J. Paul Peter

To Gayla

Jim Donnelly

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vi

About the Authors

J. Paul Peter has been a faculty member at the University of Wisconsin since 1981. He was a member

of the faculty at Indiana State, Ohio State, and Washington University before joining the

Wisconsin faculty. While at Ohio State, he was named Outstanding Marketing Professor

by the students and has won the John R. Larson Teaching Award at Wisconsin. He has

taught a variety of courses including Marketing Management, Marketing Strategy, Con-

sumer Behavior, Marketing Research, and Marketing Theory, among others.

Professor Peter’s research has appeared in the Journal of Marketing, the Journal of Marketing Research, the Journal of Consumer Research, the Journal of Retailing, and the Academy of Management Journal, among others. His article on construct validity won the prestigious William O’Dell Award from the Journal of Marketing Research, and he was a finalist for this award on two other occasions. Recently, he was the recipient of the Churchill

Award for Lifetime Achievement in Marketing Research, given by the American Marketing

Association and the Gaumnitz Distinguished Faculty Award from the School of Business,

University of Wisconsin–Madison. He is an author or editor of over 30 books, including A Preface to Marketing Management, Fourteenth edition; Marketing Management: Knowledge and Skills, ninth edition; Consumer Behavior and Marketing Strategy, ninth edition; Strategic Management: Concepts and Applications, third edition; and Marketing: Creating Value for Customers, second edition. He is one of the most cited authors in the marketing literature. Professor Peter has served on the review boards of the Journal of Marketing, Jour- nal of Marketing Research, Journal of Consumer Research, and Journal of Business Research and was measurement editor for JMR and professional publications editor for the American Marketing Association. He has taught in a variety of executive programs and

consulted for several corporations as well as the Federal Trade Commission.

James H. Donnelly Jr. has spent his academic career in the Gatton College of Business and Economics at the

University of Kentucky. In 1990 he received the first Chancellor’s Award for Outstanding

Teaching given at the university. Previously, he had twice received the UK Alumni Associa-

tion’s Great Teacher Award, an award one can only be eligible to receive every 10 years. He

has also received two Outstanding Teacher awards from Beta Gamma Sigma, national busi-

ness honorary. In 1992 he received an Acorn Award recognizing “those who shape the future”

from the Kentucky Advocates for Higher Education. In 2001 and 2002 he was selected as

“Best University of Kentucky Professor.” In 1995 he became one of six charter members

elected to the American Bankers Association’s Bank Marketing Hall of Fame. He has also

received a “Distinguished Doctoral Graduate Award” from the University of Maryland.

During his career he has published in the Journal of Marketing Research, Journal of Marketing, Journal of Retailing, Administrative Science Quarterly, Academy of Man- agement Journal, Journal of Applied Psychology, Personnel Psychology, Journal of Business Research, and Operations Research among others. He has served on the edito- rial review board of the Journal of Marketing. He is the author of more than  a dozen books, which include widely adopted academic texts as well as professional books.

Professor Donnelly is very active in the banking industry where he has served on the board

of directors of the Institute of Certified Bankers and the ABA’s Marketing Network. He has

also served as academic dean of the ABA’s School of Bank Marketing and Management.

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vii

Preface

We are proud to introduce the fourteenth edition of A Preface to Marketing Management. Our plan has always been to deliver a clear and concise presentation of the basic princi- ples of marketing in such a way that the core concepts and ideas are covered in sufficient

depth to ensure in-depth understanding. By offering an engaging, clear, and conceptu-

ally sound text, our book has been able to maintain its position as a leading marketing

management text.

Throughout the history of the book, feedback from both students and instructors has

suggested that our plan is a good one. Our book has been used in a wide variety of set-

tings and is the best-selling book of its kind. We introduce the fourteenth edition knowing

that our book and its eight foreign translations have been used around the world whenever

courses require an overview of the critical aspects of marketing management.

With this edition, we seek to more effectively implement our plan by building on a strong foundation, maintaining the attributes and elements of the book that make it a very

teachable text, updating existing content, adding new content, and focusing the presenta-

tion. We seek to emphasize quality content and examples and avoid excess verbiage, pic-

tures, and description.

As usual, each time we revise the book there is an emphasis on responding to feedback

from students and instructors. These two constituencies plus our own intuitions drive each

revision. Marketing is an exciting and dynamic field of study. We want to capture the

sense of excitement and at the same time respect its history.

Our book has become known simply as the Preface. We want to believe a major reason it has endured is that because marketing is figuring out how to do a superior job of satisfy-

ing customers, we simply try to practice what we preach. Welcome to the Preface.

THE PRESENT EDITION

Every element of content in our book is designed with one thought in mind: to assist stu-

dents in analyzing marketing problems and cases and developing and writing marketing

plans. Section I of the book consists of 13 concise chapters that cover the essentials of mar-

keting management. We think of it as the “must know” content of the field. It is divided

into four parts that focus on strategic planning and marketing planning, understanding tar-

get markets, the marketing mix, and marketing in special fields. These 13 chapters should

provide students a clear understanding of the terminology, techniques, tools, and strategies

for effective marketing management and marketing strategy development.

In addition to revising and updating the text chapters, this edition contains new content as

well. There are discussions of internal and external secondary data sources, the use of social

media monitoring, alternative search in consumer behavior, key characteristics of organiza-

tional buyers, e-procurement, global virtual teams, brand equity, using distinctive compe-

tencies in new product development, consumer databases, business-to-business databases,

mobile marketing, online retailing and multichannel marketing, franchising, the effects of

the Internet on pricing, global account managers, and learning about different cultures.

In the twelfth edition, we altered two of the text elements. The changes have been well

received by instructors and students. First, “Marketing Insights” are included to assist students

as they solve marketing problems, analyze marketing cases, and develop marketing plans.

Second, we know that our book is often used with case problems, writing assignments,

and constructing marketing plans. Accordingly, there is an “Additional Resources” section

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viii Preface

at the end of each chapter. Our purpose is to highlight current resources that students can

use in writing assignments and oral presentations. The resources have been selected with

students in mind. They include resources accessible to students at various stages of mar-

keting education given the wide spectrum of courses in which the book is utilized.

NEW FEATURES AND CONTENT CHANGES

Chapter 1: Strategic Planning and The Marketing Management Process

• Revised basic questions that must be asked when developing a mission statement.

• Marketing Insight 1-3 now contains five actual mission statements for firms of varying

sizes and industries. It provides students with a better mix of alternatives when com-

pleting the exercise in Marketing Insight 1-4.

• Updated additional resources.

Chapter 2: Marketing Research: Process and Systems for Decision Making

• Revised section on secondary data to include both internal and external sources

• Added new figure “Common Types of Information Available in a Secondary Data

Search”

• Added a new Marketing Insight, “Social Media Monitoring for Marketing Insights”

• Updated additional resources

Chapter 3: Consumer Behavior • Updated discussion of consumer and marketer reactions to recession

• Revised and updated discussion of Alternative Search

• Updated additional resources

Chapter 4: Business, Government, and Institutional Buying • Revised Marketing Insight on “Key Characteristics of Organizational Buying Behavior”

• New Marketing Insight, “Organizational Buying on the Internet: E-Procurement”

• Revised Discussion of “Organizational Needs”

• Updated additional resources

Chapter 5: Market Segmentation • New Marketing Insight, “Segmenting the Mobile Phone Market”

• Revised and updated discussion of VALS

Chapter 6: Product and Brand Strategy • Marketing Insight 6-3 now contains the latest information on the value of the top twenty

brands in the world

• Contains a new section on branding and brand equity

• Revised and updated Marketing Insight 6-6

• Added a new section on global virtual teams

• New key terms and concepts

• Updated additional resources

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Preface ix

Chapter 7: New Product Planning and Development • New Marketing Insight 7-4 which focuses on utilizing corporate strengths in the new

product development process. It includes eight firms with strengths in either technol-

ogy or markets

• Updated additional resources

Chapter 8: Integrated Marketing Communications • Revised Marketing Insight 8-1 which presents up-to-date information on the top ten

websites in Brazil, Portugal and South Korea

• Revised section on direct marketing as part of the promotion mix

• Revised Marketing Insight 8-6

• New section on direct marketing

• New Marketing Insight 8-7 on the contents of a comprehensive database included are

both consumer and business-to-business databases

• Added new Key Terms and Concepts

• Updated additional resources

Chapter 9: Personal Selling, Relationship Building, and Sales Management

• New Marketing Insight 9-1 which focuses on what a salesperson actually does

• A new discussion of an increasingly important customer organization structure, the

global account manager

• Added new Key Terms and Concepts

• Updated additional resources

Chapter 10: Distribution Strategy • Added New Marketing Insight, “Advantages and Disadvantages of Franchising”

• New section on “Online and Mobile Retailing”

• Updated additional resources

• New “Key Terms and Concepts”: online retailing, mobile retailing, multichannel marketing

Chapter 11: Pricing Strategy • Added a new discussion of the Internet as an external influence on pricing decisions

• A new Marketing Insight, “Ten Tips for Managing Pricing Strategy”

Chapter 12: The Marketing of Services • The chapter has been significantly revised and has been shortened for this edition

• A new section on the importance of all the elements of the marketing mix in the market-

ing of services has been added

• Updated additional resources

Chapter 13: Global Marketing • Marketing Insight 13-1 has been updated with the latest data on selected U.S. companies

and their international sales

• The section on cultural misunderstanding as a problem in foreign markets has been

replaced with an entirely new section

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x Preface

• Marketing Insight 13-3 has been replaced with a new Marketing Insight which focuses

on ways to learn about new cultures

• Updated additional resources

Section II: Analyzing Marketing Problems and Cases • New Marketing Insight, “Objectives of Case Analysis”

• Revised and updated discussion of SWOT analysis

• Updated additional resources

Section III: Financial Analysis for Marketing Decisions • Updated dates and additional resources

Section IV: Developing Marketing Plans • Updated dates and additional resources

STUDENT SUPPORT

Knowing that our book is used for a variety of course levels, programs, and students, we

have assembled several elements that we believe will support students for whatever pur-

pose they use our book.

Key Terms and Concepts New to the previous edition, we decided to add a section of key terms and concepts at the

conclusion of each chapter. There was much debate as to where they should be placed in

the book. We decided to place them at the end of the chapter in which they appear. In this

way, they are more visible to students than as an appendix at the end of the book. More

than a glossary, it also presents key concepts covered in the chapter.

Analyzing Marketing P roblems and Cases Section II presents a very practical and comprehensive framework for analyzing, prepar-

ing, and presenting case analyses. It includes discussions of what a case is, preparing for

the class discussion and written analysis, pitfalls to avoid in case analysis, and preparing

to do an oral presentation. It has been praised by both instructors and students.

For courses utilizing marketing problems and cases, we encourage students to read this

guide before discussing a problem or case. Thus, it could have been placed at the begin-

ning of the book, but because it is often referred to throughout the semester, we have

placed it after the text chapters. And for those courses that do not utilize cases, the book

may be used without reference to this section.

Financial Analysis for Marketing Decisions It is absolutely critical for marketing students to understand and appreciate the fact that

the ultimate objectives of marketing are usually expressed in financial terms. Section III

enables students to assess a company’s financial position. It presents important financial

calculations that are useful in evaluating the financial position of a firm and the financial

impact of various decisions and strategies. Included are discussions of breakeven analysis,

net present value, and ratio analysis.

Developing Marketing Plans Given the purpose of this book and the needs of users, Section IV enables students to

develop practical planning skills so they are able to construct a quality marketing plan for

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Preface xi

any product or service. It provides a complete format for structuring and presenting one,

including specific questions to ask in competitive analysis, the development of well-stated

objectives, analyzing customers, and implementation and control. As with Section II, we

know that this section has become a valuable take-away resource for many students long

after their course has been completed.

A Value-Added Website We encourage students to view the student section of the Online Learning Center (OLC)

at website www.mhhe.com/peterdonnelly14e, which contains a number of useful aids for

facilitating learning and supporting student achievement. We believe you will find it a

useful resource.

INSTRUCTOR SUPPORT

The Preface has been used as a resource in college courses and professional development programs that require an overview of the critical “need-to-know” aspects of marketing

management and marketing strategy development. It has been used:

• As the primary introductory text at the undergraduate level.

• At both the undergraduate and MBA level, where several AACSB core curriculum

courses are team-taught as one multidisciplinary 9- to 12-hour course.

• At the advanced undergraduate and MBA level where it is used as the content founda-

tion in courses that utilize marketing cases.

• In short courses and executive development programs.

The instructor section of www.mhhe.com/peterdonnelly14e includes an instructor’s

manual and other support material. It includes two expanded supplements. They were

developed in response to instructors’ requests. We offer a test bank of nearly 1,300

multiple-choice, true-false, and brief essay questions. It is available in both print and

EZ Test Online. We also offer Power Point slides that highlight key text material. Your

McGraw-Hill representative can also assist in the delivery of any additional instructor

support material.

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xii

Acknowledgments

Our book is based on the works of many academic researchers and marketing practitioners.

We want to thank those individuals who contributed their ideas to develop the field of mar-

keting throughout the years. Indeed, our book would not be possible without their contri-

butions. We would also like to thank our teachers, colleagues, and students for their many

contributions to our education. We would also like to publicly acknowledge those individu-

als who served as reviewers of this and previous editions. We appreciate their advice and

counsel and have done our best to reflect their insightful comments.

Roger D. Absmire Sam Houston State University

Anna Andriasova University of Maryland University College

Catherine Axinn Syracuse University

Mike Ballif University of Utah

Andrew Bergstein Pennsylvania State University

Edward Bond Bradley University

Donald Brady Millersville University

Tim Carlson Judson University

Glenn Chappell Meridith College

Newell Chiesl Indiana State University

Reid P. Claxton East Carolina University

Larry Crowson University of Central Florida

Mike Dailey University of Texas, Arlington

Linda M. Delene Western Michigan University

Gerard DiBartolo Salisbury University

Casey Donoho Northern Arizona University

James A. Eckert Western Michigan University

Matthew Elbeck Troy University Dothan

Karen A. Evans Herkimer County Community College

R. E. Evans University of Oklahoma

Lawrence Feick University of Pittsburgh

Robert Finney California State University, Hayward

Stephen Goldberg Fordham University

David Good Grand Valley State University

David Griffith University of Oklahoma

Perry Haan Tiffin University

Lawrence Hamer DePaul University

Harry Harmon Central Missouri

Jack Healey Golden State University

Betty Jean Hebel Madonna University

Catherine Holderness University of North Carolina–Greensboro

JoAnne S. Hooper Western Carolina University

David Horne Wayne State University

Nasim Z. Hosein Northwood University

Nicole Howatt UCF

Fred Hughes Faulkner University

Anupam Jaju GMU

Chris Joiner George Mason University

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Benoy Joseph Cleveland State University Sol Klein Northeastern University Robert Brock Lawes Chaminade University of Honolulu Eunkyu Lee Syracuse University Tina Lowrey University of Texas at San Antonio Franklyn Manu Morgan State University Edward J. Mayo Western Michigan University Edward M. Mazze University of Rhode Island Donald J. Messmer College of William & Mary Albert Milhomme Texas State University Chip Miller Drake University David L. Moore LeMoyne College Johannah Jones Nolan University of Alabama, Birmingham R. Stephen Parker Southwest Missouri State University Joan Phillips University of Notre Dame Thomas Powers University of Alabama at Birmingham Debu Purohit Duke University John Rayburn University of Tennessee

Martha Reeves Duke

Gary K. Rhoads Brigham Young University

Lee Richardson University of Baltimore Henry Rodkin DePaul University Ritesh Saini George Mason University Matthew H. Sauber Eastern Michigan University Alan Sawyer University of Florida Ronald L. Schill Brigham Young University Mark Spriggs University of St. Thomas Vernon R. Stauble California State Polytechnic University David X. Swenson College of St. Scholastica Ann Marie Thompson Northern Illinois University John R. Thompson Memphis State University Gordon Urquhart Cornell College Sean Valentine University of Wyoming Ana Valenzuela Baruch College, CUNY Stacy Vollmers University of St. Thomas Jacquelyn Warwick Andrews University

Kevin Webb Drexel University

Kathleen R. Whitney Central Michigan University

J. B. Wilkinson University of Akron

Dale Wilson Michigan State University

It is always easy to work with professionals. That is why working with the profession-

als at McGraw-Hill is always enjoyable for us. Sankha Basu, publisher, and Jane Mohr,

project manager, support what we do and we are very grateful. Thank you Heather Darr,

development editor, and welcome to our team. We also wish to acknowledge Francois

Ortalo-Magne, dean of the School of Business at the University of Wisconsin, and David

Blackwell, dean of the Gatton College of Business and Economics at the University of

Kentucky, who support what we do.

J. Paul Peter

James H. Donnelly, Jr.

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xiv

Contents

SECTION I ESSENTIALS OF MARKETING MANAGEMENT 1

PART A INTRODUCTION 3

Chapter 1 Strategic Planning and the Marketing Man- agement Process 4

The Marketing Concept 4

What Is Marketing? 5

What Is Strategic Planning? 6

Strategic Planning and Marketing Management 6 The Strategic Planning Process 7 The Complete Strategic Plan 16

The Marketing Management Process 16

Situation Analysis 16 Marketing Planning 19 Implementation and Control of the Marketing Plan 20 Marketing Information Systems and Marketing Research 21

The Strategic Plan, the Marketing Plan, and

Other Functional Area Plans 21

Marketing’s Role in Cross-Functional Strategic Planning 21

Summary 22

Appendix Portfolio Models 27

PART B MARKETING INFORMATION, RESEARCH, AND UNDERSTANDING THE TARGET MARKET 31

Chapter 2 Marketing Research: Process and Systems for Decision Making 32

The Role of Marketing Research 32

The Marketing Research Process 33

Purpose of the Research 33 Plan of the Research 34 Performance of the Research 37 Processing of Research Data 39

Preparation of the Research Report 40 Limitations of the Research Process 40

Marketing Information Systems 42

Summary 43

Chapter 3 Consumer Behavior 45

Social Influences on Consumer Decision

Making 46

Culture and Subculture 46 Social Class 47 Reference Groups and Families 48

Marketing Influences on Consumer Decision

Making 48

Product Influences 48 Price Influences 48 Promotion Influences 49 Place Influences 49

Situational Influences on Consumer Decision

Making 51

Psychological Influences on Consumer Decision

Making 51

Product Knowledge 51 Product Involvement 52

Consumer Decision Making 52

Need Recognition 53 Alternative Search 54 Alternative Evaluation 55 Purchase Decision 55 Postpurchase Evaluation 56

Summary 58

Chapter 4 Business, Government, and Institutional Buying 60

Categories of Organizational Buyers 60

Producers 60 Intermediaries 61 Government Agencies 61 Other Institutions 61

The Organizational Buying Process 61

Purchase-Type Influences on Organizational

Buying 62

Straight Rebuy 62 Modified Rebuy 62 New Task Purchase 62

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Contents xv

Structural Influences on Organizational Buying 63

Purchasing Roles 63 Organization-Specific Factors 64 Purchasing Policies and Procedures 65

Behavioral Influences on Organizational Buying 65

Personal Motivations 65 Role Perceptions 66

Stages in the Organizational Buying

Process 68

Organizational Need 68 Vendor Analysis 68 Purchase Activities 69 Postpurchase Evaluation 70

Summary 70

Chapter 5 Market Segmentation 72

Delineate the Firm’s Current

Situation 72

Determine Consumer Needs

and Wants 73

Divide Markets on Relevant Dimensions 73

A Priori versus Post Hoc Segmentation 74 Relevance of Segmentation Dimensions 75 Bases for Segmentation 75

Develop Product Positioning 81

Decide Segmentation Strategy 82

Design Marketing Mix Strategy 84

Summary 84

PART C THE MARKETING MIX 85

Chapter 6 Product and Brand Strategy 86

Basic Issues in Product Management 86

Product Definition 86 Product Classification 87 Product Quality and Value 88 Product Mix and Product Line 89 Branding and Brand Equity 90 Packaging 96

Product Life Cycle 97

Product Adoption and Diffusion 99 The Product Audit 100

Deletions 100 Product Improvement 101

Organizing for Product Management 101

Summary 103

Chapter 7 New Product Planning and Development 105

New Product Strategy 106

New Product Planning and Development

Process 108

Idea Generation 108 Idea Screening 110 Project Planning 111 Product Development 112 Test Marketing 112 Commercialization 113 The Importance of Time 113

Some Important New Product Decisions 114

Quality Level 114 Product Features 115 Product Design 116 Product Safety 116

Causes of New Product Failure 116

Need for Research 117 Summary 118

Chapter 8 Integrated Marketing Communications 120

Strategic Goals of Marketing

Communication 120

Create Awareness 120 Build Positive Images 120 Identify Prospects 120 Build Channel Relationships 121 Retain Customers 121

The Promotion Mix 121

Integrated Marketing Communications 122

Advertising: Planning and Strategy 124

Objectives of Advertising 124 Advertising Decisions 126

The Expenditure Question 126 The Allocation Question 127

Sales Promotion 132

Push versus Pull Marketing 132 Trade Sales Promotions 133 Consumer Promotions 133 What Sales Promotion Can and Can’t Do 134

Public Relations 135

Direct Marketing 136

Summary 137

Appendix Major Federal Agencies Involved in Control of Advertising 139

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xvi Contents

Chapter 9 Personal Selling, Relationship Building, and Sales Management 140

Importance of Personal Selling 140

The Sales Process 141

Objectives of the Sales Force 141 The Sales Relationship-Building Process 142 People Who Support the Sales Force 146

Managing the Sales and Relationship-Building

Process 147

The Sales Management Task 148 Controlling the Sales Force 149 Motivating and Compensating Performance 152

Summary 154

Chapter 10 Distribution Strategy 156

The Need for Marketing Intermediaries 156

Classification of Marketing Intermediaries and

Functions 156

Channels of Distribution 158

Selecting Channels of Distribution 159

Specific Considerations 159 Managing a Channel of Distribution 162

Relationship Marketing in Channels 162 Vertical Marketing Systems 162

Wholesaling 164

Store and Nonstore Retailing 165

Store Retailing 166 Nonstore Retailing 167

Summary 170

Chapter 11 Pricing Strategy 172

Demand Influences on Pricing Decisions 172

Demographic Factors 172 Psychological Factors 172 Price Elasticity 174

Supply Influences on Pricing Decisions 174

Pricing Objectives 174 Cost Considerations in Pricing 174 Product Considerations in Pricing 176

Environmental Influences on Pricing

Decisions 177

The Internet 177 Competition 177 Government Regulations 178

A General Pricing Model 178

Set Pricing Objectives 179 Evaluate Product–Price Relationships 179 Estimate Costs and Other Price Limitations 180 Analyze Profit Potential 181 Set Initial Price Structure 181 Change Price as Needed 181

Summary 181

PART D MARKETING IN SPECIAL FIELDS 183

Chapter 12 The Marketing of Services 184

Important Characteristics of Services 186

Intangibility 186 Inseparability 187 Perishability and Fluctuating Demand 188 Client Relationship 188 Customer Effort 189 Uniformity 190

Providing Quality Services 190

Customer Satisfaction Measurement 192 The Importance of Internal Marketing 192

Overcoming the Obstacles in Service Marketing 194

Limited View of Marketing 194 Limited Competition 194 Noncreative Management 195 No Obsolescence 195

Implications for Service Marketers 196

Summary 197

Chapter 13 Global Marketing 199

The Competitive Advantage of Nations 200

Organizing for Global Marketing 201

Problems with Entering Foreign Markets 201 Organizing the Multinational Company 204

Programming for Global Marketing 206

Global Marketing Research 206 Global Product Strategy 209 Global Distribution Strategy 209 Global Pricing Strategy 210 Global Advertising and Sales Promotion Strategy 210

Entry and Growth Strategies for Global Marketing 211

Summary 214

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Contents xvii

SECTION II ANALYZING MARKETING PROBLEMS AND CASES 215

A Case Analysis Framework 216

1. Analyze and Record the Current Situation 217 2. Analyze and Record Problems and Their Core Elements 221 3. Formulate, Evaluate, and Record Alternative Courses of Action 222 4. Select and Record the Chosen Alternative and Imple- mentation Details 223

Pitfalls to Avoid in Case Analysis 223

Communicating Case Analyses 226

The Written Report 226 The Oral Presentation 228

Summary 228

SECTION III FINANCIAL ANALYSIS FOR MARKET- ING DECISIONS 229

Financial Analysis 230

Breakeven Analysis 230 Net Present Value Analysis 232 Ratio Analysis 234

Summary 238

SECTION IV DEVELOPING MARKETING PLANS 239

A Marketing Plan Framework 240

Title Page 241 Executive Summary 241 Table of Contents 242 Introduction 242 Situational Analysis 242 Marketing Planning 242 Implementation and Control of the Marketing Plan 244 Summary 246 Appendix—Financial Analysis 246 References 249

Summary 249

Chapter Notes 251

Index 256

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Essentials

of Marketing

Management

Section

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M a rk

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S e c ti

o n

I

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o f

M a rk

e ti n g

M a n a g e m

e n t

Introduction A Part

1 Strategic Planning and the Marketing Management Process

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4

P a rt A

In tro

d u ctio

n

Chapter 1 Strategic Planning and the Marketing Management Process

The purpose of this introductory chapter is to present the marketing management process

and outline what marketing managers must manage if they are to be effective. In doing so, it will also present a framework around which the remaining chapters are organized. Our

first task is to review the organizational philosophy known as the marketing concept, since

it underlies much of the thinking presented in this book. The remainder of this chapter will

focus on the process of strategic planning and its relationship to the process of marketing

planning.

THE MARKETING CONCEPT

Simply stated, the marketing concept means that an organization should seek to make a profit by serving the needs of customer groups. The concept is very straightforward and has a great deal of commonsense validity. Perhaps this is why it is often misunderstood,

forgotten, or overlooked.

The purpose of the marketing concept is to rivet the attention of marketing managers on

serving broad classes of customer needs (customer orientation), rather than on the firm’s

current products (production orientation) or on devising methods to attract customers to

current products (selling orientation). Thus, effective marketing starts with the recogni-

tion of customer needs and then works backward to devise products and services to satisfy

these needs. In this way, marketing managers can satisfy customers more efficiently in

the present and anticipate changes in customer needs more accurately in the future. This

means that organizations should focus on building long-term customer relationships in

which the initial sale is viewed as a beginning step in the process, not as an end goal. As a

result, the customer will be more satisfied and the firm will be more profitable.

The principal task of the marketing function operating under the marketing concept is

not to manipulate customers to do .what suits the interests of the firm, but rather to find

effective and efficient means of making the business do what suits the interests of custom-

ers. This is not to say that all firms practice marketing in this way. Clearly, many firms still

emphasize only production and sales. However, effective marketing, as defined in this text,

requires that consumer needs come first in organizational decision making.

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One qualification to this statement deals with the question of a conflict between con-

sumer wants and societal needs and wants. For example, if society deems clean air and

water as necessary for survival, this need may well take precedence over a consumer’s

want for goods and services that pollute the environment.

WHAT IS MARKETING?

Everyone reading this book has been a customer for most of his or her life. Last evening you

stopped at a local supermarket to graze at the salad bar, pick up some bottled water and a bag

of Fritos corn chips. While you were there, you snapped a $1.00 coupon for a new flavor salad

dressing out of a dispenser and tasted some new breakfast potatoes being cooked in the back

of the store. As you sat down at home to eat your salad, you answered the phone and someone

suggested that you need to have your carpets cleaned. Later on in the evening you saw TV

commercials for tires, soft drinks, athletic shoes, and the dangers of smoking and drinking

during pregnancy. Today when you enrolled in a marketing course, you found that the instruc-

tor has decided that you must purchase this book. A friend has already purchased the book on

the Internet. All of these activities involve marketing. And each of us knows something about

marketing because it has been a part of our life since we had our first dollar to spend.

Since we are all involved in marketing, it may seem strange that one of the persistent

problems in the field has been its definition. The American Marketing Association defines

marketing as “the activity, set of institutions, and processes for creating, communicating,

delivering, and exchanging offerings that have value for customers, clients, partners, and

society at large.”1 This definition takes into account all parties involved in the marketing

effort: members of the producing organization, resellers of goods and services, and custom-

ers or clients. While the broadness of the definition allows the inclusion of nonbusiness

1. Create customer focus throughout the business. 2. Listen to the customer. 3. Define and nurture your distinctive competence, that is, what your organization does

well, better than competitors. 4. Define marketing as market intelligence. 5. Target customers precisely. 6. Manage for profitability, not sales volume. 7. Make customer value the guiding star. 8. Let customers define quality. 9. Measure and manage customer expectations. 10. Build customer relationships and loyalty. 11. Define the business as a service business. 12. Commit to continuous improvement and innovation. 13. Manage the culture of your organization along with strategy and structure. 14. Grow with strategic partners and alliances. 15. Destroy marketing bureaucracy.

Source: For a very early discussion of the marketing concept, see Robert L. King, “The Marketing Concept: Fact or Intelligent Platitude,” The Marketing Concept in Action, Proceedings of the 47th National Conference (Chicago: American Marketing Association, 1964), p. 657. Also see Frederick E. Webster Jr., “Defining the New Marketing Concept,” Marketing Management 2, no. 4 (1994) pp. 22–31; William O. Bearden, Thomas N. Ingram, and Raymond W. LaForge, Marketing: Principles and Perspectives, 5th ed. (Burr Ridge, IL: McGraw-Hill/Irwin, 2007), p. 9; and William D. Perreault Jr., Joseph P. Cannon, and E. Jerome McCarthey, Basic Marketing: A Managerial Approach, 19th ed. (Burr Ridge, IL: McGraw-Hill Education, 2014), pp. 19–26.

MARKETING INSIGHT Some Guidelines for Implementing the Marketing Concept 1–1

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6 Part A Introduction

exchange processes, the primary emphasis in this text is on marketing in the business environ-

ment. However, this emphasis is not meant to imply that marketing concepts, principles, and

techniques cannot be fruitfully employed in other areas of exchange as is clearly illustrated in

Figure 1.1.

WHAT IS STRATEGIC PLANNING?

Before a production manager, marketing manager, and personnel manager can develop plans

for their individual departments, some larger plan or blueprint for the entire or ganization should exist. Otherwise, on what would the individual departmental plans be based?

In other words, there is a larger context for planning activities. Let us assume that we are

dealing with a large business organization that has several business divisions and several

product lines within each division (e.g., General Electric, Altria). Before individual divi-

sions or departments can implement any marketing planning, a plan has to be developed for

the entire organization.2 This means that senior managers must look toward the future and

evaluate their ability to shape their organization’s destiny in the years and decades to come.

The output of this process is objectives and strategies designed to give the organization a

chance to compete effectively in the future. The objectives and strategies established at the

top level provide the context for planning in each of the divisions and departments by divi-

sional and departmental managers.

Strategic Planning and Marketing Management Some of the most successful business organizations are here today because many years

ago they offered the right product at the right time to a rapidly growing market. The

same can also be said for nonprofit and governmental organizations. Many of the criti-

cal decisions of the past were made without the benefit of strategic thinking or planning.

Whether these decisions were based on wisdom or were just luck is not important; they

worked for these organizations. However, a worse fate befell countless other organiza-

tions. More than three-quarters of the 100 largest U.S. corporations of 70 years ago have

fallen from the list. These corporations at one time dominated their markets, controlled

vast resources, and had the best-trained workers. In the end, they all made the same criti-

cal mistake. Their managements failed to recognize that business strategies need to reflect

FIGURE 1.1 Major Types of

Marketing

Type Description Example

Product Marketing designed to create exchange Strategies to sell for tangible products. Gateway computers. Service Marketing designed to create exchanges Strategies by Allstate for intangible products. to sell insurance. Person Marketing designed to create favorable Strategies to elect actions toward persons. a political candidate. Place Marketing designed to attract people to Strategies to get places. people to vacation in national or state parks. Cause Marketing designed to create support Strategies to get for ideas, causes, or issues or to get pregnant women not people to change undesirable to drink alcohol. behaviors. Organization Marketing designed to attract donors, Strategies designed to members, participants, or attract blood donors. volunteers.

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1. It costs a great deal more to acquire a new customer than to keep an old one. 2. Loyal customers buy more from your firm over time. 3. The longer you keep a customer, the more profitable they become over time. 4. It costs less to service loyal customers than new customers. 5. Loyal customers are often excellent referrals for new business. 6. Loyal customers are often willing to pay more for the quality and value they desire.

Source: One of the earliest works on the value of the loyal customer was Frederick F. Reichheld, The Loyalty Effect, BOSTON: HBS Press, 1996. Also see Roland T. Rust, Katherine N. Lemon, and Valerie A. Zeithaml, “Return on Marketing: Using Customer Equity to Focus Marketing Strategies,“ Journal of Marketing, January 2004, pp. 76–89; William O. Bearden, Thomas N. Ingram, and Raymond W. LaForge, Marketing: Principles and Perspectives, 5th ed. (Burr Ridge, IL: McGraw-Hill/Irwin, 2007), p. 8; and W. D. Perreault Jr., J. P. Cannon, and E. Jerome McCarthy, Basic Marketing: A Marketing Strategy Planning Approach, 19th ed. (Burr Ridge, IL: McGraw-Hill/Irwin, 2013), pp. 42–43.

MARKETING INSIGHT The Long-Term Value of Loyal Customers

changing environments and emphasis must be placed on developing business systems that

allow for continuous improvement. Instead, they attempted to carry on business as usual.

Present-day managers are increasingly recognizing that wisdom and innovation alone

are no longer sufficient to guide the destinies of organizations, both large and small. These

same managers also realize that the true mission of the organization is to provide value

for three key constituencies: customers, employees, and investors. Without this type of

outlook, no one, including shareholders, will profit in the long run.

Strategic planning includes all the activities that lead to the development of a clear

organizational mission, organizational objectives, and appropriate strategies to achieve

the objectives for the entire organization. The form of the process itself has come under

criticism in some quarters for being too structured; however, strategic planning, if per-

formed successfully, plays a key role in achieving an equilibrium between the short and

the long term by balancing acceptable financial performance with preparation for inevita-

ble changes in markets, technology, and competition, as well as in economic and politi-

cal arenas. Managing principally for current cash flows, market share gains, and earnings

trends can mortgage the firm’s future. An intense focus on the near term can produce an

aversion to risk that dooms a business to stagnation. Conversely, an overemphasis on the

long run is  just as inappropriate. Companies that overextend themselves betting on the

future may penalize short-term profitability and other operating results to such an extent

that the company is vulnerable to takeover and other threatening actions.

The strategic planning process is depicted in Figure 1.2. In the strategic planning process,

the organization gathers information about the changing elements of its environment.

Managers from all functional areas in the organization assist in this information-gathering

process. This information is useful in aiding the organization to adapt better to these changes

through the process of strategic planning. The strategic plan(s)3 and supporting plan are

then implemented in the environment. The end results of this implementation are fed back

as new information so that continuous adaptation and improvement can take place.

The Strategic Planning Process The output of the strategic planning process is the development of a strategic plan. Figure 1.2

indicates four components of a strategic plan: mission, objectives, strategies, and portfolio

plan. Let us carefully examine each one.

Organizational Mission The organization’s environment provides the resources that sustain the organization,

whether it is a business, a college or university, or a government agency. In exchange

1–2

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8 Part A Introduction

for these resources, the organization must supply the environment with quality goods

and services at an acceptable price. In other words, every organization exists to accom-

plish something in the larger environment and that purpose, vision, or mission usually is

clear at the organization’s inception. As time passes, however, the organization expands,

and the  environment and managerial personnel change. As a result, one or more things

are likely to occur. First, the organization’s original purpose may become irrelevant as

the organization expands into new products, new markets, and even new industries. For

example, Levi Strauss began as a manufacturer of work clothes. Second, the original

mission may remain relevant, but managers begin to lose interest in it. Finally, changes

in the environment may make the original mission inappropriate, as occurred with the

March of Dimes when a cure was found for polio. The result of any or all three of these

conditions is a “drifting” organization, without a clear mission, vision, or purpose to guide

critical decisions. When this occurs, management must search for a purpose or emphati-

cally restate and reinforce the original purpose.

The mission statement, or purpose, of an organization is the description of its reason

for existence. It is the long-run vision of what the organization strives to be, the unique

aim that differentiates the organization from similar ones and the means by which this

differentiation will take place. In essence, the mission statement defines the direction in

which the organization is heading and how it will succeed in reaching its desired goal.

While some argue that vision and mission statements differ in their purpose, the per-

spective we will take is that both reflect the organization’s attempt to guide behavior,

create a  culture, and inspire commitment. However, it is more important that the mis-

sion statement comes from the heart and is practical, easy to identify with, and easy to

remember so that it will provide direction and significance to all members of the organi-

zation regardless of their organizational level.

The basic questions that must be answered when an organization decides to examine and

restate its mission are, What is our business? Who are our customers? What do customers

value? and What is our business? The answers are, in a sense, the assumptions on which the

FIGURE 1.2 The Strategic Planning Process

Organizational mission

Organizational objectives

Organizational strategies

Organizational portfolio plan

The organization's strategic plan

Implementation

Information

The environment

Cooperative Competitive Economic Social Political Legal

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Organization Mission

Large pharmaceutical firm We will become the world’s most valued company to patients, cus- tomers, colleagues, investors, business partners, and the communities where we work and live.

Community bank To help citizens successfully achieve and celebrate important life events with education, information, products, and services.

Skin care products We will provide luxury skin-care products with therapeutic qualities that make them worth their premium price.

Hotel chain Grow a worldwide lodging business using total-quality-management (TQM) principles to continuously improve preference and profitability. Our commitment is that every guest leaves satisfied.

Mid-size bank We will become the best bank in the state for medium-size businesses by 2017.

MARKETING INSIGHT Some Actual Mission Statements

organization is being run and from which future decisions will evolve. While such ques-

tions may seem simplistic, they are such difficult and critical ones that the major respon-

sibility for answering them must lie with top management. In fact, the mission statement

remains the most widely used management tool in business today. In developing a state-

ment of mission, management must take into account three key elements: the organiza-

tion’s history, its distinctive competencies, and its environment.4

1. The organization’s history. Every organization—large or small, profit or nonprofit— has a history of objectives, accomplishments, mistakes, and policies. In formulating a

mission, the critical characteristics and events of the past must be considered.

2. The organization’s distinctive competencies. While there are many things an organization may be able to do, it should seek to do what it can do best. Distinctive

competencies are things that an organization does well—so well in fact that they give it an

advantage over similar organizations. For Honeywell, it’s their ability to design, manufac-

ture, and distribute a superior line of thermostats. Similarly, Procter & Gamble’s distinctive

competency is its knowledge of the market for low-priced, repetitively purchased consumer

products. No matter how appealing an opportunity may be, to gain advantage over competi-

tors, the organization must formulate strategy based on distinctive competencies.

3. The organization’s environment. The organization’s environment dictates the oppo r- tunities, constraints, and threats that must be identified before a mission statement is

developed. For example, managers in any industry that is affected by Internet technology

breakthroughs should continually be asking, How will the changes in technology affect my

customers’ behavior and the means by which we need to conduct our business?

However, it is extremely difficult to write a useful and effective mission statement. It is

not uncommon for an organization to spend one or two years developing a useful mission

statement. When completed, an effective mission statement will be focused on markets rather than products, achievable, motivating, and specific.5

Focused on Markets Rather Than Products The customers or clients of an organiza- tion are critical in determining its mission. Traditionally, many organizations defined their

business in terms of what they made (“our business is glass”), and in many cases they

named the organiza tion for the product or service (e.g., American Tobacco, Hormel Meats,

National Cash Register, Harbor View Savings and Loan Association). Many of these

organizations have found that, when products and technologies become obsolete, their

mission is no longer relevant and the name of the organization may no longer describe

what it does. Thus, a more enduring way of defining the mission is needed. In recent years,

1–3

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therefore, a key feature of mission statements has been an external rather than internal focus. In other words, the mission statement should focus on the broad class of needs

that the organization is seeking to satisfy (external focus), not on the physical product or

service that the organization is offering at present (internal focus). These market-driven

firms stand out in their ability to continuously anticipate market opportunities and respond

before their competitors. Peter Drucker has clearly stated this principle:

A business is not defined by the company’s name, statutes, or articles of incorporation. It is

defined by the want the customer satisfies when he buys a product or service. To satisfy the

customer is the mission and purpose of every business. The question “What is our business?”

can, therefore, be answered only by looking at the business from the outside, from the point

of view of customer and market.6

While Drucker was referring to business organizations, the same necessity exists for

both nonprofit and governmental organizations. That necessity is to state the mission in

terms of serving a particular group of clients or customers and meeting a particular class

of need.

Achievable While the mission statement should stretch the organization toward more effective performance, it should, at the same time, be realistic and achievable. In other

words, it should open a vision of new opportunities but should not lead the organization

into unrealistic ventures far beyond its competencies.

Motivational One of the side (but very important) benefits of a well-defined mission is the guidance it provides employees and managers working in geographically dispersed

units and on independent tasks. It provides a shared sense of purpose outside the various

activities taking place within the organization. Therefore, such end results as sales, patients

cared for, students graduated, and reduction in violent crimes can then be viewed as the

result of careful pursuit and accomplishment of the mission and not as the mission itself.

Specific As we mentioned earlier, public relations should not be the primary purpose of a statement of mission. It must be specific to provide direction and guidelines to manage-

ment when they are choosing between alternative courses of action. In other words, “to

produce the highest-quality products at the lowest possible cost” sounds very good, but it

does not provide direction for management.

1. Incomplete—not specific as to where the company is headed and what kind of com- pany management is trying to create.

2. Vague—does not provide direction to decision makers when faced with product/market choices.

3. Not motivational—does not provide a sense of purpose or commitment to something bigger than the numbers.

4. Not distinctive—not specific to our company. 5. Too reliant on superlatives—too many superlatives such as #1, recognized leader, most

successful. 6. Too generic—does not specify the business or industry to which it applies. 7. Too broad—does not rule out any opportunity management might wish to pursue.

Source: Adapted from Arthur A. Thompson Jr. Margaret A. Peteraf, John E. Gamble, and A. J. Strickland III, Crafting and Executing Strategy, 19th ed. (Burr Ridge, IL: McGraw-Hill/Irwin, 2014), p. 22.

Examine the mission statements in Marketing Insight 1–3. Do any of these shortcomings apply to them?

MARKETING INSIGHT Common Shortcomings in Mission Statements 1–4

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Organizational Objectives Organizational objectives are the end points of an organization’s mission and are what it seeks through the ongoing, long-run operations of the organization. The organizational

mission is distilled into a finer set of specific and achievable organizational objectives.

These objectives must be specific, measurable, action commitments by which the mission of the organization is to be achieved.

As with the statement of mission, organizational objectives are more than good inten-

tions. In fact, if formulated properly, they can accomplish the following:

1. They can be converted into specific action.

2. They will provide direction. That is, they can serve as a starting point for more spe-

cific and detailed objectives at lower levels in the organization. Each manager will then

know how his or her objectives relate to those at higher levels.

3. They can establish long-run priorities for the organization.

4. They can facilitate management control because they serve as standards against which

overall organizational performance can be evaluated.

Organizational objectives are necessary in all areas that may influence the performance

and long-run survival of the organization. As shown in Figure 1.3, objectives can be estab-

lished in and across many areas of the organization. The list provided in Figure 1.3 is by no

means exhaustive. For example, some organizations are specifying the primary objective

as the attainment of a specific level of quality, either in the marketing of a product or the

providing of a service. These organizations believe that objectives should reflect an orga-

nization’s comm itment to the customer rather than its own finances. Obviously, during the

strategic planning process conflicts are likely to occur between various functional depart-

ments in the organization. The important point is that management must translate the

What They May What Marketers May Functions Want to Deliver Want Them to Deliver

Research and development Basic research projects Products that deliver customer value Product features Customer benefits Few projects Many new products Production/operations Long production runs Short production runs Standardized products Customized products No model changes Frequent model changes Long lead times Short lead times Standard orders Customer orders No new products Many new products Finance Rigid budgets Flexible budgets Budgets based on return Budgets based on need to on investment increase sales Low sales commissions High sales commissions Accounting Standardized billing Custom billing Strict payment terms Flexible payment terms Strict credit standards Flexible credit standards Human resources Trainable employees Skilled employees Low salaries High salaries

MARKETING INSIGHT Potential Sources of Cross-Functional Conflict for Marketers 1–5

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12 Part A Introduction

organizational mission into specific objectives that support the realization of the mission.

The objectives may flow directly from the mission or be considered subordinate necessi-

ties for carrying out the mission. As discussed earlier, the objectives are specific, measur-

able, action commitments on the part of the organization.

Organizational Strategies Hopefully, when an organization has formulated its mission and developed its objec-

tives, it knows where it wants to go. The next managerial task is to develop a “grand

design” to get there. This grand design constitutes the organizational strategies. Strategy

involves the choice of major directions the organization will take in pursuing its objec-

tives. Toward this end, it is critical that strategies are consistent with goals and objec-

tives and that top management ensures strategies are implemented effectively. As many

as 70 percent of strategic plans fail because the strategies in them are not well defined

and, thus, cannot be implemented effectively. What follows is a discussion of various

strategies organizations can pursue. We discuss three approaches: (1) strategies based on

products and markets, (2) strategies based on competitive advantage, and (3) strategies

based on value.

Organizational Strategies Based on Products and Markets One means to developing organizational strategies is to focus on the directions the organization can take in order

to grow. Figure 1.4, which presents the available strategic choices, is a product–market

matrix.7 It indicates that an organization can grow by better managing what it is

FIGURE 1.3 Sample

Organizational

Objectives

(manufacturing firm)

Products Present Products New Products

Markets

Present customers Market penetration Product development

New customers Market development Diversification

FIGURE 1.4 Organizational

Growth Strategies

Area of Performance Possible Objective

1. Market standing To make our brands number one in their field in terms of market share.

2. Innovations To be a leader in introducing new products by spending no less than 7 percent of sales for research and development.

3. Productivity To manufacture all products efficiently as measured by the productivity of the workforce.

4. Physical and financial resources To protect and maintain all resources—equipment, build- ings, inventory, and funds.

5. Profitability To achieve an annual rate of return on investment of at least 15 percent.

6. Manager performance To identify critical areas of management depth and and responsibility succession. 7. Worker performance and attitude To maintain levels of employee satisfaction consistent with

our own and similar industries. 8. Social responsibility To respond appropriately whenever possible to societal

expectations and environmental needs.

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presently doing or by finding new things to do. In choosing one or both of these paths,

it must also decide whether to concentrate on present customers or to seek new ones.

Thus, according to Figure 1.4, there are only four paths an organization can take in

order to grow.

Market Penetration Strategies These strategies focus primarily on increasing the sale of present products to present customers. For example:

• Encouraging present customers to use more of the product: “Orange Juice Isn’t Just for

Breakfast Anymore.”

• Encouraging present customers to purchase more of the product: multiple packages of

Pringles, instant winner sweepstakes at a fast-food restaurant.

• Directing programs at current participants: A university directs a fund-raising program

at those graduates who already give the most money.

Tactics used to implement a market penetration strategy might include price reductions,

advertising that stresses the many benefits of the product (e.g., “Milk Is a Natural”), packag-

ing the product in different-sized packages, or making it available at more locations. Other

functional areas of the business could also be involved in implementing the strategy in addi-

tion to marketing. A production plan might be developed to produce the product more effi-

ciently. This plan might include increased production runs, the substitution of preassembled

components for individual product parts, or the automation of a process that previously was

performed manually.

Market Development Strategies Pursuing growth through market development, an organization would seek to find new customers for its present products. For example:

• Arm & Hammer continues to seek new uses for its baking soda.

• McDonald’s continually seeks expansion into overseas markets.

• As the consumption of salt declined, the book 101 Things You Can Do with Salt Besides Eat It appeared.

1. The Fit Test: How well does the strategy fit the company’s situation? A strategy must have good external fit, which means it will be well matched to industry and competitive condi- tions, the company’s best market opportunities, and other relevant aspects of its business environment. It also must have a good internal fit, which means it is tailored to the com- pany’s resources and distinctive competencies and be supported by a complementary set of functional capabilities (sales and marketing, production, etc.).

2. The Competitive Advantage Test: Can the strategy help the company achieve a sustainable competitive advantage? Strategies that fail this test are unlikely to produce superior performance for more than a brief period of time. A good strategy should enable the organization to achieve a long-term competitive advantage.

3. The Performance Test: Is the strategy producing good company performance? Critical performance indicators are (a) profitability and financial strength and (b) competitive strength and market standing. Above average performance in these two areas is an indi- cator of a winning strategy.

Source: Adapted from Arthur A. Thompson Jr. Margaret A. Peteraf, John E. Gamble, and A. J. Strickland III, Crafting and Executing Strategy, 19th ed. (Burr Ridge, IL: McGraw-Hill/Irwin, 2014), p. 12.

MARKETING INSIGHT Three Tests for Organizational Strategies 1–6

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14 Part A Introduction

Market development strategies involve much, much more than simply getting the prod-

uct to a new market. Before deciding on marketing techniques such as advertising and

packaging, companies often find they must establish a clear position in the market, some-

times spending large sums of money simply to educate consumers as to why they should

consider buying the product.

Product Development Strategies Selecting one of the remaining two strategies means the organization will seek new things to do. With this particular strategy, the new products

developed would be directed primarily to present customers. For example:

• Offering a different version of an existing product: mini-Oreos, Ritz with cheese.

• Offering a new and improved version of their product: Gillette’s latest improvement in

shaving technology.

• Offering a new way to use an existing product: Vaseline’s Lip Therapy.

Diversification This strategy can lead the organization into entirely new and even unre- lated businesses. It involves seeking new products (often through acquisitions) for custom-

ers not currently being served. For example:

• Altria, originally a manufacturer of cigarettes, is widely diversified in financial ser-

vices, Post cereals, Sealtest dairy, and Kraft cheese, among others.

• Brown Foreman Distillers acquired Hartmann Luggage, and Sara Lee acquired Coach

Leather Products.

• Some universities are establishing corporations to find commercial uses for faculty research.

Organizational Strategies Based on Competitive Advantage Michael Porter devel- oped a model for formulating organizational strategy that is applicable across a wide

variety of industries.8 The focus of the model is on devising means to gain competitive

advantage. Competitive advantage is an ability to outperform competitors in providing

something that the market values. Porter suggests that firms should first analyze their

industry and  then develop either a cost leadership strategy or a strategy based on dif- ferentiation. These general strategies can be used on marketwide bases or in a niche (segment) within the total market.

Using a cost leadership strategy, a firm would focus on being the low-cost company

in its industry. They would stress efficiency and offer a standard, no-frills product. They

could achieve this through efficiencies in production, product design, manufacturing,

distribution, technology, or some other means. The important point is that to succeed, the

organization must continually strive to be the cost leader in the industry or market segment

it competes in. It must also offer products or services that are acceptable to customers

when compared to the competition. Walmart, Southwest Airlines, and Timex Group Ltd.

are companies that have succeeded in using a cost leadership strategy.

Using a strategy based on differentiation, a firm seeks to be unique in its industry or

market segment along particular dimensions that the customers value. These dimensions

might pertain to design, quality, service, variety of offerings, brand name, or some other

factor. The important point is that because of uniqueness of the product or service along one

or more of these dimensions, the firm can charge a premium price. L.L.Bean, Rolex, Coca-

Cola, and Microsoft are companies that have succeeded using a differentiation strategy.

Organizational Strategies Based on Value As competition increases, the concept of “customer value” has become critical for marketers as well as customers. It can be thought

of as an extension of the marketing concept philosophy that focuses on developing and

delivering superior value to customers as a way to achieve organizational objectives. Thus,

it focuses not only on customer needs, but also on the question, How can we create value

for them and still achieve our objectives?

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Chapter One Strategic Planning and the Marketing Management Process 15

It has become pretty clear that in today’s competitive environment it is unlikely

that a firm will succeed by trying to be all things to all people.9 Thus, to succeed firms

must seek to build long-term relationships with their customers by offering a unique

value that only they can offer. It seems that many firms have succeeded by choosing

to deliver superior customer value using one of three value strategies—best price, best

product, or best service.

Dell Inc., Costco, and Southwest Airlines are among the success stories in offering cus-

tomers the best price. Rubbermaid, Nike, Starbucks, and Microsoft believe they offer the

best products on the market. Airborne Express, Roadway, Cott Corporation, and Lands’

End provide superior customer value by providing outstanding service.

Choosing an Appropriate Strategy On what basis does an organization choose one (or all) of its strategies? Of extreme

importance are the directions set by the mission statement. Management should select those

strategies consistent with its mission and capitalize on the organization’s distinctive com-

petencies that will lead to a sustainable competitive advantage. A sustainable competitive

advantage can be based on either the assets or skills of the organization. Technical superi-

ority, low-cost production, customer service/product support, location, financial resources,

continuing product innovation, and overall marketing skills are all examples of distinctive

competencies that can lead to a sustainable competitive advantage. For example, Honda is

known for providing quality automobiles at a reasonable price. Each succeeding genera-

tion of Honda automobiles has shown marked quality improvements over previous genera-

tions. Likewise, VF Corporation, manufacturer of Wrangler and Lee jeans, has formed

“quick response” partnerships with both discounters and department stores to ensure the

efficiency of product flow. The key to sustaining a competitive advantage is to continu-

ally focus and build on the assets and skills that will lead to long-term performance gains.

Organizational Portfolio Plan The final phase of the strategic planning process is the formulation of the organizational

portfolio plan. In reality, most organizations at a particular time are a portfolio of busi-

nesses, that is, product lines, divisions, and schools. To illustrate, an appliance manufac-

turer may have several product lines (e.g., televisions, washers and dryers, refrigerators,

stereos) as well as two divisions, consumer appliances and industrial appliances. A college

or university will have numerous schools (e.g., education, business, law, architecture) and

several programs within each school. Some widely diversified organizations such as Altria

are in numerous unrelated businesses, such as cigarettes, food products, land development,

and industrial paper products.

Managing such groups of businesses is made a little easier if resources are plentiful,

cash is plentiful, and each is experiencing growth and profits. Unfortunately, providing

larger and larger budgets each year to all businesses is seldom feasible. Many are not

experiencing growth, and profits and resources (financial and nonfinancial) are becom-

ing more and more scarce. In such a situation, choices must be made, and some method is

necessary to help management make the choices. Management must decide which busi-

nesses to build, maintain, or eliminate, or which new businesses to add. Indeed, much of

the recent activity in corporate restructuring has centered on decisions relating to which

groups of businesses management should focus on.

Obviously, the first step in this approach is to identify the various divisions, product

lines, and so on that can be considered a “business.” When identified, these are referred to

as strategic business units (SBUs) and have the following characteristics:

• They have a distinct mission.

• They have their own competitors.

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16 Part A Introduction

• They are a single business or collection of related businesses.

• They can be planned independently of the other businesses of the total organization.

Thus, depending on the type of organization, an SBU could be a single product, product

line, or division; a college of business administration; or a state mental health agency.

Once the organization has identified and classified all of its SBUs, some method must

be established to determine how resources should be allocated among the various SBUs.

These methods are known as portfolio models. For those readers interested, the appendix of this chapter presents two of the most popular portfolio models, the Boston Consulting

Group model and the General Electric model.

The Complete Strategic Plan Figure 1.2 indicates that at this point the strategic planning process is complete, and the

organization has a time-phased blueprint that outlines its mission, objectives, and strate-

gies. Completion of the strategic plan facilitates the development of marketing plans for

each product, product line, or division of the organization. The marketing plan serves as

a subset of the strategic plan in that it allows for detailed planning at a target market

level. This important relationship between strategic planning and marketing planning is

the subject of the final section of this chapter.

THE MARKETING MANAGEMENT PROCESS

Marketing management can be defined as “the process of planning and executing the

conception, pricing, promotion, and distribution of goods, services, and ideas to cre-

ate exchanges with target groups that satisfy customer and organizational objectives.”10

It should be noted that this definition is entirely consistent with the marketing concept,

since it emphasizes serving target market needs as the key to achieving organizational

objectives. The remainder of this section will be devoted to a discussion of the marketing

management process according to the model in Figure 1.5.

Situation Analysis With a clear understanding of organizational objectives and mission, the marketing

manager must then analyze and monitor the position of the firm and, specifically, the

marketing department, in terms of its past, present, and future situation. Of course, the

future situation is of primary concern. However, analyses of past trends and the current

situation are most useful for predicting the future situation.

The situation analysis can be divided into six major areas of concern: (1) the coopera-

tive environment, (2) the competitive environment, (3) the economic environment, (4) the

social environment, (5) the political environment, and (6) the legal environment. In ana-

lyzing each of these environments, the marketing executive must search both for oppor-

tunities and for constraints or threats to achieving objectives. Opportunities for profitable

marketing often arise from changes in these environments that bring about new sets of

needs to be satisfied. Constraints on marketing activities, such as limited supplies of scarce

resources, also arise from these environments.

The Cooperative Environment The cooperative environment includes all firms and indi- viduals who have a vested interest in the firm’s accomplishing its objectives. Parties of pri-

mary interest to the marketing executive in this environment are (1) suppliers, (2) resellers,

(3) other departments in the firm, and (4) subdepartments and employees of the marketing

department. Opportunities in this environment are primarily related to methods of increas-

ing efficiency. For example, a company might decide to switch from a competitive bid

process of obtaining materials to a single source that is located near the company’s plant.

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Chapter One Strategic Planning and the Marketing Management Process 17

Likewise, members of the marketing, engineering, and manufacturing functions may use a

teamwork approach to developing new products versus a sequential approach. Constraints

consist of such things as unresolved conflicts and shortages of materials. For example, a

company manager may believe that a distributor is doing an insufficient job of promoting

and selling the product, or a marketing manager may feel that manufacturing is not taking

the steps needed to produce a quality product.

The Competitive Environment The competitive environment includes primarily other firms in the industry that rival the organization for both resources and sales. Opportuni-

ties in this environment include such things as (1) acquiring competing firms; (2) offering

demonstrably better value to consumers and attracting them away from competitors; and

(3) in some cases, driving competitors out of the industry. For example, one airline pur-

chases another airline, a bank offers depositors a free checking account with no minimum

balance requirements, or a grocery chain engages in an everyday low-price strategy that

competitors can’t meet. The primary constraints in these environments are the demand

stimulation activities of competing firms and the number of consumers who cannot be

lured away from competition.

The Economic Environment The state of the macroeconomy and changes in it also bring about marketing opportunities and constraints. For example, such factors as high

inflation and unemployment levels can limit the size of the market that can afford to

purchase a firm’s top-of-the-line product. At the same time, these factors may offer a

profitable opportunity to develop rental services for such products or to develop less-

expensive models  of the product. In addition, changes in technology can provide sig-

nificant threats and  opportunities. For example, in the communications industry, when

technology was developed  to a level where it was possible to provide cable television

using phone lines, such a system posed a severe threat to the cable industry.

The strategic plan Organizational mission Organizational objectives Organizational strategies Organizational portfolio plan

Implementation and control

Marketing information system and marketing research

The marketing plan Situation analysis Marketing objectives Target market selection Marketing mix Product strategy Promotion strategy Pricing strategy Distribution strategy

FIGURE 1.5 Strategic

Planning and

Marketing Planning

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18

Speed of the Process. There is the problem of either being so slow that the process seems to go on forever or so fast that there is an extreme burst of activity to rush out a plan. Amount of Data Collected. Sufficient data are needed to properly estimate customer needs and competitive trends. However, the law of diminishing returns quickly sets in on the data-collection process. Responsibility for Developing the Plan. If planning is delegated to professional planners, valuable line management input may be ignored. If the process is left to line manag- ers, planning may be relegated to secondary status. Structure. Many executives believe the most important part of planning is not the plan itself but the structure of thought about the strategic issues facing the business. However, the structure should not take precedence over the content so that planning becomes merely filling out forms or crunching numbers. Length of the Plan. The length of a marketing plan must be balanced between being so long that both staff and line managers ignore it and so brief that it ignores key details. Frequency of Planning. Too frequent reevaluation of strategies can lead to erratic firm behavior. However, when plans are not revised frequently enough, the business may not adapt quickly enough to environmental changes and thus suffer a deterioration in its competitive position. Number of Alternative Strategies Considered. Discussing too few alternatives raises the likelihood of failure, whereas discussing too many increases the time and cost of the planning effort. Cross-Functional Acceptance. A common mistake is to view the plan as the proprietary possession of marketing. Successful implementation requires a broad consensus, including other functional areas. Using the Plan as a Sales Document. A major but often overlooked purpose of a plan and its presentation is to generate funds from either internal or external sources. Therefore, the better the plan, the better the chance of gaining desired funding. Senior Management Leadership. Commitment from senior management is essential to the success of a marketing planning effort. Tying Compensation to Successful Planning Efforts. Management compensation should be oriented toward the achievement of objectives stated in the plan.

Source: From Donald R. Lehmann and Russell S. Winer, Analysis for Marketing Planning 7E, McGraw-Hill/ Irwin, 2008, Chapter 1. Reprinted with permission of McGraw-Hill Education.

MARKETING INSIGHT Key Issues in the Marketing Planning Process That Need to Be Addressed

The Social Environment This environment includes general cultural and social tradi- tions, norms, and attitudes. While these values change slowly, such changes often bring

about the need for new products and services. For example, a change in values concern-

ing the desirability of large families brought about an opportunity to market better meth-

ods of birth control. On the other hand, cultural and social values also place constraints

on marketing activities. As a rule, business practices that are contrary to social values

become political issues, which are often resolved by legal constraints. For example, public

demand for a cleaner environment has caused the government to require that automobile

manu facturers’ products meet certain average gas mileage and emission standards.

The Political Environment The political environment includes the attitudes and reac- tions of the general public, social and business critics, and other organizations, such as

the Better Business Bureau. Dissatisfaction with such business and marketing practices as

unsafe products, products that waste resources, and unethical sales procedures can have

adverse effects on corporation image and customer loyalty. However, adapting business

1–7

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Chapter One Strategic Planning and the Marketing Management Process 19

and marketing practices to these attitudes can be an opportunity. For example, these atti-

tudes have brought about markets for such products as unbreakable children’s toys, high-

efficiency air conditioners, and more economical automobiles.

The Legal Environment This environment includes a host of federal, state, and local legislation directed at protecting both business competition and consumer rights. In past

years, legislation reflected social and political attitudes and has been primarily directed at

constraining business practices. Such legislation usually acts as a constraint on business

behavior, but again can be viewed as providing opportunities for marketing safer and more

efficient products. In recent years, there has been less emphasis on creating new laws

for constraining business practices. As an example, deregulation has become more com-

mon, as evidenced by events in the airlines, financial services, and telecommunications

industries.

Marketing Planning The previous sections emphasized that (1) marketing activities must be aligned with

organizational objectives and (2) marketing opportunities are often found by systematically

analyzing situational environments. Once an opportunity is recognized, the marketing exec-

utive must then plan an appropriate strategy for taking advantage of  the opportunity. This

process can be viewed in terms of three interrelated tasks: (1) establishing marketing objec-

tives, (2) selecting the target market, and (3) developing the marketing mix.

Establishing Objectives Marketing objectives usually are derived from organizational objectives; in some cases where the firm is totally marketing oriented, the two are identi-

cal. In either case, objectives must be specified and performance in achieving them should

be measurable. Marketing objectives are usually stated as standards of performance (e.g.,

a certain percentage of market share or sales volume) or as tasks to be achieved by given

dates. While such objectives are useful, the marketing concept emphasizes that profits

rather than sales should be the overriding objective of the firm and marketing department.

In any case, these objectives provide the framework for the marketing plan.

Selecting the Target Market The success of any marketing plan hinges on how well it can identify customer needs and organize its resources to satisfy them profitably. Thus,

a crucial element of the marketing plan is selecting the groups or segments of potential

customers the firm is going to serve with each of its products. Four important questions

must be answered:

1. What do customers want or need?

2. What must be done to satisfy these wants or needs?

3. What is the size of the market?

4. What is its growth profile?

Present target markets and potential target markets are then ranked according to (1)

profitability; (2) present and future sales volume; and (3) the match between what it takes

to appeal successfully to the segment and the organization’s capabilities. Those that appear

to offer the greatest potential are selected. One cautionary note on this process involves the

importance of not neglecting present customers when developing market share and sales

strategies. Chapters 3, 4, and 5 are devoted to discussing consumer behavior, industrial

buyers, and market segmentation.

Developing the Marketing Mix The marketing mix is the set of controllable variables that must be managed to satisfy the target market and achieve organizational objectives.

These controllable variables are usually classified according to four major decision areas:

product, price, promotion, and place (or channels of distribution). The importance of

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20

these decision areas cannot be overstated , and in fact, the major portion of this text is

devoted to analyzing them. Chapters 6 and 7 are devoted to product and new product

strategies, Chapters 8 and 9 to  promotion strategies in terms of both nonpersonal and

personal selling, Chapter 10 to distribution strategies, and Chapter 11 to pricing strate-

gies. In addition, marketing mix variables are the focus of analysis in two chapters on

marketing in special fields, that is, the marketing of services (Chapter 12) and global

marketing (Chapter 13). Thus, it should be clear that the marketing mix is the core of the

marketing management process.

The output of the foregoing process is the marketing plan. It is a formal statement of

decisions that have been made on marketing activities; it is a blueprint of the objectives,

strategies, and tasks to be performed.

Implementation and Control of the Marketing Plan Implementing the marketing plan involves putting the plan into action and performing

marketing tasks according to the predefined schedule. Even the most carefully devel-

oped plans often cannot be executed with perfect timing. Thus, the marketing executive

must closely monitor and coordinate implementation of the plan. In some cases, adjust-

ments may have to be made in the basic plan because of changes in any of the situational

environments. For example, competitors may introduce a new product. In this event, it

may be desirable to speed up or delay implementation of the plan. In almost all cases,

some minor adjustments or fine tuning will be necessary in implementation.

Controlling the marketing plan involves three basic steps. First, the results of the

implemented marketing plan are measured. Second , these results are compared with

objectives. Third, decisions are made on whether the plan is achieving objectives. If

serious deviations exist between actual and planned results, adjustments may have to be

made to redirect the plan toward achieving objectives.

Poorly Stated Objectives Well-Stated Objectives

Our objective is to be a leader in the Our objective is to spend 12 percent of sales industry in terms of new product revenue between 2013 and 2015 on research and development. development in an effort to introduce at least five new products in 2016. Our objective is to maximize profits. Our objective is to achieve a 10 percent return on investment during 2013, with a payback on new investments of no longer than four years. Our objective is to better serve Our objective is to obtain customer satisfaction customers. ratings of at least 90 percent on the 2013 annual customer satisfaction survey, and to retain at least 85 percent of our 2013 customers as repeat purchasers in 2014. Our objective is to be the best that we Our objective is to increase market share from can be. 30 percent to 40 percent in 2013 by increasing promotional expenditures by 14 percent.

Source: From Donald R. Lehmann and Russell S. Winer, Analysis for Marketing Planning 7E, McGraw-Hill/ Irwin, 2008, Chapter 1. Reprinted with permission of McGraw-Hill Education.

MARKETING INSIGHT Examples of Marketing Objectives 1–8

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Chapter One Strategic Planning and the Marketing Management Process 21

Marketing Information Systems and Marketing Research Throughout the marketing management process, current, reliable, and valid information is

needed to make effective marketing decisions. Providing this information is the task of the

marketing information system and marketing research. These topics are discussed in detail

in Chapter 2.

THE STRATEGIC PLAN, THE MARKETING PLAN, AND OTHER FUNCTIONAL AREA PLANS

Strategic planning is clearly a top-management responsibility. In recent years, however,

there has been an increasing shift toward more active participation by marketing managers

in strategic analysis and planning. This is because, in reality, nearly all strategic planning

questions have marketing implications. In fact, the two major strategic planning questions—

What products should we make? and What markets should we serve?—are clearly market-

ing questions. Thus, marketing executives are involved in the strategic planning process in

at least two important ways: (1) They influence the process by providing important inputs

in the form of information and suggestions relating to customers, products, and middlemen;

and (2) they must always be aware of what the process of stategic planning involves as well

as the results because everything they do—the marketing objectives and strategies they

develop—must be derived from the strategic plan. In fact, the planning done in all func-

tional areas of the organization should be derived from the strategic plan.

Marketing’s Role in Cross-Functional Strategic Planning More and more organizations are rethinking the traditional role of marketing. Rather

than dividing work according to function (e.g., production, finance, technology, human

resources), they are bringing managers and employees together to participate in cross- functional teams. These teams might have responsibility for a particular product, line of products, or group of customers.

Because team members are responsible for all activities involving their products and/or

customers, they are responsible for strategic planning. This means that all personnel work-

ing in a cross-functional team will participate in creating a strategic plan to serve customers.

Rather than making decisions independently, marketing managers work closely with

team members from production, finance, human resources, and other areas to devise plans

that address all concerns. Thus, if a team member from production says, “That product will

be too difficult to produce,” or if a team member from finance says, “We’ll never make a

profit at that price,” the team members from marketing must help resolve the problems.

This approach requires a high degree of skill at problem solving and gaining cooperation.

Clearly the greatest advantage of strategic planning with a cross-functional team is

the  ability of team members to consider a situation from a number of viewpoints. The

resulting insights can help the team avoid costly mistakes and poor solutions. Japanese

manufacturers are noted for using cross-functional teams to figure out ways to make desir-

able products at given target costs. In contrast, U.S. manufacturers traditionally have devel-

oped products by having one group decide what to make, another calculate production

costs, and yet another predict whether enough of the product will sell at a high enough price.

Thus, in well-managed organizations, a direct relationship exists between strategic

planning and the planning done by managers at all levels. The focus and time perspectives

will, of course, differ. Figure 1.6 illustrates the cross-functional perspective of strategic

planning. It indicates very clearly that all functional area plans should be derived from the

strategic plan while at the same time contributing to the achievement of it.

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22 Part A Introduction

If done properly, strategic planning results in a clearly defined blueprint for manage-

ment action in all functional areas of the organization. Figure 1.7 clearly illustrates this

blueprint using only one organizational objective and two strategies from the strategic

plan (above the dotted line) and illustrating how these are translated into elements of the

marketing department plan and the production department plan (below the dotted line).

Note that in Figure 1.7, all objectives and strategies are related to other objectives and

strategies at higher and lower levels in the organization: That is, a hierarchy of objectives

and strategies exists. We have illustrated only two possible marketing objectives and two

possible production objectives. Obviously, many others could be developed, but our pur-

pose is to illustrate the cross-functional nature of strategic planning and how objectives

and strategies from the strategic plan must be translated into objectives and strategies for

all functional areas including marketing.

SUMMARY

This chapter has described the marketing management process in the context of the

organization’s overall strategic plan. Clearly, marketers must understand their cross-

functional role in joining the marketing vision for the organization with the financial goals

and manufacturing capabilities of the organization. The greater this ability, the better the

likelihood is that the organization will be able to achieve and sustain a competitive advan-

tage, the ultimate purpose of the strategic planning process.

At this point it would be useful to review Figures 1.5, 1.6, and 1.7 as well as the book’s

table of contents. This review will enable you to better relate the content and progression

of the material to follow to the marketing management process.

FIGURE 1.6 The Cross-Functional Perspective in Planning

Production plan

Objectives Forecast Budgets Strategies and programs Policies

Marketing plan

Objectives Forecast Budgets Strategies and programs Policies

Human resource plan

Objectives Forecast Budgets Strategies and programs Policies

Finance plan

Objectives Forecast Budgets Strategies and programs Policies

Technology plan

Objectives Forecast Budgets Strategies and programs Policies

Functional area plans derived from strategic plan

The strategic plan

Mission Objectives Strategies Portfolio plan

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Chapter One Strategic Planning and the Marketing Management Process 23

Austin, Robert D., Richard L. Nolan, and Shannon O’Donnell. Harder Than I Thought, Boston: Harvard Business Review Press, 2013.

Charan, Ram. Leadership in the Era of Economic Uncertainty. New York: McGraw-Hill, 2009. Christensen, Clayton, M., Scott Cook, and Tandy Hall. “Marketing Malpractice: The Cause and the

Cure.” Harvard Business Review, December 2005, pp. 74–75. Dixit, Avinash, K., and Barry J. Noblebuff. The Art of Strategy. New York: W.W. Norton and Co., 2009. Friedman, George. The Next Decade. New York: Doubleday, 2011. Kaplan, Robert S., and David Norton. “How to Implement a New Strategy Without Disrupting

Your Organization.” Harvard Business Review, March 2006, pp. 100–109. Levitt, Ted. On Marketing. Boston: HBS Press, 2006. Markower, Jack. Strategies for the Green Economy. New York: McGraw-Hill, 2009. O’Sullivan, Don, and Andrew W. Abdela. “Marketing Performance Measurement Ability and

Performance.” Journal of Marketing, April 2007, pp. 79–93. Silverstein, Michael J., Abheek Singhi, Carol Liao, and David Michael. The $10 Trillion Prize: Captivating the Newly Affluent in China and India. Boston: Harvard Business Review Press, 2012.

FIGURE 1.7 A Blueprint for Management Action: Relating the Marketing Plan to the Strategic Plan and the Production Plan

1. Market penetration

Achieve an annual rate of return on investment of at least 15 percent

One organizational objective (the profitability objective) from Figure 1.3

Two possible organizational strategies from the product-market matrix, Figure 1.4

Two possible marketing objectives and two possible production objectives derived from the strategic plan

Specific course of action of the marketing and production departments designed to achieve the objective

Improve position of present products with present customers

2. Market development

Find new customers for present products

1. Marketing department objective

Increase rate of purchase by existing customers by 10 percent by year-end

2. Production department objective

Design additional features into product that will induce new uses by existing buyers

3. Marketing department objective

Increase market share by 5 percent by attracting new market segments for existing use by year-end

4. Production department objective

Design additional features into product that will open additional markets with new uses

Marketing strategies and programs

Production strategies and programs

Marketing strategies and programs

Production strategies and programs

Additional Resources

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24 Part A Introduction

Distinctive competencies: Distinctive competencies are things that an organization does so well that they give it an advantage over similar organizations. No matter how appealing an opportunity

may be, to gain advantage over competitors, the organization must formulate strategy based on

distinctive competencies.

Diversification: An organizational strategy that seeks growth through new products (often through acquisitions) for customers not currently being served.

Market development: An organizational strategy that seeks growth through seeking new custom- ers for present products.

Market penetration: An organizational strategy that seeks growth through increasing the sale of present products to present customers.

Marketing: The activity, set of institutions, and processes for creating, communicating, deliver- ing, and exchanging offerings that have value for customers, clients, partners, and society at large.

Marketing concept: The marketing concept means that an organization should seek to make a profit by serving the needs of customer groups. Its purpose is to rivet the attention of marketing

managers on serving broad classes of customer needs (customer orientation), rather than on the

firm’s products (production orientation) or on devising methods to attract customers to current

products (selling orientation).

Marketing information system: Throughout the marketing management process, current, reliable, and valid information is needed to make effective marketing decisions. Providing this

information is the task of the marketing information system and marketing research.

Marketing management: Marketing management is the process of planning and executing the conception, pricing, promotion, and distribution of goods, services, and ideas to create exchanges

with target groups that satisfy customer and organizational objectives.

Marketing mix: The marketing mix is the set of controllable variables that must be managed to satisfy the target market and achieve organizational objectives. The controllable variables are

usually classified according to four major decision areas: product, price, promotion, and place

(or channels of distribution).

Marketing planning: The marketing planning process produces three outputs: (1) establishing marketing objectives, (2) selecting the target market, and (3) developing the marketing mix.

Organizational mission: The mission statement, or purpose, of an organization is the description of its reason for existence. It is the long-run vision of what the organization strives to be, the unique

aim that differentiates the organization from similar ones and the means by which this differentia-

tion will take place. An effective mission statement will be focused on markets rather than prod-

ucts, achievable, motivating, and specific.

Organizational objectives: Organizational objectives are the end points of an organization’s mission and are what it seeks through the ongoing, long-run operation of the organization. The

organizational mission is distilled into a finer set of specific, measurable, action commitments by

which the mission of the organization is to be achieved.

Organizational portfolio plan: This stage of the strategic plan involves the allocation of resources across the organization’s product lines, divisions, or businesses. It involves deciding

which ones to build, maintain, or eliminate, or which to add.

Organizational strategies: Organizational strategies are the choice of the major directions the organization will take in pursuing its objectives. There are three major approaches: (1) strategies

based on products and markets, (2) strategies based on competitive advantage, and (3) strategies

based on value.

Organizational strategies based on competitive advantage: This approach to developing organi- zational strategy would develop either a cost leadership strategy which focuses on being the lower

cost company in the industry or a differentiation strategy which focuses on being unique in the

industry or market segment along dimensions that customers value.

Organizational strategies based on products and markets: An approach to developing organi- zational strategies that focuses on the four paths an organization can grow: market penetration strat-

egies, market development strategies, product development strategies, and diversification strategies.

Key Terms and Concepts

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Chapter One Strategic Planning and the Marketing Management Process 25

Organizational strategies based on value: This approach to developing organizational strategy seeks to succeed by choosing to deliver superior customer value using one of three value strategies—

best price, best product, or best service.

Product development: An organizational strategy that seeks growth through developing new products primarily for present customers.

Situation analysis: This stage of the marketing planning process involves the analysis of the past, present, and likely future in six major areas of concern: (1) the cooperative environment, (2) the

competitive environment, (3) the economic environment, (4) the social environment, (5) the politi-

cal environment, and (6) the legal environment. Opportunities for and constraints on marketing

activities arise from these environments.

Strategic business units (SBUs): Strategic business units (SBUs) are product lines and divisions that can be considered a “business” for the purpose of the organizational portfolio plan. An SBU

must have a distinct mission, have its own competitors, be a single business or collection of related

businesses, and be able to be planned independently of the other SBUs.

Strategic planning: Strategic planning provides a blueprint for management actions for the entire organization. It includes all the activities that lead to the development of a clear organizational

mission, organizational objectives, and appropriate strategies to achieve the objectives for the entire

organization.

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27

Portfolio Models

Portfolio models remain a valuable aid to marketing manag-

ers in their efforts to develop effective marketing plans. The

use of these models can aid managers who face situations

that can best be described as “more products, less time, and

less money.” More specifically, (1) as the number of prod-

ucts a firm produces expands, the time available for devel-

oping marketing plans for each product decreases; (2) at a

strategic level, management must make resource allocation

decisions across lines of products and, in diversified organi-

zations, across different lines of business; and (3) when

resources are limited (which they usually are), the process of

deciding which strategic business units (SBUs) to emphasize

becomes very complex. In such situations, portfolio models

can be very useful.

Portfolio analysis is not a new idea. Banks manage loan

portfolios seeking to balance risks and yields. Individuals

who are serious investors usually have a portfolio of various

kinds of investments (common stocks, preferred stocks, bank

accounts, and the like), each with different characteristics of

risk, growth, and rate of return. The investor seeks to manage

the portfolio to maximize whatever objectives he or she might

have. Applying this same idea, most organizations have a wide

range of products, product lines, and businesses, each with dif-

ferent growth rates and returns. Similar to the investor, manag-

ers should seek a desirable balance among alternative SBUs.

Specifically, management should seek to develop a business

portfolio that will ensure long-run profits and cash flow.

Portfolio models can be used to classify SBUs to deter-

mine the future cash contributions that can be expected

from each SBU as well as the future resources that each will

require. Remember, depending on the organization, an SBU

could be a single product, product line, division, or distinct

business. While there are many different types of portfolio

models, they generally examine the competitive position of

the SBU and the chances for improving the SBU’s contribu-

tion to profitability and cash flow.

There are several portfolio analysis techniques. Two of

the most widely used are discussed in this appendix. To truly

appreciate the concept of portfolio analysis, however, we

must briefly review the development of portfolio theory.

A REVIEW OF PORTFOLIO THEORY

The interest in developing aids for managers in the selec-

tion of strategy was spurred by an organization known as

the Boston Consulting Group (BCG) more than 25 years

ago. Its ideas, which will be discussed shortly, and many of

those that followed were based on the concept of experience

curves.

Experience curves are similar in concept to learning curves. Learning curves were developed to express the idea that the

number of labor hours it takes to produce one unit of a par-

ticular product declines in a predictable manner as the number

of units produced increases. Hence, an accurate estimation of

how long it takes to produce the 100th unit is possible if the

production times for the 1st and 10th units are known. The

concept of experience curves was based on this model.

Experience curves were first widely discussed in the Stra-

tegic Planning Institute’s ongoing Profit Impact of Marketing

Strategies (PIMS) study. The PIMS project studies 150 firms

with more than 1,000 individual business units. Its major

focus is on determining which environmental and internal firm

variables influence the firm’s return on investment (ROI) and

cash flow. The researchers have concluded that seven catego-

ries of variables appear to influence the return on investment:

(1)  competitive position, (2) industry/market environment,

(3) budget allocation, (4) capital structure, (5) production pro-

cesses, (6) company characteristics, and (7) “change action”

factors.11

The experience curve includes all costs associated with

a  product and implies that the per-unit costs of a product

should fall, due to cumulative experience, as production

volume increases. In a given industry, therefore, the pro-

ducer with the largest volume and corresponding market

share should have the lowest marginal cost. This leader in

market share should be able to underprice competitors, dis-

courage entry into the market by potential competitors, and,

as a result, achieve an acceptable return on investment. The

linkage of experience to cost to price to market share to ROI

is exhibited in Figure A.1. The BCG’s view of the experience

Appendix

P a rt

A

In

tr o d u ct

io n

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28 Part A Introduction

curve led the members to develop what has become known

as the BCG Portfolio Model.

THE BCG MODEL

The BCG model is based on the assumption that profitability

and cash flow will be closely related to sales volume. Thus,

in this model, SBUs are classified according to their relative

market share and the growth rate of the market the SBU is

in. Using these dimensions, products are either classified as

stars, cash cows, dogs, or question marks. The BCG model is

presented in Figure A.2.

• Stars are SBUs with a high share of a high-growth mar- ket. Because high-growth markets attract competition,

such SBUs are usually cash users because they are growing

and because the firm needs to protect their market share

position.

• Cash cows are often market leaders, but the market they are in is not growing rapidly. Because these SBUs have a high

share of a low-growth market, they are cash generators for

the firm.

• Dogs are SBUs that have a low share of a low-growth market. If the SBU has a very loyal group of customers, it

may be a source of profits and cash. Usually, dogs are not

large sources of cash.

• Question marks are SBUs with a low share of a high- growth market. They have great potential but require great

resources if the firm is to successfully build market share.

As you can see, a firm with 10 SBUs will usually have a

portfolio that includes some of each of these groups. Having

Experience curve

Market share

Cost

Profit curve based on experience curve

Market share

ROI

FIGURE A.1 Experience Curve and Resulting Profit

Relative Market Share

High Low

Market Growth Rate

High

Low

Stars Question marks

Cash cows

Dogs

FIGURE A.2 The Boston Consult-

ing Group Portfolio

Model

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Chapter One Strategic Planning and the Marketing Management Process 29

developed this analysis, management must determine what

role each SBU should assume. Four basic objectives are

possible:

1. Build share. This objective sacrifices immediate earnings to improve market share. It is appropriate for promising

question marks whose share has to grow if they are ever

to become stars.

2. Hold share. This objective seeks to preserve the SBU’s market share. It is very appropriate for strong cash cows

to ensure that they can continue to yield a large cash flow.

3. Harvest. Here, the objective seeks to increase the product’s short-term cash flow without concern for the

long-run impact. It allows market share to decline in order

to maximize earnings and cash flow. It is an appropriate

objective for weak cash cows, weak question marks, and

dogs.

4. Divest. This objective involves selling or divesting the SBU because better investment opportunities exist else-

where. It is very appropriate for dogs and those question

marks the firm cannot afford to finance for growth.

There have been several major criticisms of the BCG

Portfolio Model, revolving around its focus on market

share and market growth as the primary indicators of pref-

erence. First, the BCG model assumes market growth is

uncontrollable.12 As a result, managers can become pre-

occupied with setting market share objectives instead of

trying to grow the market. Second , assumptions regarding

market share as a critical factor affecting firm performance

may not hold true, especially in international markets.13

Third , the BCG model assumes that the major source of

SBU financing comes from internal means. Fourth, the

BCG matrix does not take into account any interdependen-

cies that may exist between SBUs, such as shared distribu-

tion.14 Fifth, the BCG matrix does not take into account any

measures of profits and customer satisfaction.15 Sixth, and

perhaps most important, the thrust of the BCG matrix is

based on the underlying assumption that corporate strategy

begins with an analysis of competitive position. By its very

nature, a strategy developed entirely on competitive anal-

ysis will always be a reactive one.16 While the preceding

criticisms are certainly valid ones, managers (especially of

large firms) across all industries continue to find the BCG

matrix useful in assessing the strategic position of SBUs.17

THE GENERAL ELECTRIC MODEL

Although the BCG model can be useful, it does assume that

market share is the sole determinant of an SBU’s profit-

ability. Also, in projecting market growth rates, a manager

should carefully analyze the factors that influence sales and

any opportunities for influencing industry sales.

Some firms have developed alternative portfolio models

to incorporate more information about market opportunities

and competitive positions. The GE model is one of these. The

GE model emphasizes all the potential sources of strength,

not just market share, and all of the factors that influence the

long-term attractiveness of a market, not just its growth rate.

As Figure A.3 indicates, all SBUs are classified according

to business strength and industry attractiveness. Figure A.4 presents a list of items that can be used to position SBUs in

the matrix.

Business Strength

Strong Average Weak

Industry Attractiveness

High

Medium

Low

A A

A

B

B

CC

FIGURE A.3 The General Electric

Portfolio Model

B C

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30 Part A Introduction

Industry attractiveness is a composite index made up of such factors as those listed in Figure A.4. For example:

market size—the larger the market, the more attractive it will be; market growth—high-growth markets are more attractive than low-growth markets; profitability—high-profit-margin markets are more attractive than low-profit-margin industries.

Business strength is a composite index made up of such factors as those listed in Figure A.4. Such as market share— the higher the SBU’s share of market, the greater its business

strength; quality leadership—the higher the SBU’s quality compared to competitors, the greater its business strength;

share compared with leading competitor—the closer the SBU’s share to the market leader, the greater its business strength.

Once the SBUs are classified, they are placed on the grid

(Figure A.3). Priority “A” SBUs (often called the green zone)

are those in the three cells at the upper left, indicating that

these are SBUs high in both industry attractiveness and busi-

ness strength, and that the firm should “build share.” Priority

“B” SBUs (often called the yellow zone) are those medium in both industry attractiveness and business strength. The firm

will usually decide to “hold share” on these SBUs. Priority

“C” SBUs are those in the three cells at the lower right (often

called the red zone). These SBUs are low in both industry attractiveness and business strength. The firm will usually

decide to harvest or divest these SBUs.

Whether the BCG model, the GE model, or a variation

of these models is used, some analyses must be made of the

firm’s current portfolio of SBUs as part of any strategic plan-

ning effort. Marketing must get its direction from the organi-

zation’s strategic plan.

FIGURE A.4 Components

of Industry

Attractiveness

and Business

Strength at GE

Industry Attractiveness Business Strength

Market position Market size Domestic market share Market growth World market share Profitability Share growth Cyclicality Share compared with leading competitor Ability to recover from inflation World scope Competitive strengths Quality leadership Technology Marketing Relative profitability

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S e c ti

o n I

E ss

e n tia

ls o

f M

a rk

e tin

g

M a n a g e m

e n t

Marketing Information,

Research, and Understanding

the Target Market

Part

2 Marketing Research: Process and Systems for Decision Making

3 Consumer Behavior

4 Business, Government, and Institutional Buying

5 Market Segmentation

B

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32

P a rt B

M arketin

g In

form ation

, R esearch

, an

d U

n d erstan

d in

g th

e T arg

et M arket

Chapter

2 Marketing Research: Process and Systems for Decision Making

Marketing managers require current, reliable, useful information to make effective decisions.

In today’s highly competitive global economy, marketers need to exploit opportunities and

avoid mistakes if they are to survive and be profitable. Not only is sound marketing research

needed, but also a system that gets current, valid information to the marketing decision

maker in a timely manner.

This chapter is concerned with the marketing research process and information systems

for decision making. It begins by discussing the marketing research process that is used to

develop useful information for decision making. Then, marketing information systems are

briefly discussed. The chapter is intended to provide a detailed introduction to many of the

important topics in the area, but it does not provide a complete explanation of the plethora

of marketing research topics.

THE ROLE OF MARKETING RESEARCH

Marketing research is the process by which information about the environment is

generated, analyzed, and interpreted for use in marketing decision making.1 It cannot

be overstated that marketing research is an aid to decision making and not a substitute for it. In other words, marketing research does not make decisions, but it can substan- tially increase the chances that good decisions are made. Unfortunately, too many mar-

keting managers view research reports as the final answer to their problems; whatever

the research indicates is taken as the appropriate course of action. Instead, marketing

managers should recognize that (1) even the most carefully executed research can be

fraught with errors; (2) marketing research does not forecast with certainty what will

happen in the future; and (3) they should make decisions in light of their own knowledge

and experience, since no marketing research study includes all of the factors that could

influence the success of a strategy.

Although marketing research does not make decisions, it can reduce the risks associ ated

with managing marketing strategies. For example, it can reduce the risk of introducing

new products by evaluating consumer acceptance of them prior to full-scale introduction.

Marketing research is also vital for investigating the effects of various marketing strategies

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Chapter Two Marketing Research: Process and Systems for Decision Making 33

after they have been implemented. For example, marketing research can examine the effects

of a change in any element of the marketing mix on customer perception and behavior.

At one time, marketing researchers were primarily engaged in the technical aspects of

research, but were not heavily involved in the strategic use of research findings. Today,

however, many marketing researchers work hand-in-hand with marketing managers

throughout the research process and have responsibility for making strategic recommenda-

tions based on the research.

THE MARKETING RESEARCH PROCESS

Marketing research can be viewed as systematic processes for obtaining information to

aid in decision making. There are many types of marketing research, and the framework

illustrated in Figure 2.1 represents a general approach to the process. Each element of this

process is discussed next.

Purpose of the Research The first step in the research process is to determine explicitly why the research is needed

and what it is to accomplish. This may be much more difficult than it sounds. Quite often

a situation or problem is recognized as needing research, yet the nature of the problem

is not clear or well defined nor is the appropriate type of research evident. Thus, manag-

ers and researchers need to discuss and clarify the current situation and develop a clear

understanding of the problem. At the end of this stage, managers and researchers should

agree on (1) the current situation involving the problem to be researched, (2) the nature

of the problem, and (3) the specific question or questions the research is designed to

investigate. This step is crucial since it influences the type of research to be conducted

and the research design.

Purpose of the research

Plan of the research

Performance of the research

Processing of research data

Preparation of research report

FIGURE 2.1 The Five Ps of the

Research Process

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34 Part B Marketing Information, Research, and Understanding the Target Market

Plan of the Research Once the specific research question or questions have been agreed on, a research plan

can be developed. A research plan spells out the nature of the research to be conducted

and includes an explanation of such things as the sample design, measures, and analysis

techniques to be used. Three critical issues that influence the research plan are (1) whether

primary or secondary data are needed, (2) whether qualitative or quantitative research is

needed, and (3) whether the company will do its own research or contract with a marketing

research specialist.

Primary versus Secondary Data Given the information needed and budget constraints, a decision must be made as to

whether primary data, secondary data, or some combination of the two is needed. Primary data are data collected specifically for the research problem under investigation; second- ary data are those that have previously been collected for other purposes but can be used for the problem at hand. For example, if a company wanted to know why users of a com-

petitive brand didn’t prefer its brand, it may have to collect primary data to find out. On

the other hand, if a company wanted to know the population size of key global markets

that it might enter, it could find this information from secondary sources. Secondary infor-

mation has the advantage of usually being cheaper than primary data, although it is not

always available for strategy-specific research questions.

There are many types of secondary data that could be useful for understanding a market

and for answering a particular research question. There are also many sources of secondary

data. Some of these data can be found from sources internal to the organization such as sales invoices, quarterly sales reports, and marketing research done by the organization for

other purposes but useful for the problem at hand.

Other secondary data must be obtained from sources external to the organization and include information such as the types listed in Figure 2.2. Organizations can get such

information from a number of sources. One source is syndicated data providers, such as

ACNielsen (which offers sales–tracking data across grocery, drug, and mass merchan-

disers among other services) and J.D. Power Associates (which offers in-depth reports

on automotive, travel, health, and other industries). Another external source is the vol-

ume of data and information provided by the government, such as U.S. census data,

Guide to Industrial Statistics, U.S. Industrial Outlook, Survey of Current Business, and Guide to Foreign Trade Statistics. Finally, much useful information about competitors can be found by analyzing their websites, other published reports about them, and their

annual reports.

Qualitative versus Quantitative Research Given a research question, a decision must be made whether qualitative or quantitative

research would be a better approach. Qualitative research typically involves face-to-face

interviews with respondents designed to develop a better understanding of what they think

and feel concerning a research topic, such as a brand name, a product, a package, or an

advertisement. The two most common types of qualitative research in marketing are focus

groups and long interviews. Focus groups typically involve discussions among a small number of consumers led by an interviewer and are designed to generate insights and ideas

about products and brands. Long interviews are conducted by an interviewer with a single respondent for several hours. They are designed to find out such things as the meanings var-

ious products or brands have for an individual or how a product influences a person’s life.

Quantitative research involves more systematic procedures designed to obtain and

analyze numerical data. Four common types of quantitative research in marketing are

observation, surveys, experiments, and mathematical modeling.

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Chapter Two Marketing Research: Process and Systems for Decision Making 35

Observational research involves watching people and recording relevant facts and behaviors. For example, retail stores may use observational research to determine what

patterns customers use in walking through stores, how much time they spend in various

parts of the store, and how many items of merchandise they examine. This information can

be used to design store layouts more effectively. Similarly, many retail marketers do traffic

counts at various intersections to help determine the best locations for stores.

Survey research involves the collection of data by means of a questionnaire by mail, phone, online, or in person. Surveys are commonly used in marketing research to inves-

tigate customer beliefs, attitudes, satisfaction, and many other issues. Mail surveys are

useful for reaching widely dispersed markets but take more time to get responses than tel-

ephone surveys; personal surveys involving structured questions are useful but expensive.

Experimental research involves manipulating one variable and examining its impact on other variables. For example, the price of a product could be changed in one test store,

while left the same in other stores. Comparing sales in the test store with those in other

stores can provide evidence about the likely impact of a price change in the overall market.

Experiments are useful for getting a better idea of the causal relationships among vari-

ables, but they are often difficult to design and administer effectively in natural settings.

Thus, many marketing research experiments are conducted in laboratories or simulated

stores to carefully control other variables that could impact results.

Mathematical modeling often involves secondary data, such as scanner data collected and stored in computer files from retail checkout counters. This approach involves the

development of equations to model relationships among variables and uses econometric

and statistical techniques to investigate the impact of various strategies and tactics on sales

FIGURE 2.2 Common Types of Information Available in a Secondary Data Search

Demographics

Population growth: actual and projected Population density In-migration and out-migration patterns Population trends by age and ethnic background

Employment Characteristics

Labor force growth Unemployment levels Percentage of employment by occupation categories Employment by industry

Economic Data

Personal income levels (per capita and median) Type of manufacturing/service firms Total housing starts Building permits issued Sales tax rates

Competitive Characteristics

Levels of retail and wholesale sales Number and types of competing retailers Availability of financial institutions

Supply Characteristics

Number of distribution facilities Cost of deliveries Level of rail, water, air, and road transportation

Regulations

Taxes Licensing Wages Zoning

International Market Characteristics

Transportation and exporting requirements Trade barriers Business philosophies Legal system Social customs Political climate Cultural patterns Religious and moral background

Source: From Joseph Hair, Jr., Robert Bush, and David Ortinau, Marketing Research 4E, p. 53. Reprinted with permission of McGraw-Hill Education.

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36

Qualitative research is commonly used for

• Identifying a business problem or opportunity situation, or establishing information requirements.

• Obtaining preliminary insights into the motivation, emotional, attitudinal, and personal- ity factors that influence marketplace behaviors.

• Building theories and models to explain marketplace behaviors or relationships between two or more marketing variables.

• Developing valid scales for investigating specific market factors, consumer qualities (e.g., attitudes, emotional feelings, preferences, beliefs, perceptions), and behavioral outcomes.

• Determining the preliminary effectiveness of marketing strategies on actual marketplace behaviors.

• Developing new products and services, or repositioning current product or service images.

Quantitative research is commonly used for

• Validating or answering a business problem or information requirements. • Obtaining detailed descriptions or insights into the motivation, emotional, attitudinal,

and personality factors that influence marketplace behaviors. • Testing theories and models to explain marketplace behaviors or relationships between

two or more marketing variables. • Assessing the reliability and validity of scales for investigating market factors, consumer

qualities (e.g., attitudes, emotional feelings, preferences, beliefs, perceptions) and behavioral outcomes.

• Assessing the effectiveness of marketing strategies on marketplace behaviors. • Examining new-product/service development or repositioning current products or ser-

vice images. • Segmenting and/or comparing large or small differences in markets, new products,

services, or evaluation and repositioning of current products or service images.

Source: From Joseph Hair, Jr., Robert Bush, and David Ortinau, Marketing Research 4E, p.154–155. Reprinted with permission of McGraw-Hill Education.

and brand choices. Math modeling is useful because it provides an efficient way to study

problems with extremely large secondary data sets.

Which of these types of research is best for particular research questions requires

considerable knowledge of each of them. Often, qualitative research is used in early

stages of investigating a topic to get more information and insight about it. Then, quan-

titative approaches are used to investigate the degree to which the insights hold across a

larger sample or population. Figure 2.3 provides a comparison of a variety of qualitative

and quantitative data collection methods.

Company versus Contract Research Most large consumer goods companies have marketing research departments that can

perform a variety of types of research. In addition many marketing research firms,

advertising agencies, and consulting companies do marketing research on a contract

basis. Some marketing research suppliers have special expertise in a particular type of

research that makes them a better choice than doing the research internally. A decision

about whether the marketing research department has the ability to do a particular type of

MARKETING INSIGHT Guidelines for Using Qualitative and Quantitative Marketing Research 2–1

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Chapter Two Marketing Research: Process and Systems for Decision Making 37

Focus groups

Telephone surveys

Mail surveys

Personal (in-depth) interviews

Mall intercepts

Internet surveys

Projective techniques

Observation

Method Advantages Disadvantages

• Depth of information collected. • Flexibility in use. • Relatively low cost. • Data collected quickly.

• Centralized control of data collection. • More cost-effective than personal interviews. • Data collected quickly.

• Cost-effective per completed response. • Broad geographic dispersion. • Ease of administration. • Data collected quickly.

• More depth of response than telephone interviews.

• Generate substantial number of ideas compared with group methods.

• Flexibility in collecting data, answering questions, probing respondents.

• Data collected quickly. • Excellent for concept tests, copy

evaluations, other visuals. • Fairly high response rates. • Inexpensive, quickly executed. • Visual stimuli can be evaluated. • Real-time data processing possible. • Can be answered at convenience of

respondent.

• Useful in word association tests of new brand names.

• Less threatening to respondents for sensitive topics.

• Can identify important motives underlying choices.

• Can collect sensitive data. • Accuracy of measuring overt behaviors. • Different perspective than survey self- reports. • Useful in studies of cross-cultural differences.

• Requires expert moderator. • Questions of group size and acquaintanceships of

participants. • Potential for bias from moderator. • Small sample size. • Resistance in collecting income, financial data. • Limited depth of response. • Disproportionate coverage of low-income segments. • Abuse of phone by solicitors. • Perceived intrusiveness. • Refusal and contact problems with certain segments. • Limited depth of response. • Difficult to estimate nonresponse biases. • Resistance and bias in collecting income, financial

data. • Lack of control following mailing. • Easy to transmit biasing cues. • Not-at-homes. • Broad coverage often infeasible. • Cost per contact high. • Data collection time may be excessive. • Limited time. • Sample composition or representativeness is suspect. • Costs depend on incidence rates. • Interviewer supervision difficult.

• Responses must be checked for duplication, bogus responses.

• Respondent self-selection bias. • Limited ability to qualify respondents and confirm

responses. • Difficulty in generating sample frames for probability

sampling. • Require trained interviewers. • Cost per interview high.

• Appropriate only for frequently occurring behaviors. • Unable to assess opinions of attitudes causing

behaviors. • May be expensive in data-collection-time costs.

FIGURE 2.3 A Comparison of Data Collection Methods Used in Marketing Research

research itself or whether all or part of the research should be contracted with a research

supplier must be made. In either case, schedules for task completion, the exact responsi-

bilities of all involved parties, and cost need to be considered.

Performance of the Research Performance of the research involves preparing for data collection and actually col-

lecting them. The tasks at this stage obviously depend on the type of research that has

Source: From William Bearden, Thomas Ingram and Raymond LaForge, Marketing: Principles and Perspectives 5E, 2007, p. 135. Reprinted with permission

of McGraw-Hill Education.

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38

A. Planning 1. Segmentation: What kinds of people buy our products? Where do they live? How

much do they earn? How many of them are there? 2. Demand estimation: Are the markets for our products increasing or decreasing? Are

there promising markets that we have not yet reached? 3. Environmental assessment: Are the channels of distribution for our products chang-

ing? What should our presence on the Internet be? B. Problem Solving

1. Product a. In testing new products and product-line extensions, which product design is

likely to be the most successful? What features do consumers value most? b. What kind of packaging should we use? c. What are the forecasts for the product? How might we reenergize its life cycle?

2. Price a. What price should we charge for our products? b. How sensitive to price changes are our target segments? c. Given the lifetime value assessments of our segments, should we be discounting

or charging a premium to our most valued customers? d. As production costs decline, should we lower our prices or try to develop

higher-quality products? e. Do consumers use price as a cue to value or a cue to quality in our industry?

3. Place a. Where, and by whom, are our products being sold? Where, and by whom, should

our products be sold? b. What kinds of incentives should we offer the trade to push our products? c. Are our relationships with our suppliers and distributors satisfactory and

cooperative? 4. Promotion

a. How much should we spend on promotion? How should it be allocated to products and to geographic areas?

b. Which ad copy should we run in our markets? With what frequency and media expenditures?

c. What combination of media—newspapers, radio, television, magazines, Internet ad banners—should we use?

d. What is our consumer coupon redemption rate? C. Control

1. What is our market share overall? In each geographic area? By each customer type? 2. Are customers satisfied with our products? How is our record for service? Are there

many returns? Do levels of customer satisfaction vary with market? With segment? 3. Are our employees satisfied? Do they feel well trained and empowered to assist our

customers? 4. How does the public perceive our company? What is our reputation with the trade?

Source: From Dawn Iacobucci and Gilbert A. Churchill, Jr., Marketing Research: Methodological Foundations 10E. © 2010 South-Western, a part of Cengage Learning, Inc. Reproduced by permission. www.cengage. com/permissions.

MARKETING INSIGHT Kinds of Questions that Marketing Research Can Help Answer

been selected and the type of data needed. If secondary data are to be used, they must be

located, prepared for analysis, and possibly paid for. If primary data are to be collected,

then observational forms, questionnaires, or other types of measures must be designed,

pretested, and validated. Samples must be drawn and interviews must be scheduled or

preparations must be made for mailing or phoning selected individuals.

2–2

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39

In terms of actual data collection, a cardinal rule is to obtain and record the maximal

amount of useful information, subject to the constraints of time, money, and respondent

privacy. Failure to obtain and record data clearly can obviously lead to a poor research

study, while failure to consider the rights of respondents raises both practical and ethi-

cal problems. Thus, both the objectives and constraints of data collection must be closely

monitored.

Processing of Research Data Processing research data includes the preparation of data for analysis and the actual analysis

of them. Preparations include such things as editing and structuring data and coding them for

analysis. Data sets should be clearly labeled to ensure they are not misinterpreted or misplaced.

The appropriate analysis techniques for collected data depend on the nature of the

research question and the design of the research. Qualitative research data consist of

interview records that are content analyzed for ideas or themes. Quantitative research data

may be analyzed in a variety of ways depending on the objectives of the research.

Social media monitoring involves the observation and analysis of conversations in social media such as Facebook, Twitter, blogs, and product review sites. Such observation and analysis can provide marketing researchers with a rich source of useful information because these sites are a natural place for consumers to share information about products, brands, and organizations. The analysis looks at patterns of clicks, searches, purchases, and other variables to establish patterns and develop new insights into markets.

Intense interest in personal data about Internet users is booming, along with the prac- tice of “scraping”—using sophisticated software to harvest online conversations and collect personal details from social networking sites, résumé sites, and online forums where people share their lives. Tracking peoples’ activities online to gather details of their behavior and personal interests has become big business. There is even software to match peoples’ real names to the pseudonyms they use on blogs, social nets, and online forums.

Nielsen Buzzmetrics is a leader in social media monitoring, collecting data from 130 mil- lion blogs, 8,000 message boards, Twitter, and social networks. Its services include Threat- Tracker, which alerts a company if its brand is being discussed in a negative way.

A new tool is collecting the equivalent of fingerprints from every computer, cell phone, and TV in the world—every device will have a “reputation” based on its owner’s online behavior, shopping habits, and demographics. This will be more difficult for users to block than earlier tools to monitor online behavior, such as browser cookies. Similarly, “deep packet inspection” technology provides a powerful way of reading packets of data traveling across the Internet to track not just web browsing but all online activity.

The growth of social networks like Facebook and Twitter has led to companies scram- bling to decode the new data about peoples’ online relationships to develop new insights. They are finding that a person is more likely to buy something if online “friends” have bought it. For example, San Francisco company Rapleaf harvests data from blogs, online forums, and social networks, following the network behavior of 480 million people, and advises companies on promotions. From “friendship” data, Rapleaf found that borrowers are a better bet if their friends have higher credit ratings.

Insurance companies are, for example, preparing to use people’s Facebook profiles as a way of setting premiums based on lifestyles—online data about food purchases, activities, and social groups provide an indicator of life expectancy.

Source: From David Cravens and Nigel Piercy, Strategic Marketing 10E, 2013, p. 152. Reprinted with permis- sion of McGraw-Hill Education.

MARKETING INSIGHT Social Media Monitoring for Market Insights 2–3

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40 Part B Marketing Information, Research, and Understanding the Target Market

A critical part of this stage is interpreting and assessing the research results. Seldom, if

ever, do marketing research studies obtain findings that are totally unambiguous. Usually,

relationships among variables or differences between groups are small to moderate, and

judgment and insight are needed to draw appropriate inferences and conclusions. Marketing

researchers should always double-check their analysis and avoid overstating the strength of

their findings. The implications for developing or changing a marketing strategy should be

carefully thought out and tempered with judgment about the overall quality of the study.

Preparation of the Research Report The research report is a complete statement of everything done in a research project and

includes a write-up of each of the previous stages as well as the strategic recommendations

from the research. The limitations of the research should be carefully noted. Figure 2.4

illustrates the types of questions marketing researchers and managers should discuss prior

to submitting the final research report.

Research reports should be clear and unambiguous with respect to what was done and

what recommendations are made. Often research reports must trade off the apparent precision

of scientific jargon for everyday language that managers can understand. Researchers should

work closely with managers to ensure that the study and its limitations are fully understood.

Limitations of the Research Process Although the foregoing discussion presented the research process as a set of simple stages,

this does not mean that conducting quality marketing research is a simple task. Many prob-

lems and difficulties must be overcome if a research study is to provide valuable informa-

tion for decision making.2 For example, consider the difficulties in one type of marketing

research, test marketing. The major goal of most test marketing is to measure new product sales on a limited

basis where competitive retaliation and other factors are allowed to operate freely. In this

way, future sales potential can often be estimated reasonably well. Listed here are a num-

ber of problems that could invalidate test marketing study results.

1. Test market areas are not representative of the market in general in terms of population

characteristics, competition, and distribution outlets.

2. Sample size and design are incorrectly formulated because of budget constraints.

3. Pretest measurements of competitive brand sales are not made or are inaccurate, limiting

the meaningfulness of market share estimates.

4. Test stores do not give complete support to the study such that certain package sizes

may not be carried or prices may not be held constant during the test period.

FIGURE 2.4 Eight Criteria for

Evaluating Marketing

Research Reports

1. Was the type of research appropriate for the research questions? 2. Was the research well designed?

a. Was the sample studied appropriate for the research questions? b. Were measures well developed, pretested, and validated? c. Were the data analysis techniques the best ones for the study?

3. Was there adequate supervision of data collection, editing, and coding? 4. Was the analysis conducted according to standards accepted in the field? 5. Do the findings make sense, given the research question and design, and were they

considered in light of previous knowledge and experience? 6. Are the limitations of the study recognized and explained in detail? 7. Are the conclusions appropriately drawn or are they over- or understated? 8. Are the recommendations for marketing strategy clear and appropriate?

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41

Marketing researchers have ethical responsibilities to the respondents who provide primary data, clients for whom they work, and subordinates who work under them. Here are a number of ethical responsibilities to these groups.

RESPONSIBILITIES TO RESPONDENTS

1. Preserving respondent anonymity. Marketing researchers should ensure that respondents’ identities are safe from invasion of privacy.

2. Avoiding mental stress for respondents. Marketing researchers should minimize the mental stress placed on respondents.

3. Avoiding questions detrimental to respondents. Marketing researchers should avoid asking questions for which the answers conflict with the self-interest of the respondents.

4. Avoiding the use of dangerous equipment or techniques. Physical or reputational harm to respondents based on their participation in marketing research should not occur. Respondents should be informed of any other than minimal risks involved in the research and be free to self-determine their participation.

5. Avoiding deception of respondents. Respondents should not be deceived about the purpose of the study in most cases. Many consider deception acceptable in research where it is needed to obtain valid results, there is minimal risk to respondents, and respondents are debriefed explaining the real purpose of the study.

6. Avoiding coercion of respondents. Marketing researchers should avoid coercing or harassing people to try to get them to agree to be interviewed or fill out questionnaires.

RESPONSIBILITIES TO CLIENTS

1. Providing confidentiality. Marketing researchers are obliged not to reveal information about a client to competitors and should carefully consider when a company should be identified as a client.

2. Providing technical integrity. Marketing researchers are obliged to design efficient studies without undue expense or complexity and accurately report results.

3. Providing administrative integrity. Marketing researchers are obliged to price their work fairly without hidden charges.

4. Providing guidance on research usage. Marketing researchers are obliged to promote the correct usage of research and to prevent the misuse of findings.

RESPONSIBILITIES TO SUBORDINATE EMPLOYEES

1. Creating an ethical work environment. Marketing research managers are obliged to create an ethical work environment where unethical behavior is not encouraged or overlooked.

2. Avoiding opportunities for unethical behavior. Marketing research managers are obliged to avoid placing subordinates in situations where unethical behavior could be concealed but rewarded.

5. Test-market products are advertised or promoted beyond a profitable level for the

market in general.

6. The effects of factors that influence sales, such as the sales force, season, weather

conditions, competitive retaliation, shelf space, and so forth, are ignored in the research.

7. The test-market period is too short to determine whether the product will be repur-

chased by customers.

A list of such problems could be developed for any type of marketing research.

However, careful research planning, coordination, implementation, and control can help

reduce such problems and increase the value of research for decision making.

MARKETING INSIGHT Ethical Responsibilities of Marketing Researchers 2–4

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42 Part B Marketing Information, Research, and Understanding the Target Market

MARKETING INFORMATION SYSTEMS

Most marketers use computer-based systems to help them gather, sort, store, and distribute infor-

mation for marketing decisions.3 A popular form of marketing information system is the mar-

keting decision support system, which is a coordinated collection of data, tools, and techniques

involving both computer hardware and software by which marketers gather and interpret rel-

evant information for decision making. These systems require three types of software:

1. Database management software for sorting and retrieving data from internal and

external sources.

Selected Government Sources

American Factfinder Economics Statistics Briefing Room EDGAR Database of Corporate Information (SEC filings) FedStats GPO Access Stat-USA U.S. Bureau of Labor Statistics U.S. Bureau of the Census U.S. Department of Commerce U.S. Small Business Administration U.S. Patent and Trademark Office CBDNet (Commerce Business Daily)—government procurement, sales, and contract awards

http://factfinder.census.gov/ http://www.whitehouse.gov/fsbr/esbr.html http://www.sec.gov/edgar.shtml http://www.fedstats.gov/ http://www.gpoaccess.gov/ http://www.stat-usa.gov/ http://www.bls.gov/ http://www.census.gov/ http://www.commerce.gov/ http://www.sbaonline.sba.gov/ http://www.uspto.gov/ http://www.cbdnet.access.gpo.gov

FIGURE 2.5 Some Information Sources for Marketing Information Systems

Selected Nonproprietary Sources

Ad* Access Advertising World (ad industry portal) American Demographics Competia Express (industry portal) Global Edge Kerlins.net Qualitative Research Bibliography KnowThis.com Marketing Virtual Library Marketing and Research Library MarketingPower.com

http://scriptorium.lib.duke.edu/adaccess/ http://advertising.utexas.edu/world http://www.demographics.com http://www.competia.com/express/ http://www.demographics.com http://kerlins.net/bobbi/research/qualresearch/bibliography/ http://knowthis.com http://www.mrlibrary.com/ http://ma rketingpower.com

Gallup Poll Harris Poll The Polling Report Public Opinion Public Agenda Roper Center for Public Opinion Research Poll Question Database Forrester Research Reports Roper Reports JD Power Satisfaction Studies Quirk’s Marketing Research Review Ad Forum BizMiner

http://www.gallup.com/poll/ http://www.harrisinteractive.com/harris_poll/ http://www.pollingreport.com/ http://europa.eu.int/comm./public_opinion/ http://www.publicagenda.org/ http://www.ropercenter.uconn.edu http://www.irss.unc.edu/data_archive/pollsearch.html http://forrester.com http://www.nopworld.com http://www.jdpower.com http://www.quirks.com http://www.adforum.com http://www.bizminer.com

Selected Proprietary Sources (with some free information)

Source: From Donald Cooper and Pamela Schindler, Marketing Research, 2006, p. 122–123. Reprinted with permission of McGraw-Hill Education.

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Chapter Two Marketing Research: Process and Systems for Decision Making 43

2. Model base management software that contains routines for manipulating data in ways

that are useful for marketing decision making.

3. A dialog system that permits marketers to explore databases and use models to produce

information to address their decision-making needs.

Marketing decision support systems are designed to handle information from both internal

and external sources. Internal information includes such things as sales records, which can be

divided by territory, package size, brand, price, order size, or salesperson; inventory data that

can indicate how rapidly various products are selling; or expenditure data on such things as

advertising, personal selling, or packaging. Internal information is particularly important for

investigating the efficiency and effectiveness of various marketing strategies.

External information is gathered from outside the organization and concerns changes

in the environment that could influence marketing strategies. External information is

needed concerning changes in global economies and societies, competitors, customers,

and technology. Figure 2.5 lists a sample of sources of external information that could be

monitored by a marketing information system to help marketers make better decisions. Of

course, information from marketing research studies conducted by an organization is also

put into marketing information systems to improve marketing strategy development.

SUMMARY

This chapter emphasized the importance of marketing research for making sound marketing

strategy decisions. The chapter discussed marketing research as a process involving several

stages, which include determining the purpose of the research, designing the plan for the

research, performing the research, processing the research data, and preparing the research

report. Then, marketing information systems were discussed and one type, the marketing

decision support system, was explained. Such systems should provide decision makers with

the right information, at the right time in the right way, to make sound marketing decisions.

Burns, Alvin C. and Ronald Bush. Marketing Research, 7th ed. Upper Saddle River, NJ: Prentice-Hall, 2014.

Churchill, Gilbert A., Jr.; Tom J. Brown; and Tracy A. Suter. Basic Marketing Research. 8th ed. Mason, OH: Thomson South-Western, 2014.

Hair, Joseph F., Jr., Robert P. Bush, and David J. Ortinau. Marketing Research. 4th ed. Burr Ridge, IL: McGraw-Hill/Irwin, 2009.

Iacobucci Dawn, and Gilbert A. Churchill Jr. Marketing Research: Methodological Foundations. 10th ed. Mason, OH: Thomson South-Western, 2010.

Molhatra, Naresh K. Marketing Research. 6th ed. Upper Saddle River, NJ: Pearson Education, 2010. Zikmund William G., and Barry J. Babin. Essentials of Marketing Research. 5th ed. Mason, OH: Thomson South-Western, 2013.

Additional Resources

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44 Part B Marketing Information, Research, and Understanding the Target Market

Experimental research: Experimental research involves manipulating one variable and examin- ing its impact on other variables.

Focus groups: A type of qualitative research that typically involves discussions among a small number of consumers led by an interviewer and designed to generate insights and ideas about

products and brands.

Long interviews: A type of qualitative research conducted by an interviewer with a single respondent for several hours and designed to find out such things as the meanings various

products and brands have for the person or how a product influences the person’s life.

Marketing research: Marketing research is the process by which information about the environ- ment is generated, analyzed, and interpreted for use in marketing decision making. Most often

consumers or organizational buyers are the subject of the research.

Mathematical modeling: Mathematical modeling involves developing equations to model relationships among variables to investigate the impact of various strategies and tactics on sales

and brand choices.

Observational research: Observational research involves watching people and recording relevant facts and behaviors.

Primary data: Primary data are data collected specifically for the research problem under investigation.

Qualitative research: Qualitative research typically involves face-to-face interviews with respondents designed to develop a better understanding of what they think and feel concerning a

research topic, such as a brand name, a product, a package, or an advertisement.

Quantitative research: Quantitative research involves systematic procedures designed to obtain and analyze numerical data.

Secondary data: Secondary data are those that have previously been collected for other purposes but can be used for the problem at hand.

Survey research: Survey research involves the collection of data bv means of a questionnaire either by mail, phone, online, or in person.

Test marketing: The major goal of most test marketing is to measure new product sales on a lim- ited basis where competitive retaliation and other factors are allowed to operate freely. In this way,

future sales potential can often be estimated reasonably well.

Key Terms and Concepts

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45

3 Consumer Behavior

The marketing concept emphasizes that profitable marketing begins with the discovery

and understanding of consumer needs and then develops a marketing mix to satisfy these

needs. Thus, an understanding of consumers and their needs and purchasing behavior is

integral to successful marketing. Unfortunately, there is no single theory of consumer

behavior that can totally explain why consumers behave as they do. Instead, there are

numerous theories, models, and concepts making up the field. In addition, the majority

of these notions have been borrowed from a variety of other disciplines, such as sociol-

ogy, psychology, anthropology, and economics, and must be integrated to understand

consumer behavior.

In this chapter, consumer behavior will be examined in terms of the model in Figure 3.1.

The chapter begins by reviewing social, marketing, and situational influences on consumer

decision making. These provide information that can influence consumers’ thoughts and

feelings about purchasing various products and brands. The degree to which this information

influences consumers’ decisions depends on a number of psychological influences. Two of

the most important of these are product knowledge and product involvement, which will

then be discussed. The chapter concludes by discussing the consumer decision-making

process.

Chapter

Psychological influences

Consumer decision making

Social influences Situational influencesMarketing influences

FIGURE 3.1 An Overview of the Buying Process

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46

MARKETING INSIGHT A Summary of American Cultural Values

Value General Features Relevance to Marketing

Achievement and success activity

Efficiency and practicality

Material comfort

Individualism

Freedom

External conformity

Humanitarianism

Youthfulness

Fitness and health

Hard work is good; success flows from hard work. Keeping busy is healthy and natural.

Admiration of things that solve problems (e.g., save time and effort). People can improve themselves; tomorrow should be better than today.

“The good life.”

Being oneself (e.g., self-reliance, self-interest, self-esteem).

Freedom of choice.

Uniformity of observable behavior; desire for acceptance.

Caring for others, particularly the underdog. A state of mind that stresses being “young at heart” and having a youthful appearance. Caring about one’s body, including the desire to be physically fit and healthy.

Acts as a justification for acquisition of goods (“You deserve it”). Stimulates interest in products that are time-savers and enhance leisure time. Stimulates purchase of products that function well and save time. Stimulates desire for new products that fulfill unsatisfied needs; ready accept- ance of products that claim to be “new” or “improved.” Fosters acceptance of convenience and luxury products that make life more enjoyable. Stimulates acceptance of customized or unique products that enable a person to “express his or her own personality.” Fosters interest in wide product lines and differentiated products. Stimulates interest in products that are used or owned by others in the same social group. Stimulates patronage of firms that compete with market leaders. Stimulates acceptance of products that provide the illusion of maintaining or fostering youthfulness. Stimulates acceptance of food products, activities, and equipment perceived to maintain or increase physical fitness.

Source: From Leon G. Schiffman and Leslie Lazar Kanuck, Consumer Behavior 10th edition, © 2010. Repro- duced by permission of Pearson Education, Inc., Upper Saddle River, New Jersey.

SOCIAL INFLUENCES ON CONSUMER DECISION MAKING

Behavioral scientists have become increasingly aware of the powerful effects of the social

environment and personal interactions on human behavior. In terms of consumer behav-

ior, culture, social class, and reference group influences have been related to purchase and

consumption decisions. It should be noted that these influences can have both direct and

indirect effects on the buying process. By direct effects, we mean direct communication

between the individual and other members of society concerning a particular decision. By

indirect effects, we mean the influence of society on an individual’s basic values and attitudes

as well as the important role that groups play in structuring an individual’s personality.

Culture and Subculture Culture is one of the most basic influences on an individual’s needs, wants, and behav-

ior, since all facets of life are carried out against the background of the society in which

an individual lives. Cultural antecedents affect everyday behavior, and there is empirical

support for the notion that culture is a determinant of certain aspects of consumer behavior.

3–1

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Chapter Three Consumer Behavior 47

Cultural values are transmitted through three basic organizations: the family, religious

organizations, and educational institutions; and in today’s society, educational institutions

are playing an increasingly greater role in this regard. Marketing managers should adapt

the marketing mix to cultural values and constantly monitor value changes and differences

in both domestic and global markets. To illustrate, one of the changing values in America

is the increasing emphasis on achievement and career success. This change in values has

been recognized by many business firms that have expanded their emphasis on time-saving,

convenience-oriented products.

In large nations such as the United States, the population is bound to lose a significant

amount of its homogeneity, and thus subcultures arise. In other words, there are subcultures in

the American culture where people have more frequent interactions than with the population

at large and thus tend to think and act alike in some respects. Subcultures are based on such

things as geographic areas, religions, nationalities, ethnic groups, and age. Many subcultural

barriers are decreasing because of mass communication, mass transit, and a decline in the

influence of religious values. However, age groups, such as the teen market, baby boomers,

and the mature market, have become increasingly important for marketing strategy. For exam-

ple, since baby boomers (those born between 1946 and 1962) make up about a third of the U.S.

population and soon will account for about half of discretionary spending, many marketers are

repositioning products to serve them. Snickers candy bars, for instance, used to be promoted to

children as a treat but are now promoted to adults as a wholesome between-meals snack.

Social Class While many people like to think of America as a land of equality, a class structure can be

observed. Social classes develop on the basis of such things as wealth, skill, and power. The

single best indicator of social class is occupation. However, interest at this point is in the influence

of social class on the individual’s behavior. What is important here is that different social classes

tend to have different attitudinal configurations and values that influence the behavior of indi-

vidual members. For marketing purposes, four different social classes have been identified.1

Upper Americans comprise 14 percent of the population and are differentiated mainly by having high incomes. This class remains the group in which quality merchandise is most

prized and prestige brands are commonly sought. Spending with good taste is a priority as

are products such as theater; books; investments in art; European travel; household help;

club memberships for tennis, golf, and swimming; and prestige schooling for children.

The middle class comprises 34 percent of the population, and these consumers want to do the right thing and buy what is popular. They are concerned with fashion and buying what

experts in the media recommend. Increased earnings have led to spending on more “worth-

while experiences” for children, including winter ski trips, college education, and shopping

for better brands of clothes at more expensive stores. Appearance of the home is important.

This group emulates the upper Americans, which distinguishes it from the working class.

The working class comprises 38 percent of the population, people who are “family folk” who depend heavily on relatives for economic and emotional support. The emphasis

on family ties is only one sign of how much more limited and different working-class

horizons are socially, psychologically, and geographically compared to those of the middle

class. For them, “keeping up with the times” focuses on the mechanical and recreational,

and thus, ease of labor and leisure are what they continue to pursue.

Lower Americans comprise 16 percent of the population and are as diverse in values and consumption goals as are other social levels. Some members of this group are homeless and

penniless although most work part-time or full-time jobs at low wages. Most receive public

housing, food stamps, and Medicaid. The primary demands of this group are food, clothing,

and other staples. Given that a number of people in this group have little education or resources,

many people feel it is unethical to try to market alcoholic beverages or tobacco products to it.

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48 Part B Marketing Information, Research, and Understanding the Target Market

For the marketing manager, social class offers some insights into consumer behavior and is

potentially useful as a market segmentation variable. However, there is considerable controversy

as to whether social class is superior to income for the purpose of market segmentation.

Reference Groups and Families Groups that an individual looks to (uses as a reference) when forming attitudes and opinions

are described as reference groups.2 Primary reference groups include family and close friends, while secondary reference groups include fraternal organizations and professional  associa-

tions. A buyer may also consult a single individual about decisions, and this individual would

be considered a reference individual.

A person normally has several reference groups or reference individuals for various

subjects or different decisions. For example, a woman may consult one reference group

when she is purchasing a car and a different reference group for lingerie. In other words,

the nature of the product and the role the individual is playing during the purchasing pro-

cess influence which reference group will be consulted. Reference group influence is gen-

erally considered to be stronger for products that are “public” or conspicuous—that is,

products that other people see the individual using, such as clothes or automobiles.

As noted, the family is generally recognized to be an important reference group, and it

has been suggested that the household, rather than the individual, is the relevant unit for

studying consumer behavior.3 This is because within a household the purchaser of goods

and services is not always the user of these goods and services. Thus, it is important for

marketing managers to determine not only who makes the actual purchase but also who

makes the decision to purchase. In addition, it has been recognized that the needs, income,

assets, debts, and expenditure patterns change over the course of what is called the family life cycle. The family life cycle can be divided into a number of stages ranging from single, to married, to married with children of different age groups, to older couples, to solitary

survivors. It may also include divorced people, both with and without children. Because

the life cycle combines trends in earning power with demands placed on income, it is a

useful way of classifying and segmenting individuals and families.4

MARKETING INFLUENCES ON CONSUMER DECISION MAKING

Marketing strategies are often designed to influence consumer decision making and lead

to profitable exchanges. Each element of the marketing mix (product, price, promotion,

place) can affect consumers in various ways.

Product Influences Many attributes of a company’s products, including brand name, quality, newness, and

complexity, can affect consumer behavior. The physical appearance of the product, pack-

aging, and labeling information can also influence whether consumers notice a product

in-store, examine it, and purchase it. One of the key tasks of marketers is to differentiate

their products from those of competitors and create consumer perceptions that the product

is worth purchasing.

Price Influences The price of products and services often influences whether consumers will purchase

them at all and, if so, which competitive offering is selected. Stores, such as Walmart,

which are perceived to charge the lowest prices, attract many consumers based on this

fact alone. For some offerings, higher prices may not deter purchase because consumers

believe that the products or services are higher quality or are more prestigious. However,

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49

many of today’s value- conscious consumers may buy products more on the basis of price

than other attributes.

Promotion Influences Advertising, sales promotions, salespeople, and publicity can influence what consum-

ers think about products, what emotions they experience in purchasing and using them,

and what behaviors they perform, including shopping in particular stores and purchasing

specific brands. Since consumers receive so much information from marketers and screen

out a good deal of it, it is important for marketers to devise communications that (1) offer

consistent messages about their products and (2) are placed in media that consumers in the

target market are likely to use. Marketing communications play a critical role in informing

consumers about products and services, including where they can be purchased, and in

creating favorable images and perceptions.

Place Influences The marketer’s strategy for distributing products can influence consumers in several ways.

First, products that are convenient to buy in a variety of stores increase the chances of consumers

finding and buying them. When consumers are seeking low-involvement products, they are

unlikely to engage in extensive search, so ready availability is important. Second, products

sold in exclusive outlets such as Nordstrom may be perceived by consumers as having higher

quality. In fact, one of the ways marketers create brand equity—that is, favorable consumer

Marketers know that reference groups can influence both product and brand decisions. They also know that reference group influence varies depending on whether the good is used publicly (a car) or privately (a toothbrush) and whether it is a necessity (a mattress) or a luxury (a sailboat). By examining the nature of products and brands on these two dimen- sions, the following matrix can be constructed. Marketers could use this matrix to judge how reference group influence should be used in advertising and personal selling efforts. For example, public luxuries could benefit from ads showing owners being admired and complimented for their product and brand selection, whereas ads for private necessities might focus more on superior functional performance.

MARKETING INSIGHT Reference Group Influence on Products and Brands

Necessity Luxury

Public necessities Public luxuries Reference group influence Reference group influence Public Product: Weak Product: Strong Brand: Strong Brand: Strong Examples: Wristwatch, automobile, Examples: Golf clubs, snow skis, man’s suit sailboat, health club

Private necessities Private luxuries Reference group influence Reference group influence Private Product: Weak Product: Strong Brand: Weak Brand: Weak Examples: Mattress, floor Examples: Plasma TV, trash lamp, refrigerator compactor, ice maker

Source: Adapted from William O. Bearden and Michael J. Etzel, “Reference Group Influences on Product and Brand Purchase Decisions,” Journal of Consumer Research, September 1982, p. 185, as reported in J. Paul Peter and Jerry C. Olson, Consumer Behavior and Marketing Strategy, 9th ed. (Burr Ridge, IL: McGraw-Hill/ Irwin, 2010), pp. 340–341.

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50

MARKETING INSIGHT Consumer (and Marketer) Reactions to the Recession

The recent recession changed the behavior of consumers and marketers. According to a Gallup Poll, 55 percent of consumers said they cut household spending as a result of lower prices in the stock market and fears about the economy. They said they cut back on travel for the holidays (63 percent), eating out at restaurants (81 percent), entertainment such as going to the movies (72 percent), and household services such as housekeeping and lawn service (37 percent). Although the economy has improved, millions of people are still unemployed and many consumers continue to be frugal. Consumers also sold old jewelry and ransacked closets to find “stuff” to put on eBay. According to eBay CEO John Donahoe, Americans typically have about $3,200 worth of goods at home they could sell to raise cash. Coupon usage to trim grocery costs also went up for the first time in 15 years. Rather than use credit cards, many consumers started sav- ing money to buy something they wanted, and layaway plans in which consumers pay in advance for items weekly or monthly also made a comeback. eLayaway, a start-up that handles layaway programs for 1,000 retailers, had its customer base jump from 150 to 3,000 in the fall of the year. The number of consumers who had both a full-time and a part-time job increased 11 percent over the previous year, according to the Bureau of Labor Statistics. Many of these consumers were trying to increase their income so they could save more to help make up some of the losses in their retirement accounts. Also, sales of Blu-ray high defini- tion disks more than tripled during the year as consumers found watching them at home a lot cheaper than a night at the movies. Finally, 29 percent of consumers said they were buying more store and generic brands to save money. So what did marketers do to try to keep merchandise moving and the economy from stalling? Most retailers put products on sale at deep discounts and many companies tried to promote the idea that their products provided value to consumers. For example, Procter & Gamble promoted its new Total Care versions of Tide detergent and Downy fabric softener as products that preserved the look of new clothes. In other words, the products would keep clothes looking new longer so consumers wouldn’t have to buy clothes as often and could save money. Since consumers were eating more meals at home, Campbell and Kraft banded together to promote a low-cost classic meal: tomato soup and a grilled cheese sandwich. “Warm hearts without stretching budgets” read the copy in the ad that shows a package of Kraft Singles cheese slices and a can of Campbell’s tomato soup. Kraft’s DiGiorno pizza aired ads that stated that a home-delivered pizza cost twice as much as a DiGiorno. Gillette ran a series of ads to justify the $20 to $25 price for eight Fusion Power razor blades arguing that “In the world of high performance, what machine can you run for as little as a dollar a week?” Kellogg cereals played up the idea that a bowl of cereal with milk was a meal that cost only 50 cents. It also snatched up paid search terms including “cereal,” “breakfast,” and “value,” on portals such as Google.com to drive budget-conscious con- sumers to its website. When they click on the ad, consumers are linked to a site that plays up the “excellent economic value” of Kellogg’s cereal and offers a dollar-off coupon to buy some. Velveeta cheese ads tell shoppers to “forget the cheddar, Velveeta is better,” and claim that a package of Velveeta is “twice the size of cheddar, for the same price.” In sum, many consumers tried to find new ways to live within their means and still live comfortably during a difficult economic time. Many marketers tried to convince consumers that their products provided good value for the money, but in a way that did not detract from their high-quality image.

Sources: Mark Jewell, “Recession Breeds Frugality,” Wisconsin State Journal, April 4, 2013, p. C1t; Jarne O’Donnell and Sandra Block, “Consumers Get Frugal, So Retailers Get Creative,” USA Today, January 28, 2009, p. B1; Mindy Fetterman, “Americans Are Digging Deep to Save Money,” USA Today, November 17, 2008, p. 1A+; Laura Petrecca, “Marketers Try to Promote Value Without Cheapening Image,” USA Today, November 17, 2008, p.1B+.

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Chapter Three Consumer Behavior 51

perceptions of brands—is by selling them in prestigious outlets. Third, offering products by

nonstore methods, such as on the Internet or in catalogs, can create consumer perceptions that

the products are innovative, exclusive, or tailored for specific target markets.

SITUATIONAL INFLUENCES ON CONSUMER DECISION MAKING

Situational influences can be defined as all the factors particular to a time and place that

have a demonstrable and systematic effect on current behavior. In terms of purchasing situ-

ations, five groups of situational influences have been identified.5 These influences may be

perceived either consciously or subconsciously and may have considerable effect on product

and brand choice.

1. Physical features are the most readily apparent features of a situation. These features include geographical and institutional location, decor, sounds, aromas, lighting, weather,

and visible configurations of merchandise or other materials.

2. Social features provide additional depth to a description of a situation. These include other persons prese nt, their characteristics, their apparent roles and interpersonal

interactions.

3. Time is a dimension of situations that may be specified in units ranging from time of day to season of the year. Time also may be measured relative to some past or future event for

the situational participant. This allows such conceptions as time since last purchase, time since

or until meals or paydays, and time constraints imposed by prior or standing commitments.

4. Task features of a situation include an intent or requirement to select, shop for, or obtain information about a general or specific purchase. In addition, task may reflect different

buyer and user roles anticipated by the individual. For instance, a person shopping for a small

appliance as a wedding gift for a friend is in a different situation than when shopping for a

small appliance for personal use.

5. Current conditions make up a final feature that characterizes a situation. These are momentary moods (such as acute anxiety, pleasantness, hostility, and excitation) or

momentary conditions (such as cash on hand, fatigue, and illness) rather than chronic indi-

vidual traits. These conditions are considered to be immediately antecedent to the current

situation to distinguish the states the individual brings to the situation from states of the

individual resulting from the situation. For instance, people may select a certain motion pic-

ture because they feel depressed (an antecedent state and a part of the choice situation), but

the fact that the movie causes them to feel happier is a response to the consumption situa-

tion. This altered state then may become antecedent for behavior in the next choice situation

encountered, such as buying a hot dog from a street vendor after leaving the theater.

PSYCHOLOGICAL INFLUENCES ON CONSUMER DECISION MAKING

Information from group, marketing, and situational influences affects what consumers think

and feel about particular products and brands. However, a number of psychological factors

influence how this information is interpreted and used and how it affects the consumer

decision-making process. Two of the most important psychological factors are product

knowledge and product involvement.6

Product Knowledge Product knowledge refers to the amount of information a consumer has stored in her or his  memory about particular product classes, product forms, brands, models, and ways

to purchase them. For example, a consumer may know a lot about coffee (product class),

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52 Part B Marketing Information, Research, and Understanding the Target Market

ground versus instant coffee (product form), Folgers versus Maxwell House (brand), and

various package sizes (models) and stores that sell it (ways to purchase).

Group, marketing, and situational influences determine the initial level of prod-

uct knowledge as well as changes in it. For example, a consumer may hear about a new

Starbucks opening up from a friend (group influence), see an ad for it in the newspaper

(marketing influence), or see the coffee shop on the way to work (situational influence).

Any of these increase the amount of product knowledge, in this case, a new source for

purchasing the product.

The initial level of product knowledge may influence how much information is sought

when deciding to make a purchase. For example, if a consumer already believes that

Folgers is the best-tasting coffee, knows where to buy it, and knows how much it costs,

little additional information may be sought.

Finally, product knowledge influences how quickly a consumer goes through the

decision-making process. For example, when purchasing a new product for which the

consumer has little product knowledge, extensive information may be sought and more time

may be devoted to the decision.

Product Involvement Product involvement refers to a consumer’s perception of the importance or personal relevance of an item. For example, Harley-Davidson motorcycle owners are generally highly involved

in the purchase and use of the product, brand, and accessories. However, a consumer buying a

new toothbrush would likely view this as a low-involvement purchase.

Product involvement influences consumer decision making in two ways. First, if the pur-

chase is for a high-involvement product, consumers are likely to develop a high degree of

product knowledge so that they can be confident that the item they purchase is just right for

them. Second, a high degree of product involvement encourages extensive decision making by

consumers, which likely increases the time it takes to go through the decision-making process.

CONSUMER DECISION MAKING

The process by which consumers make decisions to purchase various products and brands

is shown in Figure 3.2. In general, consumers recognize a need for a product, search for

informa tion about alternatives to meet the need, evaluate the information, make purchases,

and evaluate the decision after the purchase. There are three types of decision making, which

vary in terms of how complex or expensive a product is and how involved a consumer is in

purchasing it.

Extensive decision making requires the most time and effort since the purchase typically involves a  highly complex or expensive product that is important to the consumer. For

example, the purchase of a car, house, or computer often involves considerable time and

effort comparing alternatives and deciding on the right one. In terms of the number of

purchases a consumer makes, extensive decision making is relatively rare, but it is criti-

cal for marketers of highly complex or expensive products to understand that consumers

are willing to process considerable information to make the best choice. Thus, marketers

should provide consumers with factual information that highlights competitive advantages

for such high- involvement products.

Limited decision making is more moderate but still involves some time and effort searching for and comparing alternatives. For example, when buying shirts or shorts,

consumers may shop several stores and compare a number of different brands and styles.

Marketers of products for which consumers usually do limited decision making often use

eye-catching advertising and in-store displays to make consumers aware of their products

and encourage consumers to consider buying them.

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Chapter Three Consumer Behavior 53

Routine decision making is the most common type and the way consumers purchase most packaged goods. Such products are simple, inexpensive, and familiar; and consumers

often have developed favorite brands that they purchase without much deliberation. For

example, consumers often make habitual purchases of soft drinks, candy bars, or canned

soup without carefully comparing the relative merits of different brands. Marketers of such

products need to have them readily available for purchase in a variety of outlets and price

them competitively if price is an important criterion to consumers. Marketers of these low-

involvement products often use celebrity spokespeople and other non-product-related cues

to encourage purchases.

Need Recognition The starting point in the buying process is the consumer’s recognition of an unsatisfied

need. Any number of either internal or external stimuli may activate needs or wants and

recognition of them. Internal stimuli are such things as feeling hungry and wanting some

food, feeling a headache coming on and wanting some Excedrin, or feeling bored and

looking for a movie to go to. External stimuli are such things as seeing a McDonald’s sign

and then feeling hungry or seeing a sale sign for winter parkas and remembering that last

year’s coat is worn out.

It is the task of marketing managers to find out what needs and wants a particular product

can and does satisfy and what unsatisfied needs and wants consumers have for which a new

product could be developed. In order to do so, marketing managers should understand what

types of needs consumers may have. A well-known classification of needs was developed

many years ago by Abraham Maslow and includes five types.7 Maslow’s view is that lower-

level needs, starting with physiological and safety needs, must be attended to before higher-

level needs can be satisfied. Maslow’s hierarchy is described here:

Physiological needs. This category consists of the primary needs of the human body, such as food, water, and sex. Physiological needs will dominate when all needs are

unsatisfied. In such a case, none of the other needs will serve as a basis for motivation.

Safety needs. With the physiological needs met, the next higher level assumes impor- tance. Safety needs consist of such things as protection from physical harm, ill health,

and economic disaster and avoidance of the unexpected.

Belongingness and love needs. These needs are related to the social and gregarious nature of humans and the need for companionship. This level in the hierarchy is the

point of departure from the physical or quasi-physical needs of the two previous lev-

els. Nonsatisfaction of this level of need may affect the mental health of the individual.

Esteem needs. These needs consist of both the need for awareness of importance to oth- ers (self-esteem) and actual esteem from others. Satisfaction of these needs leads to feel-

ings of self-confidence and prestige.

Postpurchase evaluation

Purchase decision

Alternative evaluation

Alternative search

Need recognition

Consumer decision making

FIGURE 3.2 The Consumer Decision-Making Process

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54 Part B Marketing Information, Research, and Understanding the Target Market

Self-actualization needs. These can be defined as the desire to become everything one is capable of becoming. This means that the individual will fully realize her or his

talents and capabilities.

Maslow assumed that satisfaction of these needs is only possible after the satisfaction

of all the needs lower in the hierarchy. While the hierarchical arrangement of Maslow pre-

sents a convenient explanation, it is probably more realistic to assume that the various need

categories overlap. Thus, in affluent societies, many products may satisfy more than one of

these needs. For example, gourmet foods may satisfy both the basic physiological need of

hunger as well as esteem and status needs for those who serve gourmet foods to their guests.

Alternative Search Once a need is recognized, the individual then searches for alternatives for satisfying

the need. The individual can collect information from five basic sources for a particular

purchase decision.

1. Internal sources. For many purchases, consumers have had previous experience dealing with particular needs and wants. Consumers can readily “search” through their

memories for stored information and experiences dealing with need-satisfying alterna-

tives. If a previously acceptable product and brand is remembered, a purchase decision

may be made with little or no additional information search or evaluation. A purchase may

be made quickly at a store or website. This is quite common for simple, inexpensive prod-

ucts that are frequently purchased and for brands to which the consumer is highly loyal.

2. Group sources. A common source of information for purchase decisions comes from communication with other people, such as family, friends, and neighbors. This infor-

mation can be conveyed via face-to-face conversations as well as via social media like

Facebook or Twitter. Generally, a consumer views some of these relevant others as having

particular expertise for the product class being considered. Group sources are often the

most powerful influence on purchase decisions.

3. Marketing sources. Marketing sources include such things as advertising, salespeople, dealers, packaging, websites, and displays. For many purchases that require a high degree of

decision making, consumers first go to their search engines and look up manufacturer and

retail websites to collect information about products and brands. Marketing sources provide a

major means by which consumers learn about purchase options. However, consumers often do

not trust these sources as much as group or public sources because they are viewed as biased.

4. Public sources. Public sources of information include such things as product ratings in Consumer Reports; buyer reviews on websites like Amazon.com; and articles written about the product in newspapers, in magazines, on independent blogs, and on other web-

sites. Here, product quality and value perceptions are important marketing management

considerations because many of these sources are highly trusted by consumers. They are

more trusted because their purpose is to provide useful information for making purchase

decisions rather than to actually sell particular products.

5. Experiential sources. Experiential sources refer to handling, examining, and perhaps trying on or using a product. This usually requires an actual shopping trip to a brick-and-

mortar store or trying out the products and brands owned by friends and relatives. Alterna-

tively, consumers can order online in order to have the product delivered so it can be tried

out and kept if acceptable.

The consumer then processes information collected from these sources.8 However, the

exact nature of how individuals process information to form evaluations of products is not

fully understood. In general, information processing is viewed as a four-step process in

which the individual is (1) exposed to information, (2) becomes attentive to the information,

(3) understands the information, and (4) retains the information.9

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MARKETING INSIGHT Ethical Norms for Marketers

The marketing profession has long recognized the need to uphold its integrity, honor, and dignity. Listed here are the ethical norms established by the American Marketing Associa- tion to be used by marketers in dealing with consumers and other stakeholders. As marketers we must:

1. Do no harm. This means consciously avoiding harmful actions or omissions by embod- ying high ethical standards and adhering to all applicable laws and regulations in the choices we make.

2. Foster trust in the marketing system. This means striving for good faith and fair dealing so as to contribute toward the efficacy of the exchange process as well as avoid- ing deception in product design, pricing, communication, and delivery of distribution.

3. Embrace ethical values. This means building relationships and enhancing consumer confidence in the integrity of marketing by affirming these core values: honesty, respon- sibility, fairness, respect, transparency, and citizenship.

Source: www.marketingpower.com, Reprinted with permission.

Alternative Evaluation During the process of collecting information or, in some cases, after information is acquired,

the consumer evaluates alternatives on the basis of what he or she has learned. One approach

to describing the evaluation process is as follows:

1. The consumer has information about a number of brands in a product class.

2. The consumer perceives that at least some of the brands in a product class are viable

alternatives for satisfying a recognized need.

3. Each of these brands has a set of attributes (color, quality, size, and so forth).

4. A set of these attributes is relevant to the consumer, and the consumer perceives that

different brands vary in how much of each attribute they possess.

5. The brand that is perceived as offering the greatest number of desired attributes in the

desired amounts and desired order will be the brand the consumer will like best.

6. The brand the consumer likes best is the brand the consumer will intend to purchase.10

Purchase Decision If no other factors intervene after the consumer has decided on the brand that is intended for

purchase, the actual purchase is a common result of search and evaluation. Actually, a pur-

chase involves many decisions, which include product type, brand, model, dealer selection,

and method of payment, among other factors. In addition, rather than purchasing, the  con-

sumer may make a decision to modify, postpone, or avoid purchase based on an inhibitor to

purchase or a perceived risk.

Traditional risk theorists believe that consumers tend to make risk-minimizing deci-

sions based on their perceived definition of the particular purchase. The perception of risk is based on the possible consequences and uncertainties involved. Consequences may

range from economic loss, to embarrassment if a new food product does not turn out well,

to actual physical harm. Perceived risk may be either functional (related to financial and

performance considerations) or psychosocial (related to whether the product will further

one’s self- or reference-group image). The amount of risk a consumer perceives in a par-

ticular product depends on such things as the price of the product and whether other people

will see the individual using it.

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56 Part B Marketing Information, Research, and Understanding the Target Market

The perceived risk literature emphasizes that consumers generally try to reduce risk in their

decision making. This can be done by either reducing the possible negative consequences or

by reducing the uncertainty. The possible consequences of a purchase might be minimized by

purchasing in small quantities or by lowering the individual’s aspiration level to expect less in

the way of results from the product. However, this cannot always be done. Thus, reducing risk

by attempting to increase the certainty of the purchase outcome may be the more widely used

strategy. This can be done by seeking additional information regarding the proposed purchase.

In general, the more information the consumer collects prior to purchase, the less likely post-

purchase dissonance is to occur.

Postpurchase Evaluation In general, if the individual finds that a certain response achieves a desired goal or satis-

fies a need, the success of this cue-response pattern will be remembered. The probability

of responding in a like manner to the same or similar situation in the future is increased.

In other words, the response has a higher probability of being repeated when the need

and cue appear together again, and thus it can be said that learning has taken place. Fre-

quent reinforcement increases the habit potential of the particular response. Likewise, if a

response does not satisfy the need adequately, the probability that the same response will be

repeated is reduced.

For some marketers this means that if an individual finds that a particular product

fulfills the need for which it was purchased, the probability is high that the individual

will repurchase the product the next time the need arises. The firm’s promotional efforts

often act as the cue. If an individual repeatedly purchases a product with favorable

results, loyalty may develop toward the particular product or brand. This loyalty can

result in habitual purchases, and such habits are often extremely difficult for competing

firms to alter.

Although many studies in the area of buyer behavior center on the buyer’s attitudes,

motives, and behavior before and during the purchase decision, behavior after the purchase

has also been studied. Specifically, studies have been undertaken to investigate postpur-

chase dissonance, as well as postpurchase satisfaction.

The occurrence of postdecision dissonance is related to the concept of cognitive disso- nance. This theory states that there is often a lack of consistency or harmony among an indi- vidual’s various cognitions, or attitudes and beliefs, after a decision has been made—that is,

the individual has doubts and second thoughts about the choice made. Further, it is more likely

that the intensity of the anxiety will be greater when any of the following conditions exist:

1. The decision is an important one psychologically or financially, or both.

2. There are a number of forgone alternatives.

3. The forgone alternatives have many favorable features.

These factors can relate to many buying decisions. For example, postpurchase disso-

nance might be expected to be present among many purchasers of such products as auto-

mobiles, major appliances, and homes. In these cases, the decision to purchase is usually

an important one both financially and psychologically, and a number of favorable alterna-

tives are usually available.

These findings have much relevance for marketers. In a buying situation, when a purchaser

becomes dissonant, it is reasonable to predict such a person would be highly receptive to

advertising and sales promotion that support the purchase decision. Such communication

presents favorable aspects of the product and can be useful in reinforcing the buyer’s wish to

believe that a wise purchase decision was made. For example, purchasers of major appliances

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57

Increasing the Influencing Factor Influencing Factor Causes the Search to:

I. Market characteristics A. Number of alternatives Increase B. Price range Increase C. Store concentration Increase D. Information availability Increase

1. Advertising 2. Point-of-purchase 3. Sales personnel 4. Packaging 5. Experienced consumers 6. Independent sources II. Product characteristics

A. Price Increase B. Differentiation Increase C. Positive products Increase

III. Consumer characteristics A. Learning and experience Decrease B. Shopping orientation Mixed C. Social status Increase D. Age and household life cycle Mixed E. Product involvement Mixed F. Perceived risk Increase

IV. Situational characteristics A. Time availability Increase B. Purchase for self Decrease C. Pleasant surroundings Increase D. Social surroundings Mixed E. Physical/mental energy Increase

Source: From Delbert Hawkins, David Mothersbaugh and Roger Best, Consumer Behavior: Building Market- ing Strategy 12E, 2013, p. 528. Reprinted with permission of McGraw-Hill Education.

or automobiles might be given a phone call or sent a letter reassuring them that they have

made a wise purchase.

As noted, researchers have also studied postpurchase consumer satisfaction. Much

of  this work has been based on what is called the disconfirmation paradigm. Basically, this approach views satisfaction with products and brands as a result of two other variables.

The first variable is the expectations a consumer has about a product before purchase.

These expectations concern the beliefs the consumer has about the product’s performance.

The second variable is the difference between expectations and postpurchase percep-

tions of how the product actually performed. If the product performed as well as expected

or better than expected, the consumer will be satisfied with the product. If the product per-

formed worse than expected, the consumer will be dissatisfied with it.

One implication of this view for marketers is that care must be taken not to raise

prepurchase expectations to such a level that the product cannot possibly meet them. Rather, it

is important to create positive expectations consistent with the product’s likely performance.11

MARKETING INSIGHT Factors Affecting Information Search by Consumers 3–5

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58 Part B Marketing Information, Research, and Understanding the Target Market

SUMMARY

This chapter presented an overview of consumer behavior. Social, marketing, and situational

influences on consumer decision making were discussed first, followed by a discussion of

two important psychological factors: product knowledge and product involvement. Con-

sumer decision making, which can be extensive, limited, or routine, was viewed as a series

of stages: need recognition, alternative search, alternative evaluation, purchase decision,

and postpurchase evaluation. Clearly, understanding consumer behavior is a prerequisite for

developing successful marketing strategies.

Additional Resources

Hawkins, Del I., and David L. Mothersbaugh. Consumer Behavior: Building Marketing Strategy. 12th ed. Burr Ridge, IL: McGraw-Hill, 2013.

Hoyer, Wayne D., and Deborah J. MacInnis. Consumer Behavior. 6th ed. Mason, OH: South- Western, 2013.

Peter, J. Paul, and Jerry C. Olson. Consumer Behavior and Marketing Strategy. 9th ed. Burr Ridge, IL: McGraw-Hill/Irwin, 2010.

Schiffman, Leon G., and Leslie Kanuck. Consumer Behavior. 10th ed. Upper Saddle River, NJ: Prentice Hall, 2010.

Solomon, Michael R. Consumer Behavior. 10th ed. Upper Saddle River, NJ: Prentice Hall, 2013.

Key Terms and Concepts

Belongingness and love needs: According to Maslow, the needs related to the social and gregarious nature of humans and the need for companionship.

Cognitive dissonance: A lack of harmony among a person’s thoughts after a decision has been made—that is, the individual has doubts and second thoughts about the choice that was made.

Current conditions: Situational influences such as momentary moods and conditions that influ- ence consumer behavior.

Disconfirmation paradigm: Approach that views consumer satisfaction as the degree to which the actual performance of a product is consistent with expectations a consumer had before

purchase. If the product is as good as expected, then the consumer will be satisfied; if not, then

the consumer’s expectations are disconfirmed.

Esteem needs: According to Maslow, the needs that consist of both the need for awareness of importance to others (self-esteem) and actual esteem from others.

Experiential sources of information: The information a consumer gets from handling, examin- ing, and perhaps trying a product while shopping.

Extensive decision making: Level of decision making that requires the most time and effort since the purchase typically involves a highly complex or expensive product that is important to the

consumer.

Family life cycle: Framework that divides the development of a family into a number of stages based on the needs, assets, debts, and expenditures that change as a family begins, grows, and

matures.

Group sources of information: A common source of information for purchase decisions that comes from communication with other people such as family, friends, neighbors, and acquaintances.

Internal sources of information: Stored information and experience a consumer has in memory for dealing with a particular need.

Limited decision making: Level of decision making that requires a moderate amount of time and effort to search for and compare alternatives.

Lower Americans: Comprise 16 percent of the population and have the lowest education levels and resources; the bottom of the social class hierarchy.

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Chapter Three Consumer Behavior 59

Marketing sources of information: Include such things as advertising, salespeople, dealers, pack- aging, and displays offered by marketers to influence consumer decision making and behavior.

Middle class: Middle social class; comprises 34 percent of the population and is concerned with doing the right thing and buying what is popular. This class tends to emulate Upper Americans.

Need recognition: The first step in the consumer decision making process; the recognition by the consumer of a felt need or want.

Physical features of a situation: The geographical and institutional decor, sounds, aromas, light- ing, weather, and visible configurations of merchandise or other materials.

Physiological needs: According to Maslow, the primary needs of the human body such as food, water, and sex.

Product knowledge: The amount of information a consumer has stored in her or his memory about particular product classes, product forms, brands, and models, and ways to purchase them.

Public sources of information: Publicity, such as newspaper articles about the product, and independent ratings of the product, such as Consumer Reports.

Reference groups: Groups that an individual looks to (uses as a reference) when forming attitudes and opinions.

Routine decision making: The most common type of decision making, involves little in the way of thinking and deliberation. It is often habitual and is the way consumers commonly purchase

packaged goods that are inexpensive, simple, and familiar.

Safety needs: According to Maslow, things such as protection from physical harm, ill health, and economic disaster and avoidance of the unexpected.

Self-actualization needs: According to Maslow, the desire to become everything one can become and fully realize talents and capabilities.

Situational influences: All of the factors particular to a time and place that have a demonstrable and systematic effect on current behavior.

Social features of a situation: Include other persons present in a situation, their characteristics, their apparent roles and interpersonal interactions.

Task features of a situation: Include the intent or requirement to select, shop for, or obtain infor- mation about a general or specific purchase.

Time dimension of a situation: The temporal dimension of a situation such as the time of day or season of the year. It can also be relative to other life events such as the time since the last purchase

or time until payday.

Upper Americans: Social class that comprises 14 percent of the population and is differentiated mainly by having high incomes. This social class remains the group in which quality merchandise

is most prized and prestige brands are commonly sought.

Working class: Social class that comprises 38 percent of the population; “family folk” who depend heavily on relatives for economic and emotional support.

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60

Chapter

4 Business, Government, and Institutional Buying

In the previous chapter we discussed consumer behavior and the decision-making pro-

cess used to purchase products and services. However, final consumers are not the only

purchasers of products and services. Rather, businesses, government agencies, and other

institutions buy products and services to maintain their organizations and achieve their

organizational objectives. These organizations are major customers for many marketers.

In this chapter we discuss the nature of these organizations and offer a general model of

the buying process for them. The chapter begins by discussing four categories of organi-

zational buyers and then presents an overview of the organizational buying process.

CATEGORIES OF ORGANIZATIONAL BUYERS

Organizational buyers can be classified in many ways. For example, the U.S. govern-

ment classifies organizations in similar lines of business in the North American Industry

Classification System (NAICS, pronounced “knacks”). NAICS provides information about the number of establishments, sales volume, and number of employees in each industry

broken down by geographic area. Information on NAICS codes is available online at www.

naics.com. In addition, a commercial source, Dun’s Business Locator, provides information

on more than 10 million U.S. businesses. Both of these can provide useful information

for organizational marketers seeking organizational buyers. However, for the purpose of

this  text, it is useful to classify organizational buyers into four categories: These include

producers, intermediaries, government agencies, and other institutions. Taken collectively,

marketing to these organizations is called business-to- business or B2B marketing. Business- to-business marketing has become a topic of increasing interest because it is the major area

where Internet marketing has been done profitably.

Producers These organizational buyers consist of businesses that buy goods and services in order to

produce other goods and services for sale. For example, Dell Inc. buys computer chips from

Intel in order to make computers to be sold to consumers and other organizations. Producers

are engaged in many different industries, ranging from agriculture to manufacturing, from

construction to finance. Together they constitute the largest segment of organizational buyers.

Producers of goods tend to be larger and more geographically concentrated than producers of

services.

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Chapter Four Business, Government, and Institutional Buying 61

Intermediaries Marketing intermediaries or resellers purchase products to resell at a profit. This group

includes a number of types of resellers such as wholesalers (Grainger) and retailers

(Walmart) that buy products from manufacturers and distribute them to consumers

and other organizational buyers. Intermediaries also purchase products and services to

run their own businesses, such as office supplies and maintenance services. Given their

importance to marketing, intermediaries will be discussed in detail in Chapter 10.

Government Agencies In the United States, government agencies operate at the federal, state, and local levels;

there are more than 86,000 governmental agencies in this country that purchase machin-

ery, equipment, facilities, supplies, and services. Government agencies account for tril-

lions of dollars worth of buying, and more than half of this amount represents purchases

by the federal government, making it the world’s biggest customer. The governments of

other countries also are huge customers for marketers. Marketing to government agencies

can be complex since such agencies often have strict purchasing policies and regulations.

Other Institutions Besides businesses and government agencies, marketers also sell products and services

to a variety of other institutions, such as hospitals, museums, universities, nursing homes,

and churches. Many of these are nonprofit organizations that purchase products and ser-

vices to maintain their operations and serve their clientele.

THE ORGANIZATIONAL BUYING PROCESS

Regardless of the type of organization, a buying process is needed to ensure that prod-

ucts and services are purchased and received in a timely and efficient manner. In general,

organizations develop a buying process to serve their purchasing needs. Figure 4.1 pre-

sents a model of organizational buying that represents some of the common influences and

stages in the process.

Organizational buying process

Postpurchase evaluation

Purchase activities

Vendor analysis

Behavioral influencesStructural influencesPurchase-type influences

Organizational need

FIGURE 4.1 A Model of the Organizational Buying Process

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62 Part B Marketing Information, Research, and Understanding the Target Market

PURCHASE-TYPE INFLUENCES ON ORGANIZATIONAL BUYING

A major consideration that affects the organizational buying process is the complexity of the

purchase that is to be made. Three types of organizational purchase based on their degree

of complexity include the straight rebuy, modified rebuy, and new task purchase.1

Straight Rebuy The simplest and most common type of purchase is called a straight rebuy. This type of purchase involves routinely reordering a product from the same supplier that it had been

purchased from in the past. Organizations use a straight rebuy when they are experienced

at buying the product, have an ongoing need for it, and have regular suppliers of it. In

many cases, organizations have computer systems that automatically reorder certain com-

monly used products. Organizations use this simple approach to purchasing because it is

fast and requires relatively few employees.

Straight rebuys are common among organizations that practice just-in-time inventory, which is a system of replenishing parts or goods for resale just before they are needed.

Such buyers do not have time to hunt around for potential suppliers and solicit bids. Instead

they regularly place their orders with a supplier whose quality and timely delivery can be

counted on. If a supplier delivers items that are late or of unacceptable quality, these buyers

will not have a reserve in inventory to draw on. Therefore, organizations that use just-in-

time inventory tend to favor suppliers with a strong commitment to quality.

To retain customers who use straight rebuys, the marketer needs to maintain high-

quality products and reliable service so that the customers will continue to be satisfied with

their purchases.

Modified Rebuy When some aspects of the buying situation are unfamiliar, the organization will use a modi- fied rebuy. This type of purchase involves considering a limited number of alternatives before making a selection. Organizational buyers follow this approach rather than a straight rebuy

when a routine purchase changes in some way; for example, a supplier discontinues a product

or stops satisfying the customer, the price of a usual product rises, or a new product becomes

available to meet the same need.

In such situations, the organizational buyer considers the new information and decides what

changes to make. If the change proves satisfactory and the product is one needed routinely, the

buyer may then make it a straight rebuy. Marketers seek to win new organizational custom-

ers by giving them reasons to change from a straight rebuy to a modified rebuy in which the

marketer’s products are considered.

New Task Purchase Organizations purchase some products only occasionally, especially in the case of large

investments such as machinery, equipment, and real estate. In these cases, the organiza-

tion may use a new task purchase. This type of purchase involves an extensive search for information and a formal decision process.

New task purchases are most often used for big-ticket items, so the cost of a mistake

is great. Therefore, a new task purchase is time consuming and involves a relatively large

number of decision makers, who may consider many alternatives. This is the type of

purchase decision that is most likely to involve joint decision making because many kinds

of expertise are required to make the best decision.

A new task purchase is an opportunity for the marketer to learn about the needs of the

organizations in its target market and to discuss ways to meet organizational needs, such

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Chapter Four Business, Government, and Institutional Buying 63

as through the use of new products and technology. Figure 4.2 offers some suggestions for

reaching organizational buyers for the three types of purchases.

STRUCTURAL INFLUENCES ON ORGANIZATIONAL BUYING

The term structural influences refers to the design of the organizational environment and how it affects the purchasing process. Three important structural influences on organiza-

tional buying are purchasing roles, organization-specific factors, and purchasing policies

and procedures.

Purchasing Roles It is common in organizational buying for purchases to be made cross-functionally with

representatives from different functional departments playing various roles in the process.

Taken collectively, these are called the buying center and include the following roles:

1. Initiators, who start the purchasing process by recognizing a need or problem in the organization. For example, an executive might see a need for faster computers.

2. Users, who are the people in the organization who actually use the product, for exam- ple, an assistant who would use a new word processor.

FIGURE 4.2 Marketing Tactics for Reaching Organizational Buyers

Type of Purchase Marketing Element Promotional Approach

Straight rebuy Advertising Use reminder advertising. Build image for company. Promotion Hospitality events at trade shows. Selling Any personal selling is designed to build relationships. Automate the purchasing process, perhaps through EDI (electronic data exchange). Modified rebuy Advertising Use comparison advertising to show differences between your product and similar products. Promotion Customer site demonstrations, hospitality events at trade shows. Selling Protect relationship with current customers with plant tours, special trade-in pricing, and other offers. Anticipate or respond quickly to changes in customer needs. New task purchase Advertising Detailed, educational ads to try to get users to try product, substitute for old method. Promotion Use demonstrations at trade shows to show how it works. Offer free trials or demonstrations at the customer’s site. Selling Heavy emphasis on understanding customers’ needs and showing how new product satisfies needs better than old methods.

Source: Based on F. Robert Dwyer and John F. Tanner Jr., Business Marketing, 4th ed. Burr Ridge, IL: McGraw-Hill/Irwin, 2009, p. 73.

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64 Part B Marketing Information, Research, and Understanding the Target Market

64

Source: From Roger Kerin, Steven Hartley and William Rudelius, Marketing 11E, 2013, p. 141. Reprinted with permission of McGraw-Hill Education.

3. Influencers, who affect the buying decision, usually by helping define the specifications for what is needed. For example, an information systems manager would be a key influ-

encer in the purchase of a new computer system.

4. Buyers, who have the formal authority and responsibility to select the supplier and negotiate the terms of the contract. For example, in the purchase of ink cartridges, the

purchasing agent would likely perform this role.

5. Deciders, who have the formal or informal power to select or approve the supplier that receives the contract. For important technical purchases, deciders may come from

R&D, engineering, or quality control.

6. Gatekeepers, who control the flow of information in the buying center. Purchasing personnel, technical experts, and assistants can all keep marketers and their information

from reaching people performing the other four roles.2

When several persons are involved in the organizational purchase decision, marketers may

need to use a variety of means to reach each individual or group. Fortunately, it is often easy to

find which individuals in organizations are involved in a purchase because such information

is provided to suppliers. Organizations do this because it makes suppliers more knowledge-

able about purchasing practices, thus making the purchasing process more efficient.3 Also, a

number of firms have developed closer channel relationships that facilitate these transactions.

Organization-Specific Factors Three primary organization-specific factors influence the purchasing process: orientation,

size, and degree of centralization. First, in terms of orientation, the dominant function in an

organization may control purchasing decisions. For example, if the organization is technol-

ogy oriented, it is likely to be dominated by engineering personnel, who will make buying

decisions. Similarly, if the organization is production oriented, production personnel may

dominate buying decisions.

MARKETING INSIGHT Key Characteristics of Organizational Buying Behavior 4–1

Market Characteristics

• Demand for industrial products and services is derived from consumer demand. • Few customers typically exist in an industry, and their purchase orders are large.

Product or Service Characteristics

• Products or services are technical in nature and purchased on the basis of specifications. • Many of the goods purchased are raw and semifinished. • Heavy emphasis is placed on delivery time, technical assistance, and postsale service.

Buying Process Characteristics

• Technically qualified and professional buyers follow established purchasing policies and procedures. • Buying objectives and criteria are typically spelled out, as are procedures for evaluating sellers and

their products or services. • There are multiple buying influences, and multiple parties participate in purchase decisions. • There are reciprocal arrangements, and negotiation between buyers and sellers is commonplace. • Online buying over the Internet is widespread.

Marketing Mix Characteristics

• Direct selling to organizational buyers is the rule, and distribution is very important. • Advertising and other forms of promotion are technical in nature. • Price is often negotiated, evaluated as part of broader seller and product or service qualities, and

frequently affected by quantity discounts.

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Chapter Four Business, Government, and Institutional Buying 65

Second, the size of the organization may influence the purchasing process. If the organi-

zation is large, it will likely have a high degree of joint decision making for other than

straight rebuys. Smaller organizations are likely to have more autonomous decision making.

Finally, the degree of centralization of an organization influences whether decisions are

made individually or jointly with others. Organizations that are highly centralized are less

likely to have joint decision making. Thus, a privately owned, small company with tech-

nology or production orientations will tend toward autonomous decision making, while a

large-scale public corporation with considerable decentralization will tend to have greater

joint decision making.

Purchasing Policies and Procedures Organizations typically develop a number of policies and procedures for various types

of purchases. These policies and procedures are designed to ensure that the appropri-

ate products and services are purchased efficiently and that responsibility for buying

is assigned appropriately. Often a purchasing department will be assigned the task of

centralized buying for the whole organization, and individuals within this department will

have authority to purchase particular types of products and services in a given price range.

A current trend in many organizations is sole sourcing, in which all of a particular type of product is purchased from a single supplier. Sole sourcing has become more popular

because organizational buyers have become more concerned with quality and timely deliv-

ery and less likely to purchase only on the basis of price. Sole sourcing is advantageous for

suppliers because it provides them with predictable and profitable demand and allows them

to build long-term relationships with organizational buyers. It is advantageous for organiza-

tional buyers because it not only increases timely delivery and quality of supplies but also

allows the buyers to work more closely with suppliers to develop superior products that meet

their needs and those of their customers. The use of sole sourcing also simplifies the buying

process and can make what were formerly modified rebuys into simpler straight rebuys.

Of course, many organizational purchases are more complicated and require policies

and procedures to direct the buying process. In many cases, organizations will develop

a list of approved vendors from which buyers have authorization to purchase particular

products. The buyer’s responsibility is to select the vendor that will provide the appropri-

ate levels of quality and service at the lowest cost. These policies and procedures also

specify what positions in the purchasing department or buying center have authority to

make purchases of different types and dollar amounts.

For large one-time projects, such as the construction of a building, organizations may

seek competitive bids for part or all of the project. The development of policies and pro-

cedures for handling such purchases is usually complex and involves a number of criteria

and committees.

BEHAVIORAL INFLUENCES ON ORGANIZATIONAL BUYING

Organizational buyers are influenced by a variety of psychological and social factors. We

will discuss two of these, personal motivations and role perceptions.

Personal Motivations Organizational buyers are, of course, subject to the same personal motives or motivational

forces as other individuals. Although these buyers may emphasize nonpersonal motives in

their buying activities, it has been found that organizational buyers often are influenced by

such personal factors as friendship, professional pride, fear and uncertainty (risk), trust,

and personal ambitions in their buying activities.

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66 Part B Marketing Information, Research, and Understanding the Target Market

1. Avoid the intent and appearance of unethical or compromising practice in relationships, actions, and communications.

2. Demonstrate loyalty to the employer by diligently following the lawful instructions of the employer, using reasonable care and only the authority granted.

3. Refrain from any private or professional business activity that would create a conflict between personal interests and the interests of the employer.

4. Refrain from soliciting or accepting money, loans, credits, or prejudicial discounts and the acceptance of gifts, entertainment, favors, or services from past or potential suppliers that might influence or appear to influence purchasing decisions.

5. Handle confidential or proprietary information belonging to employers or suppliers with due care and proper consideration of ethical and legal ramifications and government regulations.

6. Promote positive supplier relationships through courtesy and impartiality throughout all phases of the purchasing cycle.

7. Refrain from reciprocal agreements that restrain competition. 8. Know and obey the letter and spirit of laws governing the purchasing function and

remain alert to the legal ramifications of purchasing decisions. 9. Encourage all segments of society to participate by demonstrating support for small,

disadvantaged, and minority-owned businesses. 10. Discourage purchasing’s involvement in employer-sponsored programs of personal

purchases that are not business related. 11. Enhance the proficiency and stature of the purchasing profession by acquiring and

maintaining current technical knowledge and the highest standards of ethical behavior. 12. Conduct international purchasing in accordance with the laws, customs, and practices

of foreign countries, consistent with U.S. laws, your organization’s policies, and these Ethical Standards and Guidelines.

Source: Institute for Supply Management as reported in F. Robert Dwyer and John F. Tanner, Business Marketing 4E, McGraw-Hill/Irwin, 2009, p. 86.

MARKETING INSIGHT Code of Ethics for Organizational Buyers

For example, professional pride often expresses itself through efforts to attain status in

the firm. One way to achieve this might be to initiate or influence the purchase of goods

that will demonstrate a buyer’s value to the organization. If new materials, equipment,

or components result in cost savings or increased profits, the individuals initiating the

changes have demonstrated their value at the same time. Fear and uncertainty are strong

motivational forces on organizational buyers, and reduction of risk is often important to

them. This can have a strong influence on purchase behavior. Marketers should under-

stand the relative strength of personal gain versus risk-reducing motives and emphasize

the more important motives when dealing with buyers.

Thus, in examining buyer motivations, it is necessary to consider both personal and

nonpersonal motivational forces and to recognize that the relative importance of each

is not a fixed quantity. It will vary with the nature of the product, the climate within the

organization, and the relative strength of the two forces in the particular buyer.

Role Perceptions A final factor that influences organizational buyers is their own perception of their role.

The manner in which individuals behave depends on their perception of their role, their

commitment to what they believe is expected of their role, the “maturity” of the role type,

and the extent to which the institution is committed to the role type.

4–2

66

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Chapter Four Business, Government, and Institutional Buying 67

67

Different buyers will have different degrees of commitment to their buying role, which

will cause variations in role behavior from one buyer to the next. By commitment we mean willingness to perform their job in the manner expected by the organization. For example,

some buyers seek to take charge in their role as buyer and have little commitment to com-

pany expectations. The implication for marketers is that such buyers expect, even demand,

that they be kept constantly advised of all new developments to enable them to more effec-

tively shape their own role. On the other hand, other buyers may have no interest in prescrib-

ing their role activities and accept their role as given to them. Such a buyer is most concerned

with merely implementing prescribed company activities and buying policies with sanctioned

products. Thus, some buyers will be highly committed to play the role the firm dictates (i.e.,

the formal organization’s perception of their role), while others might be extremely innova-

tive and uncommitted to the expected role performance. Obviously, roles may be heavily

influenced by the organizational climate existing in the particular organization.4

Organizations can be divided into three groups based on differences in degree of employee

commitment. These groups include innovative, adaptive, and lethargic firms. In an innovative

firm, individuals approach their occupational roles with a weak commitment to expected norms of behavior. In an adaptive organization, there is a moderate commitment. In a lethar- gic organization, individuals express a strong commitment to traditionally accepted behavior

and behave accordingly. Thus, a buyer in a lethargic firm would probably be less innovative

in order to maintain acceptance and status within the organization and would keep conflict

within the firm to a minimum.

The process of an organization purchasing online is referred to as e-procurement. E-procurement sales have grown rapidly and account for more sales dollars annually than online sales to consumers. There are a variety of methods by which organizations buy online:

• Industry purchasing sites: Industries have formed websites to streamline and standardize the e-procurement process. Steel, chemicals, paper, and automobile manufactures have created integrated websites to assist their own purchasing departments in online pur- chasing and supplier selection.

• Business function sites: Certain business functions have websites to standardize purchas- ing. For example, individual utilities formerly negotiated by phone to buy and sell elec- tricity with each other; however, today the purchasing of electricity by utility companies is done over a website dedicated to energy management.

• Extranet to major suppliers: Many companies have set up direct links to approved sup- pliers to make the purchase easier and move it closer to frontline decision makers. Office Depot, for example, has a number of direct relationships with thousands of companies.

• Company buying sites: Many large companies have created their own websites to assist vendors’ requests for proposals, and other relevant supplier information as well as some contact information are accessible for review.

There are three major reasons online buying is prominent in organizational markets. First, organizational buyers depend on timely supplier information that describes product availability, technical specifications, application uses, price, and delivery schedules. This information can be conveyed quickly online. Second, online buying substantially reduces buyer order–processing costs. Third, organizational marketers have found that the use of the Internet can reduce marketing costs, particularly sales and advertising expenses, and broaden their potential customer base for many types of products and services.

Sources: Roger A. Kerin, Steven W. Hartley, and William Rudelius, Marketing, 11th ed. (Burr Ridge, IL: McGraw-Hill, 2013), p. 151; Greg W. Marshall and Mark W. Johnston, Essentials of Marketing Management (Burr Ridge, IL: McGraw-Hill, 2011), p. 156.

MARKETING INSIGHT Organizational Buying on the Internet: E-Procurement 4–3

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68 Part B Marketing Information, Research, and Understanding the Target Market

Buyers’ perception of their role may differ from the perception of their role held by others

in the organization. This difference can result in variance in perception of the actual purchase

responsibility held by the buyer. One study involving purchasing agents revealed that, in

every firm included in the study, the purchasing agents believed they had more responsibility

and control over certain decisions than the other influential purchase decision makers in the

firm perceived them as having. The decisions were (1) designing the product, (2) setting

a cost for the product, (3) determining performance life, (4) naming a specific supplier, (5)

assessing the amount of engineering help available from the supplier, and (6) reducing rejects.

This variance in role perception held true regardless of the size of the firm or the significance

of the item purchased to the overall success of the firm. It is important, therefore, that the

marketer be aware that such perceptual differences may exist and to determine as accurately

as possible the amount of control and responsibility over purchasing decisions held by each

purchase decision influencer in the firm.

STAGES IN THE ORGANIZATIONAL BUYING PROCESS

As with consumer buying, most organizational purchases are made in response to a

particular need or problem. Ideally, the products or services purchased will meet the

organizational need and improve the organization’s efficiency, effectiveness, and prof-

its. The organizational buying process can be analyzed as a series of four stages:

organizational need, vendor analysis, purchase activities, and postpurchase evaluation.

Organizational Need Organizations have many needs for products and services to help them survive and meet

their objectives. For example, a manufacturer may need to purchase new machinery to

increase its production capacity and meet demand; a retailer may need to purchase services

from a marketing research firm to better understand its market; a government agency may

need to purchase faster computers to keep up with growing demand for its  services; a

hospital may need to purchase more comfortable beds for its patients. Recognizing these

needs, and a willingness and ability to meet them, often results in organizational purchases.

For straight rebuys, the purchase process may involve little more than a phone call or a few

clicks on a computer to order products and arrange payment and delivery. For modified

rebuys or new task purchases, the process may be much more complex.

Vendor Analysis Organizational buyers must search for, locate, and evaluate vendors of products and services

to meet their needs. Searching for and locating vendors is often easy since they frequently

make  sales calls on organizations that might need their products. Vendors also advertise

in trade magazines and have displays at industry trade shows to increase their visibility to

organizational buyers. However, most organizational purchases begin with an online search

for information and vendors. For products and services that the organization has previously

purchased, the organization may already have developed a list of approved vendors.

Organizational buyers often use a vendor analysis to evaluate possible suppliers. A vendor analysis is the process by which organizational buyers rate each potential supplier on various performance measures such as product quality, on-time delivery, price, payment terms, and

use of modern technology. Figure 4.3 presents a sample vendor analysis form that lists a num-

ber of purchase criteria and the weights one organization used to compare potential suppliers.

A formal vendor analysis can be used for at least three purposes. First, it can be used

to develop a list of approved vendors, all of which provide acceptable levels of products

and services. Organizational buyers can then select any company on the list, simplifying the

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Chapter Four Business, Government, and Institutional Buying 69

purchase process. Second, a vendor analysis could be used to compare competing vendors;

the buyers then select the best one on the basis of the ratings. This could help the organiza-

tion pare down vendors to a single supplier for which a long-term, sole-sourcing relationship

could be developed. Third, a vendor analysis can be done both before and after purchases to

compare performance on evaluation criteria and evaluate the process of vendor selection.

Purchase Activities Straight rebuys may involve a quick online order to an approved vendor or sole-source sup-

plier. However, other types of organizational purchases can involve long time periods with

extensive negotiations on price and terms and formal contracts stating quality, delivery, and

service criteria. The complexity of the product or service, the number of suppliers available,

Supplier Name: __________________________________ Type of Product: _______________________________

Shipping Location: ________________________________ Annual Sales Dollars: ___________________________

5 4 3 2 1 0 Excellent Good Satisfactory Fair Poor N/A

Quality (45%) Defect rates ___ ___ ___ ___ ___ ___ Quality of sample ___ ___ ___ ___ ___ ___ Conformance with quality program ___ ___ ___ ___ ___ ___ Responsiveness to quality problems ___ ___ ___ ___ ___ ___ Overall quality ___ ___ ___ ___ ___ ___

Delivery (25%) Avoidance of late shipments ___ ___ ___ ___ ___ ___ Ability to expand production ___ ___ ___ ___ ___ ___ Performance in sample delivery ___ ___ ___ ___ ___ ___ Response to changes in order size ___ ___ ___ ___ ___ ___ Overall delivery ___ ___ ___ ___ ___ ___

Price (20%) Price competitiveness ___ ___ ___ ___ ___ ___ Payment terms ___ ___ ___ ___ ___ ___ Absorption of costs ___ ___ ___ ___ ___ ___ Submission of cost savings plans ___ ___ ___ ___ ___ ___ Overall price ___ ___ ___ ___ ___ ___

Technology (10%) State-of-the-art components ___ ___ ___ ___ ___ ___ Sharing research & development capability ___ ___ ___ ___ ___ ___ Ability and willingness to help with design ___ ___ ___ ___ ___ ___ Responsiveness to engineering problems ___ ___ ___ ___ ___ ___ Overall technology ___ ___ ___ ___ ___ ___

Buyer: ________________________ Date: ________________________

Comments: ________________________________________________________________________________________________

FIGURE 4.3 Sample Vendor Analysis Form

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70 Part B Marketing Information, Research, and Understanding the Target Market

the importance of the product to the buying organization, and pricing all influence the number

of purchase activities to be performed and their difficulty. For example, an airline buying a

fleet of jumbo jets or a car rental agency buying a fleet of cars may take months or years to

negotiate and make purchases. While such buyers may have considerable leverage in nego-

tiating, it should be remembered that these organizations need the products just as badly as

the sellers need to sell them. Thus, there is often more collaboration among organizational

buyers and sellers than in the consumer market.

Postpurchase Evaluation Organizational buyers must evaluate both the vendors and the products they purchase to

determine whether the products are acceptable for future purchases or whether other sources of

supply should be found. A comparison of the performance of the vendor and products with the

criteria listed on the prior vendor analysis can be useful for this purpose. If the purchase process

goes smoothly and products meet price and quality criteria, then the vendor may be put on the

approved list or perhaps further negotiations can be made to sole-source with the supplier.

One problem in judging the acceptability of suppliers and products is that different func-

tional areas may have different evaluation criteria. Figure 4.4 presents several functional

areas of a manufacturing company and their common concerns in purchasing. Clearly,

these concerns should be considered both prior to purchasing from a particular supplier

and after purchasing to ensure that every area’s needs are being met as well as possible.

SUMMARY

Organizational buyers include individuals involved in purchasing products and services for

businesses, government agencies, and other institutions and agencies. The organizational

buying process is influenced by whether the purchase is a straight rebuy, modified rebuy,

or new task purchase. It is also influenced by people in various purchasing roles, the orien-

tation, size, and degree of centralization of the organization, the organization’s purchasing

policies and procedures, and individuals’ motivations and perceived roles. The organiza-

tional buying process can be viewed as a series of four stages ranging from organizational

need, to vendor analysis, to purchase activities, to postpurchase evaluation. It is important

that companies marketing to organizations understand the influences and process by which

organizations buy products and services so their needs can be met fully and profitably.

FIGURE 4.4 Functional Areas and

Their Key Concerns in

Organizational Buying

Source: From Michael H.

Morris, Leyland F. Pitt and

Earl D. Honeycutt Jr.

Business-to-Business

Marketing 3E, Sage

Publications, 2001, p. 66.

Reproduced with permission

of Sage Publications via

Copyright Clearance Center.

Key Concerns

Name reputation of vendor; ability of vendors to meet design specifications. Delivery and reliability of purchases such that interruption of production schedules is minimized. Impact of purchased items on marketability of the company’s products. Degree to which purchased items are compatible with existing facilities and equipment; maintenance service offered by vendor; installation arrangements offered by vendor. Effects of purchases on cash flow, balance sheet, and income statement positions; variances in costs of materials over estimates; feasibility of make-or-buy and lease options to purchasing. Obtaining lowest possible price at acceptable quality levels; maintaining good relations with vendors. Assurance that purchased items meet prescribed specifica- tions and tolerances, governmental regulations, and customer requirements.

Functional Areas

Design and development engineering Production

Sales/marketing

Maintenance

Finance/accounting

Purchasing

Quality control

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Chapter Four Business, Government, and Institutional Buying 71

Anderson, James C., James A. Narus, and Das Narayandas. Business Marketing Management. 3rd ed. Upper Saddle River, NJ: Prentice Hall, 2009.

Brennan, Ross, Louise E. Canning, and Raymond McDowell. Business-to-Business Marketing. Thousand Oaks, CA: Sage, 2007.

Dwyer, F. Robert, and John F. Tanner. Business Marketing. 4th ed. Burr Ridge, IL: McGraw-Hill/ Irwin, 2009.

Hutt, Michael D., and Thomas W. Speh. Business Marketing Management: B2B. 11th ed. Mason, OH: Thomson South-Western, 2013.

Vitale Robert, Waldemar Pfoertsch, and Joseph Giglierano. Business to Business Marketing. Upper Saddle River, NJ: Prentice Hall, 2011.

Additional Resources

Key Terms and Concepts

Business-to-business (B2B) marketing: Marketing products and services to producers, interme- diaries, government agencies, and other institutions rather than to consumers.

Buyers: In buying centers, the persons who have formal authority and responsibility to select the supplier and negotiate the terms of the contract.

Buying center: An organizational group formed from different departments which has the respon- sibility to evaluate and select products for purchase. Different members of the group may play

different roles in the process.

Deciders: In a buying center, individuals who have the formal and informal power to select or approve the supplier that receives the contract. For routinely purchased products, the decider is

likely to be the buyer but for more complex products, the decider could come from R&D, engineer-

ing, or quality control.

Gatekeepers: The people who control the flow of information to a buying center.

Influencers: In buying centers, the people who affect the buying decision usually by helping define the specifications for what is needed.

Initiators: In buying centers, the people who start the buying process by recognizing a need or a problem in the organization.

Modified rebuy: A type of organizational purchase that involves the consideration of a limited number of alternatives before making a selection.

NAICS: The North American Industry Classification System which provides information about the number of establishments, sales volume, and number of employees in each industry broken

down by geographic area.

New task purchase: A type of organizational purchase that involves an extensive search for information and a formal decision process.

Sole sourcing: Organizational purchasing in which all of a type of product are obtained from a single supplier.

Straight rebuy: A type of organizational purchase that involves routinely reordering a product from the same supplier that it had been purchased from in the past.

Users: In a buying center, the people in the organization that actually use the product to be purchased.

Vendor analysis: The process by which organizational buyers rate each potential supplier on various performance measures such as product quality, on-time delivery, price, payment terms, and

use of modern technology.

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72

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5 Market Segmentation

Market segmentation is one of the most important concepts in marketing. In fact, a primary

reason for studying consumer and organizational buyer behavior is to provide  bases

for effective segmentation, and a large portion of marketing research is concerned with

segmentation. From a marketing management point of view, selection of the appropriate

target market is paramount to developing successful marketing programs.

The logic of market segmentation is quite simple and is based on the idea that a single

product item can seldom meet the needs and wants of all consumers. Typically, consumers vary as to their needs, wants, and preferences for products and services, and  successful

marketers adapt their marketing programs to fulfill these preference patterns. For exam-

ple, even a simple product like chewing gum has multiple flavors, package sizes, sugar

contents, calories, consistencies (e.g., liquid centers), and colors to meet the preferences

of various consumers. While a single product item cannot meet the needs of all consum-

ers, it can almost always serve more than one consumer. Thus, there are usually groups of consumers who can be served well by a single item. If a particular group can be served profitably by a firm, it is a viable market segment. In other words, the firm should develop a marketing mix to serve the group or market segment.

In this chapter we consider the process of market segmentation. We define market segmentation as the process of dividing a market into groups of similar consumers and selecting the most appropriate group(s) for the firm to serve. The group or segment that

a company selects to market to is called a target market. We break down the process of market segmentation into six steps, as shown in Figure 5.1. While we recognize that the

order of these steps may vary, depending on the firm and situation, there are few if any

times when market segmentation analysis can be ignored. In fact, even if the final deci-

sion is to “mass market” and not segment at all, this decision should be reached only after a market segmentation analysis has been conducted. Thus, market segmentation analysis

is a cornerstone of sound marketing planning and decision making.

DELINEATE THE FIRM’S CURRENT SITUATION

As emphasized in Chapter 1, a firm must do a complete situational analysis when embark-

ing on a new or modified marketing program. At the marketing planning level, such an

analysis aids in determining objectives, opportunities, and constraints to be considered

when selecting target markets and developing marketing mixes. In addition, marketing

managers must have a clear idea of the amount of financial and other resources that will

be available for developing and executing a marketing plan. Thus, the inclusion of this

first step in the market segmentation process is intended to be a reminder of tasks to be

performed prior to marketing planning.

Chapter

72

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Chapter Five Market Segmentation 73

DETERMINE CONSUMER NEEDS AND WANTS

As emphasized throughout this text, successful marketing strategies depend on discovering and

satisfying consumer needs and wants. In some cases, this idea is quite operational. To illustrate,

suppose a firm has a good deal of venture capital and is seeking to diversify its interest into

new markets. A firm in this situation may seek to discover a broad variety of unsatisfied needs.

However, in most situations, the industry in which the firm operates specifies the boundaries

of a firm’s need satisfaction activities. For example, a firm in the communication industry may

seek more efficient methods for serving consumers’ long- distance telephone needs.

As a practical matter, new technology often brings about an investigation of consumer needs

and wants for new or modified products and services. In these situations, the firm is seeking

the group of consumers whose needs could best be satisfied by the new or modified product.

Further, at a strategic level, consumer needs and wants usually are translated into more opera-

tional concepts. For instance, consumer attitudes, preferences, and benefits sought, which are

determined through marketing research, are commonly used for segmentation purposes.

DIVIDE MARKETS ON RELEVANT DIMENSIONS

In a narrow sense, this step is often considered to be the whole of market segmentation

(i.e.,  consumers are grouped on the basis of one or more similarities and treated as a

homogeneous segment of a heterogeneous total market). Three important questions should

be considered here:

1. Should the segmentation be a priori or post hoc?

2. How does one determine the relevant dimensions or bases to use for segmentation?

3. What are some bases for segmenting consumer and organizational buyer markets?

Design marketing mix strategy

Develop product positioning

Divide markets on relevant dimensions

Determine consumer needs and wants

Delineate firm’s current situation

Decide segmentation strategy

FIGURE 5.1 A Model of the

Market Segmentation

Process

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74

MARKETING INSIGHT Segmenting the Mobile Phone Market

A Priori versus Post Hoc Segmentation Real-world segmentation has followed one of two general patterns. An a priori segmenta- tion approach is one in which the marketing manager has decided on the appropriate basis for segmentation in advance of doing any research on a market. For example, a manager may

decide that a market should be divided on the basis of whether people are nonusers, light

users, or heavy users of a particular product. Segmentation research is then conducted to

determine the size of each of these groups and their demographic or psychographic profiles.

Post hoc segmentation is an approach in which people are grouped into segments on the basis of research findings. For example, people interviewed concerning their attitudes or

benefits sought in a particular product category are grouped according to their responses.

The size of each of these groups and their demographic and psychographic profiles are

then determined.

Both of these approaches are valuable, and the question of which to use depends in part

on how well the firm knows the market for a particular product class. If through previous

research and experience a marketing manager has successfully isolated a number of key

market dimensions, then an a priori approach based on them may provide more useful

information. In the case of segmentation for entirely new products, a post hoc approach

may be useful for determining key market dimensions. However, even when using a post

hoc approach, some consideration must be given to the variables to be included in the

research design. Thus, some consideration must be given to the relevant segmentation

dimensions regardless of which approach is used.

5–1

Millions of people have mobile phones and tablets with which they can gather product infor- mation, find outlets for buying products, and make purchases. It is not surprising that market- ers are interested in understanding this market so that they can better serve it. Here is a recent segmentation of the mobile phone market and some of the marketing implications of it.

• Mobirati (19 percent) are younger, grew up with cell phones, and the phone is central to life. Trend high on interest in services to use phone to buy in store, accepting ads if get value in return and using information to decide social activities like where to eat.

• Mobile Professionals (17 percent) are both younger and older and use phone for business and personal life. Phone features are critical, and the phone is thought of as an informa- tion tool. Trend high on wanting features beyond just calling and on using phone in many ways to get information they need.

• Social Connectors (22 percent) are younger, communication is key, and the mobile device helps them connect socially. Trend high on feeling that text messages are just as meaningful as a “real” conversation and feeling that their phone connects them to their social world.

• Pragmatic Adopters (22 percent) are older; cell phones came later in their lives. Learning to use beyond just calling. More functional, but still quite important because they are one of the highest-income segments.

• Basic Planners (20 percent) are older, not into mobility or technology. Use cell phone for basic calling. Trend high on using cell phone only for emergencies and only for basic calling.

Clearly these segments and their characteristics are important to marketers in relation to information search and product purchasing. In particular, the Mobirati and Mobile Professi onals are key users of search and buying features of cell phones, and to some degree, are open to mobile “push” marketing in the form of advertisements. Pragmatic adopters seem to be worth pursuing because of their willingness to learn new features and adopt new functionality beyond basic calling, and also because they have high incomes.

Source: From Delbert Hawkins, David Mothersbaugh and Roger Best, Consumer Behavior: Building Marketing Strategy 12E, 2013, p. 523. Reprinted with permission of McGraw-Hill Education.

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Chapter Five Market Segmentation 75

Relevance of Segmentation Dimensions Unfortunately, there is no simple solution for determining the relevant dimensions for

segmenting markets. Certainly, managerial expertise and experience are needed for

selecting the appropriate dimensions or bases on which to segment particular markets.

In most cases, however, at least some initial dimensions can be determined from previ-

ous research, purchase trends, and managerial judgment. For instance, suppose we wish

to segment the market for all-terrain vehicles. Clearly, several dimensions come to mind

for initial consideration, including sex (male), age (18 to 35 years), lifestyle (outdoors-

man), and income level (perhaps $30,000 to $80,000). At a minimum, these variables

should be  included in subsequent segmentation research. Of course, the most market-

oriented approach to segmentation is on the basis of what benefits the potential consumer is

seeking. Thus, consideration and research of sought benefits are a strongly recommended

approach in the marketing literature. This approach will be considered in some detail in the

following section.

Bases for Segmentation A number of useful bases for segmenting consumer and organizational markets are

presented in Figure 5.2. This is by no means a complete list of possible segmentation

variables but represents some useful bases and categories. Two commonly used approaches

for segmenting markets include benefit segmentation and psychographic segmentation.

We will discuss these two in some detail. We will also discuss geodemographic segmen-

tation, a recent development with a number of advantages for marketers.

Benefit Segmentation The belief underlying this segmentation approach is that the benefits people are seeking

in consuming a given product are the basic reasons for the existence of true market seg-

ments.1 Thus, this approach attempts to measure consumer value systems and consumer

perceptions of various brands in a product class. To illustrate, Russell Haley provided the

classic example of a benefit segmentation in terms of the toothpaste market. Haley identi-

fied five basic segments, which are presented in Figure 5.3. Haley argued that this seg-

mentation could be very useful for selecting advertising copy, media, commercial length,

packaging, and new product design. For example, colorful packages might be appropriate

for the sensory segment, perhaps aqua (to indicate fluoride) for the worrier group, and

gleaming white for the social segment because of this segment’s interest in white teeth.

One study used a benefit segmentation approach to segment the market for bank ser-

vices.2 Their research was concerned with the question of whether benefit segments remain

stable across time. While they found some stability in segments, there were some differ-

ences in attribute importance, size, and demographics at different times. Thus, they argue

for ongoing benefit segmentation research to keep track of any changes in a market that

might affect marketing strategy.

Benefit segmentation is clearly a market-oriented approach that seeks to identify con-

sumer needs and wants and to satisfy them by providing products and ser vices with the

desired benefits. It is clearly very consistent with the approach to marketing suggested by

the marketing concept.

Psychographic Segmentation Whereas benefit segmentation focuses on the benefits sought by the consumer, psycho-

graphic segmentation focuses on consumer lifestyles. Consumers are first asked a vari-

ety of questions about their lifestyles and then grouped on the basis of the similarity

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Consumer Markets

Segmentation Base Examples of Market Segments

Geographic: Continents Africa, Asia, Europe, North America, South America Global regions Southeast Asia, Mediterranean, Caribbean Countries China, Canada, France, United States, Brazil Country regions Pacific Northwest, Middle Atlantic, Midwest City, county, or SMSA size Under 5,000 people; 5,000–19,999; 20,000–49,999; 50,000 –99,999; 100,000–249,999;

250,000–499,999; 500,000–999,999; or over a million Population density Urban, suburban, rural Climate Tropical, temperate, cold Demographic: Age Under 6 years old, 6–12, 13–19, 20–29, 30–39, 40–49, 50–59, 601 Gender Male, female Family size 1–2 persons, 3–4 persons, more than 4 persons Family life cycle Single, young married, married with children, sole survivor Income Under $10,000 per year, $10,000–$19,999, $20,000–$29,999, $30,000–$39,999, $40,000–

$49,999, $50,000–59,999, 60,000–69,999, 70,0001 Education Grade school or less, some high school, graduated from high school, some college, graduated

from college, some graduate work, graduate degree Marital status Single, married, divorced, widowed Social: Culture American, Hispanic, African, Asian, European Subculture Religion Jewish, Catholic, Muslim, Mormon, Buddhist Race European American, Asian American, African American, Hispanic American Nationality French, Malaysian, Australian, Canadian, Japanese Social class Upper class, middle class, working class, lower class Thoughts and feelings: Knowledge Expert, novice Involvement High, medium, low Attitude Positive, neutral, negative Benefits sought Convenience, economy, prestige Innovativeness Innovator, early adopter, early majority, late majority, laggards, nonadopter Readiness stage Unaware, aware, interested, desirous, plan to purchase Perceived risk High, moderate, low Behavior: Media usage Newspaper, magazine, TV, Internet Specific media usage Sports Illustrated, Cosmopolitan, Ebony Payment method Cash, Visa, MasterCard, American Express, check Loyalty status None, some, total Usage rate Light, medium, heavy User status Nonuser, ex-user, current user, potential user Usage situation Work, home, vacation, commuting Combined approaches: Psychographics Achievers, strivers, strugglers Person/situation College students for lunch, executives for business dinner Geodemography Money and Brains, American Dreams, Bohemian Mix

Organizational Buyer Markets

Segmentation Base Examples of Market Segments

Company size Small, medium, large relative to industry Purchase quantity Small, medium, large account Product application Production, maintenance, product component Organization type Manufacturer, retailer, government agency, hospital Location North, south, east, west sales territory Purchase status New customer, occasional purchaser, frequent purchaser, nonpurchaser Attribute importance Price, service, reliability of supply

FIGURE 5.2 Useful Segmentation Bases for Consumer and Organizational Buyer Markets

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77

5–2 MARKETING INSIGHT Want to Know Your VALS™ Category?

Check It Out Online

If you are a resident of the United States or Canada, a fluent English-speaker, and age 18 years of age or older, you can learn your VALS type by completing the VALS ques- tionnaire on the Internet. The web address is http://www.strategicbusinessinsights.com/ vals/presurvey.shtml. The survey takes about 10 minutes to complete, and your VALS type will take less than 10 seconds to compute. You will get a report that includes both your primary and secondary VALS type. The VALS website has a lot of information describing the program and different types of VALS segments.

Independent Sensory Segment Sociable Segment Worrier Segment Segment

Principal benefit sought Flavor and product appearance Brightness of teeth Decay prevention Price Demographic strengths Children Teens, young people Large families Men Special behavioral Users of spearmint-flavored Smokers Heavy users Heavy users characteristics toothpaste Brands disproportionately Colgate Macleans, Ultra Brite Crest Cheapest brand favored Lifestyle characteristics Hedonistic Active Conservative Value-oriented

FIGURE 5.3 Toothpaste Market Benefit Segments

of their responses. Lifestyles are measured by asking consumers about their activities (work, hobbies, vacations), interests (family, job, community), and opinions (about social issues, politics, business). The activity, interest, and opinion (AIO) questions

are very general in some studies but in others, at least some of the questions relate to

specific products.3

The best-known psychographic segmentation is called VALS™. Originally developed in

the 1970s, VALS was completely redesigned on a scientific footing in the late 1980s. VALS

explains and predicts consumer behavior. Strategic Business Insights, a spinoff from SRI

International, currently owns and operates VALS.

As shown in Figure 5.4, the U.S. VALS™ framework has eight psychographic groups

based on two dimensions. The vertical dimension segments people based on the degree to

which they are innovative and have resources such as income, education, self-confidence,

intelligence, leadership skills, and energy. The horizontal dimension of primary motiva-

tions provides context about an individual’s self-perception and worldview. For example,

customers driven by knowledge and principles are motivated primarily by ideals. These consumers include the Thinkers and Believers. Consumers driven to demonstrate success

to their peers are motivated primarily by achievement; Achievers and Strivers. Consumers driven by a desire for social or physical activity, variety, and risk taking are motivated

primarily by self-expression; Experiencers and Makers. Innovators and Survivors operate outside of primary motivations. Innovators because they have the most abundant resources

and may express any of the three motivations. Survivors because they have few resources,

live complacently and within their means without a strong primary motivation. Figure 5.4

gives more details about each of the eight groups.4

Marketers can purchase research data that show which VALS™ groups are the primary

buyers of specific products and services either through propriety research projects or with

a license to VALS and GfK MRI. This information can be used to better focus elements of

the marketing mix, such as promotion, on the best target markets.

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78 Part B Marketing Information, Research, and Understanding the Target Market

Innovators. Innovators are successful, sophisticated, take-charge people with high self-esteem. Because they have such abundant resources, they exhibit all three primary motivations in varying degrees. They are change leaders and are the most receptive to new ideas and technologies. Innovators are very active consumers, and their purchases reflect cultivated tastes for upscale, niche products and services. Image is important to Innovators, not as evidence of status or power but as an expression of their taste, independence, and personality. Innovators are among the established and emerging leaders in business and government, yet they continue to seek challenges. Their lives are characterized by variety. Their possessions and recreation reflect a cultivated taste for the finer things in life.

Thinkers. Thinkers are motivated by ideals. They are mature, satisfied, comfortable, and reflective people who value order, knowledge, and responsibility. They tend to be well educated and actively seek out information in the decision-making pro- cess. They are well-informed about world and national events and are alert to opportunities to broaden their knowledge. Thinkers have a moderate respect for the status quo institutions of authority and social decorum, but are open to consider new ideas. Although their incomes allow them many choices, Thinkers are conservative, practical consumers; they look for durability, functionality, and value in the products they buy.

Achievers. Motivated by the desire for achievement, Achievers have goal-oriented lifestyles and a deep commitment to career and family. Their social lives reflect this focus and are structured around family, their place of worship, and work. Achievers live conventional lives, are politically conservative, and respect authority and the status quo. They value consen- sus, predictability, and stability over risk, intimacy, and self-discovery. With many wants and needs, Achievers are active in the consumer marketplace. Image is important to Achievers; they favor established, prestige products and services that

Ideals

Innovators

Believers

Survivors

Achievement Self-expression

High resources High innovation

Primary motivation

Low resources Low innovation

Strivers Makers

Thinkers Achievers Experiencers

FIGURE 5.4 VALS™ Framework and Segments Source: Strategic Business Insights (SBI); www.strategicbusinessinsights.com/VALS Reprinted with permission.

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Chapter Five Market Segmentation 79

Geodemographic Segmentation One problem with many segmentation approaches is that although they identify types or

categories of consumers, they do not identify specific individuals or households within

a market. Geodemographic segmentation identifies specific households in a market by

focusing on local neighborhood geography (such as zip codes) to create classifications

of actual, addressable, mappable neighborhoods where consumers live and shop.5 One

geodemographic system, is called Nielsen PRIZM, which stands for consumers “Potential

Ranking Index of ZIP Markets.” The system classifies every U.S. neighborhood into one

of 14 groups. Each of these groups is further divided into 3 to 6 segments, with a total

of 66 distinct segments in this system. Each group and segment is based on zip codes,

demographic information from the U.S. Census, and information on product use, media

use, and lifestyle preferences. Figure 5.5 shows a sample group with five segments. The

PRIZM system includes maps of different areas that rank neighborhoods on their poten-

tial to purchase specific products and services. The PRIZM segmentation is available on

major marketing databases from leading providers.

The PRIZM system is based on the assumptions that consumers in particular neighbor-

hoods are similar in many respects and that the best prospects are those who actually use a

product or other consumers like them. Marketers use PRIZM to better understand consum-

ers in various markets, what they are like, where they live, and how to reach them. These

data help marketers with target market selection, direct marketing campaigns, site selec-

tion, media selection, and analysis of sales potential in various areas.

FIGURE 5.4 (continued)

demonstrate success to their peers. Because of their busy lives, they are often interested in a variety of time-saving devices.

Experiencers. Experiencers are motivated by self-expression. As young, enthusiastic, and impulsive consumers, Experiencers quickly become enthusiastic about new possibilities but are equally quick to cool. They seek variety and excitement, savoring the new, the offbeat, and the risky. Their energy finds an outlet in exercise, sports, outdoor recreation, and social activities. Experiencers are avid consumers and spend a comparatively high proportion of their income on fashion, entertainment, and socializing. Their purchases reflect the emphasis they place on looking good and having “cool” stuff.

Believers. Like Thinkers, Believers are motivated by ideals. They are conservative, conventional people with concrete beliefs based on traditional, established codes: family, religion, community, and the nation. Many Believers express moral codes that are deeply rooted and literally interpreted. They follow established routines, organized in large part around home, family, community, and social or religious organizations to which they belong. As consumers, Believers are predicta- ble; they choose familiar products and established brands. They favor American products and are generally loyal customers.

Strivers. Strivers are trendy and fun loving. Because they are motivated by achievement, Strivers are concerned about the opinions and approval of others. Money defines success for Strivers, who don’t have enough of it to meet their desires. They favor stylish products that emulate the purchases of people with greater material wealth. Many see themselves as having a job rather than a career, and a lack of skills and focus often prevents them from moving ahead. Strivers are active consum- ers because shopping is both a social activity and an opportunity to demonstrate to peers their ability to buy. As consumers, they are as impulsive as their financial circumstance will allow.

Makers. Like Experiencers, Makers are motivated by self-expression. They express themselves and experience the world by working on it—building a house, raising children, fixing a car, or canning vegetables—and have enough skill and energy to carry out their projects successfully. Makers are practical people who have constructive skills and value self-sufficiency. They live within a traditional context of family, practical work, and physical recreation and have little interest in what lies outside that context. Makers are suspicious of new ideas and large institutions such as big business. They are respect- ful of government authority and organized labor, but resentful of government intrusion on individual rights. They are unimpressed by material possessions other than those with a practical or functional purpose. Because they prefer value to luxury, they buy basic products.

Survivors. Survivors live narrowly focused lives. With few resources with which to cope, they often believe that the world is changing too quickly. They are comfortable with the familiar and are primarily concerned with safety and security. Because they must focus on meeting needs rather than fulfilling desires, Survivors do not show a strong primary motivation. Survivors are cautious consumers. They represent a very modest market for most products and services. They are loyal to favorite brands, especially if they can purchase them at a discount.

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80 Part B Marketing Information, Research, and Understanding the Target Market

FIGURE 5.5 PRIZM Social Group U1—Urban Uptown

Source: www.mybestsegments.com, March 25, 2013.

Group U1 – Urban Uptown

The five segments in Urban Uptown are home to the nation's wealthiest urban consumers. Members of this social group tend to be affluent to middle class, college educated and ethnically diverse, with above-average concentrations of Asian and Hispanic Americans. Although this group is diverse in terms of housing styles and family sizes, residents share an upscale urban perspective that's reflected in their marketplace choices. Urban Uptown consumers tend to frequent the arts, shop at exclusive retailers, drive luxury imports, travel abroad and spend heavily on computer and wireless technology.

The Urban Uptown group consists of the following segments:

04. Young Digerati 07. Money and Brains 16. Bohemian Mix 26. The Cosmopolitans 29. American Dreams

04. Young Digerati – Young Digerati are the nation’s tech–savvy singles and couples living in fashionable neighborhoods on the urban fringe. Affluent, highly educated and ethnically mixed, Young Digerati communities are typically filled with trendy apartments and condos, fitness clubs and clothing boutiques, casual restaurants and all types of bars–from juice to coffee to microbrew.

07. Money and Brains – The residents of Money & Brains seem to have it all: high incomes, advanced degrees and sophisticated tastes to match their credentials. Many of these citydwellers– predominantly white with a high concentration of Asian Americans–are married couples with few children who live in fashionable homes on small, manicured lots.

16. Bohemian Mix – A collection of young, mobile urbanites, Bohemian Mix represents the nation’s most liberal lifestyles. Its residents are a progressive mix of young singles and couples, students and professionals, Hispanics, Asians, African– Americans and whites. In their funky rowhouses and apartments, Bohemian Mixers are the early adopters who are quick to check out the latest movie, nightclub, laptop and microbrew.

26. The Cosmopolitans – These immigrants and descendants of multi– cultural backgrounds in multi-racial, multi- lingual neighborhoods typify the American Dream. Married couples, with and without children, as well as single parents are affluent from working hard at multiple trades and public service jobs. They have big families, which is unusual for social group U1.

29. American Dreams – American Dreams is a living example of how ethnically diverse the nation has become: more than half the residents are Hispanic, Asian or African- American. In these multilingual neighborhoods–one in ten speaks a language other than English–middle-aged immigrants and their children live in middle- class comfort.

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DEVELOP PRODUCT POSITIONING

By this time, the firm should have a good idea of the basic segments of the market that could

potentially be satisfied with its product. The current step is concerned with positioning

the product favorably in the minds of customers relative to competitive products. Several

different positioning strategies can be used. First, products can be positioned by focusing

on their superiority to competitive products based on one or more attributes. For exam-

ple, a car could be positioned as less expensive (Hyundai), safer (Volvo), higher quality

(Toyota), or more prestigious (Lexus) than other cars. Second, products can be positioned

by use or application. For example, Campbell’s soup is positioned not only as a lunch item

but also for use as a sauce or dip or as an ingredient in main dishes. Third, products can be

positioned in terms of particular types of product users. For example, sales for Johnson’s

Baby Shampoo increased dramatically after the company positioned the product not only

for babies but also for active adults who need to wash their hair frequently. Fourth, prod-

ucts can be positioned relative to a product class. For example, Caress soap was positioned

by Lever Brothers as a bath oil product rather than as a soap.  Finally, products can be

positioned directly against particular competitors. For example, Coke and Pepsi and

McDonald’s and Burger King commonly position directly against each other on vari-

ous criteria, such as taste. The classic example of positioning is of this last type: Seven-Up

positioned itself as a tasty alternative to the dominant soft drink, colas.

One way to investigate how to position a product is by using a positioning map, which is a visual depiction of customer perceptions of competitive products, brands, or models.

It is constructed by surveying customers about various product attributes and develop-

ing dimensions and a graph indicating the relative position of competitors. Figure 5.6

Luxurious

Functional

Traditional Sporty

Mercedes Lexus

Porsche BMW

Infiniti Acura

Nissan Toyota

VW Kia

Saturn

Chevrolet

Buick Chrysler

Cadillac

Lincoln

Mercury Ford

Dodge

FIGURE 5.6 Positioning Map for

Automobiles

MARKETING INSIGHT Want to Know Your PRIZM Classification? Check It Out Online

You can find your PRIZM classification by going to www.MyBestSegments.com and click- ing on “ZIP Code Look-Up.” By putting in your zip code (and a security code) you can find out about the segments in your neighborhood. A more detailed explanation of the seg- ments can be found by clicking the “Segment Explorer” tab.

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82

presents a sample positioning map for automobiles that offers marketers a way of assess-

ing whether their brands are positioned appropriately. For example, if Chrysler or Buick

wants to be positioned in the minds of consumers as serious competitors to Lexus, then

their strategies need to be changed to move up on this dimension. After the new strate-

gies are implemented, a new positioning map could be developed to see if the brands

moved up as desired.

Some experts argue that different positioning strategies should be used depend-

ing on whether the firm is a market leader or follower and that followers usually should

not attempt to position directly against the industry leader.6 The main point here is that

in segmenting markets, some segments might have to be forgone because a market-

leading competitive product already dominates in sales and in the minds of customers.

Thus, a smaller or less desirable target market may have to be selected since competing

with market leaders is costly and not often successful.

DECIDE SEGMENTATION STRATEGY

The firm is now ready to select its segmentation strategy. There are four basic alternatives.

First, the firm may decide not to enter the market. For example, analysis to this stage may

reveal there is no viable market niche for the firm’s offering. Second, the firm may decide

MARKETING INSIGHT Can Target Marketing Be Unethical?

Dividing markets into segments and then selecting the best ones to serve is one of the cor- nerstones of sound marketing practice. However, there are situations when target market- ing has been criticized as being unethical.

• R. J. Reynolds Tobacco Company planned to target African American consumers with a new brand of menthol cigarettes, Uptown. This brand was to be advertised with sugges- tions of glamour, high fashion, and night life. After criticism for targeting a vulnerable population, the company canceled plans for the brand.

• RJR planned to target white, 18- to 24-year-old “virile” females with a new cigarette brand, Dakota. It was criticized for targeting young, poorly educated, blue-collar women; and although it expanded the market to include males, Dakota failed in test markets and was withdrawn.

• Heileman Brewing Company planned to market a new brand of malt liquor called PowerMaster. Malt liquor is disproportionately consumed by African Americans and in low- income neighborhoods. Criticism of this strategy led the brand to be withdrawn.

• The food industry has been criticized for many years for promoting high-fat-content foods to children.

One study suggests that whether targeting a group of consumers is unethical depends on two dimensions. The first is the degree to which the product can harm the consumers, and the second is the vulnerability of the group. Thus, to market harmful products to vulnerable target markets is likely to be considered unethical and could result in boycotts, negative word of mouth, and possibly litigation or legislation.

Source: Kevin Freking, “Marketing to Minors,” Wisconsin State Journal, July 31, 2008, p. A7; N. Craig Smith and Elizabeth Cooper-Martin, “Ethics and Target Marketing: The Role of Product Harm and Consumer Vulnerability,” Journal of Marketing, July 1997, pp. 1–20.

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Chapter Five Market Segmentation 83

not to segment but to be a mass marketer. There are at least three situations when this may

be the appropriate decision for the firm:

1. The market is so small that marketing to a portion of it is not profitable.

2. Heavy users make up such a large proportion of the sales volume that they are the only

relevant target.

3. The brand is the dominant brand in the market, and targeting to a few segments would

not benefit sales and profits.

Third, the firm may decide to market to one segment. And fourth, the firm may decide

to market to more than one segment and design a separate marketing mix for each. In any

case, the firm must have some criteria on which to base its segmentation strategy deci-

sions. Three important criteria on which to base such decisions are that a viable segment

must be (1) measurable, (2) meaningful, and (3) marketable.

1. Measurable. For a segment to be selected, the firm must be capable of measuring its size and characteristics. For instance, one of the difficulties with segmenting on the

basis of social class is that the concept and its divisions are not clearly defined and

measured. Alternatively, income is a much easier concept to measure.

2. Meaningful. A meaningful segment is one that is large enough to have sufficient sales and growth potential to offer long-run profits for the firm.

3. Marketable. A marketable segment is one that can be reached and served by the firm in an efficient manner.

Figure 5.7 offers a list of questions marketing managers should answer when deciding

whether a market segment meets these criteria. Segments that do so are viable target markets for

the firm’s offering. The firm must now give further attention to completing its marketing mix.

FIGURE 5.7 Selecting Target

Markets: Some

Questions Marketing

Managers Should

Answer

In order to select the best target markets, marketing managers must evaluate market segments on a number of dimensions. Here is a list of questions managers should answer before selecting target markets.

Measurability Questions

1. What are the appropriate bases for segmenting this market and are these bases readily measurable?

2. Are secondary data available on these bases so that the market segment can be identified and measured inexpensively?

3. If primary data are needed, is there sufficient return on investment to do the research? 4. Are specific names and addresses of people in this market segment needed; or is general

knowledge of their existence, number, and geographic location sufficient? 5. Can purchases of people in this market segment be readily measured and tracked?

Meaningfulness Questions

1. How many people are in this market segment and how frequently will they purchase our product? 2. What market share can we expect in this segment? 3. What is the growth potential of this segment? 4. How strong is competition for this market segment and how is it likely to change in the future? 5. How satisfied are customers in this market segment with current product offerings?

Marketability Questions

1. Can this market segment be reached with our current channels of distribution? 2. If new channels are needed, can we establish them efficiently? 3. What specific promotion media do these people read, listen to, or watch? 4. Can we afford to promote to these people in the appropriate media to reach them? 5. Are people in this market segment willing to pay a price that is profitable for the company? 6. Can we produce a product for this market segment and do so profitably?

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84 Part B Marketing Information, Research, and Understanding the Target Market

DESIGN MARKETING MIX STRATEGY

The firm is now in a position to complete its marketing plan by finalizing the marketing

mix or mixes to be used for each segment. Clearly, selection of the target market and

designing the marketing mix go hand in hand, and thus many marketing mix decisions

should have already been carefully considered. To illustrate, the target market selected

may be price sensitive, so some consideration has already been given to price levels, and

clearly product positioning has many implications for promotion and channel decisions.

Thus, while we place marketing mix design at the end of the model, many of these deci-

sions are made in conjunction with target market selection. In the next six chapters of this text, marketing mix decisions will be discussed in detail.

SUMMARY

The purpose of this chapter was to provide an overview of market segmentation. Market

segmentation was defined as the process of dividing a market into groups of similar con-

sumers and selecting the most appropriate group(s) for the firm to serve. Market segmenta-

tion was analyzed as a six-stage process: (1) to delineate the firm’s current situation, (2) to

determine consumer needs and wants, (3) to divide the market on relevant dimensions,

(4) to develop product positioning, (5) to decide segmentation strategy, and (6) to design

marketing mix strategy.

Key Terms and Concepts

A priori segmentation: Approach in which the marketing manager has decided on the appropriate basis for segmentation in advance of doing any research on the market.

Benefit segmentation: Approach that focuses on satisfying needs and wants by grouping consum- ers on the basis of the benefits they are seeking in a product.

Geodemographic segmentation: Approach that identifies specific households in a market by focusing on local neighborhood geography (such as zip codes) to create classifications of actual,

addressable, mappable neighborhoods where consumers live and shop.

Market segmentation: The process of dividing a market into groups of similar consumers and selecting the most appropriate group(s) for the firm to serve.

Post hoc segmentation: Approach that groups people into segments on the basis of research find- ings rather than determining the basis prior to any research.

Positioning map: A visual depiction of consumer perceptions of competitive products, brands, or models.

Psychographic segmentation: Approach that focuses on consumer lifestyles as the basis for segmentation. Consumers are asked a variety of questions about their lifestyles (commonly, their

activities, interests, and opinions) and then grouped on the basis of the similarity of their responses.

Target market: The group or segment a company selects to serve.

VALS: A product of SRI Consulting Business Intelligence; the best known psychographic approach; stands for “values and lifestyles.”

Additional Resources

Bolton, Ruth N., and Matthew B. Myers.“Price-Based Global Market Segmentation for Services.”

Journal of Marketing, July 2003, pp. 108–128. Dickson, Peter R., and James L. Ginter. “Market Segmentation, Product Differentiation, and

Marketing Strategy.” Journal of Marketing, April 1987, pp. 1–10. Myers, James H. Segmentation and Positioning for Strategic Marketing Decisions. Chicago: American Marketing Association, 1996.

Yankelovich, Daniel, and David Meer. “Rediscovering Market Segmentation,” Harvard Business Review, February 2006, pp. 122–131.

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S e c ti

o n

I

E ss

e n ti a ls

o f

M a rk

e ti n g

M a n a g e m

e n t

The Marketing Mix

6 Product and Brand Strategy

7 New Product Planning and Development

8 Integrated Marketing Communications

9 Personal Selling, Relationship Building, and Sales Management

10 Distribution Strategy

11 Pricing Strategy

C Part

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86

P a rt C

T h e M

a rke

tin g M

ix

6 Product and Brand Strategy

Product strategy is a critical element of marketing and business strategy, since it is through

the sale of products and services that companies survive and grow. This chapter discusses

four important areas of concern in developing product strategies. First, some basic issues are

discussed, including product definition, product classification, product quality and value,

product mix and product line, branding and brand equity, and packaging. Second, the product

life cycle and its implications for product strategy are explained. Third, the product audit is

reviewed, and finally, three ways to organize for product management are outlined. These

include the marketing manager system, brand manager system, and cross-functional teams.

BASIC ISSUES IN PRODUCT MANAGEMENT

Successful marketing depends on understanding the nature of products and basic decision

areas in product management. In this section, we discuss the definition and classification

of products, the importance of product quality and value, and the nature of a product mix

and product lines. Also considered is the role of branding and packaging.

Product Definition The way in which the product variable is defined can have important implications for the

survival, profitability, and long-run growth of the firm. For example, the same product

can be viewed at least three different ways. First, it can be viewed in terms of the tangi- ble product––the physical entity or service that is offered to the buyer. Second, it can be viewed in terms of the extended product––the tangible product along with the whole clus- ter of services that accompany it. For example, a manufacturer of computer software may

offer a 24-hour hotline to answer questions users may have or to offer free or reduced-cost

software updates, free replacement of damaged software, and a subscription to a newsletter

that documents new applications of the software. Third, it can be viewed in terms of the

generic product—the essential benefits the buyer expects to receive from the product. For example, many personal care products bring to the purchaser feelings of self-enhancement

and security in addition to the tangible benefits they offer.

From the standpoint of the marketing manager, to define the product solely in terms of the

tangible product is to fall into the error of “marketing myopia.” Executives who are guilty of

committing this error define their company’s product too narrowly, since they overemphasize

the physical object itself. The classic example of this mistake can be found in railroad passenger

Chapter

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87

service. Although no amount of product improvement could have staved off its decline, if the

industry had defined itself as being in the transportation business, rather than the railroad busi-

ness, it might still be profitable today. On the positive side, toothpaste manufacturers have been

willing to exercise flexibility in defining their product. For years toothpaste was an oral hygiene

product in which emphasis was placed solely on fighting tooth decay and bad breath (e.g., Crest

with fluoride). More recently, many manufacturers have recognized the need to market tooth-

paste as a cosmetic item (to clean teeth of stains), as a defense against gum disease (to reduce

the buildup of tartar above the gumline), as an aid for denture wearers, and as a breath fresh-

ener. As a result, special-purpose brands have been designed to serve these particular needs,

such as Ultra Brite, Close-Up, Aqua-Fresh, Aim, Dental Care, and the wide variety of baking

soda, tartar-control formula, and gel toothpastes offered under existing brand names.

In line with the marketing concept philosophy, a reasonable definition of product is that

it is the sum of the physical, psychological, and sociological satisfactions the buyer derives from purchase, ownership, and consumption. From this standpoint, products are customer- satisfying objects that include such things as accessories, packaging, and service.

Product Classification A product classification scheme can be useful to the marketing manager as an analytical

device to assist in planning marketing strategy and programs. A basic assumption underlying

such classifications is that products with common attributes can be marketed in a similar

fashion. In general, products are classed according to two basic criteria: (1) end use or

market and (2) degree of processing or physical transformation.

1. Agricultural products and raw materials. These are goods grown or extracted from the land or sea, such as iron ore, wheat, and sand. In general, these products are fairly

homogeneous, sold in large volume, and have low value per unit or in bulk weight.

2. Organizational goods. Such products are purchased by business firms for the purpose of producing other goods or for running the business. This category includes the following:

a. Raw materials and semifinished goods. b. Major and minor equipment, such as basic machinery, tools, and other processing

facilities.

MARKETING INSIGHT Elements of Product Strategy

1. An audit of the firm’s actual and potential resources a. Financial strength b. Access to raw materials c. Plant and equipment d. Operating personnel e. Management f. Engineering and technical skills g. Patents and licenses 2. Approaches to current markets a. More of the same products b. Variations of present products in terms of grades,

sizes, and packages c. New products to replace or supplement current

lines d. Product deletions

3. Approaches to new or potential markets a. Geographical expansion of domestic sales b. New socioeconomic or ethnic groups c. Overseas markets d. New uses of present products e. Complementary goods f. Mergers and acquisitions 4. State of competition a. New entries into the industry b. Product imitation c. Competitive mergers or acquisitions

6–1

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88 Part C The Marketing Mix

c. Parts or components, which become an integral element of some other finished good. d. Supplies or items used to operate the business but that do not become part of the

final product.

3. Consumer goods. Consumer goods can be divided into three classes: a. Convenience goods, such as food, which are purchased frequently with minimum

effort. Impulse goods would also fall into this category.

b. Shopping goods, such as appliances, which are purchased after some time and energy are spent comparing the various offerings.

c. Specialty goods, which are unique in some way so the consumer will make a special purchase effort to obtain them.

In general, the buying motive, buying habits, and character of the market are differ-

ent for organizational goods vis-à-vis consumer goods. A primary purchasing motive for

organizational goods is, of course, profit. As mentioned in a previous chapter, organiza-

tional goods are usually purchased as means to an end and not as an end in themselves.

This is another way of saying that the demand for organizational goods is a derived

demand. Organizational goods are often purchased directly from the original source with

few middlemen, because many of these goods can be bought in large quantities; they have

high unit value; technical advice on installation and use is required; and the product is

ordered according to the user’s specifications. Many organizational goods are subject to

multiple-purchase influence, and a long period of negotiation is often required.

The market for organizational goods has certain attributes that distinguish it from the con-

sumer goods market. Much of the market is concentrated geographically, as in the case of

steel, auto, or shoe manufacturing. Certain products have a limited number of buyers; this is

known as a vertical market, which means that (1) it is narrow, because customers are restricted to a few industries; and (2) it is deep, in that a large percentage of the producers in the mar-

ket use the product. Some products, such as desktop computers, have a horizontal market, which means that the goods are purchased by all types of firms in many different industries.

In general, buyers of organizational goods are reasonably well informed. As noted previously,

heavy reliance is often placed on price, quality control, and reliability of supply source.

In terms of consumer products, many marketing scholars have found the convenience,

shopping, and specialty classification inadequate and have attempted either to refine it or to

derive an entirely new typology. None of these attempts appears to have met with complete

success. Perhaps there is no best way to deal with this problem. From the standpoint of the

marketing manager, product classification is useful to the extent that it assists in providing

guidelines for developing an appropriate marketing mix. For example, convenience goods

generally require broadcast promotion and long channels of distribution as opposed to

shopping goods, which generally require more targeted promotion and somewhat shorter

channels of distribution.

Product Quality and Value Quality can be defined as the degree of excellence or superiority that an organization’s product possesses. Quality can encompass both the tangible and intangible aspects of a

firm’s products or services. In a technical sense, quality can refer to physical traits such as

features, performance, reliability, durability, aesthetics, serviceability, and conformance to

specifications. Although quality can be evaluated from many perspectives, the customer is

the key perceiver of quality because his or her purchase decision determines the success of

the organization’s product or service and often the fate of the organization itself.

Many organizations have formalized their interest in providing quality products by

undertaking total-quality management (TQM) programs. TQM is an organizationwide

commit ment to satisfying customers by continuously improving every business process

involved in delivering products or services. Instead of merely correcting defects when

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Chapter Six Product and Brand Strategy 89

they occur, organizations that practice TQM train and commit employees to continually

look for ways to do things better so defects and problems don’t arise in the first place.

The result of this process is higher-quality products being produced at a lower cost.

Indeed, the emphasis on quality has risen to such a level that more than 70 countries

have adopted the ISO 9000 quality system of standards, a standardized approach for

evaluating a supplier’s quality system, which can be applied to virtually any business.1

The term quality is often confused with the concept of value. Value encompasses not only quality but also price. Value can be defined as what the customer gets in exchange for what the customer gives. In other words, a customer, in most cases, receives a prod-

uct in exchange for having paid the supplier for the product. A customer’s perception of

the value associated with a product is generally based both on the degree to which the

product meets his or her specifications and the price that the customer will have to pay to

acquire the product. Some organizations are beginning to shift their primary focus from

one that solely emphasizes quality to one that also equally encompasses the customer’s

viewpoint of the price/quality trade-off. Organizations that are successful at this process

derive their competitive advantage from the provision of customer value. In other words,

they offer goods and services that meet or exceed customer needs at a fair price. Recall that

Chapter 1 described various strategies based on value.

Product Mix and Product Line A firm’s product mix is the full set of products offered for sale by the organization; A product mix may consist of several product lines, or groups of products that share com- mon characteristics, distribution channels, customers, or uses. A firm’s product mix is

described by its width and depth. Width of the product mix refers to the number of prod- uct lines handled by the organization. For example, one division of General Mills has a

widespread mix consisting of five different product lines: ready-to-eat cereals, conveni-

ence foods, snack foods, baking products, and dairy products. Depth refers to the average number of products in each line. In its ready-to-eat cereals line, General Mills has eight

different products. It has five different products in its line of convenience foods. Thus, the

organization has a wide product mix and deep product lines.

An integral component of product line planning revolves around the question of how

many product variants should be included in the line.2 Manufacturing costs are usually

minimized through large-volume production runs, and distribution costs tend to be lower

if only one product is sold, stocked, and serviced. At a given level of sales, profits will

usually be highest if those sales have been achieved with a single product. However, many

firms offer many product variants.

Organizations offer varying products within a given product line for three reasons. First,

potential customers rarely agree on a single set of specifications regarding their “ideal

product,” differing greatly in the importance and value they place on specific attributes.

For example, in the laundry detergent market, there is a marked split between preferences

for powder versus liquid detergent. Second, customers prefer variety. For example, a per-

son may like Italian food but does not want to only eat spaghetti. Therefore, an Italian

restaurant will offer the customer a wide variety of Italian dishes to choose from. Third,

the dynamics of competition lead to multiproduct lines. As com petitors seek to increase

market share, they find it advantageous to introduce new products that subsegment an

existing market segment by offering benefits more precisely tailored to the specific needs

of a portion of that segment. For example, Proctor & Gamble offers Jif peanut butter in a

low-salt version to target a specific subsegment of the peanut butter market.

All too often, organizations pursue product line additions with little regard for conse-

quences. However, in reaching a decision on product line additions, organizations need

to evaluate whether (1) total profits will decrease or (2) the quality/value associated with

current products will suffer. If the answer to either of these is yes, then the organization

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90

should not proceed with the addition. Closely related to product line additions are issues

associated with branding. These are covered next.

Branding and Brand Equity A critical focus in marketing strategy is on building the company’s brand and brand equity.

Marketing Insight 6–3 presents some of the most valuable worldwide brands. If you exam-

ine Marketing Insight 6–3 you will see that you are most likely familiar with each one of

them. Why is this so? More than likely it is because of some or all of the following reasons:

1. Whatever they do, they do it very well (e.g., Microsoft, Mercedes-Benz).

2. They tell their story often and very well (e.g., Gillette, GE).

3. Customers see the brand wherever they shop (e.g., McDonald’s, Coca-Cola).

4. The brand has a distinct personality, in other words, they stand for something

(e.g., Disney, Louis Vuitton).

MARKETING INSIGHT 6–2

A. CLASSES OF CONSUMER GOODS—SOME CHARACTERISTICS AND MARKETING CONSIDERATIONS

Type of Product

Characteristics and Marketing Considerations Convenience Shopping Specialty

Characteristics Time and effort devoted by Very little Considerable Cannot generalize; consumer may go consumer to shopping to nearby store and buy with minimum effort or may have to go to distant store and spend much time and effort Time spent planning Very little Considerable Considerable the purchase How soon want is satisfied Immediately Relatively long Relatively long time after it arises time Are price and quality No Yes No compared? Price Usually low High High Frequency of purchase Usually frequent Infrequent Infrequent Importance Unimportant Often very Cannot generalize important Marketing considerations Length of channel Long Short Short to very short Importance of retailer Any single store Important Very important is relatively unimportant Number of outlets As many as Few Few; often only one in a market possible Stock turnover High Lower Lower Gross margin Low High High Responsibility for advertising Producer Retailer Joint responsibility Importance of Very important Less important Less important point-of-purchase display Brand or store name Brand name Store name Both important Importance of packaging Very important Less important Less important

Source: From Michael Etzel, Bruce Walker and William Stanton, Marketing 13E, 2004, p. 211, 214. Reprinted with permission of McGraw-Hill Education.

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91

MARKETING INSIGHT (continued)

B. CLASSES OF ORGANIZATIONAL PRODUCTS—SOME CHARACTERISTICS AND MARKETING CONSIDERATIONS

Type of Product

Characteristics Fabricating and Marketing Raw Parts and Accessory Operating Considerations Materials Materials Installations Equipment Supplies

Example Iron ore Engine blocks Blast furnaces Storage Paper clips racks Characteristics Unit price Very low Low Very high Medium Low Length of life Very short Depends on Very long Long Short final product Quantities Large Large Very small Small Small purchased Frequency Frequent Infrequent Very Medium Frequent of purchase delivery; purchase, but infrequent frequency long-term frequent delivery purchase contract Standardization Very much; Very much Very little; Little Much of competitive grading is custom made products important Quantity of Limited; Usually no No problem Usually no Usually no supply supply can problem problem problem be increased slowly or not at all Marketing considerations Nature of Short; no Short; Short; no Middlemen Middlemen channel middlemen middlemen for middlemen used used small buyers Negotiation Hard to Medium Long Medium Short period generalize Price Important Important Not Not main Important competition important factor Presale/postsale Not important Important Very important Important Very little service Promotional Very little Moderate Sales people Important Not too activity very important important Brand preference None Generally low High High Low Advance buying Important; Important; Not usually Not usually Not usually contract long-term long-term used used used contracts used contracts used

6–2

The brand name is perhaps the single most important element on the package, serv-

ing as a unique identifier. Specifically, a brand is a name, term, design, symbol, or any other feature that identifies one seller’s good or service as distinct from those of other

sellers. The legal term for brand is trademark.3 A good brand name can evoke feelings of trust, confidence, security, and strength. To illustrate, consider the case of Bayer aspirin.

Bayer can be sold at up to two times the price of generic aspirin due to the strength of its

brand image.

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92

Many companies make use of manufacturer branding strategies in carrying out market

and product development strategies. The line extension approach uses a brand name to facilitate entry into a new market segment (e.g., Diet Coke and Liquid Tide). An alternative

to line extension is brand extension. In brand extension, a current brand name is used to enter a completely different product class (e.g., Jello pudding pops, Ivory shampoo).4

A third form of branding is franchise extension or family branding, whereby a com- pany attaches the corporate name to a product to enter either a new market segment or a

different product class (e.g., Honda lawnmower, Toyota Lexus). A final type of branding

strategy that is becoming more and more common is dual branding. A dual branding (also known as joint or cobranding) strategy is one in which two or more branded products are

integrated (e.g., Bacardi rum and Coca-Cola, Long John Silver’s and A&W Root Beer,

Archway cookies and Kellogg cereal, US Airways and Bank of America Visa). The logic

behind this strategy is that if one brand name on a product gives a certain signal of quality,

then the presence of a second brand name on the product should result in a signal that is at

least as powerful as, if not more powerful than, the signal in the case of the single brand

name. Each of the preceding four approaches is an attempt by companies to gain a com-

petitive advantage by making use of its or others’ established reputation, or both.

Companies may also choose to assign different brand names to each product. This is

known as multibranding strategy. By doing so, the firm makes a conscious decision to allow the product to succeed or fail on its own merits. Major advantages of using multiple brand

names are that (1) the firm can distance products from other offerings it markets; (2)  the

image of one product (or set of products) is not associated with other products the company

markets; (3) the product(s) can be targeted at a specific market segment; and (4) should the

product(s) fail, the probability of failure impacting on other company products is minimized.

MARKETING INSIGHT How Much Is a Brand Worth: Best Global Brands 2012 Report 6–3

2012 Country Brand Rank 2011 Rank Brand of Origin Sector Value ($M)

1 1 Coca-Cola United States Beverages 77,839 2 17 Apple United States Electronics 76,568 3 2 IBM United States Business services 75,532 4 4 Google United States Internet services 69,726 5 3 Microsoft United States Computer software 57,853 6 5 GE United States Diversified 43,682 7 6 McDonald’s United States Restaurants 40,062 8 7 Intel United States Electronics 39,385 9 19 Samsung South Korea Electronics 32,893 10 11 Toyota Japan Automotive 30,280 11 12 Mercedes-Benz Germany Automotive 30,097 12 15 BMW Germany Automotive 29,052 13 9 Disney United States Media 27,438 14 14 Cisco United States Business services 27,197 15 12 HP United States Electronics 26,087 16 13 Gillette United States FMCG 24,898 17 16 Louis Vuitton France Luxury 23,527 18 20 Oracle United States Computer software 22,126 19 8 Nokia Finland Electronics 21,009 20 26 Amazon United States Retail 18,625

Source: Interbrand’s Best Global Brands 2012 Report, www.bestglobalbrands.com. Reprinted with permission.

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Chapter Six Product and Brand Strategy 93

For example, many consumers are unaware that a number of different brands of laundry

detergent are all marketed by Procter & Gamble. The major disadvantage of this strategy is

that because new names are assigned, there is no consumer brand awareness and significant

amounts of money must be spent familiarizing customers with new brands.

Increasingly, companies are finding that brand names are one of the most valuable assets

they possess. Successful extensions of an existing brand can lead to additional loyalty and

associated profits. Conversely, a wrong extension can cause damaging associations, as

perceptions linked to the brand name are transferred back from one product to the other.5

Brand equity can be viewed as the set of assets (or liabilities) linked to the brand that add (or subtract) value.6 The value of these assets is dependent upon the consequences or results of

the marketplace’s relationship with a brand. Figure 6.1 lists the elements of brand equity.

Brand equity is determined by the consumer and is the culmination of the consumer’s

assessment of the product, the company that manufactures and markets the product, and all

other variables that impact on the product between manufacture and consumer consumption.

Before leaving the topic of manufacturer brands, it is important to note that, as with

consumer products, organizational products also can possess brand equity. However, sev-

eral differences do exist between the two sectors.7 First, organizational products are usu-

ally branded with firm names. As a result, loyalty (or disloyalty) to the brand tends to be

of a more global nature, extending across all the firm’s product lines. Second, because firm

versus brand loyalty exists, attempts to position new products in a manner differing from

existing products may prove to be difficult, if not impossible. Finally, loyalty to organi-

zational products encompasses not only the firm and its products but also the distribution

channel members employed to distribute the product. Therefore, attempts to establish or

change brand image must also take into account distributor image.

Brand loyalty

Name awareness

Perceived quality

Brand associations

Other proprietary brand assets

Brand equity

Name symbol

Provides value to customer by enhancing customer's

• Interpretation/processing of information

• Confidence in the purchase decision

• Use satisfaction

Provides value to firm by enhancing

• Efficiency and effectiveness of marketing programs

• Brand loyalty

• Prices/margins

• Brand extensions

• Trade leverage

• Competitive advantage

FIGURE 6.1 Elements of Brand

Equity

Source: Reprinted with

permission of Simon &

Schuster Publishing Group

from the Free Press edition

of Managing Brand equity:

Capitalizing on the Value of

a Brand Name by David A.

Aaker. Copyright © 1991

by David A. Aaker. All rights

reserved.

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94

As a related branding strategy, many retail firms produce or market their products under

a so-called private label. For example, Kmart has phased in its own store-brand products

to compete with the national brands. There’s Nature’s Classics, a line of fancy snacks and

cookies; Oral Pure, a line of dental care products; Prevail house cleaners; B.E., a Gap-style

line of weekend wear; and Benchmark, a line of “made in the U.S.A.” tools. Such a strat-

egy is highly important in industries where middlemen have gained control over distribu-

tion to the consumer. The growth of the large discount and specialty stores, such as Kmart,

Walmart, Target, The Gap, Limited, and others, has accelerated the development of pri-

vate brands. If a manufacturer refuses to supply certain middlemen with private branded

merchandise, the alternative is for these middlemen to go into the manufacturing business,

as in the case of Kroger supermarkets.

Private label products differ markedly from so-called generic products that sport labels

such as “beer,” “cigarettes,” and “potato chips.” Today’s house brands are packaged in

distinctively upscale containers. The quality of the products used as house brands equals

and sometimes exceeds those offered by name brands. While generic products were posi-

tioned as a means for consumers to struggle through recessionary times, private label

brands are being marketed as value brands, products that are equivalent to national brands

but are priced much lower. Private brands are rapidly growing in popularity. For example,

it only took JCPenney Company, Inc., five years to nurture its private-label jeans, the

Arizona brand, into a powerhouse with annual sales surpassing $500 million.

Consolidation within the supermarket industry, growth of super stores, and height-

ened product marketing are poised to strengthen private brands even further. However,

these gains will not come without a fight from national manufacturers who are under-

taking aggressive actions to defend their brands’ market share. Some have significantly

rolled back prices, while others have instituted increased promotional campaigns. The ulti-

mate winner in this ongoing battle between private (store) and manufacturer (national)

brands, not surprisingly, should be the consumer who is able to play off these store brands

against national brands. By shopping at a mass merchandiser like Walmart or Walgreens,

consumers are exposed to and able to choose from a wide array of both national and store

brands, thus giving them the best of both worlds: value and variety.

MARKETING INSIGHT Qualities of a Good Brand Name 6–4

1. The name should suggest the product benefits. Names such as Easy Off (oven cleaner) and PowerBook (laptop computer) clearly suggest the benefits of purchasing the product.

2. The name should be memorable, distinctive, and positive. Many automobiles such as Mustang, Eagle, Firebird, and Bronco have strong names.

3. The name should fit the company or product image. Sharp (audio and video func- tions), Mustard’s Last Stand (hot dogs), and Paddy O’Furniture (patio furniture) are some examples.

4. The name should have no legal restrictions. For example, the U.S. Food and Drug Administration discourages the use of word heart in food brand names. Also, since brand names often need a corresponding address on the Internet, the choice may be compli- cated because millions of domain names have already been selected.

5. The name should be simple (such as Bold detergent and Sure deodorant), and emo- tional (Beautiful, Opium, and Obsession perfumes).

Source: Adapted from Roger A. Kerin, Steven W. Hartley, Eric N. Berkowitz, and William Rudelius, Marketing, 11th ed. (Burr Ridge, IL: McGraw-Hill, 2013), chap. 11. Also see Kevin Lane Keller, Strategic Brand Management, 4th ed. (Upper Saddle River, NJ: Prentice Hall, 2012), chap. 4.

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95

MARKETING INSIGHT A Brand Report Card 6–5

Many different factors work together to make a strong brand. Brand managers often focus on only one or two of these factors. Here is a list of several characteristics shared by the world’s strongest brands that can be used to assess the strengths of a brand and to identify points of improvement.

Characteristic Examples

Delivers benefits desired by customers. Starbucks offers “coffee house experience,” not just coffee beans, and monitors bean selection and roasting to preserve quality.

Stays relevant. Gillette continuously invests in major product improvements (MACH3), while using a consistent slogan: “The best a man can get.”

Prices are based on value. P&G reduced operating costs and passed on savings as “everyday low pricing,” thus growing margins.

Well-positioned relative to competitors. Saturn competes on excellent customer service, Mercedes on product superiority. Visa stresses being “everywhere you want to be.”

Is consistent. Michelob tried several different positionings and campaigns between 1970 and 1995, while watching sales slip.

The brand portfolio makes sense. The Gap has Gap, Banana Republic, and Old Navy stores for different market segments; BMW has the 3-, 5-, and 7-series.

Marketing activities are coordinated. Coca-Cola uses ads, promotions, catalogs, sponsorships, and interactive media.

What the brand means to customers is Bic couldn’t sell perfume in lighter-shaped well understood. bottles; Gillette uses different brand names such as Oral-B for toothbrushes to avoid this problem.

Is supported over the long run. Coors cut back promotional support in favor of Coors Light and Zima, and lost about 50% of its sales over a four-year period.

Sources of brand equity are monitored. Disney studies revealed that its characters were becoming “overexposed” and some- times used inappropriately. It cut back on licensing and other promotional activity as a result.

Sources: Kevin Lane Keller, “The Brand Report Card,” Harvard Business Review, January-February 2000, pp. 147–157; Merle Crawford and Anthony DiBenedetto, New Product Management, 10th ed. (Burr Ridge, IL: McGraw-Hill/Irwin, 2011), p. 418.

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96

MARKETING INSIGHT How Packaging Can Benefit Consumers and Marketers 6–6

Packaging Distinctive or unique packaging is one method of differentiating a relatively homogeneous

product. To illustrate, shelf-stable microwave dinners, pumps rather than tubes of tooth-

paste or bars of soap, and different sizes and designs of tissue packages are attempts to

differentiate a product through packaging changes and to satisfy consumer needs at the

same time.

In other cases, packaging changes have succeeded in creating new attributes of value

in a brand. A growing number of manufacturers are using green labels or packaging their

products totally in green wrap to signify low- or no-fat content.

Opportunity to Add Value Some Decision Factors Examples

Promoting Link product to promotion The bunny on the Energizer battery package is a reminder that it “keeps going and going.”

Branding at point of Coke’s logo greets almost purchase or consumption everyone each time the refrigerator is opened.

Product information Nabisco’s nutrition label helps consumers decide which cookie to buy, and a UPC code reduces checkout time and errors.

Protecting For shipping and storing Sony’s MP3 player is kept safe by Styrofoam inserts.

From tampering Tylenol’s safety seal prevents tampering.

From shoplifting Cardboard hang-tag on Gillette razor blades is too large to hide in hand.

From spoiling Kraft’s shredded cheese has a resealable zipper package to keep it fresh.

Enhancing product The environment Tide detergent bottle can be recycled.

Convenience in use The package for Better Oats brand oatmeal includes a built-in measuring cup pouch so consumers don’t need a measuring cup.

Added product functions Plastic tub is useful for refrigerator leftovers after the Cool Whip is gone.

Source: From William Perreault, Jr., Joseph Cannon and E. Jerome McCarthy, Basic Marketing 18E, 2011, p. 241 Reprinted with permission of McGraw-Hill Education.

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Chapter Six Product and Brand Strategy 97

Finally, packaging changes can make products urgently salable to a targeted segment.

For example, the products in the Gillette Series grooming line, including shave cream,

razors, aftershave, and skin conditioner, come in ribbed, rounded, metallic-gray shapes,

looking at once vaguely sexual and like precision engineering.8

Marketing managers must consider both the consumer and costs in making packaging

decisions. On one hand, the package must be capable of protecting the product through

the channel of distribution to the consumer. In addition, it is desirable for packages to have a

convenient size and be easy to open for the consumer. For example, single-serving soups

and zip-lock packaging in cereal boxes are attempts by manufacturers to serve consumers

better. Hopefully, the package is also attractive and informative, capable of being used as a

competitive weapon to project a product’s image. However, maximizing these objectives

may increase the cost of the product to such an extent that consumers are no longer will-

ing to purchase it. Thus, the marketing manager must determine the optimal protection,

conven ience, positioning, and promotional strengths of packages, subject to cost constraints.

PRODUCT LIFE CYCLE

A firm’s product strategy must take into account the fact that products have a life cycle.

Figure 6.2 illustrates this life-cycle concept. Products are introduced, grow, mature, and

decline. This cycle varies according to industry, product, technology, and market. Marketing

executives need to be aware of the life-cycle concept because it can be a valuable aid in

developing marketing strategies.

During the introduction phase of the cycle, there are usually high production and marketing

costs, and since sales are only beginning to materialize, profits are low or nonexistent. Profits

increase and are positively correlated with sales during the growth stage as the market begins

trying and adopting the product. As the product matures, profits for the initiating firm do not

keep pace with sales because of competition. Here the seller may be forced to “remarket” the

Total market sales

Introduction Growth Maturation Decline or continued expansion

Status quo

D o ll a rs

Time

New markets New uses

New product features

Status quo

New markets

New uses

New product features

Total market profit

FIGURE 6.2 The Product Life

Cycle

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98

MARKETING INSIGHT Marketing Strategy Implications of the Product Life Cycle

Life-Cycle Stage

Strategy Dimension Introduction Growth Maturity Decline

Basic objectives

Product

Pricing

Channels

Promotion

Establish a market for product type; persuade early adopters to buy

Provide high quality; select a good brand; get patent or trademark protection

Often high to recover development costs; sometimes low to build demand rapidly

Limited number of channels

Aimed at early adopters; messages designed to educate about product type; incentives such as samples and coupons to induce trial

Build sales and market share; develop preference for brand Provide high quality; add services to enhance value

Somewhat high because of heavy demand

Greater number of chann els to meet demand

Aimed at wider audience; messages focus on brand benefits; for consumer products, emphasis on advertising

Defend brand’s share of market; seek growth by luring customers from competitors Improve quality; add features to distinguish brand from competitors’ brands

Low, reflecting heavy competition

Greater number of channels and more incentives to resellers Messages focus on differentiating brand from its competitors’ brands; heavy use of incentives such as coupons to induce buyers to switch brands

Limit costs or seek ways to revive sales and profits

Continue providing high quality to maintain brand’s reputation; seek ways to make the product new again Low to sell off remaining inventory or high to serve a niche market Limited number of channels

Minimal, to keep costs down

6–7

product, which may involve making price concessions, increasing product quality, or expand-

ing outlays on advertising and sales promotion just to maintain market share. At some point

sales decline, and the seller must decide whether to (1) drop the product, (2) alter the product,

(3) seek new uses for the product, (4) seek new markets, or (5) continue with more of the same.

The usefulness of the product life-cycle concept is primarily that it forces management

to take a long-range view of marketing planning. In doing so, it should become clear that

shifts in phases of the life cycle correspond to changes in the market situation, competi-

tion, and demand. Thus, the astute marketing manager should recognize the necessity of

altering the marketing mix to meet these changing conditions. It is possible for managers

to undertake strategies that, in effect, can lead to a revitalized product life cycle. For exam-

ple, past advancements in technology led to the replacement of rotary dial telephones by

touch-tone, push-button phones. Today, even newer technology has enabled the cordless

and cellular phone to replace the traditional touch-tone, push-button phone. When applied

with sound judgment, the life-cycle concept can aid in forecasting, pricing, advertising,

product planning, and other aspects of marketing management. However, the marketing

manager must also recognize that the life cycle is purely a tool for assisting in strategy

development and not let the life cycle dictate strategy development.9

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Chapter Six Product and Brand Strategy 99

As useful as the product life cycle can be to managers, it does have limitations that

require it to be used cautiously in developing strategy. For one thing, the length of time a

product will remain in each stage is unknown and can’t be predicted with accuracy. Thus,

while each stage will likely occur for a successful product, marketers can’t forecast when

one stage will end and another will begin in order to adapt their strategies at the appropri-

ate time. Also, they may misjudge when a stage is ending and implement an inappropriate

strategy. For example, marketers who believe their products are ending the maturity stage

may cut promotion costs and thus push the product into decline, whereas the product might

have continued to sell if promotion had been maintained and altered.

Another limitation is that not all products go through the product life cycle in the same way.

For example, many products are failures and do not have anything approaching a complete

life cycle. Several variations of the life cycle also exist, two of which are fashions and fads.

Fashions are accepted and popular product styles. Their life cycle involves a distinctive- ness stage in which trendsetters adopt the style, followed by an emulation stage in which

more customers purchase the style to be the trendsetters. Next is the economic stage, in

which the style becomes widely available at mass-market prices. Many fashions, such as

skirt length and designer jeans, lose popularity, then regain it and repeat the fashion of

cycle. The fashion cycle is clearly visible in clothing, cosmetics, tattoos, and body piercing.

Fads are products that experience an intense but brief period of popularity. Their life cycle resembles the basic product life cycle but in a very compressed form. It is usually so

brief that competitors have no chance to capitalize on the fad. Some fads may repeat their

popularity after long lapses.

Product Adoption and Diffusion Obviously not all customers immediately purchase a product in the introductory stage of

the product life cycle. The shape of the life-cycle curve indicates that most sales occur

after the product has been available for awhile. The spread of a product through the popu-

lation is known as the diffusion of innovation, as illustrated in Figure 6.3, which presents

five adopter categories.

The first category is innovators, those who are the first to buy a new product. When innovators are consumers, they tend to be people who are venturesome and willing to take

risks. When innovators are organizational buyers, they tend to be organizations that seek to

remain at the cutting edge through the use of the latest technology and ideas.

Laggards (16%)

Late Majority (34%)

Early Majority (34%)

Early Adopters (13.5%)

Innovators (2.5%)

FIGURE 6.3 Adopter Categories

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100 Part C The Marketing Mix

If the experience of innovators is favorable, early adopters begin to buy. These buy- ers, who are respected social leaders and above average in education, influence the next

group. Influenced by what early adopters have, the rest of the market begins to get inter-

ested in the product. The biggest category of buyers is divided into groups called the early

majority and late majority. Members of the early majority tend to avoid risk and to make purchases carefully. They also have many informal contacts. Members of the late majority not only avoid risks, but are cautious and skeptical about new ideas. Eventually, the prod-

uct becomes commonplace, and even laggards are ready to buy. Laggards are reluctant to make changes and are comfortable with traditional products. They also have a fear of debt,

but may eventually purchase a well-established brand.

THE PRODUCT AUDIT

The product audit is a marketing management technique whereby the company’s current

product offerings are reviewed to ascertain whether each product should be continued as

is, improved, modified, or deleted. The audit is a task that should be carried out at regular

intervals as a matter of policy. Product audits are the responsibility of the product manager

unless specifically delegated to someone else.

Deletions In today’s environment, a growing number of products are being introduced each year that

are competing for limited shelf space. This growth is primarily due to (1) new knowl-

edge being applied faster, and (2) the decrease in time between product introductions (by

a  given organization).10 In addition, companies are not consistently removing products

from the market at the same time they are introducing new products. The result is a situ-

ation in which too many products are fighting for too little shelf space. One of the main

purposes of the product audit is to detect sick products and then bury them. Rather than let

the retailer or distributor decide which products should remain, organizations themselves

should take the lead in developing criteria for deciding which products should stay and

which should be deleted. Some of the more obvious factors to be con sidered are

Sales trends. How have sales moved over time? What has happened to market share? Why have sales declined? What changes in sales have occurred in competitive products

both in our line and in those of other manufacturers?

Profit contribution. What has been the profit contribution of this product to the com- pany? If profits have declined, how are these tied to price? Have selling, promotion,

and distribution costs risen out of proportion to sales? Does the product require exces-

sive management time and effort?

Product life cycle. Has the product reached a level of maturity and saturation in the market? Has new technology been developed that poses a threat to the product? Are

more effective substitutes on the market? Has the product outgrown its useful ness?

Can the resources used on this product be put to better use?

Customer migration patterns. If the product is deleted, will customers of this product switch to other substitute products marketed by our firm? In total, will profits associ-

ated with our line increase due to favorable switching patterns?

The preceding factors should be used as guidelines for making the final decision to

delete a product. Deletion decisions are very difficult to make because of their poten-

tial impact on customers and the firm. For example, eliminating a product may force a

company to lay off some employees. There are other factors to consider as well, such as

keeping consumers supplied with replacement parts and repair service and maintaining the

goodwill of distributors who have an inventory of the product. The deletion plan should

also provide for clearing out of stock in question.

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Chapter Six Product and Brand Strategy 101

Product Improvement One of the other important objectives of the audit is to ascertain whether to alter the prod-

uct in some way or to leave things as they are. Altering the product means changing one or

more of its attributes or marketing dimensions. Attributes refer mainly to product features, design, package, and so forth. Marketing dimensions refer to such things as price, promo- tion strategy, and channels of distribution.

It is possible to look at the product audit as a management device for controlling the

product strategy. Here, control means feedback on product performance and corrective action

in the form of product improvement. Product improvement is a top-level management deci-

sion, but the information needed to make the improvement decision may come from the

consumer or the middlemen. Advertising agencies or consultants often make sugges-

tions. Reports by the sales force should be structured in a way to provide management

with certain types of product information; in fact, these reports can be the firm’s most

valuable product- improvement tool. Implementing a product improvement decision will

often require the coordinated efforts of several specialists, plus some research. For exam-

ple, product design improvement decisions involve engineering, manufacturing, account-

ing, and marketing. When a firm becomes aware that a product’s design can be improved,

it is not always clear how consumers will react to the various alterations. To illustrate, in

blind taste tests, the Coca-Cola Company found that consumers overwhelmingly preferred

the taste of a reformulated, sweeter new Coke over old Coke. However, when placed on

the market in labeled containers, new Coke turned out to be a failure due to consumers’

emotional attachments to the classic Coke. Consequently, it is advisable to conduct some

market tests in realistic settings.

A discussion of product improvement would not be complete without taking into account

the benefits associated with benchmarking, especially as they relate to the notion of the

extended product, the tangible product along with the whole cluster of services that accom-

pany it.11 The formal definition of benchmarking is the continuous process of mea suring products, services, and practices against those of the toughest competitors or companies

renowned as leaders. In other words, benchmarking involves learning about best practices

from best-performing companies—how they are achieving strong performance. It is an

effective tool organizations use to improve on existing products, activities, functions, or pro-

cesses. Major corporations such as IBM, AT&T, DuPont, Ford, Eastman Kodak, Miliken,

Motorola, and Xerox all have numerous benchmarking studies in progress. Benchmarking

can assist companies in many product improvement efforts, including (1) boosting prod-

uct quality, (2) developing more user-friendly products, (3) improving customer order-

processing activities, and (4) shortening delivery lead times. In the case of benchmarking,

companies can achieve great success by copying others. Thus, by its very nature, bench-

marking becomes an essential element in the ongoing product auditing process.

ORGANIZING FOR PRODUCT MANAGEMENT

Whether managing existing products or developing new products (the subject of the next

chapter), organizations that are successful have one factor in common: They actively man-

age both types. Obviously, if a firm has only one product, it gets everyone’s attention. But

as the number of products grow and the need to develop new products becomes evident,

some rational management system is necessary.

Under a marketing-manager system, one person is responsible for overseeing an entire product line with all of the functional areas of marketing such as research, advertising, sales

promotion, sales, and product planning. This type of system is popular in organizations

with a line or lines of similar products or one dominant product line. Sometimes referred

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102 Part C The Marketing Mix

to as category management, the marketing manager system is seen as being superior to a

brand manager system because one manager oversees all brands within a particular line,

thus avoiding brand competition. Organizations such as PepsiCo, Purex, Eastman Kodak,

and Levi Strauss use some form of marketing-manager system.

Under a brand-manager system, a manager focuses on a single product or a very small group of new and existing products. Typically, this person is responsible for everything from

marketing research and package design to advertising. Often called a product-management

system, the brand-manager system has been criticized on several dimensions. First, brand

managers often have difficulty because they do not have authority commensurate with

their responsibilities. Second, they often pay inadequate attention to new products. Finally,

they are often more concerned with their own brand’s profitability than with the profitabil-

ity of all of the organization’s brands. These criticisms are not aimed at people but at the

system itself, which may force brand managers into the preceding behaviors. Despite its

drawbacks, organizations such as RJR Nabisco and Black & Decker have used this system.

Successful new products often come from organizations that try to bring all the capabil- ities of the organization to bear on the problems of customers. Obviously, this requires the

cooperation of all the various functional departments in the organization (see Figure 6.4).

Thus, the use of cross-functional teams has become an important way to manage the development of new products. A venture team is a popular method used in such organiza- tions as Xerox, Polaroid, Exxon, IBM, Monsanto, and Motorola. A venture team is a cross-

functional team responsible for all the tasks involved in the development of a new product.

Once the new product is already launched, the team may turn over responsibility for

managing the product to a brand manager or product manager or it may manage the new

product as a separate business.

The use of cross-functional teams in product management and new product devel-

opment is increasing for a very simple reason: Organizations need the contributions of

all functions and therefore require their cooperation. Cross-functional teams operate

independently of the organization’s functional departments but include members from each

function. A team might include a member from engineering, marketing, finance, service,

and designers. Some organizations even include important outsiders (e.g., parts suppliers)

on cross-functional teams. Finally, a global virtual team is a cross-functional team that

FIGURE 6.4 Some Requirements

for the Effective Use

of Cross-Functional

Teams in Product

Management

and New Product

Development

A growing number of organizations have begun using cross-functional teams for product m anagement and new product development. Having representatives from various departments clearly has its advantages, but most important, effective teams must have the nurture and support of management. Some requirements for effective teams are

1. Commitment of top management and provision of clear goals. Organizations that successfully use cross-functional teams in product management or development have managers who are deeply committed to the team concept. As a result, high-performance teams have a clear understand- ing of the product management and development goals of the organization. The importance of these goals encourages individuals to defer their own functional or departmental concerns to team goals.

2. Trust among members. For cross-functional teams to work, a high level of trust must exist among members. The climate of trust within a team seems to be highly dependent on mem- bers’ perception of management’s trust of the group as a whole.

3. Cross-functional cooperation. If a team is to take responsibility and assume the risk of product development, its members will need detailed information about the overall operation of the organization. It often requires that functional units be willing to share information that previ- ously was not shared with other departments.

4. Time and training. Effective cross-functional teams need time to mature. They require massive planning and intense and prompt access to resources, financial and other. Because members have to put aside functional and departmental loyalties and concerns, training is usually necessary.

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Chapter Six Product and Brand Strategy 103

operates across time, geographic distance, organizational boundaries, and cultures, whose

members communicate mainly through electronic technology (e.g., smartphone, laptop,

texting, e-mail, video conferencing, etc.). With infrequent face-to-face contact, these teams

are faced with the challenge of building and maintaining trust as they work toward accom-

plishing the team’s objectives. In particular, miscommunication between team members

from diverse cultures and backgrounds can create a roadblock to the development of trust

and ultimately, effective functioning. Figure 6.4 presents some prerequisites for the use of

cross-functional teams in managing existing products and developing new products.

SUMMARY

This chapter has been concerned with a central element of marketing management—

product strategy. The first part of the chapter discussed some basic issues in product strat-

egy, including product definition and classification, product quality and value, product mix

and product lines, branding and brand equity, and packaging. The product life cycle was

discussed as well as the product audit. Finally, three methods of organizing for product

management were presented. Although product considerations are extremely important,

remember that the product is only one element of the marketing mix. Focusing on product

decisions alone, without consideration of the other marketing mix variables, would be an

ineffective approach to marketing strategy.

Additional Resources

Calkins, Tim. Defending Your Brand. New York: Palgrave Macmillan, 2012. Gladwell, Malcolm. The Tipping Point. New York: Book Bag Books, 2006. Keough, Donald R. The Ten Commandments of Business Failure. New York: Portfolio Books, 2008.

Knapp, Duane. The Brand Promise. New York: McGraw-Hill, 2008. Pullig, Chris, Carolyn J. Simmons, and Richard G. Netemeyer. “Brand Dilution: When Do New

Brands Hurt Existing Brands?” Journal of Marketing, April 2006, pp. 52–64. Rust, Roland, Debra Viana Thompson, and Rebecca Thompson. “Defeating Feature Fatigue.”

Harvard Business Review, February 2006, pp. 98–109. Van Praet, Douglas. Unconscious Branding. New York: Palgrave Macmillan, 2012.

Brand: A name, term, design, symbol, or any other feature that identifies one seller’s good or ser- vice as distinct from those of other sellers. The legal term for brand is trademark.

Brand equity: The set of assets (or liabilities) linked to the brand that add (or subtract) value. The value of these assets is dependent upon the consequences or results of the market place’s relation-

ship with the brand.

Brand extension: A strategy that uses a current brand name to enter a completely different prod- uct class.

Brand-manager system: Type of product management system in which a manager focuses on a single product or a very small group of new and existing products. The brand manager is responsi-

ble for everything from marketing research and package design to advertising.

Cross-functional teams: Teams requiring the membership and cooperation of all the various functional departments in the organization to create successful new products.

Dual branding: A strategy in which two or more branded products are integrated. This strategy is sometimes called joint or cobranding.

Extended product: The tangible product along with the whole cluster of services that accompany it; one of the three ways a product can be viewed.

Key Terms and Concepts

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104 Part C The Marketing Mix

Fads: A product that experiences an intense but often very brief period of popularity. The faster it becomes popular, the faster it will become unpopular. A few fads may repeat their popularity after

long absences.

Family branding: Sometimes called franchise extension; an organization’s attachment of the corporate name to a product to enter either a new market segment or a different product class.

Fashions: Accepted and popular products that go through a repetitive cycle of popularity, lost popularity, and regained popularity, repeating the cycle again.

Generic product: Product that includes the essential benefits the buyer expects to receive; one of the three ways a product can be viewed.

Global virtual team: A cross-functional team that operates across time, geographic distance, organizational boundaries, and cultures, whose members communicate mainly through electronic

technology (e.g., smartphone, laptop, texting, e-mail, video conferencing, etc.)

Horizontal marketing: Market that exists for an organizational product when it is purchased by all types of firms in many different industries.

Marketing-manager system: Type of product management system popular in organizations with a line or lines of similar products or one dominant line. One person is responsible for overseeing an

entire product line with all of the functional areas of marketing such as research, advertising, sales

promotion, sales, and product planning.

Multibranding: A strategy that assigns different brand names to each product. The organization makes a conscious decision to allow the products to succeed or fail on their own merits.

Product: The sum of the physical, psychological, and sociological satisfactions the buyer derives from purchase, ownership, and consumption. This definition is consistent with the marketing concept.

Product adoption and diffusion: The spread of a product through the population; encompasses five stages of adopters: innovators, early adopters, early majority, late majority, and laggards.

Product life cycle: The concept that many products go through a cycle; that is, they are intro- duced, grow, mature, and decline. While the cycle varies according to industry, product, technology

and market, it is a valuable aid in developing product and marketing strategies.

Product line: A group of products that share common characteristics, distribution channels, customers, or uses.

Product line extension: A strategy of line extension that uses a well-known brand name to enter into a new market segment.

Product mix: The full set of products offered for sale by an organization; described by its width and depth.

Product mix depth: The average number of products in each product line.

Product mix width: The number of individual product lines offered by the organization.

Quality: The degree of excellence or superiority that an organization’s product or service possesses. It can encompass both the tangible and intangible aspects of a product or service.

Although quality can be evaluated from many perspectives, the customer’s perception of quality

is crucial.

Tangible product: The physical entity or service that is offered to the buyer; one of the three ways a product can be viewed.

Value: Encompasses not only quality but also price. Value is what the customer gets for what the customer gives.

Venture team: A cross-functional team responsible for all of the tasks involved in the develop- ment of a new product. When the new product is launched, the team usually turns over responsibil-

ity for managing the product to a brand manager or product manager or it may manage the new

product as a separate business.

Vertical market: Market for organizational products that have a limited number of buyers. A ver- tical market is narrow because customers are restricted to a few industries and is deep in that a large

percentage of the producers in the market use the product.

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105

P a rt

C

T h e M

a rk

e ti n g M

ix

Chapter

7 New Product Planning and Development

New products are a vital part of a firm’s competitive growth strategy. Leaders of successful

firms know that it is not enough to develop new products on a sporadic basis. What counts

is a climate of product development that leads to one triumph after another. It is common-

place for major companies to have 50 percent or more of their current sales in products

introduced within the last 10 years.

Some additional facts about new products are important to remember:

• Many new products are failures. Estimates of new product failures range from

33 percent to 90 percent, depending on industry.

• New product sales grow far more rapidly than sales of current products, potentially

providing a surprisingly large boost to a company’s growth rate.

• Companies vary widely in the effectiveness of their new product programs.

• A major obstacle to effectively predicting new product demand is limited vision.

• Common elements appear in the management practices that generally distinguish the

relative degree of efficiency and success between companies.

In one recent year, almost 22,000 products were introduced in supermarkets, drug-

stores, mass merchandisers, and health food stores. Of these, only a small percentage (less

than 20 percent) met sales goals. The cost of introducing a new brand in some consumer

markets can range from $50 million to hundreds of millions of dollars. In addition to the

outlay cost of product failures, there are also opportunity costs. These opportunity costs

refer not only to the alternative uses of funds spent on product failures but also to the time

spent in unprofitable product development.

Product development can take many years. For example, Hills Brothers (now owned by

Nestlé) spent 22 years in developing its instant coffee, while it took General Foods (now

owned by Altria) 10 years to develop Maxim. However, the success of one new product is

no guarantee that additional low-cost brand extensions will be successful. For example, on

the positive side, Gillette was able to leverage the research and monies spent on the original

Sensor to successfully develop and launch the Sensor razor for women and the Sensor Excel

razor. On the negative side, Maxwell House (Altria), Folgers (Procter & Gamble), and Nestlé

are still struggling to develop commercially successful lines of fresh whole bean coffee, hav-

ing been beaten to the punch by smaller companies such as Starbucks, Millstone Coffee Inc.,

and Brothers Gourmet Coffees.1

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106 Part C The Marketing Mix

Good management, with heavy emphasis on planning, organization, and interaction

among the various functional units (e.g., marketing, manufacturing, engineering, R&D),

seems to be the key factor contributing to a firm’s success in launching new products. The

primary reason found for new product failure is an inability on the part of the selling com-

pany to match its offerings to the needs of the customer. This inability to satisfy customer

needs can be attributed to three main sources: inadequacy of upfront intelligence efforts,

failure on the part of the company to stick close to what the company does best, and the

inability to provide better value than competing products and technologies.

NEW PRODUCT STRATEGY

When developing new products, the first question must be, In how many ways can a prod-

uct be new? Authors C. Merle Crawford and Anthony DiBenedetto have developed a use-

ful definition of new products based on the following categories.2

1. New-to-the-world products. Products that are inventions and create a whole new market. For example, Sony Walkman, Polaroid camera, the Palm Pilot, the laser printer, in-line

skates.

2. New-to-the-firm products. Products that take the firm into a category new to it but not to the world. Examples are Canon’s laser printer, AT&T’s Universal Credit Card,

Hallmark gift items, P&G’s first shampoo.

3. Additions to existing product lines. These are products that extend existing product lines to current markets such as Bud Light, Apple’s iMac, and Tide’s liquid detergent.

4. Improvements and revisions of existing products. These are current products that are made better. Virtually every product on the market has been improved, often many times.

5. Repositionings. Products that are retargeted for a new use or application. Arm & Hammer baking soda is a classic example, being repositioned as a drain deodorant, refrigerator

freshener, toothpaste, deodorant, and so on. Aspirin has been repositioned as a safeguard

against heart attacks.

6. Cost reductions. These are new products that simply replace existing products in a line, providing the customer similar performance but at a lower cost.

The new product categories listed here raise the issue of imitation products, strictly me-too

or improved versions of existing products. If a firm introduces a form of dry beer that is new to

them but is identical or similar to other beers on the market, is it a new product? The answer is

yes, because it is new to the firm. Managers should not get the idea that to imitate is bad and to

innovate is good, for most of the best-selling products on the market today are improvements

over another company’s original invention. The best strategy is the one that will maximize

company goals. It should be noted that Crawford and DiBenedetto’s categories don’t encom-

pass variations such as new to a country, new channel of distribution, packaging improvement,

and different resources or method of manufacture, which they consider to be variations of the

six categories, especially as these variations relate to additions to product lines.

A second broader approach to the new product question is the one developed by H.

Igor Ansoff in the form of growth vectors.3 This is the matrix first introduced in Chapter 1

that indicates the direction in which the organization is moving with respect to its current

products and markets. It is shown again in Figure 7.1.

Market penetration denotes a growth direction through the increase in market share for present product markets. Product development refers to creating new products to replace existing ones. Firms using either market penetration or product development strategies are

attempting to capitalize on existing markets and combat competitive entry and/or further

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Chapter Seven New Product Planning and Development 107

market incursions. Market development refers to finding new customers for existing products. Diversification refers to developing new products and cultivating new markets. Firms using market development and diversification strategies are seeking to establish

footholds in new markets or preempt competition in emerging market segments.

As shown in Figure 7.1, market penetration and market development strategies use present

products. A goal of these types of strategies is to either increase frequency of consumption or

increase the number of customers using the firm’s product(s). A strategic focus is placed on

altering the breadth and depth of the firm’s existing product lines. Product development and

diversification can be characterized as product mix strategies. New products, as defined in

the growth vector matrix, usually require the firm to make significant investments in research

and development and may require major changes in its organizational structure. Firms are

not confined to pursuing a single direction. For example, Miller Brewing Co. decided four

key strategies would dictate its activities, including (1)  building its premium-brand fran-

chises through investment spending, (2) continuing to develop value-added new products

with clear consumer benefits, (3) leveraging local markets to build its brand franchise,

and (4) building business globally.4 Success for Miller depends on pursuing strategies that

encompass all areas of the growth vector matrix.

It has already been stated that new products are the lifeblood of successful business firms.

Thus, the critical product policy question is not whether to develop new products but in what

direction to move. One way of dealing with this problem is to formulate standards or norms

that new products must meet if they are to be considered candidates for launching. In other

words, as part of its new product policy, management must ask itself the basic question,

What is the potential contribution of each anticipated new product to the company?

Each company must answer this question in accordance with its long-term goals, corpo-

rate mission, resources, and so forth. Unfortunately, some of the reasons commonly given

to justify the launching of new products are so general that they become meaningless.

Phrases such as additional profits, increased growth, or cyclical stability must be trans- lated into more specific objectives. For example, one objective may be to reduce manufac-

turing overhead costs by using plant capacity better. This may be accomplished by using

the new product as an off-season filler. Naturally, the new product proposal would also

have to include production and accounting data to back up this cost argument.

In every new product proposal some attention must be given to the ultimate economic

contribution of each new product candidate. If the argument is that a certain type of product

is needed to keep up with competition or to establish leadership in the market, it is fair to ask,

Why? To put the question another way, top management can ask: What will be the effect on

the firm’s long-run profit picture if we do not develop and launch this or that new product?

Policy-making criteria on new products should specify (1) a working definition of the profit

concept acceptable to top management, (2) a minimum level or floor of profits, (3) the avail-

ability and cost of capital to develop a new product, and (4) a specified time period in which

the new product must recoup its operating costs and begin contributing to profits.

Products Present New

Markets

Present Market penetration Product development

New Market development Diversification

FIGURE 7.1 Organizational

Growth Strategies

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108

MARKETING INSIGHT Factors Associated with New Product Success 7–1

It is critical that firms not become solely preoccupied with a short-term focus on earn-

ings associated with new products. For example, in some industrial markets, a 20-year

spread has been found between the development and wide-spread adoption of products,

on average. Indeed, an advantage that some Japanese firms appear to possess is that

their management is free from the pressure of steady improvement in earnings per share

that plagues American managers who emphasize short-term profits. Japanese managers

believe that market share will lead to customer loyalty, which in turn will lead to prof-

its generated from repeat purchases. Through a continual introduction of new products,

firms will succeed in building share. This share growth will then ultimately result in

earnings growth and profitability that the stock market will support through higher share

prices over the long term.

NEW PRODUCT PLANNING AND DEVELOPMENT PROCESS

Ideally, products that generate a maximum dollar profit with a minimum amount of risk

should be developed and marketed. However, it is very difficult for planners to implement

this idea because of the number and nature of the variables involved. What is needed is a

systematic, formalized process for new product planning. Although such a process does

not provide management with any magic answers, it can increase the probability of new

product success. Initially, the firm must establish some new product policy guidelines that

include the product fields of primary interest, organizational responsibilities for managing

the various stages in new product development, and criteria for making go-ahead deci-

sions. After these guidelines are established, a process such as the one shown in Figure 7.2

should be useful in new product development.

Idea Generation Every product starts as an idea. But all new product ideas do not have equal merit or

potential for economic or commercial success. Some estimates indicate that as many as

60 or 70 ideas are necessary to yield one successful product. This is an average figure,

1. A superior differentiated product that is unique by virtue of features, benefits, quality, and value.

2. A market-driven and customer focused new product development process. 3. Predevelopment work prior to beginning the development process. 4. Clear and early product definition. 5. Appropriate internal organizational structure. 6. A product that is familiar to the company’s current products and markets. 7. A new product development process that uses profiles of previous product successes. 8. Controls on the new product development process that ensure sound execution. 9. Sound execution rather than speed. 10. Support for the new product through friendly, courteous, prompt, and efficient

customer service.

Sources: Based on Robert G. Cooper, “What Distinguishes the Top Performing New Products in Financial Services,” Journal of Product Innovation Management, September 1994, pp. 281–299; and “The New Product System: The Industry Experience,” Journal of Product Innovation Management, June 1992, pp. 113–127; William O. Bearden, Thomas N. Ingram, and Raymond W. LaForge, Marketing: Principles and Perspectives, 5th ed. (Burr Ridge, IL: McGraw-Hill/Irwin, 2007), p. 219.

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Chapter Seven New Product Planning and Development 109

but it serves to illustrate that new product ideas have a high mortality rate. In terms of

money, almost three-fourths of all the dollars of new product expense go to unsuccessful

products.

The problem at this stage is to ensure that all new product ideas available to the com-

pany at least have a chance to be heard and evaluated. Ideas are the raw materials for

product development, and the whole planning process depends on the quality of the idea

generation and screening process. Since idea generation is the least costly stage in the

new product development process (in terms of investment in funds, time, personnel, and

escalation of commitment), it makes sense that an emphasis be placed first on recognizing

available sources of new product ideas and then on funneling these ideas to appropriate

decision makers for screening.

Top-management support is critical to providing an atmosphere that stimulates new

product activity. Many times, great ideas come from some very unusual sources. A top-

management structure that is unwilling to take risks will avoid radical new product and

other innovation activities and instead concentrate solely on minor areas of improvement

such as line extensions. To facilitate top-management support, it is essential that new prod-

uct development be focused on meeting market needs.

Both technology push and market pull research activities play an important role in

new product ideas and development. By taking a broad view of customer needs and wants,

basic and applied research (technology push) can lead to ideas that will yield high profits

to the firm. For example, Compaq bet millions (and won) on PC network servers in the

early 1990s even though business customers said they would never abandon their main-

frames. In a similar vein, Chrysler forged ahead with the original minivan despite research

Idea generation

Idea screening

Project planning

Product development

Test marketing

Commercialization

FIGURE 7.2 The New Product

Development Process

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110

showing people disliked the odd-looking vehicle.5 Marketing, on the other hand, is more

responsible for gathering and disseminating information gained from customers and other

contacts. This information relates mainly to specific features and functions of the product

that can be improved upon or market needs that current products are not satisfying (market

pull). For example, product ideas at Rubbermaid often come from employees roaming the

aisles at hardware stores and conversations with family and friends. Both technology push

and market pull approaches are essential to the generation of new product ideas.

Idea Screening The primary function of the idea screening process is twofold: first, to eliminate ideas for

new products that could not be profitably marketed by the firm, and second, to expand

viable ideas into full product concepts. New product ideas may be eliminated either because

they are outside the fields of the firm’s interest or because the firm does not have the nec-

essary resources or technology to produce the product at a profit. Generally speaking, the

MARKETING INSIGHT How Google Develops New Ideas 7–2

Marissa Mayer joined Google in early 1999 as a programmer when the workforce totaled 20. By 2007 Google had 5,700 employees and expected sales of $16 billion. As Director of Consumer Web Products Marissa is a champion of innovation, and she

favors new product launches that are early and often. HOW GOOGLE INNOVATES

The search leader has earned a reputation as one of the most innovative companies in the world of technology. These are illustrative of the ways Google hatches new ideas: FREE (THINKING) TIME

Google gives all engineers one day a week to develop their own pet projects, no matter how far these projects are from the company’s central mission. If work gets in the way of free days for a few weeks, they accumulate. Google News came out of this process. THE IDEA LIST

Anyone at Google can post thoughts for new technologies of businesses on an ideas mailing list, available companywide for input and vetting. But beware: Newbies who suggest familiar or poorly thought-out ideas can face an intellectual pummeling. OPEN OFFICE HOURS

Think back to your professors’ office hours in college. That’s pretty much what key man- agers, including Mayer, do two or three times a week, to discuss new ideas. One success born of this approach was Google’s personalized home page. BIG BRAINSTORMS

As it has grown, Google has cut back on brainstorming sessions. Mayer still holds them eight times a year, but limits hers to 100 engineers. Six concepts are pitched and dis- cussed for ten minutes each. The goal: To build on the initial idea with at least one complementary idea per minute. ACQUIRE GOOD IDEAS

Although Google strongly prefers to develop technology in-house, it has also been will- ing to snap up small companies with interesting initiatives. In 2004 it bought Keyhole, including the technology that let Google offer sophisticated maps with satellite imagery.

Sources: “Managing Googles’s Idea Factory,” BusinessWeek, October 3, 2005, pp. 88–90; David Cravens and Nigel F. Piercy, Strategic Marketing, 10th ed. (Burr Ridge, IL: McGraw-Hill, 2013), p. 220.

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Chapter Seven New Product Planning and Development 111

organization has to consider three categories of risk (and its associated risk tolerance) in

the idea screening phase prior to reaching a decision:6

1. Strategic risk. Strategic risk involves the risk of not matching the role or purpose of a new product with a specific strategic need or issue of the organization. If an organization

feels it necessary to develop certain types of radical innovations or products new to the

company in order to carry out long-term strategies, then management must be willing to

dedicate necessary resources and time to pursue these type projects.

2. Market risk. Market risk is the risk that a new product won’t meet a market need in a value-added, differentiated way. As products are being developed, customer requirements

change and new technologies evolve. Management must be willing and able to shift its

new product efforts to keep pace with change.

3. Internal risk. Internal risk is the risk that a new product won’t be developed within the desired time and budget. Up front, management must decide the level of commitment

it will extend in terms of time and budgetary expenditures to adequately ensure the com-

pletion of specific projects. Concurrently, progress goals must be established so that “pro-

ceed” or “do not proceed” decisions can be reached regarding continuation of projects.

In evaluating these risks, firms should not act too hastily in discounting new product

ideas solely because of a lack of resources or expertise. Instead, firms should consider

forming joint or strategic alliances with other firms. A strategic alliance is a long-term

partnership between two organizations designed to accomplish the strategic goals of both

parties. Potential benefits to be gained from alliances include (1) increased access to tech-

nology, funding, and information; (2) market expansion and greater penetration of current

markets; and (3) de-escalated competitive rivalries.

Ideas that appear to have adequate profit potential and offer the firm a competitive

advantage in the market should be accepted for further study.

Project Planning This stage of the process involves several steps. It is here that the new product pro-

posal  is evaluated further and responsibility for the project is assigned to a project

team. The proposal is analyzed in terms of production, marketing, financial, and com-

petitive factors. A development budget is established, and some preliminary market-

ing and technical research is undertaken. The product is actually designed in a rough

form. Alternative product features and component specifications are outlined. Finally, a

project plan is written up, which includes estimates of future development, production,

and marketing costs along with capital requirements and manpower needs. A schedule

or timetable is also included. Finally, the project proposal is given to top management

for a go or no-go decision.

Various alternatives exist for creating and managing the project teams. Two of the

better-known methods are the establishment of a skunkworks, whereby a project team can work in relative privacy away from the rest of the organization, and a rugby or relay approach, whereby groups in different areas of the company are simultaneously working on the

project. The common tie that binds these and other successful approaches together is the

degree of interaction that develops among the marketing, engineering, production, and other

critical staff. The earlier in the process that interactive, cooperative efforts begin, the higher

is the likelihood that development efforts will be successful. A key component contributing

to the success of many companies’ product development efforts relates to the emphasis

placed on creating cross-functional teams early in the development process. Both of the preceding methods use cross-functional teams. Members from many different departments

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112

come together to jointly establish new product development goals and priorities and to

develop new product development schedules.

Product Development At this juncture, the product idea has been evaluated from the standpoint of engineering,

manufacturing, finance, and marketing. If it has met all expectations, it is considered a

candidate for further research and testing. In the laboratory, the product is converted into

a finished good and tested. A development report to management is prepared that spells

out in fine detail: (1) results of the studies by the engineering department, (2) required plan

design, (3) production facilities design, (4) tooling requirements, (5) marketing test plan,

(6) financial program survey, and (7) estimated release date.7

Test Marketing Up until now the product has been a company secret. Now management goes outside

the company and submits the product candidate for customer approval. Test-market

programs are conducted in line with the general plans for launching the product. Test

marketing is a controlled experiment in a limited geographical area to test the new

product or in some cases certain aspects of the marketing strategy, such as packaging

or advertising.

The main goal of a test market is to evaluate and adjust, as necessary, the general

marketing strategy to be used and the appropriate marketing mix. Additionally, pro-

ducers can use the early interaction with buyers, occurring in test markets, to begin

exploration of issues related to the next generation of product development. Especially

in cases where new technologies and markets are emerging, firms can benefit greatly

from knowledge gained in test markets. Throughout the test market process, findings

are being analyzed and forecasts of volume developed. In summary, a well-done test

market procedure can reduce the risks that include not only lost marketing and sales

dollars but also capital—the expense of installing production lines or building a new

1. Customers a. Customer requests b. Customer complaints/compliments c. Market surveys d. Focus groups 2. Competitors a. Monitoring competitors’ developments b. Monitoring testing of competitors’

products c. Monitoring industry movements 3. Distribution channels a. Suppliers b. Distributors c. Retailers d. Trade shows

4. Research and engineering a. Product testing b. Product endorsement c. Brainstorming meetings d. Accidental discovery 5. Other internal sources a. Management b. Sales force c. Employee suggestions d. Innovation group meetings e. Stockholders 6. Other external sources a. Consultants b. Academic journals c. Periodicals and other press

7–3 MARKETING INSIGHT Some Sources of New

Product Ideas

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113

factory. Upon completion of a successful test market phase, the marketing plan can be

finalized and the product prepared for launch.

Commercialization This is the launching step in which the firm commits to introducing the product into the

marketplace. During this stage, heavy emphasis is placed on the organization structure and

management talent needed to implement the marketing strategy. Emphasis is also given to

following up on such things as bugs in the design, production costs, quality control, and

inventory requirements. Procedures and responsibility for evaluating the success of the

new product by comparison with projections are also finalized.

The Importance of Time Over the course of the last five years, companies have placed an increasing emphasis on

shortening their products’ time to market. Time to market can be defined as the elapsed time between product definition and product availability. It has been well documented

that companies that are first in bringing their products to market enjoy a competitive

advantage both in terms of profits and market share.8 Successful time-based innova-

tions can be attributed to the use of short production runs, whereby products can be

improved on an incremental basis, and the use of cross-functional teams, decentralized

work scheduling and monitoring, and a responsive system for gathering and analyzing

customer feedback.

Several U.S. companies, including Procter & Gamble, have taken steps to speed up

the new product development cycle by giving managers, at the product class and brand

family level, more decision-making power. Increasingly, companies are bypassing time-

consuming regional test markets, when feasible, in favor of national launches. It is

becoming important, more than ever, that firms do a successful job of developing new

products right the first time. To accomplish this, companies must have the right people

with the right skills and talents in key positions within the new product framework.

MARKETING INSIGHT Capitalizing on Corporate Strengths in New Product Development (Some Examples) 7–4

Source: Adapted from Merle Crawford and Anthony DiBenedetto, New Products Management, 10th ed. (Burr Ridge, IL: McGraw-Hill, 2011), p. 62.

Here are some examples of actual corporate strengths that the managements have asked be used to differentiate the firm’s new products. These strengths can be used in the sentence: New products of this firm will:

Technologies

Herman Miller: Utilize our fine furniture designs. Braun: Utilize innovative design in every product. Otis Elevator: Build in new levels of service as key benefit. Coca-Cola: Gain value by being bottled in our bottling system.

Markets

Gerber: Be for babies and only babies. Nike: Be for all sports and not just shoes. IBM: Be for all people in computers, not just techie types. Budd: Be specially created to meet the needs of Ford engineers.

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SOME IMPORTANT NEW PRODUCT DECISIONS

In the development of new products, marketers have several important decisions to make

about the characteristics of the product itself. These include quality level, product features,

product design, and product safety levels.

Quality Level Both consumers and organizational buyers consider the level of product quality when mak-

ing purchase decisions for both new and existing products. At a minimum, buyers want

products that will perform the functions they are supposed to and do so reasonably well.

Some customers are willing to accept lower quality if product use is not demanding and

the price is lower. Some homeowners might prefer Sears brand hand tools over the higher-

quality Craftsman brand since they are lower priced and may be used only occasionally.

Industrial buyers of nuts and bolts for automobiles seldom use the highest quality used in

aircraft since cars are used in less demanding situations.

In designing new products, marketers must consider what criteria potential customers

use to determine their perceptions of quality. While these will vary by product, Figure 7.3

presents eight general criteria.

MARKETING INSIGHT Some Measures of New Product Performance 7–5

FIGURE 7.3 Some Criteria

for Determining

Perceptions of Quality

Source: Adopted from David

A. Garvin, “Competing on the

Eight Dimensions of Quality,”

Harvard Business Review,

November–December 1987.

For a discussion of some

determinants of quality for

service businesses, see

chap. 12, “The Marketing of

Services.”

1. Performance—How well does the product do what it is supposed to do? 2. Features—Does the product have any unique features that are desirable? 3. Reliability—Is the product likely to function well and not break down over a reasonable time

period? 4. Conformance—Does the product conform to established standards for such things as safety? 5. Durability—How long will the product last before it will be worn out and have to be replaced? 6. Serviceability—How quickly and easily can any problems be corrected? 7. Aesthetics—How appealing is the product to the appropriate senses of sight, taste, smell, feel,

and/or sound? 8. Overall Evaluation—Considering everything about the product, including its physical character-

istics, manufacturer, brand image, packaging, and price, how good is this product?

Customer Acceptance Measures Product Level Performance

Customer acceptance (use) Product cost Customer satisfaction Time to launch Revenue (dollar sales) Product performance Market share Quality guidelines Unit volume

Financial Performance Other

Time to break even Nonfinancial measures peculiar to the Margins new product being launched. Profitability (IRR, ROI) Example: competitive effect, image change, morale change.

Source: From Merle C. Crawford and C. Anthony Di Benedetto, New Products management 10E, 2011, p. 396. Reprinted with permission of McGraw-Hill Education.

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MARKETING INSIGHT Why Cross-Functional Product Development Teams Can Work 7–6

An important indicator of a number of the criteria listed in Figure 7.3 is the presence

and extent of a new product warranty. A warranty is the producer’s statement of what it  will do to compensate the buyer if the product is defective or does not work prop-

erly. In many instances, the courts also hold that businesses have implied warranties or

unstated promises to compensate buyers if their products fail to perform up to the basic

standards of the industry or to the level promised. Certainly an organization that wants

to emphasize high quality will offer customers more than implied warranties enforced by

the courts.

Finally, many marketers offer a guarantee instead of or in addition to a warranty on new

products. A guarantee is an assurance that the product is as represented and will perform properly. Typically if the product fails to perform, the organization making the guarantee

replaces the product or refunds the customer’s money. Guarantees imply to some buyers

that the manufacturer is confident of the new products’ quality.

Product Features A product feature is a fact or particular specification about a product (e.g., “less calories than all other soft drinks,” “more vitamin C than any other multiple vitamin”). Marketers

select new product features by determining what it is that customers want their prod ucts

to  offer. Effective marketers attempt not only to ask potential customers what they

want, but to learn what these customers are likely to need. Such marketers may identify

a need for new features that target markets have not yet thought of and may not yet even

understand.

When specialized knowledge is needed to satisfy the needs of customers, cross-functional teams can greatly improve product development success. Such teams bring together com- plementary skills in one of three areas: technical or functional expertise, problem-solving and decision-making skills, and interpersonal skills.

1. Technical or functional skills. It would make little sense for a marketer to design technical specifications for a new type of cellular phone. Likewise, it would make little sense for an engineer to try to guess what features consumers find most important in choosing what type of phone to purchase. In this case, a product development group that consists solely of marketers or engineers would be less likely to succeed than a cross-functional team using the complementary skills of both.

2. Problem-solving and decision-making skills. Cross-functional teams possess the ability to identify problems and opportunities the entire organization faces, identify feasible new product alternatives, and make the necessary choices quicker. Most industrial functional units are not able to perform all of these tasks effectively. However, it is likely that the necessary skills are present in a well-chosen cross-functional team and that these skills can be used in the organization’s best interests.

3. Interpersonal skills. Common understanding and knowledge of problems faced and deci- sions needed for effective product development cannot arise without effective com- munication and constructive conflict. What is needed is risk-taking, helpful criticism, objectivity, active listening, support, and recognition of the interests and achievements of others. An effective, cross-functional team is made up of members who, in total, pos- sess all of these skills. Individual members, at various times, will be called on to use their interpersonal skill to move the team forward. The use of the complementary interper- sonal skills of team members can lead to extraordinary results for organizations.

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116 Part C The Marketing Mix

Product Design Many well-designed products are easy to use as intended and pleasing to the senses.

Designing new products with both ease of use and aesthetic appeal can be difficult, but

it can clearly differentiate a new product from competitors. Good design can add great

value to a new product. A well-designed product can please customers without neces-

sarily costing more to make. This is especially likely to happen when the organization

uses cross-functional teams to develop its products. If employees from engineering,

marketing, and manufacturing work together on what the product will look like and

how it will operate, they are more likely to create a design that is easy and economical

to make as well as use.

Product Safety Clearly, new products must have a reasonable level of safety. Safety is both an ethical and

practical issue. Ethically, customers should not be harmed by using a product as intended.

The practical issue is that when users get harmed by a product, they may stop buying, tell

others about their experience, or sue the company that made or sold it.

Some products are inherently dangerous and can result in injury to users. However, it

may be so expensive to make them safer that buyers could not afford to buy them. Such

products include automobiles, farm equipment and other machinery, and guns. Other prod-

ucts such as patented medicines can harm a small portion of users. Hopefully, the benefits

such products offer outweigh their risks.

CAUSES OF NEW PRODUCT FAILURE

Many new products with satisfactory potential have failed to make the grade for reasons

related to execution and control problems. What follows is a brief list of some of the more

important marketing causes of new product failures after the products have been carefully

screened, developed, and marketed.9

1. No competitive point of difference, unexpected reactions from competitors, or both.

2. Poor positioning.

3. Poor quality of product.

4. Nondelivery of promised benefits of product.

5. Too little marketing support.

6. Poor perceived price/quality (value) relationship.

7. Faulty estimates of market potential and other marketing research mistakes.

8. Faulty estimates of production and marketing costs.

9. Improper channels of distribution selected.

10. Rapid change in the market (economy) after the product was introduced.

Some of these problems are beyond the control of management, but it is clear that suc-

cessful new product planning requires large amounts of reliable information in diverse

areas. Each department assigned functional responsibility for product development

automatically becomes an input to the information system that the new product decision

maker needs. For example, when a firm is developing a new product, it is wise for both

engineers and marketers to consider both the kind of market to be entered (e.g., consumer,

organizational, international) and specific target segments. These decisions will be of para-

mount influence on the design and cost of the finished good, which will, of course, directly

influence price, sales, and profits.

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117

MARKETING INSIGHT Some Organizational Causes of New Product Failure 7–7

1. Not listening to the “voice of the customer.” Product managers assume they know more than customers or that doing marketing research will not be worth the cost or time.

2. Skipping steps in the new-product process. (See Figure 7-2.) 3. Trying to generate quick revenue by releasing a poorly conceived product to market. 4. “Groupthink” in product development committees. This popular problem occurs in

groups when members “go along” to “get along” rather than be seen as nay sayers or non-team players.

5. Not identifying the lessons from previous failures.

Sources: Adapted from Pierre Loewe and Jennifer Domeniquini, “Overcoming the Barriers to Effective Innovation,” Strategy and Leadership 34, no. 1 (2006), pp. 24–31; Dan P. Lovallo and Oliver Sibony, “Distortions and Deceptions in Strategic Decisions,” The McKinsey Quarterly, no. 1 (2006), pp. 19–29; Eyal Biyalogorsky, William Boulding, and Richard Staelin, “Stuck in The Past: Why Managers Persist with New Product Failures,” Journal of Marketing, April 2006, pp. 108–121; Jena MacGregor, “How Failure Breeds Success,” BusinessWeek, July 10, 2006, pp. 42–52; Roger A. Kerin, Steven W. Hartley, and William Rudelius, Marketing, 11th ed. (Burr Ridge, IL: McGraw-Hill, 2013), p. 253.

Need for Research In many respects it can be argued that the keystone activity of any new product plan-

ning  system is research—not just marketing research, but technical research as well.

Regardless of the way the new product planning function is organized in the  company,

top management’s new product development decisions require data that provide a base for

making more intelligent choices. New product project reports ought to be more than a col-

lection of “expert” opinions. Top management has a responsibility to ask certain questions,

and the new product planning team has an obligation to generate answers to these ques-

tions based on research that provides marketing, economic, engineering, and production

information. This need will be more clearly understood if some of the specific questions

commonly raised in evaluating product ideas are examined:

1. What is the anticipated market demand over time? Are the potential applications for the

product restricted?

2. Can the item be patented? Are there any antitrust problems?

3. Can the product be sold through present channels and the current sales force? What

number of new salespersons will be needed? What additional sales training will be

required?

4. At different volume levels, what will be the unit manufacturing costs?

5. What is the most appropriate package to use in terms of color, material, design, and

so forth?

6. What is the estimated return on investment?

7. What is the appropriate pricing strategy?

While this list is not intended to be exhaustive, it serves to illustrate the serious

need  for reliable information. Note also that some of the essential facts required to

answer these questions can be obtained only through time-consuming and expensive

marketing research studies. Other data can be generated in the engineering laboratories

or pulled from accounting records. Certain types of information must be based on

assumptions, which may or may not hold true, and on expectations about what will

happen in the future, as in the case of anticipated competitive reaction or the projected

level of sales.

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118 Part C The Marketing Mix

SUMMARY

This chapter has focused on the nature of new product planning and development.

Attention has been given to the management process required to have an effective program

for new product development. It should be obvious that this is one of the most important

and difficult aspects of marketing management. The problem is so complex that, unless

management develops a plan for dealing with the problem, it is likely to operate at a severe

competitive disadvantage in the marketplace.

Additional Resources

Adamson, Allen P. The Edge: Fifty Tips from Brands That Lead. New York: Palgrave Macmillan, 2013.

Bender, Michael. A Manager’s Guide to Project Management. Upper Saddle River, NJ: FT Press, 2010.

Biyalogorsky, Eyal, William Boulding, and Richard Staelin. “Stuck In The Past: Why Managers

Persist in New Product Failures.” Journal of Marketing, April 2006, pp. 108–122. Estrin, Judy. Closing the Innovation Gap. New York: McGraw-Hill, 2009. Knight, Joe, Roger Thomas, and Brad Angus. Project Management for Profit. Boston: Harvard Business Review Press, 2012.

Macintosh, Julie. Dethroning the King. New York: John Wiley and Sons, 2011. Mack, Ben. Think Two Products Ahead. New York: John Wiley, 2007. Siegel, Eric. Predictive Analytics. Hoboken, NJ: John Wiley and Sons, 2013.

Commercialization: Stage of the new product development process that involves the actual launch of the product and the implementation of the marketing strategy.

Cross-functional teams: Members from many different departments coming together to jointly establish new product development goals and priorities and to develop schedules.

Diversification: A strategy that seeks to develop new products and cultivate new customers. It often leads the organization into new businesses, sometimes through acquisition.

Guarantee: An assurance by the producer that the product is as represented and will perform properly. If not, the organization making the guarantee replaces the product or refunds the cus-

tomer’s money.

Idea generation: Stage of the new product development process at which the goal is to ensure that all new product ideas considered by the organization have the opportunity to be heard and evalu-

ated because the success of the process will depend greatly on the quality of the ideas generated.

Idea screening: Evaluation of an idea based on strategic risk, market risk, and internal risk for the purpose of eliminating ideas that could not be profitably marketed and expanding viable ideas into

full product concepts.

Market development: A strategy that seeks to find new customers for existing products. An organization pursuing this strategy seeks to establish footholds in new markets or preempt competi-

tion in emerging market segments.

Market penetration: A strategy that denotes a growth direction through the increase in market share of present products in present markets. An organization pursuing this strategy hopes to

capitalize on existing markets and combat competitive entry or incursions.

New product development process: Stages include idea generation, idea screening, project planning, product development, test marketing, commercialization.

Product development: A strategy that seeks to create new products to replace existing ones. An organization pursuing this strategy hopes to capitalize on existing markets and combat competitive

entry or incursions.

Key Terms and Concepts

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Chapter Seven New Product Planning and Development 119

Product development stage: Stage of the new product development process at which the product idea has met all expectations and is considered a candidate for further research and testing. In the

laboratory, the product is converted into a finished good and tested.

Project planning: Stage of the new product development process at which the idea is evaluated further and responsibility for the project is assigned to a project team. The idea is evaluated in

terms of production, marketing, financial, and competitive factors. A development budget is estab-

lished, and preliminary marketing and technical research is undertaken.

Rugby or relay: An approach to creating and managing product development teams that involves groups in different areas of the organization working simultaneously on the project.

Skunkworks: An approach to creating and managing product development teams that involves team members working in relative privacy, away from the rest of the organization.

Test marketing: Stage of new product development process at which the product is no longer a company secret. Test marketing is a controlled experiment in a limited geographical area to test the

new product as well as elements of the marketing mix.

Time to market: The elapsed time between product definition and product availability. It is important because history has shown that organizations that are first in bringing their product to

market often gain a competitive advantage in terms of profits and market share.

Warranty: The statement of the producer of what it will do to compensate the buyer if the product is defective or does not perform properly.

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120

P a rt C

T h e M

a rke

tin g M

ix

8 Integrated Marketing Communications

Communicating with customers will be the broad subject of the next two chapters that

focus on various elements of promotion. To simplify our discussion, the topic has been

divided into two basic categories: nonpersonal communication (Chapter 8) and personal

communication (Chapter 9). This chapter also discusses the necessity to integrate the

various elements of marketing communication.

STRATEGIC GOALS OF MARKETING COMMUNICATION

Marketers seek to communicate with target customers for the obvious goal of increased

sales and profits. Accordingly, they seek to accomplish several strategic goals with their

marketing communications efforts.

Create Awareness Obviously, we cannot purchase a product if we are not aware of it. An important strategic

goal must be to generate awareness of the firm as well as its products. Marketing com-

munications designed to create awareness are especially important for new products and

brands in order to stimulate trial purchases. As an organization expands globally, creating

awareness must be a critical goal of marketing communications.

Build Positive Images When products or brands have distinct images in the minds of customers, the customers

better understand the value that is being offered. Positive images can even create value

for customers by adding meaning to products. Retail stores and other organizations also

use communications to build positive images. A major way marketers create positive and

distinct images is through marketing communications.

Identify Prospects Identifying prospects is becoming an increasingly important goal of marketing commu-

nications because modern technology makes information gathering much more practical,

even in large consumer markets. Marketers can maintain records of consumers who have

Chapter

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121

expressed an interest in a product, then more efficiently direct future communications.

Technology now enables marketers to stay very close to their customers. Websites are

used to gather information about prospects, and supermarkets use point-of-sale terminals

to dispense coupons selected on the basis of a customer’s past purchases.

Build Channel Relationships An important goal of marketing communications is to build a relationship with the organi-

zation’s channel members. When producers use marketing communications to generate

awareness, they are also helping the retailers who carry the product. Producers may also

arrange with retailers to distribute coupons, set up special displays, or hold promotional

events in their stores, all of which benefit retailers and wholesalers. Retailers support man-

ufacturers when they feature brands in their ads to attract buyers. Because of such efforts,

all members of the channel benefit. Cooperating in these marketing communication efforts

can build stronger channel relationships.

Retain Customers Loyal customers are a major asset for every business. It costs far more to attract a new

customer than to retain an existing customer. Marketing communications can support

efforts to create value for existing customers. Interactive modes of communication—

including salespeople and websites—can play an important role in retaining customers.

They can serve as sources of information about product usage and new products being

developed. They can also gather information from customers about what they value, as

well as their experiences using the products. This two-way communication can assist

marketers in increasing the value of what they offer to existing customers, which will

influence retention.

THE PROMOTION MIX

The promotion mix concept refers to the combination and types of nonpersonal and

personal communication the organization puts forth during a specified period.1 There

are  five elements of the promotion mix, four of which are nonpersonal forms of com-

munication (advertising, sales promotion, public relations, and direct marketing), and

8–1 MARKETING INSIGHT Top 10 Websites in Three

Countries (Visitors per Month)

Rank Brazil (31.9 million visitors) Portugal (3.8 million visitors) South Korea (28.1 million visitors)

1 Google sites 26.2 Google sites 3.6 NHN Corporation 22.7 2 Microsoft sites 25.2 Microsoft sites 3.4 Daum 20.5 3 UOL 20.6 Portugal Telecom 2.4 SK Group 20.2 4 Yahoo! sites 17.4 Hi5.com 2.3 gretech 14.7 5 Terra-Telefonica 16.8 Yahoo! sites 1.4 Yahoo! sites 12.2 6 Organizacoes Globo 16.7 UOL 1.3 KT Group 11.8 7 Grupo Brasil Telecom 16.6 Grupo Impresa 1.2 Microsoft sites 11.4 8 Wikimedia sites 10.8 Wikimedia sites 1.1 Google sites 10.4 9 WordPress 10.1 Grupo Brasil Telecom 1.1 eBay 10 10 BuscaPe.com Inc. 8 WordPress 1.1 JMnet 10

Sources: comScore Media Metrix, 2012; Philip R. Cateora, Mary C. Gilly, and John I. Graham, International Marketing, 16th ed. (Burr Ridge, IL: McGraw-Hill, 2013), p. 484.

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122 Part C The Marketing Mix

one, personal selling, which is a personal form of communication. Let’s briefly examine

each one.

1. Advertising is a paid form of nonpersonal communications about an organization, its products, or its activities that is transmitted through a mass medium to a target audi-

ence. The mass medium might be television, radio, newspapers, Internet, magazines,

outdoor displays, car cards, or directories.

2. Sales promotion is an activity or material that offers customers, sales personnel, or resellers a direct inducement for purchasing a product. This inducement, which adds

value to or incentive for the product, might take the form of a coupon, sweepstakes,

refund, or display.

3. Public relations is a nonpersonal form of communication that seeks to influence the attitudes, feelings, and opinions of customers, noncustomers, stockholders, suppliers,

employees, and political bodies about the organization. A popular form is publicity, which is a nonpaid form of nonpersonal communication about the organization and

its products that is transmitted through a mass medium in the form of a news story.

Obviously, marketers seek positive publicity.

4. Direct marketing uses direct forms of communication with customers. It can take the form of direct mail, online and mobile marketing, catalogs, telemarketing, and direct

response advertising. Similar to personal selling, it may consist of an interactive dialog

between the marketer and the customer. Its objective is to generate orders, visits to

retail outlets, or requests for further information. Obviously, personal selling is a form

of direct marketing, but because it is a very personal form of communication, we place

it in its own category.

5. Personal selling is face-to-face communication with potential buyers to inform them about and persuade them to buy an organization’s product. It will be examined in detail

in the next chapter.

Obviously, marketers strive for the right mix of promotional elements to ensure that

their product is well received. For example, if the product is a new soft drink, promotional

effort is likely to rely more on advertising, sales promotion, and public relations (public-

ity) in order to (1) make potential buyers aware of the product, (2) inform these buyers

about the benefits of the product, (3) convince buyers of the product’s value, and (4) entice

buyers to purchase the product. If the product is more established but the objective is to

stabilize sales during a nonpeak season, the promotion mix will likely contain short-run

incentives (sales promotions) for people to buy the product immediately. Finally, if the

product is a new complex technology that requires a great deal of explanation, the promo-

tional mix will likely focus heavily on personal selling so that potential buyers can have

their questions answered.

As seen by the previous examples, a firm’s promotion mix is likely to change over

time. The mix must be continually adapted to reflect changes in the market, competi-

tion, the product’s life cycle, and the adoption of new strategies. In essence, the firm

should take into account three basic factors when devising its promotion mix: (1) the

role of promotion in the overall marketing mix, (2) the nature of the product, and (3) the

nature of the market.

INTEGRATED MARKETING COMMUNICATIONS

In many organizations, elements of the promotion mix are often managed by specialists

in different parts of the organization or, in some cases, outside the organization when an

advertising agency is used. For example, advertising plans might be developed jointly

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Chapter Eight Integrated Marketing Communications 123

by the advertising department and the advertising agency; plans for the sales force might

be developed by managers of the sales force; and sales promotions might be developed

independently of the advertising and sales plans. Thus, it is not surprising that the concept

of integrated marketing communications has evolved in recent years. The idea of integrated marketing communications is easy to understand and cer-

tainly has a great deal of commonsense validity. But like so many concepts in market-

ing, it is difficult to implement. The goal of integrated marketing communications is

to develop marketing communications programs that coordinate and integrate all ele-

ments of promotion—advertising, sales promotion, personal selling, and publicity—so

that the organization presents a consistent message. Integrated marketing communica-

tion seeks to manage all sources of brand or company contacts with existing and poten-

tial customers.

The concept of integrated marketing communication is illustrated in Figure 8.1. It is

generally agreed that potential buyers usually go through a process of (1) awareness of the product or service, (2) comprehension of what it can do and its important features, (3) conviction that it has value for them, and (4) ordering. Consequently, the firm’s marketing communication tools must encourage and allow the potential buyer to experience the vari-

ous stages. Figure 8.1 illustrates the role of various marketing communication tools for a

hypo thetical product.

The goal of integrated marketing communication is an important one, and many believe

it is critical for success in today’s crowded marketplace. As with many management con-

cepts, implementation is slower than many would like to see. Internal “turf” battles within

organizations and the reluctance of some advertising agencies to willingly broaden their

role beyond advertising are two factors that are hindering the successful implementation of

integrated marketing communication.

FIGURE 8.1 How Various Promotion

Tools Might Contribute

to the Purchase of a

Hypothetical Product

AwarenessTo produce:

Personal selling

Advertising

Sales promotion

Public relations

Comprehension Conviction Ordering

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124

ADVERTISING: PLANNING AND STRATEGY

Advertising seeks to promote the seller’s product by means of printed and electronic

media. This is justified on the grounds that messages can reach large numbers of people

and make them aware and persuade and remind them about the firm’s offerings.

From a marketing management perspective, advertising is an important strategic device for

maintaining a competitive advantage in the marketplace. Advertising budgets represent a large

and growing element in the cost of goods and services. In a year it is possible for large multi-

product firms to spend $1.5 to $2 billion advertising their products, and it is common to spend

$74 to $100 million on one individual brand. Clearly, advertising must be carefully planned.

Objectives of Advertising There are at least three different viewpoints about the contribution of advertising to the

economic health of the firm. The generalist viewpoint is primarily concerned with sales,

profits, return on investment, and so forth. At the other extreme, the specialist viewpoint is

represented by advertising experts who are primarily concerned with measuring the effects

MARKETING INSIGHT Online Strategies to Leverage Buzz and Word of Mouth

1. Viral marketing is an online “pass-it-along” strategy. It uses electronic media to generate brand messages throughout a wide network of buyers. Viral marketing comes in many forms but often involves e-mail. It is hoped that the viral aspect kicks in when people are “wowed” by the advertisement and e-mail it to friends and acquaintances around the world. Obviously, the initial group must be carefully selected. Honda, Volvo, and Gillette use viral marketing.

2. Blogs are personalized journals where people and organizations can keep a running dia- logue. People can read, comment on, and connect to your blog, creating a powerful network that also includes other topical and news blogs. Blogs can be used in several ways by marketers. First, organizations can place banner ads in blogs and package ads with blog feeds. Second, they can use product sampling by getting their products in the hands of well-known bloggers in the category with the idea that they will create buzz about them on their blogs. A third way marketers can use blogs is by observing impor- tant blog sites for marketing intelligence. A fourth way is for a company to create its own blog and put a company representative in charge of blogging. Finally, a company can create blogs and recruit consumer evangelists to run them.

3. Twitter is a microblogging tool. It limits posts to 140 characters. It has evolved quickly into one of the largest social media outlets. U.S. consumers spend more than two hours a month on Twitter, and that is likely to grow. For marketers, there are a number of uses for Twitter. First, consumers can post complaints or information requests to a brand’s Twitter account, to which companies can respond. Second, companies can utilize a Twitter feature called Promoted Tweets. This is an advertising program whereby com- panies tweet their followers and then promote the Tweet. The promotion indicator (like an advertisement) shows up on the Tweet, and then the Tweet itself comes up on the search for results even of those who aren’t the brand’s followers on Twitter. There are also other uses of Twitter for generating buzz and word-of-mouth advertising.

Source: From Delbert Hawkins, David Mothersbaugh and Roger Best, Consumer Behavior: Building Marketing Strategy 12E, 2013, p. 240–241. Reprinted with permission of McGraw-Hill Education.

8–2

As we know, the Internet continues to change the nature of interpersonal communication. New avenues are rapidly evolving, and the rewards can be huge for companies who can harvest the speed and ease of interconnectivity that the Internet allows. Here are a few examples:

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125

MARKETING INSIGHT Ethical and Legal Issues in Marketing Communications 8–3

Element Ethical and Legal Concerns

Advertising • Using deceptive advertising • Reinforcing unfavorable ethnic/racial/sex stereotypes • Encouraging materialism and excessive consumption Public relations • Lack of sincerity (paying lip service to worthwhile causes) • Using economic power to gain favorable publicity • Orchestrating news events to present a false appearance of

widespread support for the company position Sales promotion • Offering misleading consumer promotions • Paying slotting allowances to gain retail shelf space • Using unauthorized mailing lists to reach consumers Personal selling • Using high-pressure selling • Failing to disclose product limitations/safety concerns • Misrepresenting product health Direct marketing communications • Invading privacy with telemarketing • Using consumer database information without consumers’

authorization • Creating economic waste with unwanted direct mail

Sources: From William Bearden, Thomas Ingram and Raymond LaForge, Marketing: Principles and Perspectives 5E, 2007, p. 383. Reprinted with permission of McGraw-Hill Education.

of specific ads or campaigns; here primary attention is given to organizations that offer

services that measure different aspects of the effects of advertising such as the  Nielsen

Index, Starch Reports, Arbitron Index, and Simmons Reports. A middle view, one that

might be classified as more of a marketing management approach, understands and appre-

ciates the other two viewpoints but, in addition, sees advertising as a competitive weapon.

Emphasis in this approach is given to the strategic aspects of the advertising function.2

Building on what was said earlier, objectives for advertising can be assigned that focus

on creating awareness, aiding comprehension, developing conviction, and encouraging ordering. Within each category, more specific objectives can be developed that take into account time and degree of success desired. Obviously, compared to the large number

of people that advertising makes aware of the product or service, the number actually

motivated to purchase is usually quite small.

In the long run and often in the short run, advertising is justified on the basis of the

revenue it produces. Revenue in this case may refer to either sales or profits. Economic

theory assumes that firms are profit maximizers, and the advertising outlays should be

increased in every market and medium up to the point where the additional cost of gaining

more business equals the incremental profits. Since most business firms do not have the data

required to use the marginal analysis approach, they usually employ less-sophisticated

decision-making models. Evidence also shows that many managers advertise to maximize

sales on the assumption that higher sales mean more profits (which may or may not be true).

The point to be made here is that the ultimate objective of the business advertiser is

to make sales and profits. To achieve this objective, customers must purchase and repur-

chase the advertised product. Toward this end, an approach to advertising is needed that

provides for intelligent decision making. This approach must recognize the need for meas-

uring the results of advertising, and these measurements must be as valid and reliable as

possible. Marketing managers must also be aware that advertising not only complements

other forms of communication but is subject to the law of diminishing returns. This means

that for any advertised product, it can be assumed a point is eventually reached at which

additional advertising produces little or no additional sales.

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126 Part C The Marketing Mix

ADVERTISING DECISIONS

In line with what has just been said, the marketing manager must make two key decisions.

The first decision deals with determining the size of the advertising budget, and the sec-

ond deals with how the advertising budget should be allocated. Although these decisions

are highly interrelated, we deal with them separately to achieve a better understanding of

the problems involved. Today’s most successful brands of consumer goods were built by

heavy advertising and marketing investment long ago. Many marketers have lost sight

of the connection between advertising spending and market share. They practice the art

of discounting: cutting ad budgets to fund price promotions or fatten quarterly earnings.

Companies employing these tactics may benefit in the short term but may be at a severe

competitive disadvantage in the long term.

Marketers at some companies, however, know that brand equity and consumer pref-

erence for brands drive market share. They understand the balance of advertising

and promotion expenditures needed to build brands and gain share, market by market,

regardless of growth trends in the product categories where they compete. For example,

Procter & Gamble has built its Jif and Folger’s brands from single-digit shares to being

among category leaders. In peanut butter and coffee, P&G invests more in advertising and

less in discounting than its major competitors. What P&G and other smart marketers such

as Kellogg, General Mills, Coke, and PepsiCo hold in common is an awareness of a key

factor in advertising: consistent investment spending. They do not raid their ad budgets to

increase earnings for a few quarters, nor do they view advertising as a discretionary cost.

The Expenditure Question Most firms determine how much to spend on advertising by one of the following methods.

Percent of Sales This is one of the most popular rule-of-thumb methods, and its appeal is found in its sim-

plicity. The firm simply takes a percentage figure and applies it to either past or future

sales. For example, suppose next year’s sales are estimated to be $1 million. Using the

criterion of 2 percent of sales, the ad budget would be $20,000. This approach is usually

justified by its advocates in terms of the following argument: (1) Advertising is needed to

generate sales; (2) a number of cents (i.e., the percentage used) out of each dollar of sales

should be devoted to advertising in order to generate needed sales; and (3) the percentage

is easily adjusted and can be readily understood by other executives. The percent-of-sales

approach is popular in retailing.

Per-Unit Expenditure Closely related to the preceding technique is one in which a fixed monetary amount is spent

on advertising for each unit of the product expected to be sold. This method is popular with

higher-priced merchandise, such as automobiles or appliances. For instance, if a company is

marketing color televisions priced at $500, it may decide that it should spend $30 per set on

advertising. Since this $30 is a fixed amount for each unit, this method amounts to the same

thing as the percent-of-sales method. The big difference is in the rationale used to justify each

of the methods. The per-unit expenditure method attempts to determine the retail price by

using production costs as a base. Here the seller realizes that a reasonably competitive price

must be established for the product in question and therefore attempts to cost out the gross

margin. All this means is that, if the suggested retail price is to be $500 and manufacturing

costs are $250, a gross margin of $250 is available to cover certain expenses, such as trans-

portation, personal selling, advertising, and dealer profit. Some of these expense items are

flexible, such as advertising, while others are nearly fixed, as in the case of transportation.

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Chapter Eight Integrated Marketing Communications 127

The basic problem with this method and the percentage-of-sales method is that they view

advertising as a function of sales, rather than sales as a function of advertising.

All You Can Afford Here the advertising budget is established as a predetermined share of profits or financial

resources. The availability of current revenues sets the upper limit of the ad budget. The

only advantage to this approach is that it sets reasonable limits on the expenditures for

advertising. However, from the standpoint of sound marketing practice, this method is

undesirable because there is no necessary connection between liquidity and advertising

opportunity. Any firm that limits its advertising outlays to the amount of available funds

will probably miss opportunities for increasing sales and profits.

Competitive Parity This approach is often used in conjunction with other approaches, such as the percent-

of-sales method. The basic philosophy underlying this approach is that advertising is

defensive. Advertising budgets are based on those of competitors or other members of

the industry. From a strategy standpoint, this is a “followership” technique that assumes

that the other firms in the industry know what they are doing and have similar goals.

Competitive parity is not a preferred method, although some executives feel it is a safe

approach. This may or may not be true depending in part on the relative market share of

competing firms and their growth objectives.

The Research Approach Here the advertising budget is argued for and presented on the basis of research find-

ings. Advertising media are studied in terms of their productivity by the use of media

reports and research studies. Costs are also estimated and compared with study results.

A typical experiment is one in which three or more test markets are selected. The first

test market is used as a control, either with no advertising or with normal levels of adver-

tising. Advertising with various levels of intensity is used in the other markets, and

comparisons are made to see what effect different levels of intensity have. The market-

ing manager then evaluates the costs and benefits of the different approaches and inten-

sity levels to determine the overall budget. Although the research approach is generally

more expensive than some other models, it is a more rational approach to the expenditure

decision.

The Task Approach Well-planned advertising programs usually make use of the task approach, which initially

formulates the advertising goals and defines the tasks to accomplish these goals. Once this

is done, management determines how much it will cost to accomplish each task and adds

up the total. This approach is often in conjunction with the research approach.

The Allocation Question This question deals with the problem of deciding on the most effective way of spend-

ing advertising dollars. A general answer to the question is that management’s choice of

strategies and objectives determines the media and appeals to be used. In other words, the

firm’s or product division’s overall marketing plan will function as a general guideline for

answering the allocation question.

From a practical standpoint, however, the allocation question can be framed in terms of

message and media decisions. A successful ad campaign has two related tasks: (1) say the

right things in the ads themselves, and (2) use the appropriate media in the right amounts

at the right time to reach the target market.

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128

Message Strategy The advertising process involves creating messages with words, ideas, sounds, and other

forms of audiovisual stimuli that are designed to affect consumer (or distributor) behav-

ior. It follows that much of advertising is a communication process. To be effective, the

adver tising message should meet two general criteria: (1) It should take into account the

basic principles of communication, and (2) it should be predicated upon a good theory of

consumer motivation and behavior.

The basic communication process involves three elements: (1) the sender or source

of the communication, (2) the communication or message, and (3) the receiver or audi-

ence. Advertising agencies are considered experts in the communications field and are

employed by most large firms to create meaningful messages and assist in their dissemi-

nation. Translating the product idea or marketing message into an effective ad is termed

encoding. In advertising, the goal of encoding is to generate ads that the audience under- stands. For this to occur, the audience must be able to decode the message in the ad so that the perceived content of the message is the same as the intended content of the message.

From a practical standpoint, all this means is that advertising messages must be sent to

consumers in an understandable and meaningful way.

Advertising messages, of course, must be transmitted and carried by particular commu-

nication channels commonly known as advertising media. These media or channels vary in

efficiency, selectivity, and cost. Some channels are preferred to others because they have less

“noise,” and thus messages are more easily received and understood. For example, a particular

newspaper ad must compete with other ads, pictures, or stories on the same page. In the case

of radio or TV, while only one firm’s message is usually broadcast at a time, other distractions

(noise) can hamper clear communications, such as driving while listening to the radio.

The relationship between advertising and consumer behavior is quite obvious. For many

products and services, advertising is an influence that may affect the consumer’s decision

to purchase a particular product or brand. It is clear that consumers are subjected to many

selling influences, and the question arises about how important advertising is or can be. In

this case, the advertising expert must operate on some theory of consumer behavior. The

reader will recall from the discussion of consumer behavior that the buyer was viewed

as progressing through various stages from an unsatisfied need through and beyond a

8–4 MARKETING INSIGHT Preparing the Advertising Campaign:

The Eight-M Formula

Effective advertising should follow a plan. There is no one best way to go about planning an advertising campaign, but in general, marketers should have good answers to the following eight questions:

1. The management question: Who will manage the advertising program? 2. The money question: How much should be spent on advertising as opposed to other

forms of communication? 3. The market question: To whom should the advertising be directed? 4. The message question: What should the ads say about the product? 5. The media question: What types and combinations of media should be used? 6. The macroscheduling question: How long should the advertising campaign be in effect

before changing ads or themes? 7. The microscheduling question: At what times and dates would it be best for ads to appear

during the course of the campaign? 8. The measurement question: How will the effectiveness of the advertising campaign be

measured and how will the campaign be evaluated and controlled?

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129

8–5 MARKETING INSIGHT Some Relative Merits of Major

Advertising Media

Disadvantages

1. Nonselectivity of audience. 2. Fleeting impressions. 3. Short life. 4. Expensive.

Magazines

Advantages

1. High geographic and demographic selectivity. 2. Psychology of attention. 3. Quality of reproduction. 4. Pass-along readership.

Disadvantages

1. Long closing periods (six to eight weeks prior to publication).

2. Some waste circulation. 3. No guarantee of position (unless premium is paid).

Direct Mail

Advantages

1. Audience selectivity. 2. Flexible. 3. No competition from competing advertisements. 4. Personalized.

Disadvantages

1. Relatively high cost. 2. Consumers often pay little attention and throw it

away.

Internet

Advantages

1. Interactive. 2. Low cost per exposure. 3. Ads can be placed in interest sections. 4. Timely. 5. High information content possible. 6. New favorable medium.

Disadvantages

1. Low attention getting. 2. Short message life. 3. Reader selects exposure. 4. May be perceived as intruding. 5. Subject to download speeds.

Newspapers

Advantages

1. Flexible and timely. 2. Intense coverage of local markets. 3. Broad acceptance and use. 4. High believability of printed word.

Disadvantages

1. Short life. 2. Read hastily. 3. Small “pass-along” audience.

Radio

Advantages

1. Mass use (over 25 million radios sold annually). 2. Audience selectivity via station format. 3. Low cost (per unit of time). 4. Geographic flexibility.

Disadvantages

1. Audio presentation only. 2. Less attention than TV. 3. Chaotic buying (nonstandardized rate structures). 4. Short life.

Outdoor

Advantages

1. Flexible. 2. Relative absence of competing advertisements. 3. Repeat exposure. 4. Relatively inexpensive.

Disadvantages

1. Creative limitations. 2. Many distractions for viewer. 3. Public attack (ecological implications). 4. No selectivity of audience.

Television

Advantages

1. Combination of sight, sound, and motion. 2. Appeals to senses. 3. Mass audience coverage. 4. Psychology of attention.

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130 Part C The Marketing Mix

purchase decision. The end goal of an advertisement and its associated campaign is to

move the buyer to a decision to purchase the advertised brand. By doing so, the advertise-

ment will have succeeded in moving the consumer to the trial and repeat purchase stage of

the consumer behavior process, which is the end goal of advertising strategy.

The planning of an advertising campaign and the creation of persuasive messages require

a mixture of marketing skill and creative know-how. Relative to the dimension of market-

ing skills, some important pieces of marketing information are needed before launching an

ad campaign. Most of this information must be generated by the firm and kept up-to-date.

Listed here are some of the critical types of information an advertiser should have.

1. Who the firm’s customers and potential customers are: their demographic, economic, and psychological characteristics and any other factors affecting their likelihood of buying.

2. How many such customers there are.

3. How much of the firm’s type and brand of product they are currently buying and can reasonably be expected to buy in the short-term and long-term future.

4. Which individuals, other than customers and potential customers, influence purchasing decisions.

5. Where they buy the firm’s brand of product.

6. When they buy, and frequency of purchase.

7. Which competitive brands they buy and frequency of purchase.

8. How they use the product.

9. Why they buy particular types and brands of products.

Media Mix Media selection is no easy task. To start with, there are numerous types and combinations

of media to choose from. Marketing Insight 8 –5 presents a brief summary of the advan-

tages and disadvantages of some of the major advertising media.

In the advertising industry, a common measure of efficiency or productivity is cost per thou-

sand, or CPMs. This figure generally refers to the dollar cost of reaching 1,000 prospects,

and its chief advantage lies in its simplicity and allowance for a common base of comparison

between differing media types. The major disadvantage of the use of CPMs also relates to its

simplicity. For example, the same commercial placed in two different television programs,

having the same viewership and the same audience profile, may very well generate different

responses depending on the level of viewer involvement. This “positive effects” theory states

that the more the viewers are involved in a television program, the stronger they will respond to

commercials. In essence, involving programs produce engaged respondents who demonstrate

more favorable responses to advertising messages.

Generally, such measures as circulation, audience size, and sets in use per commer-

cial minute are used in the calculation. Of course, different relative rankings of media can

occur, depending on the measure used. A related problem deals with what is meant by

“effectively reaching” the prospect.3 Reach, in general, is the number of different targeted audience members exposed at least once to the advertiser’s message within a predetermined

time frame. Just as important as the number of different people exposed (reach) is the number

of times, on average, that they are exposed to an advertisement within a given time period.

This rate of exposure is called average frequency. Since marketers all have budget con- straints, they must decide whether to increase reach at the expense of average frequency or

average frequency at the expense of reach. In essence, the marketer’s dilemma is to develop

a media schedule that both (1) exposes a sufficient number of targeted customers (reach) to

the firm’s product and (2) exposes them enough times (average frequency) to the product

to produce the desired effect. The desired effect can come in the form of reaching goals

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131

8–6 MARKETING INSIGHT Some Innovative Nontraditional Media

Advertising can be found everywhere these days—even places where we least expect it.

Aerial Banners and Lights

Banners carrying ad messages can be pulled by low-flying planes. After dark, traveling aerial lights can display messages of up to 90 characters. Slow-flying helicopters can carry 40- by 80-foot signs lit by thousands of bulbs.

Blimps

In addition to Goodyear, blimps now carry ads for many companies, including Citibank, Coca-Cola, and Fuji Film, among others. Computer operated lighting systems allow the blimps to advertise at night.

In-Flight Ads

Many airlines’ in-flight audio and video entertainment runs ads. The travel industry and advertisers that want to reach business fliers are the primary users.

Newspaper Bags

The protective bags of newspapers are used for full-color advertising and can be enhanced by adding product samples. This method is desirable because it does not have to compete with other advertisers.

Transit Terminal Domination

The latest version of saturation bomb- ing has come to large transit hubs around the country. One advertiser buys up all or most of the message space in one confined site banishing all competition. This greatly increases the chances of being seen even by the most harried passers by.

Electronic Billboards

Most modern sports stadiums and arenas sell ad space on giant electronic displays.

Inflatables

Giant inflatable beer cans, mascots, and even cereal boxes are used for advertising purposes.

Painted Vehicles

Buses, trucks, and cars are completely deco- rated with larger than life illustrations and

messages to attract attention. Some vehicles are “wrapped” with a material that covers the entire vehicle to present the greatest visual impact.

Reactrix Brand Play

In small theaters and other spaces, Reactrix creates highly entertaining branding dis- plays that respond to the physical move- ment of the audience.

Trash Receptacles

Uniquely designed and decorated trash bins, boxes, and baskets bear advertising logos and messages. Some major cities now offer advertising space on concrete litter recepta- cles at major commercial intersections.

Kiosks

Stand-alone kiosks can be painted with eye- catching designs and messages. Unique con- structions can be attached to the top and sides to draw attention. Electronic displays running presentation software can show colorful fast-action video clips, slide images, and interactive text. These systems can also play synchronized sounds and music.

Lavatory Advertising

Numerous venues allow advertising in lava- tories. Print ads can be found on the inner side of stalls and above urinals in some men’s restrooms.

Gobo/Cookie Advertising

The gobo (or cookie) is a piece of metal stenciled with a logo through which light is projected against a wall or other suitable background. This is ideal for huge outdoor or indoor events.

Train Cars

Train cars are wrapped with advertisements instead of graffiti these days. In Chicago an eight-car commuter train was wrapped with Illinois lottery ads.

Grocery Receipts

Today most major supermarket chains print coupons on the back of grocery receipts. The coupons feature discounts at local retailers.

Source: From William Arens, Michael Weigold and Christian Arens, Contemporary Advertising 13E, 2011, p. 275. Reprinted with permission of McGraw-Hill Education.

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132 Part C The Marketing Mix

associated with any or all of the categories of advertising objectives (the prospect becomes

aware of the product, takes action, etc.) covered earlier in the chapter.

SALES PROMOTION

Over the past two decades, the popularity of sales promotion has been increasing. Two

reasons for this increased popularity are undoubtedly the increased pressure on manage-

ment for short-term results and the emergence of new purchase tracking technology. For

example, many supermarket cash registers are now equipped with a device that dispenses

coupons to a customer at the point of purchase. The type, variety, and cash amount of

the coupon will vary from customer to customer based on their purchases. In essence, it

is now  possible for the Coca-Cola Company to dispense coupons only to those custom-

ers who  purchase Pepsi Cola, thus avoiding spending promotional dollars on already-

loyal Coke drinkers. Figure 8.2 presents some popular targets of sales promotion and the

methods used.

Push versus Pull Marketing Push and pull marketing strategies comprise the two options available to marketers interested

in getting their product into the hands of customers. They are illustrated in Figure 8.3. Push strategies involve aiming promotional efforts at distributors, retailers, and sales personnel to gain their cooperation in ordering, stocking, and accelerating the sales of a product. For

example, a local rock band may visit local DJs seeking air play for their record, offer dis-

tributors special prices to carry the CD, and offer retailers special allowances for putting

up posters or special counter displays. These activities, which are usually in the form of

price allowances, distribution allowances, and advertising dollar allowances, are designed to

“push” the CD toward the customer.4

Pull strategies involve aiming promotional efforts directly at customers to encourage them to ask the retailer for the product. In the past few years drug manufacturers have begun

to advertise prescription drugs directly to consumers. Customers are encouraged to “Ask

Your Doctor” about Viagra or Paxil. These activities, which can include advertising and sales

promotion, are designed to “pull” a product through the channel from manufacturer to buyer.

FIGURE 8.2 Example of Sales Promotion Activities Source: From William Perreault, Jr., Joseph Cannon and E. Jerome McCarthy, Basic Marketing 18E, 2011, Chapter 14. Reprinted with

permission of McGraw-Hill Education.

Aimed at final consumers or users

Contests Coupons Aisle displays Samples Trade shows Point-of-purchasing materials Banners and streamers Frequent buyer programs Sponsored events

Aimed at middlemen

Price deals Promotion allowances Sales contests Calendars Gifts Trade shows Meetings Catalogs Merchandising aids Videos

Aimed at company’s own sales force

Contests Bonuses Meetings Portfolios Displays Sales aids Training materials

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Chapter Eight Integrated Marketing Communications 133

Trade Sales Promotions Trade promotions are those promotions aimed at distributors and retailers of products who make up the distribution channel. The major objectives of trade promotions are to (1) convince

retailers to carry the manufacturer’s products, (2) reduce the manufacturer’s inventories and

increase the distributor’s or retailer’s inventories, (3) support advertising and consumer sales

promotions, (4) encourage retailers either to give the product more favorable shelf space or to

place more emphasis on selling the product, and (5) serve as a reward for past sales efforts.

Promotions built around price discounts and advertising or other allowances are likely

to have higher distributor/retailer participation levels than other type promotions because

a direct economic incentive is attached to the promotion.5 The importance attached to

individual types of promotions may vary by the size of distributor/retailer. For example,

small retailers do not consider contests, sweepstakes, and sales quotas as being important

to their decision to participate in promotions; getting the full benefit of such promotions is

difficult due to their size. Marketers must keep in mind that not all distributors or retailers

will have the same reaction to promotions offered. The manufacturer must carefully con-

sider differences in attitudes when designing and implementing trade promotion programs.

Consumer Promotions Consumer promotions can fulfill several distinct objectives for the manufacturer. Some of the more commonly sought-after objectives include (1) inducing the consumer to try the

product, (2) rewarding the consumer for brand loyalty, (3) encouraging the consumer to

trade up or purchase larger sizes of a product, (4) stimulating the consumer to make repeat

purchases of the product, (5) reacting to competitor efforts, and (6) reinforcing and serving

as a complement to advertising and personal selling efforts.

FIGURE 8.3 Push versus Pull Strategies in Marketing Communications

Marketing Communications Pull Strategy

Producer Marketing Communications

Resellers End Users

Push Strategy

Marketing Communications

End UsersResellers Request ProductsProducer

Request Products

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134

8–7 MARKETING INSIGHT Evaluating Advertising

Effectiveness: Some Methods

and Available Services

Sources: Evaluating the effectiveness of advertising is a difficult task. For discussions, see Joseph Guiltinan and Gordon Paul, Marketing Management, 6th ed. (Burr Ridge, IL: McGraw-Hill/Irwin, 1997), p. 274; and George E. Belch and Michael A. Belch, Advertising and Promotion, 9th ed. (Burr Ridge, IL: McGraw-Hill, 2012), chap. 18.

Evaluating Specific Advertisements

1. Recognition tests. Estimate the percentage of people claiming to have read a magazine who recognize the ad when it is shown to them (e.g., Starch Message Report Service).

2. Recall tests. Estimate the percentage of people claiming to have read a magazine who can (unaided) recall the ad and its contents (e.g., Gallup and Robinson Impact Service, various services for TV ads as well).

3. Opinion tests. Potential audience members are asked to rank alternative advertisements as most interesting, most believable, best liked.

4. Theater tests. Theater audience is asked for brand preference before and after an ad is shown in context of a TV show (e.g., Schwerin TV Testing Service).

Evaluating Specific Advertising Objectives

1. Awareness. Potential buyers are asked to indicate brands that come to mind in a product category. A message used in an ad campaign is given and buyers are asked to identify the brand that was advertised using that message.

2. Attitude. Potential buyers are asked to rate competing or individual brands on determi- nant attributes, benefits, and characterizations using rating scales.

Evaluating Motivational Impact

1. Intention to buy. Potential buyers are asked to indicate the likelihood they will buy a brand (on a scale from “definitely will not” to “definitely will”).

2. Market test. Sales changes in different markets are monitored to compare the effects of different messages, budget levels.

Figure 8.4 presents a brief description of some of the most commonly used forms of

consumer promotion activities.

What Sales Promotion Can and Can’t Do Advocates of sales promotion often point to its growing popularity as a justification for

the argument that we don’t need advertising; sales promotion itself will suffice. Marketers

should bear in mind that sales promotion is only one part of a well-constructed inte-

grated marketing communications program. While sales promotion is proven to be

effective in achieving the objectives listed in the previous sections, there are several

compelling reasons why it should not be used as the sole promotional tool. These

reasons include sales pro motion’s inability (1) to generate long-term buyer commitment

to a brand in many cases; (2) to change, except on a temporary basis, declining sales of

a product; (3) to convince buyers to  purchase an otherwise unacceptable product; and

(4) to make up for a lack of advertising or sales support for a product. In addition,

promotions can often fuel the flames of competitive retaliation far more than other mar-

keting activities. When the competition gets drawn into the promotion war, the effect

can be a significant slowing of the sharp sales increases predicted by the initiator of the

promotion. Worse yet, promotions can often devalue the image of the promoted brand in

the consumer’s eyes.

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Chapter Eight Integrated Marketing Communications 135

FIGURE 8.4 Some Commonly Used

Forms of Consumer

Promotions

• Sampling

• Price deals • Bonus packs

• Rebates and refunds

• Sweepstakes and contests

• Premiums • Coupons

Customers are offered regular trial sizes of the product either free or at a nominal price. Customers are offered discounts from the product’s regular price. Additional amounts of the product are given to buyers when they purchase the product. Customers are given reimbursements for purchasing the product either on the spot or through the mail. Prizes are available either through chance selection or games of skill. A reward or gift can come from purchasing a product. Probably the most familiar and widely used of all consumer pro- motions, now often available at point of purchase.

The dilemma marketers face is how to cut back on sales promotions without losing

market share to competitors. In an effort to overcome this problem, some consumer prod-

ucts companies are instituting new pricing policies to try to cut back on the amount of

sales promotions used. For example, Procter & Gamble and General Mills have instituted

everyday low-price strategies for many of their products. The intent of this type of policy

is to give retailers a lower list price in exchange for cutting trade promotions. While the

net cost of the product to retailers remains unchanged, retailers are losing promotional

dollars that they controlled. In many situations, although trade allowances are supposed to

be used for encouraging retail sales, it is not uncommon for retailers to take a portion of

the trade allowance money as profit. The rationale behind companies’ (such as Procter &

Gamble and General Mills) efforts to cut back on trade and other promotions is (1) not to

force brand-loyal customers to pay unusually high prices when a product isn’t on special;

(2) to allow consumers to benefit from a lower average shelf price, since retailers will no

longer have discretion over the use of allowance dollars; and (3) to improve efficiencies

in manufacturing and distri bution systems because retailers will lose the incentive to do

heavy forward buying of discounted items.

In addition to developing pricing policies to cut back on short-term promotions, some

consumer products companies are starting to institute frequency marketing programs in which they reward consumers for purchases of products or services over a  sustained

period of time. These programs are not technically considered sales promotions due to

their ongoing nature. Frequency marketing originated in 1981 when American Airlines

launched its frequent-flyer program with the intention of securing the loyalty of busi-

ness travelers.

PUBLIC RELATIONS

As noted earlier in the chapter, public relations is a nonpersonal form of communication

that tries to influence the overall image of the organization and its products and services

among its various stakeholder groups. Public relations managers prefer to focus on commu-

nicating positive news about the organization, but they must also be available to minimize

the negative impacts of a crisis or problem. We have already noted that the most popular

and frequently used public relations tool is publicity. There are several forms of publicity:

1. News release. An announcement regarding changes in the organization or the product line, sometimes called a press release. The objective is to inform members of the media of a newsworthy event in the hope that they will convert it into a story.

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136

2. News conference. A meeting held for representatives of the media so that the organi- zation can announce major news events such as new products, technologies, mergers,

acquisitions, and special events, or, in the case of a crisis or problem, present its posi-

tion and plans for dealing with the situation.

3. Sponsorship. Providing support for and associating the organization’s name with events, programs, or even people such as amateur athletes or teams. Besides publicity,

sponsorship can also include advertising and sales promotion activities. Many organi-

zations sponsor sporting events, art festivals, and public radio and television programs.

4. Public service announcements. Many nonprofit organizations rely on the media to donate time for advertising for contributions and donors. Many nonprofit organizations

cannot afford the cost of advertising or in some cases are prohibited from doing so.

DIRECT MARKETING

We already know that direct marketing allows the organization to communicate with custom-

ers through direct mail, e-mail, mobile marketing, catalogs, telemarketing, and direct response

advertising. The Internet has had a tremendous impact on every aspect of direct mail.

Direct marketing methods are certainly not new. In fact, several of them will be dis-

cussed later in the book as methods of nonstore retailing. What is new is the ability to

design and use them more efficiently and effectively because of the Internet and the abil-

ity to develop and compile comprehensive databases (see Marketing Insight 8–7). The

databases have positively affected traditional direct marketing methods such as direct mail

and catalogs but have enabled the development of targeted e-mail marketing and mobile

marketing.

Marketers can now customize communication efforts and literally create one-to-one

connections and dialogues with customers, which can include special promotions and tar-

geted special promotions in addition to shipping data and confirmation of orders. All of the

information provided by the customers is incorporated into the seller’s database. In a kind

8–8 MARKETING INSIGHT Contents for a Comprehensive

Database

Consumer Database Business-to-Business Database

1 Name Name of company/contact/decision maker(s) 2 Address/zip code Title of contact 3 Telephone number Telephone number 4 Length of residence Source of order/inquiry or referral 5 Age Credit history 6 Gender Industrial classification 7 Marital status Size of business 8 Family data (number of children, etc.) Revenues 9 Education Number of employees 10 Income Time in business 11 Occupation Headquarters location 12 Transaction history Multiple locations 13 Promotion history Purchase history 14 Inquiring history Promotion history 15 Unique identifiers Inquiring history 16 ________________ Unique identifier

Source: From George E. Belch and Michael A. Belch, Advertising and Promotion: An Integrated Marketing Communications Perspective 9E, 2012, p. 497. Reprinted with permission of McGraw-Hill Education.

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Chapter Eight Integrated Marketing Communications 137

of irony, the more information the customer provides the marketer, the more effectively

the marketer can target that customer.

Finally, cellular technology such as a smartphone enable the customer to purchase

wherever they happen to be. Marketing by way of these handheld devices has become

known as mobile marketing.6 This technology also allows these devices to function as a medium of payment. Marketers see a great future for mobile marketing as they and their

customers capitalize on its potential.

For the American consumer facing a “poverty of time,” direct marketing offers many

benefits. In addition to saving time, consumers often save money, get better service, and enjoy

increased privacy; many even find it entertaining. For the marketer, sales revenues are the

obvious benefit but not the only one. Direct marketing activities are often very effective

in generating sales leads when a customer asks for more information about a product or

service and can also increase store traffic when potential buyers are encouraged to visit a

dealership or retail store.

SUMMARY

This chapter has been concerned with integrated marketing communications. Remember

that advertising and sales promotion are only two of the ways by which sellers can

affect the demand for their product. Advertising and sales promotion are only part of the

firm’s promotion mix, and in turn, the promotion mix is only part of the overall marketing

mix. Thus, advertising and sales promotion begin with the marketing plan and not with

the advertising and sales promotion plans. Ignoring this point can produce ineffective and

expensive promotional programs because of a lack of coordination with other elements of

the marketing mix.

Additional Resources

Burns, Brian C., and Tom U. Snyder. Selling in a New Market Space. New York: McGraw-Hill, 2010.

Seitel, Fraser, and John Doorley. Rethinking Reputation. New York: Palgrave Macmillan, 2012. Mullin, Jeanniery, and David Daniels. Email Marketing. Indianapolis: Wiley Publishers, 2009. Percival, Sean. My Space Marketing: Creating a Social Network to Boom Your Business. Indianapolis: Que Books, 2009.

Postman, Joel. SocialCorp: Social Media Goes Corporate. Berkeley, CA: New Riders, 2009. Reich, Brian, and Don Soloman. Media Rules: Mastering Today’s Technology to Connect With and Keep Your Audience. Hoboken, NJ: John Wiley and Sons, 2008. Fox, Vanessa. Marketing in the Age of Google. Hoboken, NJ: John Wiley and Sons, 2012.

Advertising: A paid form of nonpersonal communications about an organization, its product, or its activities that is transmitted through a mass medium to a target audience.

Average frequency: The number of times customers, on average, are exposed to an advertisement within a given time period.

Consumer promotions: Promotions directed at consumers designed to induce the customer to try the product, reward brand loyalty, encourage the consumer to trade-up or purchase larger sizes,

stimulate repeat purchases, and reinforce other advertising or personal selling efforts.

Cost per thousand: A common measure of efficiency or productivity in advertising, cost per thousand (CPM) refers to the dollar cost of reaching 1,000 prospects.

Direct marketing: Direct communication with customers through direct mail, e-mail, mobile marketing, catalogs, telemarketing, and direct response advertising.

Key Terms and Concepts

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138 Part C The Marketing Mix

Expenditure question: The methods used to decide how much to spend on advertising, ranging from simple (a percent of sales), to more complex (the task approach which determines goals and

how much it will cost to accomplish each goal).

Frequency marketing programs: Programs designed to reward customers for purchases of a product or service over a sustained period of time.

Integrated marketing communications: Marketing communications programs that coordinate and integrate all elements of the promotion mix so that the organization presents a consistent

message. It seeks to manage all sources of brand or company contacts with existing and potential

customers.

Mobile marketing: Marketing by way of handheld devices (e.g., smartphones).

Objectives of advertising: Creating awareness, aiding comprehension, developing conviction, and encouraging ordering. Within each category more specific objectives can be developed that take

into account time and degree of success desired.

Personal selling: Face-to-face communication with potential buyers to inform them about and persuade them to purchase an organization’s product.

Promotion mix: The combination and types of nonpersonal and personal communication an organization puts forth during a specified period. There are five elements of the promotion mix,

four of which are nonpersonal forms of communication (advertising, sales promotion, public rela-

tions, and direct marketing), and one, personal selling, which is a personal form of communication.

Public relations: Efforts directed at influencing the attitudes, feelings, and opinions of customers, noncustomers, stockholders, suppliers, employees, and political bodies about the organization.

A popular form is publicity.

Pull strategy: Promotional efforts directed at customers to encourage them to ask the retailer for the product. They are designed to “pull” a product through the distribution channel from manufac-

turer to buyer.

Push strategy: Promotional efforts directed at distributors, retailers, and sales personnel to gain their cooperation in ordering, stocking, and supporting the sales of a product. As such they “push”

the product toward the customer.

Reach: The number of targeted audience members exposed at least once to an advertiser’s mes- sage within a predetermined time frame.

Sales promotion: An activity or material that offers customers, sales personnel, or resellers a direct inducement for purchasing a product.

Trade promotions: Promotions aimed at distributors and retailers of products who make up the distribution channel.

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139

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Appendix

Major Federal Agencies Involved in Control of Advertising

Agency

Federal Trade Commission

Food and Drug Administration

Federal Communications Commission

Postal Service

Alcohol and Tobacco Tax Division

Grain Division Securities and Exchange Commission

Information Source

Patent Office Library of Congress Department of Justice

Function

Regulates commerce between states; controls unfair business practices; takes action on false and deceptive advertising; most important agency in regulation of advertising and promotion. Regulatory division of the Department of Health, Education, and Welfare; controls marketing of food, drugs, cosmetics, medical devices, and potentially hazardous consumer products. Regulates advertising indirectly, primarily through the power to grant or withdraw broadcasting licenses. Regulates material that goes through the mails, primarily in areas of obscen- ity, lottery, and fraud. Part of the Treasury Department; has broad powers to regulate deceptive and misleading advertising of liquor and tobacco. Unit of the Department of Agriculture responsible for policing seed advertising. Regulates advertising of securities.

Description

Regulates registration of trademarks. Controls protection of copyrights. Enforces all federal laws through prosecuting cases referred to it by other government agencies.

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140

9 Personal Selling, Relationship Building, and Sales Management

Personal selling, unlike advertising or sales promotion, involves direct relationships

between the seller and the prospect or customer. In a formal sense, personal selling can be

defined as a two-way flow of communication between a potential buyer and a salesperson

that is designed to accomplish at least three tasks: (1) identify the potential buyer’s needs;

(2) match those needs to one or more of the firm’s products or services; and (3) on the

basis of this match, convince the buyer to purchase the product. The personal selling ele-

ment of the promotion mix can encompass diverse forms of direct interaction between a

salesperson and a potential buyer, including face-to-face, telephone, written, and computer

communication. The behavioral scientist would most likely characterize personal selling

as a type of personal influence. Operationally, it is a complex communication process, one

still not fully understood by marketers.

IMPORTANCE OF PERSONAL SELLING

The importance of the personal selling function depends partially on the nature of the prod-

uct. As a general rule, goods that are new and different, technically complex, or expensive

require more personal selling effort. The salesperson plays a key role in providing the con-

sumer with information about such products to reduce the risks involved in purchase and

use. Insurance, for example, is a complex and technical product that often needs significant

amounts of personal selling. In addition, many organizational products cannot be presold, and

the salesperson has a key role to play in finalizing the sale.

It is important to remember that, for many companies, the salesperson represents the

customer’s main link to the firm. In fact, to some, the salesperson is the company.

Therefore, it is imperative that the company take advantage of this unique link. Through the

efforts of the successful salesperson, a company can build relationships with customers

that continue long beyond the initial sale. It is the salesperson who serves as the conduit

through which information regarding product flaws, improvements, applications, or new

uses can pass from the customer to the marketing department. To illustrate the importance

of using salespeople as an information resource, consider this fact: In some industries,

customer information serves as a major source for up to 90 percent of new product and

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Chapter Nine Personal Selling, Relationship Building, and Sales Management 141

process ideas. Along with techniques described in the previous chapter, personal selling

provides the push needed to get middlemen to carry new products, increase their amount of

goods purchased, and devote more effort in merchandising a product or brand.

In summary, personal selling is an integral part of the marketing system, fulfilling two

vital duties (in addition to the core sales task itself): one for customers and one for compa-

nies.1 First, the salesperson dispenses knowledge to buyers. Lacking relevant information,

customers are likely to make poor buying decisions. For example, computer users would

not learn about new equipment and new programming techniques without the assistance

of computer sales representatives. Doctors would have difficulty finding out about new

drugs and procedures were it not for pharmaceutical salespeople. Second, salespeople

act as a source of marketing intelligence for management. Marketing success depends on

satisfying customer needs. If present products don’t fulfill customer needs, then profit-

able opportunities may exist for new or improved products. If problems with a company’s

product exist, then management must be quickly apprised of the fact. In either situation,

salespeople are in the best position to act as the intermediary through which valuable

information can be passed back and forth between product providers and buyers.

THE SALES PROCESS

Personal selling is as much an art as it is a science. The word art is used to describe that por- tion of the selling process that is highly creative in nature and difficult to explain. This does

not mean there is little control over the personal selling element in the promotion mix. It

does imply that, all other things equal, the trained salesperson can outsell the untrained one.

Before management selects and trains salespeople, it should have an understanding

of the sales process. Obviously, the sales process will differ according to the size of the

company, the nature of the product, the market, and so forth, but some elements are com-

mon to almost all selling situations. For the purposes of this text, the term sales process refers to two basic factors: (1) the objectives the salesperson is trying to achieve while

engaged in selling activities and (2) the sequence of stages or steps the salesperson should

follow in trying to achieve the specific objectives (the relationship-building process).

Objectives of the Sales Force Much like the concepts covered in the previous chapter, personal selling can be viewed as a stra-

tegic means to gain competitive advantage in the marketplace. For example, most organizations

include service representatives as part of their sales team to ensure that customer concerns with

present products are addressed and remedied at the same time new business is being solicited.

In a similar manner, marketing management understands that while, ultimately, per-

sonal selling must be justified on the basis of the revenue and profits it produces, other

categories of objectives are generally assigned to the personal selling function as part of

the overall promotion mix.2 These objectives are

1. Information provision. Especially in the case of new products or customers, the sales- person needs to fully explain all attributes of the product or service, answer any ques-

tions, and probe for additional questions.

2. Persuasion. Once the initial product or service information is provided, the salesperson needs to focus on the following objectives:

• Clearly distinguish attributes of the firm’s products or services from those of competitors.

• Maximize the number of sales as a percent of presentations.

• Convert undecided customers into first-time buyers.

• Convert first-time customers into repeat purchasers.

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1. Creates new customers. 2. Sells more to present customers. 3. Builds long-term relationships with customers. 4. Provides solutions to customer problems. 5. Provides service to customers. 6. Helps customers resell products to their customers. 7. Helps customers use products after purchase. 8. Builds goodwill with customers. 9. Provides company with market information.

Source: From Charles Futrell, Fundamentals of Selling 13E, 2014, p. 24. Reprinted with permission of McGraw-Hill Education.

MARKETING INSIGHT What Does a Professional Salesperson Do? 9–1

142

• Sell additional or complementary items to repeat customers.

• Tend to the needs of dissatisfied customers.

3. After-sale service. Whether the sale represents a first-time or repeat purchase, the sales- person needs to ensure the following objectives are met:

• Delivery or installation of the product or service that meets or exceeds customer

expectations.

• Immediate follow-up calls and visits to address unresolved or new concerns.

• Reassurance of product or service superiority through demonstrable actions.

• Build relationships.

The Sales Relationship-Building Process For many years, the traditional approach to selling emphasized the first-time sale of a prod-

uct or service as the culmination of the sales process. As emphasized in Chapter 1, the

marketing concept and accompanying approach to personal selling view the initial sale

as merely the first step in a long-term relationship-building process, not as the end goal.

As we shall see later in this chapter, long-term relationships between the buyer and seller

can  be considered partnerships because the buyer and seller have an ongoing, mutually

beneficial affiliation, with each party having concern for the other party’s well-being.3 The

relationship-building process, which is designed to meet the objectives listed in the previ-

ous section, contains six sequential stages (Figure 9.1). These stages are (1) prospecting,

(2) planning the sales call, (3) presentation, (4) responding to objections, (5) obtaining com-

mitment/closing the sale, and (6) building a long-term relationship. What follows is a brief

description of each of the stages.

Prospecting The process of locating potential customers is called prospecting. The prospecting activ- ity is critical to the success of organizations in maintaining or increasing sales volume.

Continual prospecting is necessary for several reasons, including the fact that customers

(1) switch to other suppliers, (2) move out of the organization’s market area, (3) go out of

business because of bankruptcy, (4) are acquired by another firm, or (5) have only a one-

time need for the product or service. In addition, the organization’s buying contracts with

present customers may be replaced and organizations that wish to grow must increase their

customer base. Prospecting in some fields is more important than in others. For example, a

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Chapter Nine Personal Selling, Relationship Building, and Sales Management 143

stockbroker, real estate agent, or partner in an accounting firm with no effective prospect-

ing plan usually doesn’t last long in the business. In these positions, it may take as many as

100 contacts to gain 10 prospects who will listen to presentations from which one to two

sales may result. On the other hand, a Procter & Gamble sales representative in a certain

geographic area would likely know all the potential retailers for Crest toothpaste.

The prospecting process usually involves two major activities that are undertaken on a

continual, concurrent basis. First, prospects must be located. When names and addresses of

prospects are not available, as is usually the case when firms enter new markets or a new

salesperson is hired, they can be generated by randomly calling on businesses or households

or by employing mass appeals (through advertising). This process, called random lead gener- ation, usually requires a high number of contacts to gain a sale. A lead is a potential prospect that may or may not have the potential to be a true prospect, a candidate, to whom a sale could

be made.

For most professional, experienced salespeople, a more systematic approach to gen erating

leads from predetermined target markets is used. This approach, aptly named selected-lead generation, uses existing contacts and knowledge to generate new prospects. In general, the best source of prospects is referrals from satisfied customers. The more satisfied one’s custom-

ers are, the higher the quality of leads a salesperson will receive from them.

The second step in the prospecting process involves screening. Once leads are gener-

ated, the salesperson must determine whether the prospect is a true prospect. This qualify-

ing process usually entails gathering information, which leads to answering five questions:

1. Does the lead have a want or need that can be satisfied by the purchase of the firm’s

products or services?

2. Does the lead have the ability to pay?

FIGURE 9.1 The Sales

Relationship-Building

Process

Source: Adapted from mate-

rial discussed in Stephen B.

Castleberry and John F.

Tanner, Selling: Building

Partnerships, 8th ed. (Burr

Ridge, IL: McGraw-Hill,

2011), p. 206.

Planning the sales call

Presenting

Responding to objections

Obtaining commitment

Building a long-term relationship

Prospecting

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9–2 MARKETING INSIGHT Some Common Sources

of Sales Leads

Source: From Stephen Castleberry and John Tanner, uilding Partnerships 8E, 2011, p. 155. Reprinted with permission of McGraw-Hill Education.

Source

Satisfied customers

Endless chain

Networking

Center of influence

The Internet

Ads, direct mail, catalogs, and publicity

Shows, fairs, and merchandise markets

Seminars

Lists and directories

Data mining and CRM systems

Cold calling

Spotters

Telemarketing

Sales letters

Other sources

How Used

Current and previous customers are contacted for additional business and leads.

Salesperson attempts to secure at least one additional lead from each person he or she interviews.

Salesperson uses personal relationships with those who are connected and cooperative to secure leads.

Salesperson cultivates well-known, influential people in the territory who are willing to supply lead information.

Salesperson uses websites, e-mail, Listservs, bulletin boards, forums, round- tables, and newsgroups to secure leads.

Salespeople use these forms of promotional activities to generate leads.

Salespeople use trade shows, conventions, fairs, and merchandise markets for lead generation.

Salespeople use seminars for prospects to generate leads.

Salesperson uses secondary data sources, which can be free or fee-based.

Salespeople use sophisticated data analysis software and the company’s CRM system to generate leads.

Salesperson tries to generate leads by calling on totally unfamiliar organizations.

Salesperson pays someone for lead information.

Salesperson uses phone and/or telemarketing staff to generate leads.

Salesperson writes personal letters to potential leads.

Salesperson uses noncompeting salespeople, people in his or her own firm, friends, and so on, to secure information.

144

3. Does the lead have the authority to pay?

4. Can the lead be approached favorably?

5. Is the lead eligible to buy?

Depending on the analysis of answers to these questions, the determination of whether

a lead is a true prospect can be made. In seeking and qualifying leads, it is important to

recognize that responsibility for these activities should not be totally assumed by indi-

vidual salespeople. Rather, companies should develop a consistent, organized program,

recognizing that the job of developing prospects belongs to the entire company, not just

the sales force.

Planning the Sales Call Salespeople will readily admit that their number one problem is getting through the door

for an appointment with a prospect. Customers have become sophisticated in their buying

strategies. Consequently, salespeople have to be equally sophisticated in developing their

selling strategies.

While a full discussion on the topic of planning sales calls is beyond the scope of this

text, what follows are brief descriptions of some key areas of knowledge salespeople

should possess prior to embarking on sales calls.

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Chapter Nine Personal Selling, Relationship Building, and Sales Management 145

1. They should have thorough knowledge of the company they represent, including its

past history. This includes the philosophy of management as well as the firm’s basic

operating policies.

2. They should have thorough knowledge of their products and/or product lines. This is

particularly true when selling organizational products. When selling very technical

products, many firms require their salespeople to have training as engineers.

3. They should have good working knowledge of competitors’ products. This is a vital

requirement because the successful salesperson will have to know the strengths and

weaknesses of those products that are in competition for market share.

4. They should have in-depth knowledge of the market for their merchandise. The market here refers not only to a particular sales territory but also to the general market, includ-

ing the economic factors that affect the demand for their goods.

5. They should have accurate knowledge of the buyer or the prospect to whom they are

selling. Under the marketing concept, knowledge of the customer is a vital requirement.

Presenting Successful salespeople have learned the importance of making a good impression. One of

the most important ways of improving the buyer’s impression is for the salesperson to be

well prepared in the knowledge areas just discussed. Some salespeople actually develop a

checklist of things to take to the presentation so that nothing is forgotten. Just as important

is the development of good interpersonal skills; they are a key ingredient of effective sell-

ing. Salespeople who can adapt their selling style to individual buyer needs and styles have

a much stronger overall performance than less-flexible counterparts.

Responding to Objections To assume the buyer will passively listen and positively respond to a sales presentation by

placing an immediate order would be unrealistic. Salespeople can expect to hear objections

(issues or concerns raised by the buyer) at any time during the presentation and subsequent

relationship. Objections can be raised when the salesperson attempts to secure appoint-

ments, during the presentation, when the salesperson attempts to obtain commitment, or

during the after-sale follow-up.

When sales prospects raise an objection, it is a sign that they are not ready to buy and

need an acceptable response to the objection before the buying decision can be made. In

response to an objection, the salesperson should not challenge the respondent. Rather, the

salesperson’s objective should be to present the necessary information so that the prospect

is able to make intelligent decisions based on that information.

Obtaining Commitment At some point, if all objections have been resolved, the salesperson must ask for commit-

ment. It’s a rare moment when a customer will ask to buy. Consequently, knowing how

and when to close a sale is one of a salesperson’s most indispensable skills.

It should be noted that not all sales calls end in commitment, a successful closing.

If commitment is not obtained, salespeople should analyze the reasons and determine

whether (1) more sales calls are necessary to obtain commitment, or (2) currently, there

just does not exist a good match between customer needs and seller offerings. If the sales-

person determines that more calls are necessary, then he or she should leave the meeting

with a clear action plan, which is agreeable to the customer, for the next visit.

Building a Long-Term Relationship Focusing on building and maintaining long-term relationships with customers has become

an important goal for salespeople. As marketers realize that it can cost five times as much

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146 Part C The Marketing Mix

to acquire a new customer than to service an existing one, the importance of customer

retention and relationship building has become very clear.4 Terry Vavra focuses on the

value of current customers to the organization and has developed the concept of aftermar- keting, which focuses the organization’s attention on providing continuing satisfaction and reinforcement to individuals or organizations that are past or current customers. The goal

of aftermarketing is to build lasting relationships with customers.5 Successful aftermarket-

ing efforts require that many specific activities be undertaken by the salesperson and oth-

ers in the organization. These activities include

1. Establishing and maintaining a customer information file.

2. Monitoring order processing.

3. Ensuring initial proper use of the purchased product or service.

4. Providing ongoing guidance and suggestions.

5. Analyzing customer feedback and responding quickly to customer questions and

complaints.

6. Continually conducting customer satisfaction research and responding to it.

As seen by the preceding discussion, there are no magic secrets of successful selling. The

difference between good salespeople and mediocre ones is often the result of training plus

experience. Training is no substitute for experience; the two complement each other. The

difficulty with trying to discuss the selling job in terms of basic principles is that experienced,

successful salespeople will always be able to find exceptions to these principles.

Relationships Can Lead to Partnerships When the interaction between a salesperson and a customer does not end with the sale, the

beginnings of a relationship are present. Many salespeople are finding that building rela-

tionships and even partnering with customers is becoming increasingly important.

When a buyer and a salesperson have a close personal relationship, they both begin to rely

on each other and communicate honestly. When each has a problem, they work together to

solve it. Such market relationships are known as functional relationships. An important trust begins to exist between the parties. As with any relationship, each often gives and takes when

the situation calls for it in order to keep the relationship intact. The reader may have such a

relationship with a long-term medical or dental practitioner or hair cutter.

When organizations move beyond functional relationships, they develop strategic part- nerships, or strategic alliances. These are long-term, formal relationships in which both parties make significant commitments and investments in each other in order to pursue

mutual goals and to improve the profitability of each other. While a functional relationship

is  based on trust, a strategic partnership or alliance moves beyond trust. The partners in

the relationship actually invest in each other. Obviously, the reasons for forming strategic

partnerships vary. Some do it to create joint opportunities (banks, insurance companies,

and  brokerage firms), to gain access to new markets [United Parcel Service of America

(UPS) and  Mail Boxes Etc.], to develop new technology or exploit joint opportunities

(IBM and Apple), or to gain a marketing advantage over competitors (United Airlines and

Starbucks Coffee, American Airlines and Career Track).

People Who Support the Sales Force In many instances, sales personnel will require some assistance at various stages of the

sales process. These support personnel do not seek the order. Their purpose is to focus on

the long-term relationship and increase the likelihood of sales in the long run.

Missionary salespeople are used in certain industries such as pharmaceuticals to focus solely on promotion of existing products and introduction of new products. They

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147

MARKETING INSIGHT Why Cross-Functional Sales Teams Are Growing in Popularity 9–3

1. Improved sales productivity. When the product or system being purchased is for the whole organization, different specialists handle different parts of the job. This usually results in a more effective and efficient sales process.

2. More flexibility and quicker decisions. To thrive in today’s increasingly competitive mar- kets, buying organizations often require selling organizations to produce small runs of tailored products on a very tight schedule. Cross-functional sales teams enable sellers to be more flexible because all functional units are involved in the sales process, which also enables the seller to make quicker decisions in response to buyer demands.

3. Better decisions. In most cases, the use of cross-functional teams composed of individuals with varied backgrounds in the company will lead to more innovative forms of thought and superior decisions than would be the case of an individual acting alone. Improved decisions would benefit both the buyer and the seller.

4. Increased customer satisfaction. The ultimate measure of the success of cross-functional sales teams comes with increased customer satisfaction, cemented relationships, and repeat business. The energy, flexibility, and commitment associated with cross- functional sales teams have led many organizations to adopt the approach.

may call on physicians to convince them to prescribe a new drug or on pharmacies to

convince them to promote a new cold remedy with a large display during the cold and flu

season.

A technical sales specialist supports the sales staff by providing training or other tech- nical assistance to the prospect. This individual may follow up an expression of interest to

the salesperson from a prospect, especially when the product is to be used to solve certain

technical problems of the buyer. Some organizations will provide training to the front-line

staff of the buying organization who will be expected to sell the product to their customers.

Finally, when the product is extremely high priced and is being sold to the whole

organization, cross-functional sales teams are often used. Since products increase in technical complexity, and units of the buying organization require specialized knowl-

edge before a buying decision can be made, team selling has increased in popularity. For

example, a manufacturer’s sales team might be made up of people from sales, engineering,

customer service, and finance, depending on the needs of the customer. A bank’s sales

team might consist of people from the commercial lending, investments, small business,

and trust departments.

MANAGING THE SALES AND RELATIONSHIP-BUILDING PROCESS

Every personal sale can be divided into two parts: the part done by the salespeople and

the part done for the salespeople by the company. For example, from the standpoint of the

product, the company should provide the salesperson with a product skillfully designed,

thoroughly tested, attractively packaged, adequately advertised, and priced to com-

pare favorably with competitive products. Salespeople have the responsibility of being

thoroughly acquainted with the product, its selling features, and points of superiority and

possess a sincere belief in the value of the product. From a sales management standpoint,

the company’s part of the sale involves the following:

1. Efficient and effective sales tools, including continuous sales training, promotional

literature, samples, trade shows, product information, and adequate advertising.

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148

MARKETING INSIGHT Ten Traits of Effective Salespeople 9–4

1. Ego strength: A healthy self-esteem that allows one to bounce back from rejection. 2. A sense of urgency: Wanting to get it done now. 3. Ego drive: A combination of competitiveness and self-esteem. 4. Assertiveness: The ability to be firm, lead the sales process, and get one’s point across

confidently. 5. Willingness to take risk: Willingness to innovate and take a chance. 6. Sociable: Outgoing, talkative, friendly, and interested in others. 7. Abstract reasoning: Ability to understand concepts and ideas. 8. Skepticism: A slight lack of trust and suspicion of others. 9. Creativity: The ability to think differently. 10. Empathy: The ability to place oneself in someone else’s shoes.

Sources: From George E. Belch and Michael A. Belch, Advertising and Promotion: An Integrated Marketing Communications Perspective 8E, 2009, p. 600. Reprinted with permission of McGraw-Hill Education.

2. An efficient delivery and reorder system to ensure that customers will receive the

merchandise as promised.

3. An equitable compensation plan that rewards performance, motivates the salesperson,

and promotes company loyalty. It should also reimburse the salesperson for all reason-

able expenses incurred while doing the job.

4. Adequate supervision and evaluation of performance as a means of helping salespeople

do a better job not only for the company but for themselves as well.

The Sales Management Task Marketing managers and sales managers must make some very important decisions

regarding how the sales force should be organized. Most companies organize their sales

efforts either by geography, product, or customer. These are illustrated in Figure 9.2.

In a geographic structure, individual salespeople are assigned geographic territories to cover. A salesperson calls on all prospects in the territory and usually represents all of the

company’s products. A geographic structure provides the practical benefit of limiting the

distance each salesperson must travel to see customers and prospects.

In a product structure, each salesperson is assigned to prospects and customers for a particular product or product line. A product structure is useful when the sales force must

have specific technical knowledge about products in order to sell effectively. However,

this structure can result in a duplication of sales efforts because more than one salesperson

can call on the same customer. Consequently, it tends to be expensive.

A customer structure assigns a salesperson or selling team to serve a single customer or single type of customer. This structure works best when different types of buyers have

large or significantly different needs. When this structure involves devoting all of a sales-

person’s time to a single customer, it is expensive but can result in large sales and satisfied

customers.

In a variation of the customer structure, a company may employ major account man- agement, or the use of team selling to focus on major customers to establish long-term relationships.6 Procter & Gamble, whose sales force used to be organized by product, has

shifted to major account management. Assigning resources to particular customers has

proved to be more flexible and customer focused for the company.

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Chapter Nine Personal Selling, Relationship Building, and Sales Management 149

A newer variation of the customer structure is the global account manager who may be in charge of a single customer and all of its global needs. The customer’s needs, schedules,

and interests are the top priority of the manager. Microsoft started using global account

managers around 2000. Today, their global account managers focus on multi-billion-dollar

global customers that rely heavily on information technology.

Controlling the Sales Force There are two obvious reasons why it is critical that the sales force be properly controlled.

First, personal selling can be the largest marketing expense component in the final price of

the product. Second, unless the sales force is somehow directed, motivated, and audited on

a continual basis, it is likely to be less efficient than it is capable of being. Controlling the

sales force involves four key functions: (1) forecasting sales, (2) establishing sales territories

and quotas, (3) analyzing expenses, and (4) motivating and compensating performance.

Forecasting Sales Sales planning begins with a forecast of sales for some future period or periods. From

a practical standpoint, these forecasts are made on a short-term basis of a year or less,

although long-range forecasts of one to five years are made for purposes other than man-

aging the sales force, such as financing, production, and development. Generally speak-

ing, forecasting is the marketing manager’s responsibility. In large firms, because of the

complexity of the task, it is usually delegated to a specialized unit, such as the marketing

FIGURE 9.2 Organizing the

Sales Force

Worldwide Sales

Asia North America Europe Latin America

Worldwide Sales

Office Furniture Sales Computers Fax Machines

National Sales

Schools Law Firms Hospitals Government

Customer Structure

Product Structure

Geographic Structure

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150 Part C The Marketing Mix

research department. Forecast data should be integrated into the firm’s marketing informa-

tion system for use by sales managers and other executives. For many companies, the sales

forecast is the key instrument in the planning and control of operations.

The sales forecast is an estimate of how much of the company’s output, either in dollars or in units, can be sold during a specified future period under a proposed marketing plan

and under an assumed set of economic conditions. A sales forecast has several important

uses: (1) It is used to establish sales quotas; (2) it is used to plan personal selling efforts as

well as other types of promotional activities in the marketing mix; (3) it is used to budget

selling expenses; and (4) it is used to plan and coordinate production, logistics, invento-

ries, personnel, and so forth.

Sales forecasting has become very sophisticated in recent years, especially with the

increased availability of computer software. It should be mentioned, however, that a fore-

cast is never a substitute for sound business judgment. At the present time no single method

of sales forecasting gives uniformly accurate results with infallible precision. Outlined

next are some commonly used sales forecasting methods.7

1. Jury of executive opinion method. This combines and averages the views of top man- agement representing marketing, production, finance, purchasing, and administration.

2. Sales force composite method. This is similar to the first method in that it obtains the combined views of the sales force about the future outlook for sales. In some companies

all salespeople, or district managers, submit estimates of the future sales in their terri-

tory or district.

3. Customer expectations method. This approach involves asking customers or product users about the quantity they expect to purchase.

4. Time-series analysis. This approach involves analyzing past sales data and the impact of factors that influence sales (long-term growth trends, cyclical fluctuations, seasonal

variations).

5. Correlation analysis. This involves measuring the relationship between the dependent variable, sales, and one or more independent variables that can explain increases or

decreases in sales volumes.

6. Other quantitative techniques. Numerous statistical and mathematical techniques can be used to predict or estimate future sales. Two of the more important techniques are

(a)  growth functions, which are mathematical expressions specifying the relationship between demand and time; and (b) simulation models, in which a statistical model of the industry is developed and programmed to compute values for the key parameters of

the model.

Establishing Sales Territories and Quotas The establishment of sales territories and sales quotas represents management’s need to

match personal selling effort with sales potential (or opportunity). Soundly designed sales

territories can improve how the market is served. It is much easier to pinpoint customers

and prospects and to determine who should call on them when the market is geographi-

cally divided than when the market is considered a large aggregate of potential accounts.

The geographic segments should represent small clusters of customers or prospects within

some physical proximity. Implied here is the notion that there are some distinct economic

advantages to dividing the market into smaller segments. Salespeople restricted to a geo-

graphic area are likely to get more sales in the territory. Instead of simply servicing the

“easy” and larger accounts, they are prone to develop small accounts. Of course, there are

criteria other than geography for establishing territories. One important criterion is prod-

uct specialization. In this case, salespeople are specialists relative to particular product or

customer situations.

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151

9–5 MARKETING INSIGHT The Sales Management Challenge

Training sales personnel to satisfy customers • Methods • Where, when, who

Planning a profitable customer-oriented sales team • Objectives, goals • Forecasts • Budgets • Define roles, activities, markets • Establish design and structure

Staffing the right people to sell and lead • People planning • Employment planning

Directing average people to perform at above-average levels • Motivation • Compensation • Leadership

Evaluating the past to guide the future • Performance criteria • Conducting sessions

Source: From Charles Futrell, Fundamentals of Selling 13E, 2014, p. 472. Reprinted with permission of McGraw-Hill Education.

The question of managing sales territories cannot be discussed meaningfully with-

out saying something about sales quotas. In general, quotas represent goals assigned to

salespeople. As such, quotas provide three main benefits. First, they provide incentives

for salespeople. For example, the definite objective of selling $500,000 worth of computer

equipment is more motivating to most salespeople than the indefinite charge to go out

and sell computer equipment. Sales bonuses and commissions based on quotas can also

be motivational. Second, quotas provide a quantitative standard against which the perfor-

mance of individual sales representatives or other marketing units can be measured. They

allow management to pinpoint individuals and units that are performing above average and

those experiencing difficulty. Third, quotas can be used not only to evaluate salespersons’

performances but also to evaluate and control their efforts. As part of their job, salespeople

are expected to engage in various activities besides calling on established accounts. These

activities might include calling on new accounts, collecting past-due accounts, and plan-

ning and developing sales presentations. Activity quotas allow the  company to monitor

whether salespeople are engaging in these activities to the extent desired.

Sales quotas represent specific sales goals assigned to each territory or unit over a des-

ignated time period. The most common method of establishing quotas for territories is to

relate sales to forecasted sales potential. For example, if the Ajax Drug Company’s terri-

tory M has an estimated industry sales potential for a particular product of $400,000 for

the year, the quota might be set at 25 percent of that potential, or $100,000. The 25 percent

figure represents the market share Ajax estimates to be a reasonable target. This $100,000

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FIGURE 9.3 Medi-Test Company

Sales Activity

Evaluation

Performance index = 175.3

152 Part C The Marketing Mix

quota may represent an increase of $20,000 in sales over last year (assuming constant

prices) that is expected from new business.

In establishing sales quotas for its individual territories or sales personnel, management

needs to take into account three key factors. First, all territories will not have equal potential

and, therefore, compensation must be adjusted accordingly. Second, all salespeople will

not have equal ability and assignments may have to be made accordingly. Third, the sales

task in each territory may differ from time period to time period. For instance, the nature of

some territories may require that salespeople spend more time seeking new accounts, rather

than servicing established accounts, especially in the case of so-called new territories. The

point to be made here is that quotas can vary, not only by territory but also by assigned

tasks. The effective sales manager should assign quotas not only for dollar sales but also

for each major selling function. Figure 9.3 is an example of how this is done for the Medi-

Test Company, where each activity is assigned a quota and a weight reflecting its relative

importance.

Analyzing Expenses Sales forecasts should include a sales expense budget. In some companies, sales expense

budgets are developed from the bottom up. Each territorial or district manager submits

estimates of expenses and forecasted sales quotas. These estimates are usually prepared for

a period of a year and then broken down into quarters and months. The sales manager then

reviews the budget requests from the field offices and from staff departments.

Motivating and Compensating Performance An important task for the sales manager is motivating and compensating the sales force.

These two tasks are major determinants of sales force productivity. Managing people is

always a challenge and involves personal interaction with members of the sales force, time

in the field visiting customers, free-flowing communication with the sales force, either by

e-mail or telephone, and providing feedback on a regular basis as well as coaching and

developing incentive programs through which job promotions or increased earnings can be

achieved.

There are two basic types of compensation: salary and commission. Salary usually refers to a specific amount of monetary compensation at an agreed rate for definite time

periods. Commission is usually monetary compensation provided for each unit of sales

Territory: Southern Salesperson: Marsha Smith

(1) (2) (3) (4) (5) Percent Score Functions Quota Actual (2 4 1) Weight (3 3 4)

Sales volume Old business $380,000 $300,000 79 0.7 55.3 New business $ 20,000 $ 20,000 100 0.5 50.0 Calls on prospects Doctors 20 15 75 0.2 15.0 Druggists 80 60 75 0.2 15.0 Wholesalers 15 15 100 0.2 20.0 Hospitals 10 10 100 0.2 20.0 2.0 175.3

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EFFORT-ORIENTED MEASURES

1. Number of sales calls made. 2. Number of maintenance-repairs-operations (MRO) calls made. 3. Number of complaints handled. 4. Number of checks on reseller stocks. 5. Uncontrollable lost job time. 6. Number of inquiries followed up. 7. Number of demonstrations completed.

RESULTS-ORIENTED MEASURES

1. Sales volume (total or by product or model). 2. Sales volume as a percentage of quota. 3. Sales profitability (dollar gross margin or contribution). 4. Number of new accounts. 5. Number of stockouts. 6. Number of distributors participating in programs. 7. Number of lost accounts. 8. Percentage volume increase in key accounts. 9. Number of customer complaints. 10. Distributor sales-inventory ratios.

Sources: Adapted from Thomas N. Ingram, Raymond W. LaForge, and Charles H. Schwepker Jr., Sales Management: Analysis and Decision Making, 10th ed. (Mason, OH: Thomson South-Western, 2012), chap. 15; Thayer C. Taylor, “SFA: The Newest Orthodoxy,” Sales and Marketing Management, February 1993, pp. 26–28.

MARKETING INSIGHT Effort- and Results-Oriented Measures for Evaluating Salespeople 9–6

153

and expressed as a percentage of sales. The base on which commissions are computed may

be volume of sales in units of product, gross sales in dollars, net sales after returns, sales

volume in excess of a quota, or net profits. Very often, several compensation approaches

are combined. For example, a salesperson might be paid a base salary, a commission on

sales exceeding a volume figure, and a percentage share of the company’s profits for that

year.

In addition to straight dollar compensation, there are numerous other forms of incen-

tives that can be used to motivate the sales force. Some of these types of incentives and

their potential performance outcomes are listed in Figure 9.4.

FIGURE 9.4 Types of Sales Force

Incentives and Some

Possible Performance

Outcomes

Source: Some of the

material was adapted from

Gilbert A. Churchill Jr., Neil

M. Ford, and Orville C.

Walker, Sales Force

Management, 5th ed. (Burr

Ridge, IL: Irwin/McGraw-Hill,

1997), p. 490.

Types of Incentives Some Possible Outcomes

• Positive evaluation feedback. • Increase in sales volume. • Company-wide recognition. • Sale of more profitable products. • Bonus. • Attention on selling new products. • Salary increases. • Achieving greater market penetration. • Pay for new product idea. • Increased number of sales calls. • Education allowance. • Larger average orders. • Time off. • Attracting new customers. • Fringe benefits. • Improved service of existing customers. • Stock options. • Reduction in customer turnover. • Retirement plan. • Reduction in selling costs. • Profit sharing. • Full-line balanced selling.

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154 Part C The Marketing Mix

Additional Resources

Ash, Mary Kay. The Mary Kay Way: Timeless Principles from America’s Greatest Woman Entrepreneur. Hoboken, NJ: John Wiley and Sons, 2008. Jantsch, John. The Referral Engine. New York: Portfolio, 2010. Gonzalez, Gabriel R., K. Douglas Hoffman, and Thomas N. Ingram. “Improving Relationship

Selling through Failure Analysis and Recovery Efforts: A Framework and Call to Action.”

Journal of Personal Selling and Sales Management. Spring 2005, pp. 24–32. Hunter, Gary K., and William D. Perreault. “Making Sales Technology Effective.” Journal of Marketing, January 2007, pp. 16–34. Goldon, John. Winning the Battle for Sales. New York: McGraw-Hill, 2013. Schroder, Richard M., From a Good Sales Call to a Great Sales Call. New York: McGraw-Hill, 2011.

SUMMARY

This chapter has attempted to outline and explain the personal selling aspect of the pro-

motion mix. An emphasis was placed on describing the importance of the relationship-

building aspect of the personal selling process. For organizations that wish to continue

to grow and prosper, personal selling plays an integral part in the marketing of products

and services. As long as production continues to expand through the development of new

and highly technical products, personal selling will continue to be an important part of

marketing strategy.

Aftermarketing: A concept that focuses attention on the value of current customers to the organization and on providing continuing satisfaction and reinforcement to them as well as past

customers. The goal is to build lasting relationships with customers.

Correlation analysis: A method used in sales forecasting that involves measuring the relationship between the dependent variable, sales, and one or more independent variables that can explain

increases or decreases in sales volume.

Cross-functional sales teams: A team that might include people from sales, engineering, cus- tomer service, and finance, depending on the needs of the customer. When the product is extremely

high priced and is being sold to the whole organization, cross-functional sales teams are often used.

Customer organization structure: A structure that assigns a salesperson or team to serve a single customer or type of customer that has large or significant needs.

Geographic organization structure: Structure in which individual salespeople are assigned geographic territories. The salesperson calls on all prospects in the territory and usually represents

all of the company’s products.

Global account manager: A variation of the customer structure where one person is in charge of a single customer and all of its global needs.

Lead: A prospect that may or may not have the potential to be a true prospect, a candidate, to whom a sale could be made.

Major account organization structure: A variation of the customer organization structure, in which a company may assign a salesperson or a team to focus on major customers to foster long-

term relationships.

Missionary salesperson: Used in many industries to focus solely on the promotion of existing products and introduction of new products.

Objectives of the sales force: Ultimately, revenue and sales. Other objectives include information provision, persuasion, and after-sale service.

Key Terms and Concepts

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Chapter Nine Personal Selling, Relationship Building, and Sales Management 155

Product organization structure: Structure in which each salesperson is assigned customers and prospects for a particular product or product line. This structure is useful when the sales force must

have specific technical knowledge about products in order to sell effectively.

Prospecting: The process of locating potential customers. The process usually involves random lead generation that usually requires a high number of contacts to gain a sale or selected lead gen-

eration that uses existing contacts and knowledge to generate new prospects.

Sales forecast: An estimate of how much of the organization’s output, either in dollars or in units, can be sold during a specific period under a proposed marketing plan and under an assumed set of

economic conditions. It has many important uses in sales management, marketing planning, and

strategic planning.

Sales relationship-building process: Process that views the initial sale as the first step in a long-term relationship-building process, not as the end goal. It contains six sequential stages:

(1) prospecting, (2) planning the sales call, (3) presenting, (4) responding to objections, (5) obtain-

ing commitment/closing the sale, and (6) building a long-term relationship.

Strategic alliance: Also called strategic partnership, long-term, formal relationships in which both parties make significant commitments and investments in each other in order to pursue mutual

goals and to improve the profitability of each other. The partners in a strategic alliance actually

invest in each other.

Technical sales specialist: Often used when the product is to be used to solve technical problems of the buyer. They support the salesperson by providing training or other technical assistance to the

prospect.

Time series analyses: A method used in forecasting sales that involves analyzing past sales data and the impact of factors that influence sales (long-term growth trends, cyclical fluctuations,

seasonal variations).

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156

10 Distribution Strategy

Channel of distribution decisions involve numerous interrelated variables that must be

integrated into the total marketing mix. Because of the time and money required to set up

an efficient channel, and since channels are often hard to change once they are set up, these

decisions are critical to the success of the firm.

This chapter is concerned with the development and management of channels of distri-

bution and the process of goods distribution in complex, highly competitive, and special-

ized economies. It should be noted at the outset that channels of distribution provide the

ultimate consumer or organizational buyer with time, place, and possession utility. Thus,

an efficient channel is one that delivers the product when and where it is wanted at a mini-

mum total cost.

THE NEED FOR MARKETING INTERMEDIARIES

A channel of distribution is the combination of institutions through which a seller markets products to organizational buyers or ultimate consumers. The need for other institutions

or intermediaries in the delivery of goods is sometimes questioned, particularly since the

profits they make are viewed as adding to the cost of the product. However, this reasoning is

generally fallacious, since producers use marketing intermediaries because the intermediary

can perform functions more cheaply and more efficiently than the producer can. This notion

of efficiency is critical when the characteristics of advanced economies are considered.

For example, the U.S. economy is characterized by heterogeneity in terms of both

supply and demand. In terms of numbers alone, there are more than 7 million establish-

ments with employees comprising the supply segment of the economy, and there are nearly

110 million households making up the demand side. Clearly, if each of these units had to

deal on a one-to-one basis to obtain needed goods and services, and there were no inter-

mediaries to collect and disperse assortments of goods, the system would be totally inef-

ficient. Thus, the primary role of intermediaries is to bring supply and demand together in

an efficient and orderly fashion.

CLASSIFICATION OF MARKETING INTERMEDIARIES AND FUNCTIONS

There are a great many types of marketing intermediaries, many of which are so spe-

cialized by function and industry that they need not be discussed here. Figure 10.1 pre-

sents the major types of marketing intermediaries common to many industries. Although

there is  some overlap in this classification, these categories are based on the marketing

Chapter

P a rt C

T h e M

a rke

tin g M

ix

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Chapter Ten Distribution Strategy 157

functions performed; that is, various intermediaries perform different marketing functions and

to different degrees. Figure 10.2 is a listing of the more common marketing functions

performed in the channel.

It should be remembered that whether or not a manufacturer uses intermediaries to per-

form these functions, the functions have to be performed by someone. In other words, the

managerial question is not whether to perform the functions, but who will perform them

and to what degree.

FIGURE 10.2 Major Functions

Performed in

Channels of

Distribution

Source: From Roger Kerin,

Steven Hartley and William

Rudelius, Marketing 11E,

2013, p. 379. Reprinted with

permission of McGraw-Hill

Education.

Transactional Function

Buying: Purchasing products for resale or as an agent for supply of a product. Selling: Contacting potential customers, promoting products, and soliciting orders. Risk taking: Assuming business risks in the ownership of inventory that can become obsolete or deteriorate.

Logistical Function

Assorting: Creating product assortments from several sources to serve customers. Storing: Assembling and protecting products at a convenient location to offer better customer service. Sorting: Purchasing in large quantities and breaking into smaller amounts desired by customers. Transporting: Physically moving products to customers.

Facilitating Function

Financing: Extending credit to customers. Grading: Inspecting, testing, or judging products, and assigning them quality grades. Marketing information and research: Providing information to customers and suppliers, includ- ing competitive conditions and trends.

Middleman—an independent business concern that operates as a link between producers and ultimate consumers or organizational buyers. Merchant middleman—a middleman who buys the goods outright and takes title to them. Agent—a business unit that negotiates purchases, sales, or both but does not take title to the goods in which it deals. Wholesaler—a merchant establishment operated by a concern that is primarily engaged in buying, taking title to, usually storing and physically handling goods in large quantities, and reselling the goods (usually in smaller quantities) to retailers or to organizational buyers. Retailer—a merchant middleman who is engaged primarily in selling to ultimate consumers. Broker—a middleman who serves as a go-between for the buyer or seller. The broker assumes no title risks, does not usually have physical custody of products, and is not looked upon as a perma- nent representative of either the buyer or the seller. Manufacturers’ agent—an agent who generally operates on an extended contractual basis, often sells within an exclusive territory, handles noncompeting but related lines of goods, and possesses limited authority with regard to prices and terms of sale. Distributor—a wholesale middleman especially in lines where selective or exclusive distribution is common at the wholesaler level in which the manufacturer expects strong promotional support; often a synonym for wholesaler. Jobber—a middleman who buys from manufacturers and sells to retailers; a wholesaler. Facilitating agent—a business firm that assists in the performance of distribution tasks other than buying, selling, and transferring title (i.e., transportation companies, warehouses, etc.)

FIGURE 10.1 Major Types

of Marketing

Intermediaries

Source: Based on Peter D.

Bennett, ed., Dictionary of

Marketing Terms, 2nd ed.

(Chicago: American Marketing

Association, 1995).

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158 Part C The Marketing Mix

CHANNELS OF DISTRIBUTION

As previously noted, a channel of distribution is the combination of institutions through

which a seller markets products to the user or ultimate consumer. Some of these links

assume the risks of ownership; others do not. The conventional channel of distribution

patterns for consumer goods markets are shown in Figure 10.3.

Some manufacturers use direct channels, selling directly to a market. For example, Gateway sold computers through the mail without the use of other intermediaries. Using

a direct channel, called direct marketing, increased in popularity as marketers found that products could be sold directly using a variety of methods. These include direct mail,

telemarketing, direct-action advertising, catalog selling, cable selling, online selling, and

direct selling through demonstrations at home or place of work. These will be discussed in

more detail later in this chapter.

In other cases, one or more intermediaries may be used in the distribution process.

For example, Hewlett-Packard sells its computers and printers through retailers such as

Best Buy and Office Max. A common channel for consumer goods is one in which the

manufacturer sells through wholesalers and retailers. For instance, a cold remedy manu-

facturer may sell to drug wholesalers who, in turn, sell a vast array of drug products to

various retail outlets. Small manufacturers may also use agents, since they do not have

sufficient capital for their own sales forces. Agents are commonly used intermediaries

in the jewelry industry. The final channel in Figure 10.3 is used primarily when small

wholesalers and retailers are involved. Channels with one or more intermediaries are

referred to as indirect channels. In contrast to consumer products, the direct channel is often used in the distribution of

organizational goods. The reason for this stems from the structure of most organizational

markets, which often have relatively few but extremely large customers. Also, many orga-

nizational products, such as computer systems, need a great deal of presale and postsale ser-

vice. Distributors are used in organizational markets when there is a large number of buyers

but each purchases a small amount of a product. As in the consumer market, agents are used

FIGURE 10.3 Conventional Channels of Distribution of Consumer Goods

Manufacturer

Manufacturer

Manufacturer

Manufacturer

Manufacturer Agent

Wholesaler

Agent

Wholesaler

Retailers

Retailers

Retailers

Retailers

Consumers

Consumers

Consumers

Consumers

Consumers

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Chapter Ten Distribution Strategy 159

in organizational markets in cases where manufacturers do not wish to have their own sales

forces. Such an arrangement may be used by small manufacturers or when the market is

geographically dispersed. The final channel arrangement in Figure 10.4 may also be used

by a small manufacturer or when the market consists of many small customers. Under such

conditions, it may not be economical for sellers to have their own sales organization.

SELECTING CHANNELS OF DISTRIBUTION

Given the numerous types of channel intermediaries and functions that must be performed,

the task of selecting and designing a channel of distribution may at first appear to be over-

whelming. However, in many industries, channels of distribution have developed over

many years and have become somewhat traditional. In such cases, the producer may be

limited to this type of channel to operate in the industry. This is not to say that a traditional

channel is always the most efficient and that there are no opportunities for innovation. But

the fact that such a channel is widely accepted in the industry suggests it is highly efficient.

A primary constraint in these cases and in cases where no traditional channel exists is that

of availability of the various types of middlemen. All too often in the early stages of chan-

nel design, executives map out elaborate channel networks only to find out later that no

such independent intermediaries exist for the firm’s product in selected geographic areas.

Even if they do exist, they may not be willing to accept the seller’s products. In general,

there are six basic considerations in the initial development of channel strategy. These are

outlined in Figure 10.5.

It should be noted that for a particular product any one of these characteristics greatly

influences choice of channels. To illustrate, highly perishable products generally require

direct channels, or a firm with little financial strength may require intermediaries to

perform almost all of the marketing functions.

Specific Considerations The preceding characteristics play an important part in framing the channel selection

decision. Based on them, the choice of channels can be further refined in terms of

FIGURE 10.4 Conventional Channels of Distribution for Organizational Goods

Agents

Organizational distributors

Agents

Organizational distributors

Organizational users

Organizational users

Organizational users

Organizational users

Manufacturer

Manufacturer

Manufacturer

Manufacturer

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160 Part C The Marketing Mix

(1) distribution coverage required, (2) degree of control desired, (3) total distribution

cost, and (4) channel flexibility.

Distribution Coverage Required Because of the characteristics of the product, the environment needed to sell the product,

and the needs and expectations of the potential buyer, products will vary in the intensity of

distribution coverage they require. Distribution coverage can be viewed along a continuum

ranging from intensive to selective to exclusive distribution.

Intensive Distribution Here the manufacturer attempts to gain exposure through as many wholesalers and retailers as possible. Most convenience goods require intensive distribu-

tion based on the characteristics of the product (low unit value) and the needs and expecta-

tions of the buyer (high frequency of purchase and convenience).

Selective Distribution Here the manufacturer limits the use of intermediaries to the ones believed to be the best available in a geographic area. This may be based on the service

organization available, the sales organization, or the reputation of the intermediary. Thus,

appliances, home furnishings, and better clothing are usually distributed selectively. For

appliances, the intermediary’s service organization could be a key factor, while for better cloth-

ing and home furnishings, the intermediary’s reputation would be an important consideration.

Exclusive Distribution Here the manufacturer severely limits distribution, and interme- diaries are provided exclusive rights within a particular territory. The characteristics of

the product are a determining factor here. Where the product requires certain specialized

selling effort or investment in unique facilities or large inventories, this arrangement is

usually selected. Retail paint stores are an example of such a distribution arrangement.

FIGURE 10.5 General Considerations in Channel Planning

1. Customer characteristics. a. Number. b. Geographic dispersion. c. Preferred channels and outlets for purchase. d. Purchasing patterns. e. Use of new channels (e.g., online purchasing). 2. Product characteristics. a. Unit value. b. Perishability. c. Bulkiness. d. Degree of standardization. e. Installation and maintenance services required. 3. Intermediary characteristics. a. Availability. b. Willingness to accept product or product line. c. Geographic market served. d. Marketing functions performed. e. Potential for conflict. f. Potential for long-term relationship. g. Competitive products sold. h. Financial condition. i. Other strengths and weaknesses. 4. Competitor characteristics. a. Number. b. Relative size and market share.

c. Distribution channels and strategy. d. Financial condition and estimated marketing budget. e. Size of product mix and product lines. f. Overall marketing strategy employed. g. Other strengths and weaknesses. 5. Company characteristics. a. Relative size and market share. b. Financial condition and marketing budget. c. Size of product mix and product lines. d. Marketing strategy employed. e. Marketing objectives. f. Past channel experience. g. Marketing functions willing to perform. h. Other strengths and weaknesses. 6. Environmental characteristics. a. Economic conditions. b. Legal regulations and restrictions. c. Political issues. d. Global and domestic cultural differences and

changes. e. Technological changes. f. Other opportunities and threats.

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161

10–1 MARKETING INSIGHT Manufacturers and Intermediaries:

A Perfect Working Relationship

THE PERFECT INTERMEDIARY

1. Has access to the market that the manufacturer wants to reach. 2. Carries adequate stocks of the manufacturer’s products and a satisfactory assortment of

other products. 3. Has an effective promotional program—advertising, personal selling, and product

displays. Promotional demands placed on the manufacturer are in line with what the manufacturer intends to do.

4. Provides services to customers—credit, delivery, installation, and product repair—and honors the product warranty conditions.

5. Pays its bills on time and has capable management.

THE PERFECT MANUFACTURER

1. Provides a desirable assortment of products—well designed, properly priced, attractively packaged, and delivered on time and in adequate quantities.

2. Builds product demand for these products by advertising them. 3. Furnishes promotional assistance to its middlemen. 4. Provides managerial assistance for its middlemen. 5. Honors product warranties and provides repair and installation service.

THE PERFECT COMBINATION

1. Probably doesn’t exist.

Degree of Control Desired In selecting channels of distribution, the seller must make decisions concerning the degree

of control desired over the marketing of the firm’s products. Some manufacturers prefer

to keep as much control over their products as possible. Ordinarily, the degree of control

achieved by the seller is proportionate to the directness of the channel. One Eastern brew-

ery, for instance, owns its own fleet of trucks and operates a wholly owned delivery system

direct to grocery and liquor stores. Its market is very concentrated geographically, with

many small buyers, so such a system is economically feasible. However, all other brewers

in the area sell through distributors.

When more indirect channels are used, the manufacturer must surrender some control

over the marketing of the firm’s product. However, attempts are commonly made to

maintain a degree of control through some other indirect means, such as sharing promo-

tional expenditures, providing sales training, or other operational aids, such as accounting

systems, inventory systems, or marketing research data on the dealer’s trading area.

Total Distribution Cost The total distribution cost concept has developed out of the more general topic of systems

theory. The concept suggests that a channel of distribution should be viewed as a total

system composed of interdependent subsystems, and that the objective of the system (chan-

nel) manager should be to optimize total system performance. In terms of distribution

costs, it generally is assumed that the total system should be designed to minimize costs

for a given level of service. The following is a representative list of the major distribution

costs to be minimized:

1. Transportation.

2. Order processing.

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162 Part C The Marketing Mix

3. Cost of lost business (an opportunity cost due to inability to meet customer demand).

4. Inventory carrying costs, including:

a. Storage-space charges. b. Cost of capital invested. c. Taxes. d. Insurance. e. Obsolescence and deterioration. 5. Packaging.

6. Materials handling.

The important qualification to the total-cost concept is the statement “other things

being equal.” The purpose of the total-cost concept is to emphasize total system perfor-

mance to avoid suboptimization. However, other important factors must be considered,

not the least of which are level of customer service, sales, profits, and interface with the

total marketing mix.

Channel Flexibility A final consideration relates to the ability of the manufacturer to adapt to changing condi-

tions. To illustrate, much of the population has moved from inner cities to suburbs, and

thus buyers make most of their purchases in shopping centers and malls. If a manufacturer

had long-term exclusive dealership with retailers in the inner city, the ability to adapt to

this population shift could have been severely limited.

MANAGING A CHANNEL OF DISTRIBUTION

Once the seller has decided on the type of channel structure to use and selected the

individual members, the entire coalition should operate as a total system. From a behav-

ioral perspective, the system can be viewed as a social system since each member interacts

with the others, each member plays a role vis-à-vis the others, and each has certain expec-

tations of the other. Thus, the behavioral perspective views a channel of distribution as

more than a series of markets or participants extending from production to consumption.

Relationship Marketing in Channels For many years in theory and practice, marketing has taken a competitive view of channels

of distribution. In other words, since channel members had different goals and strategies,

it  was believed that the major focus should be on concepts such as power and conflict.

Research interests focused on issues concerning bases of power, antecedents and conse-

quences of conflict, and conflict resolution.

More recently, however, a new view of channels has developed. Perhaps because of the

success of Japanese companies in the 1980s, it was recognized that much could be gained

by developing long-term commitments and harmony among channel members. This view

is called relationship marketing, which can be defined as “marketing with the conscious aim to develop and manage long-term and/or trusting relationships with customers, dis-

tributors, suppliers, or other parties in the marketing environment.”1

It is well documented in the marketing literature that long-term relationships through-

out the channel often lead to higher-quality products with lower costs. These benefits may

account for the increased use of vertical marketing systems.2

Vertical Marketing Systems To this point in the chapter, the discussion has focused primarily on conventional channels

of distribution. In conventional channels, each firm is relatively independent of the other

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Chapter Ten Distribution Strategy 163

members in the channel. However, one of the important developments in channel manage-

ment in recent years is the increasing use of vertical marketing systems.

Vertical marketing systems are channels in which members are more dependent on one another and develop long-term working relationships in order to improve the efficiency

and effectiveness of the system. Figure 10.6 shows the major types of vertical marketing

systems, which include administered, contractual, and corporate systems.3

Administered Systems Administered vertical marketing systems are the most similar to conventional channels.

However, in these systems there is a higher degree of interorganizational planning and

management than in a conventional channel. The dependence in these systems can result

from the existence of a strong channel leader such that other channel members work

closely with this company in order to maintain a long-term relationship. While any level

of channel member may be the leader of an administered system, Walmart, Kmart, and

Sears are excellent examples of retailers that have established administered systems with

many of their suppliers.

Contractual Systems Contractual vertical marketing systems involve independent production and distribution

companies entering into formal contracts to perform designated marketing functions. Three

major types of contractual vertical marketing systems are the retail cooperative organiza-

tion, wholesaler-sponsored voluntary chain, and various franchising programs.

In a retail cooperative organization, a group of independent retailers unite and

agree to  pool buying and managerial resources to improve competitive position. In a

wholesaler-sponsored voluntary chain, a wholesaler contracts with a number of retailers

and performs channel functions for them. Usually, retailers agree to concentrate a major

portion of their purchasing with the sponsoring wholesaler and to sell advertised products

at the same price. The most visible type of contractual vertical marketing systems involves

a variety of  franchise programs. Franchises involve a parent company (the franchisor)

and an independent firm (the franchisee) entering into a contractual relationship to set up

and operate a business in a particular way. Many products and services reach consum-

ers through franchise systems, including automobiles (Ford), gasoline (Mobil), hotels and

motels (Holiday Inn), restaurants (McDonald’s), car rentals (Avis), and soft drinks (Pepsi).

In fact, some analysts predict that within the next 10 years, franchises will account for

50 percent of all retail sales.

Corporate Systems Corporate vertical marketing systems involve single ownership of two or more levels

of a channel. A manufacturer’s purchasing wholesalers or retailers is called forward

FIGURE 10.6 Major Types of

Vertical Marketing

Systems

Administered systems

Contractual systems

Vertical marketing systems

Corporate systems

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164

10–2 MARKETING INSIGHT Advantages and Disadvantages

of Franchising

integration. Wholesalers or retailers’ purchasing channel members above them is called backward integration. Firms may choose to develop corporate vertical marketing systems in order to compete more effectively with other marketing systems, to obtain scale econo-

mies, and to increase channel cooperation and avoid channel conflict.

WHOLESALING

As noted, wholesalers are merchants that are primarily engaged in buying, taking title

to, usually storing and physically handling goods in large quantities, and reselling

the goods (usually in smaller quantities) to retailers or to industrial or business users.4

Wholesalers are also called distributors in some industries, particularly when they have

exclusive distribution rights, such as in the beer industry. Other wholesalers that do not

take title to goods are called agents, brokers, or manufacturers’ representatives in vari-

ous industries. There are more than 890,000 wholesalers in the United States.

Wholesalers create value for suppliers, retailers, and users of goods by performing

distribution functions efficiently and effectively. They may transport and warehouse

goods, exhibit them at trade shows, and offer advice to retailers concerning which lines of

A franchise is a means by which a producer of products or services achieves a direct channel of distribution without wholly owning or managing the physical facilities in the market. In effect, the franchisor provides the franchisee with the marketing, management, operations, financial, and accounting know-how and skills to run a business in exchange for a financial return. Usually, the franchisee pays an initial fee plus a percentage of sales to the franchisor. Some of the top franchises are Hampton Hotels, Subway, 7-Eleven, Servpro, Days Inn, McDonald’s, Denny’s, H&R Block, Pizza Hut, and Dunkin Donuts.

This form of contractual vertical marketing system has a number of advantages for the franchisor compared with a company-owned chain:

• It allows rapid expansion requiring less capital resulting in faster market penetration and higher profits.

• It requires fewer company managers and employees, thus lowering costs. • Franchisees may have greater motivation to make the business a success than employees

of a company-owned store. • It is easier to penetrate global markets as local franchisees should better understand the

culture and the market. • Opportunities exist for additional profits on supplies sold to franchisees.

However, there are also some disadvantages:

• Brand equity of the whole franchise could be damaged if even a few of the franchisees provide poor service or mistreat customers.

• There is dependence on franchisees for financial success without full control of them. • There may be resistance from existing franchisees to expanding the number of new

outlets in a market because their sales could be lowered. • There may be difficulty managing unhappy franchisees if sales are low or slowing, which

can discourage new franchisee applicants. • There may be possible legal exposure from illegal or unsafe activities by franchisees,

such as contaminated food or poor auto repair service resulting in an accident.

Sources: Dhruv Grewal and Michael Levy, Marketing, 4th ed. (Burr Ridge, IL: McGraw-Hill, 2014), pp. 492– 493; Julian Dent, Distribution Channels, 2nd ed. (London: Kogan Page, 2011), pp. 330–331.

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Chapter Ten Distribution Strategy 165

products are selling best in other areas. Producers use wholesalers to reach large markets

and extend geographic coverage for their goods. Wholesalers may lower the costs for other

channel members by efficiently carrying out such activities as physically moving goods to

convenient locations, assuming the risk of managing large inventories of diverse products,

and delivering products as needed to replenish retail shelves.

While producers may actively seek out wholesalers for their goods, wholesalers also try

to attract producers to use their services. To do so, they may offer to perform all the distri-

bution functions or tailor their services to include only the functions that producers do not

have the ability to perform effectively. Naturally, wholesalers especially seek producers of

major brands for which sales and profit potential are likely to be the greatest. Wholesalers

may compete with other wholesalers to attract producers by offering lower costs for the

functions they perform. Wholesalers with excellent track records that do not carry directly

competing products and brands, that have appropriate locations and facilities, and that have

relationships with major retail customers can more easily attract manufacturers of successful

products. Also, wholesalers that serve large markets may be more attractive since producers

may be able to reduce the number of wholesalers they deal with and thereby lower their

costs. Long-term profitable producer–wholesaler relationships are enhanced by trust, doing a

good job for one another, and open communication about problems and opportunities.

Wholesalers also need to attract retailers and organizational customers to buy from

them. In many cases, wholesalers have exclusive contracts to distribute products in a par-

ticular trading area. For popular products and brands with large market shares, the whole-

saler’s task is simplified because retailers want to carry them. For example, distributors of

Coke and Pepsi can attract retailers easily because the products sell so well and consumers

expect to find them in many retail outlets. Retail supermarkets and convenience stores

would be at a competitive disadvantage without these brands.

However, for new or small market-share products and brands, particularly those of

less well-known manufacturers, wholesalers may have to do considerable marketing

to  get retailers to stock them. Wholesalers may get placement for such products and

brands in retail stores because they have previously developed strong long-term work-

ing relationships with them. Alternatively, wholesalers may have to carefully explain

the marketing plan for the product, why it should be successful, and why carrying the

product will benefit the retailer.

While there are still many successful wholesalers, the share of products they sell is

likely to continue to decrease. This is because large retail chains such as Walmart have

gained such market power that they can buy directly from manufacturers and bypass

wholesalers altogether. The survival of wholesalers depends on their ability to meet the

needs of both manufacturers and retailers by performing distribution functions more effi-

ciently and effectively than a channel designed without them.

STORE AND NONSTORE RETAILING

As noted, retailers are merchants who are primarily engaged in selling to ultimate con-

sumers. The more than 1.9 million retailers in the United States can be classified in many

ways. For example, they are broken down in the North American Industry Classification

System (NAICS) codes into eight general categories and a number of subcategories based

on the types of merchandise they sell.5

Marketers have a number of decisions to make to determine the best way to retail their

products. For example, decisions have to be made about whether to use stores to sell mer-

chandise, and if so, whether to sell through company-owned stores, franchised outlets, or

independent stores or chains. Decisions have to be made about whether to sell through

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166

10–3 MARKETING INSIGHT Some Benefits of Wholesalers for

Various Channel Members

BENEFITS FOR MANUFACTURERS

• Provide the ability to reach diverse geographic markets cost effectively. • Provide information about retailers and end users in various markets. • Reduce costs through greater efficiency and effectiveness in distribution functions

performed. • Reduce potential losses by assuming risks and offering expertise.

BENEFITS FOR RETAILERS

• Provide potentially profitable products otherwise unavailable for resale in retail area. • Provide information about industries, manufacturers, and other retailers. • Reduce costs by providing an assortment of goods from different manufacturers. • Reduce costs through greater efficiency in distribution functions performed.

BENEFITS FOR END USERS

• Increase the product alternatives available in local markets. • Reduce retail prices by the efficiency and effectiveness contributed to the channel. • Improve product selection by providing information to retailers about the best products

to offer end users.

nonstore methods, such as the Internet, and if so, which methods of nonstore retailing

should be used. Each of these decisions brings about a number of others such as what types

of stores to use, how many of them, what locations should be selected, and what specific

types of nonstore retailing to use.

Store Retailing About 90 percent of retail purchases are made through stores. This makes them an

appropriate retail method for most types of products and services. Retailers vary not

only in the types of merchandise they carry but also in the breadth and depth of their prod-

uct assortments and the amount of service they provide. In general, mass merchandisers carry broad product assortments and compete on two bases. Supermarkets (Kroger) and

department stores (Macy’s) compete with other retailers on the basis of offering a good

selection in a number of different categories, whereas supercenters (Walmart Supercenters),

warehouse clubs (Costco), discount stores (Walmart), and off-price retailers (T.J. Maxx)

compete more on the basis of offering lower prices on products in their large assortments.

Manufacturers of many types of consumer goods must get distribution in one or more

types of mass merchandisers to be successful.

Specialty stores handle deep assortments in a limited number of product categories. Specialty stores include limited-line stores that offer a large assortment of a few related

product lines (The Gap), single-line stores that emphasize a single product (Batteries Plus),

and category killers (Best Buy), which are large, low-priced limited-line retail chains

that attempt to dominate a particular product category. If a product type is sold primarily

through specialty stores and sales are concentrated in category killer chains, manufacturers

may have to sell through them to reach customers.

Convenience stores (7-Eleven) are retailers whose primary advantages to consumers are location convenience, close-in parking, and easy entry and exit. They stock products

that consumers want to buy in a hurry, such as milk or soft drinks, and charge higher

prices for the purchase convenience. They are an important retail outlet for many types of

convenience goods.

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Chapter Ten Distribution Strategy 167

In selecting the types of stores and specific stores and chains to resell their products,

manufacturers (and wholesalers) have a variety of factors to consider. They want stores

and chains that reach their target market and have good reputations with consumers. They

want stores and chains that handle distribution functions efficiently and effectively, order

large quantities, pay invoices quickly, display their merchandise well, and allow them

to make good profits. Selling products in the right stores and chains increases sales, and

selling in prestigious stores can increase the equity of a brand and the price that can be

charged. The locations of retail stores, the types of people who shop at them, and the

professionalism of the salespeople and clerks who work in them all affect the success of

the stores and the products they sell. In addition to the merchandise offered, store adver-

tising, and price levels, the characteristics of the store itself—including layout, colors,

smells, noises, lights, signs, and shelf space and displays—influence the success of both

the stores and the products they offer.

Nonstore Retailing Although stores dominate sales for most products, there are still opportunities to

market products successfully in other ways. Five nonstore methods of retailing include

catalogs and direct mail, vending machines, television home shopping, direct sales, and

electronic exchanges.6

Catalogs and Direct Mail Catalogs and direct mail dominate nonstore retailing. The advantages of this type of non-

store retailing for marketers are that consumers can be targeted effectively and reached in

their homes or at work, overhead costs are decreased, and assortments of specialty mer-

chandise can be presented with attractive pictures and in-depth descriptions of features and

benefits. Catalogs can also remain in homes or offices for a lengthy time period, making

available potential sales. Catalogs can offer specialty products for unique markets that are

geographically dispersed in a cost-effective manner. Although consumers cannot experi-

ence products directly as they can in stores, catalog retailers with reputations for quality

and generous return policies can reduce consumers’ risks. For example, Levenger, which

sells pens, desks, and “other tools for serious readers,” sends consumers a postage-paid

label to return unwanted merchandise. Many consumers enjoy the time savings of catalog

shopping and are willing to pay higher prices to use it.

Vending Machines Vending machines are a relatively limited method of retail merchandising, and most

vending machine sales are for beverages, food, and candy. The advantages for marketers

include the following: They are available for sales 24 hours a day, they can be placed in

a variety of high-traffic locations, and marketers can charge higher prices. While uses of

vending machines for such things as airline insurance and concert and game tickets are not

unusual, this method has limited potential for most products.

Television Home Shopping Television home shopping includes cable channels dedicated to shopping, infomercials,

and direct-response advertising shown on cable and broadcast networks. Home Shopping

Network and QVC are the leaders in this market, and the major products sold are inex-

pensive jewelry, apparel, cosmetics, and exercise equipment. While this method allows

better visual display than catalogs, potential customers must be watching at the time

the  merchandise is offered; if not, they have no way of knowing about the product or

purchasing it.

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168 Part C The Marketing Mix

Direct Sales Direct sales are made by salespeople to consumers in their homes or offices or by telephone.

The most common products purchased this way are cosmetics, fragrances, dec orative

accessories, vacuum cleaners, home appliances, cooking utensils, kitchenware, jewelry,

food and nutritional products, and educational materials. Avon, Mary Kay, and Tupperware

are probably the best-known retail users of this channel. Salespeople can demonstrate prod-

ucts effectively and provide detailed feature and benefit information. A limitation of this

method is that consumers are often too busy to spend their time this way and do not want to

pay the higher prices needed to cover the high costs of this method of retailing.

Online and Mobile Retailing Online retailing is the marketing of products and services directly to consumers via the Internet. Some of the products and services are digital in that they are delivered directly

to consumers’ computers, smartphones, and tablets. These include music and software

downloads, information services, insurance and other financial services, e-books, com-

puter games, and movie rentals, among others. Other products are tangible, such as cloth-

ing or computers, that require physical delivery to consumers.

Online retailing is the fastest-growing type of retailing, and in some years, online sales

have grown 20 to 25 percent. The percentage of total retail sales that are on the Internet is

expected to grow to more than 12 percent in the near future. Some of the growth in online

sales is the result of online-only stores like Amazon.com and Priceline.com developing

successful strategies to serve consumers effectively. However, much of the growth has

come about because established retailers have set up virtual stores as an additional channel

to their brick-and-mortar stores. For example, Eddie Bauer, Lands’ End, Bass Pro Shops,

and Cabela’s all offer products for sale in stores, in catalogs, and on the Internet.

Figure 10.7 lists some of the advantages and disadvantages of online retailing for

marketers. In examining this figure, it is important to recognize that there are some

FIGURE 10.7 Online Retailing:

Advantages and

Disadvantages for

Marketers

Advantages for Marketers

Reduces the need for stores, paper catalogs, and salespeople; can be cost efficient. Allows good visual presentation and full description of product features and benefits. Allows vast assortments of products to be offered efficiently. Allows strategic elements, such as product offerings, prices, and promotion appeals, to be changed quickly. Allows products to be offered globally in an efficient manner. Allows products to be offered 24 hours a day, 365 days a year. Fosters the development of one-on-one, interactive relationships with customers. Provides an efficient means for developing a customer database and doing online marketing research.

Disadvantages for Marketers

Strong price competition online often squeezes profit margins. Low entry barriers lead some e-marketers to overemphasize order-taking and not develop sufficient infrastructure for order fulfillment. Customers must go to the website rather than having marketers seek them out via salespeople and advertising; advertising their websites is prohibitively expensive for many small e-marketers. Limits the market to customers who are willing and able to purchase electronically; many countries still have a small population of computer-literate people. Not as good for selling touch-and-feel products as opposed to look-and-buy products unless there is strong brand/store/site equity (Dell computers/Walmart/Amazon.com) or the products are homogeneous (books, CDs, plane tickets, etc.). Often less effective and efficient in business-to-consumer markets than in business-to-business markets.

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169

10–4 MARKETING INSIGHT Questions to Ask When Developing

Successful Commercial Websites

differences in advantages and disadvantages depending on whether the marketer is a

small, entrepreneurial venture or a large, established company. Because online retailing

offers low-entry barriers, this is an advantage for a small company that wants to get into

a market and compete for business with less capital. However, for large, established

companies, this is less of an advantage because they have the capital to invest: Low-

entry barriers create more competition for them from smaller companies.

Similarly, large companies with established names and brand equity can more eas-

ily market products that customers would ordinarily want to examine before purchase

(touch-and-feel products) than can smaller companies with less brand equity. This does

not mean that virtual-only companies cannot compete for business. Companies like

Amazon.com and Priceline.com have created well-known and well-respected websites

and have generated considerable sales and profits.

One of the recent developments in online retailing is mobile retailing in which prod- ucts and services are marketed to consumers via smartphones and tablets. Consumers

can be standing in a retail store and search for information about products and competi-

tive prices with their smartphone. Consumers can collect information in a brick-and-

mortar store and then order the product online using a tablet. Smartphones and tablets

are commonly used to look for coupons, read product reviews, get product information,

and look for lower prices.

When developing commercial websites, it is important to consider what customers expe- rience when searching for information, evaluating alternative products, and purchasing them. Here are some basic questions that website designers should consider.

INFORMATION SEARCH

1. Ease of navigation—is it easy to move throughout the website? 2. Speed of page downloads—does each page load quickly enough? 3. Effectiveness of search features—are search features returning the information users are

looking for? 4. Frequency of product updates—is product information updated often enough to meet

user needs?

EVALUATION OF ALTERNATIVES

1. Ease of product comparisons—is it easy to compare different products offered on the website?

2. Product descriptions—are product descriptions accurate, clear, and comprehensive enough to allow customers to make informed decisions?

3. Contacting customer service representatives—are customer service phone numbers easy to locate?

4. In-stock status—are out-of-stock products flagged before the customer proceeds to the checkout process?

PURCHASE

1. Security and privacy issues—do users feel comfortable transmitting personal information? 2. Checkout process—are users able to move through the checkout process in a reasonable

amount of time? 3. Payment options—are payment options offered that nonbuyers desire? 4. Delivery options—are delivery options offered that nonbuyers desire? 5. Ordering instructions—are ordering instructions easy to understand?

Source: Based on K. Douglas Hoffman and John E. G. Bateson, Services Marketing: Concepts, Strategies, and Cases, 3rd ed. (Mason, OH: Thomson South-Western, 2006), p. 86.

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170 Part C The Marketing Mix

Additional Resources

Multichannel Marketing As noted, a number of companies offer products and services in stores, in catalogs, and

online. This is called multichannel marketing, and it has been found that sales usually increase with this strategy over that of a single channel. However, there are some prob-

lems in implementing this strategy that marketers have not fully overcome. While it is

easy to argue that all channels should provide a consistent marketing mix, some market-

ers have had difficulty generating such a mix. For example, some marketers have had

difficulty in pricing because their in-store prices are too high to compete effectively

in online retailing, where lower prices are the norm. Thus, they may have to offer the

same product at a lower price online than in their stores in order to compete with sites

like Amazon.com: Barnes & Noble does so, for example. Similarly, while marketers

can provide abundant information and imagery on a full-screen computer, smartphones

cannot easily handle such complexity. This, combined with concerns about transaction

speed and security, may explain why relatively few purchases are actually made on

smartphones, compared with tablets and desktop computers.7 Also, unique skills and

resources are needed for different channels. For example, different types of managers,

salespeople, distribution centers, and delivery systems are needed for store-based retail

chains versus online retailing.

While marketers are still working on these issues, one thing that can help provide

consistency is a customer relationship management system. This involves a centralized

customer data warehouse that houses a complete history of each customer’s interactions

with the company—regardless of whether it occurred in a store, on the Internet, on the

telephone, or by mail. Such an information storehouse allows marketers to efficiently

handle complaints, expedite returns, target promotions, and provide a near-seamless

experience for customers.8

SUMMARY

This chapter introduced the distribution of goods and services in a complex, highly competi-

tive, highly specialized economy. It emphasized the vital need for marketing intermediaries

to bring about exchanges between buyers and sellers in a reasonably efficient manner. The

chapter examined various types of intermediaries and the distribution functions they per-

form as well as topics in the selection and management of distribution channels. Finally,

both wholesaling and store and nonstore retailing were discussed.

Coughlin, Anne T., Erin Anderson, Louis W. Stern, and Adel I. El-Ansary. Marketing Channels. 7th ed. Upper Saddle River, NJ: Prentice Hall, 2006.

Levy, Michael, and Barton A. Weitz. Retailing Management. 8th ed. Burr Ridge, IL: McGraw-Hill, 2012.

Pasqua, Rachel, and Noah Elkin. Mobile Marketing. Indianapolis: John Wiley and Sons, 2013. Rosenbloom, Bert. Marketing Channels: A Management View. 8th ed. Mason, OH: Thomson South-Western, 2012.

Simchi-Levi, David, Philip Kaminsky, and Edith Simchi-Levi. Designing and Managing the Supply Chain. 3rd ed. Burr Ridge, IL: McGraw-Hill, 2008.

Key Terms and Concepts

Note: For definitions of the major types of marketing intermediaries, see Figure 10.1 and for the major functions performed in channels of distribution, see Figure 10.2 at the beginning of this

chapter.

Administered system: A vertical marketing system with a higher degree of interorganizational planning than a conventional channel often brought about by having a strong channel leader.

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Chapter Ten Distribution Strategy 171

Backward integration: The purchase by wholesalers or retailers of channel members above them.

Channel of distribution: The combination of institutions through which a seller markets products to organizational buyers or ultimate consumers.

Contractual system: A vertical marketing system that involves independent production and distribution companies entering into formal contracts to perform designated marketing functions.

Convenience stores: Retailers whose primary advantages to consumers are location convenience, close-in parking, and easy entry and exit. They typically stock a limited number of items that

consumers want to buy in a hurry, such as milk or soft drinks and include stores like 7-Eleven

and PDQ.

Corporate system: A vertical marketing system involving single ownership of two or more levels of a channel such as a manufacturer owning a wholesale operation.

Direct channels: Channels in which the manufacturer sells directly to a market without the use of intermediaries.

Direct marketing: A direct channel in which the seller uses direct mail, telemarketing, direct- action advertising, catalog selling, cable selling, online selling, or direct selling through demonstra-

tions at home or place of work to reach buyers.

Exclusive distribution: An approach to distribution that involves the manufacturer providing exclusive rights to intermediaries in particular territories.

Forward integration: A manufacturer’s purchase of wholesalers or retailers who distribute its products.

Indirect channels: Distribution channels with one or more intermediaries.

Intensive distribution: An approach to distribution that involves using as many wholesalers and retailers as possible to get broad distribution. It is commonly used with convenience goods.

Mass merchandisers: Large retailers that carry broad product assortments and compete on the basis of a good selection in a number of different categories (e.g., Macy’s, Kroger) or on the basis

of lower prices on products in their large assortment (e.g., Walmart, Costco).

Mobile retailing: The marketing of products and services directly to consumers via smartphones and tablets.

Multichannel marketing: Offering products and services in multiple channels such as in stores, in catalogs, and online.

Online retailing: The marketing of products and services directly to consumers via the Internet. Consumers can search, order, and pay for products on their computers, tablets, or smartphones

using this channel.

Relationship marketing: Marketing with the conscious aim to develop and manage long-term and/ or trusting relationships with customers, distributors, suppliers, or other parties in the marketing

environment.

Selective distribution: An approach to distribution in which the manufacturer limits the use of intermediaries to the best available in a geographic area. The intermediaries are commonly selected

on the basis of the service or sales organization available or reputation.

Specialty stores: Stores that handle deep assortments in a limited number of product categories, such as The Gap, Batteries Plus, or Best Buy.

Total distribution costs: Concept that suggests that a channel of distribution should be viewed as a total system composed of interdependent subsystems and that the objective of the system

(channel) manager should be to optimize total system performance. This typically means the total

system should minimize costs for a given level of service.

Vertical marketing systems: Channels in which members are more dependent on one another and develop long-term working relationships in order to improve the efficiency and effectiveness of the

system.

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172

Chapter

11 Pricing Strategy

One of the most important and complex decisions a firm has to make relates to pricing its

products or services. If consumers or organizational buyers perceive a price to be too high,

they may purchase competitive brands or substitute products, leading to a loss of sales

and profits for the firm. If the price is too low, sales might increase, but profitability may

suffer. Thus, pricing decisions must be given careful consideration when a firm is intro-

ducing a new product or planning a short- or long-term price change.

This chapter discusses demand, supply, and environmental influences that affect pricing

decisions and emphasizes that all three must be considered for effective pricing. However,

as will be discussed in the chapter, many firms price their products without explicitly con-

sidering all of these influences.

DEMAND INFLUENCES ON PRICING DECISIONS

Demand influences on pricing decisions concern primarily the nature of the target mar-

ket and expected reactions of consumers to a given price or change in price. There are three

primary considerations here: demographic factors, psychological factors, and price elasticity.

Demographic Factors In the initial selection of the target market that a firm intends to serve, a number of demo-

graphic factors are usually considered. Demographic factors that are particularly important

for pricing decisions include the following:

1. Number of potential buyers.

2. Location of potential buyers.

3. Position of potential buyers (organizational buyers or final consumers).

4. Expected consumption rates of potential buyers.

5. Economic strength of potential buyers.

These factors help determine market potential and are useful for estimating expected sales

at various price levels.

Psychological Factors Psychological factors related to pricing concern primarily how consumers will perceive

various prices or price changes. For example, marketing managers should be concerned

with such questions as these:

1. Will potential buyers use price as an indicator of product quality?

2. Will potential buyers be favorably attracted by odd pricing (e.g., 99¢, $3,999)?

P a rt C

T h e M

a rke

tin g M

ix

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173

11–1 MARKETING INSIGHT Is the Price of a Product

Only Money?

3. Will potential buyers perceive the price as too high relative to the service the product

gives them or relative to competition?

4. Are potential buyers prestige oriented and therefore willing to pay higher prices to

fulfill this need?

5. How much will potential buyers be willing to pay for the product?

While psychological factors have a significant effect on the success of a pricing strategy

and ultimately on marketing strategy, answers to the preceding questions may require con-

siderable marketing research. In fact, a review of buyers’ subjective perceptions of price

concluded that very little is known about how price affects buyers’ perceptions of alterna-

tive purchase offers and how these perceptions affect purchase response.1 However, some

tentative generalizations about how buyers perceive price have been formulated. For exam-

ple, research has found that persons who choose high-priced items usually perceive large

quality variations within product categories and see the consequences of a poor choice as

being undesirable. They believe that quality is related to price and see themselves as good

judges of product quality. In general, the reverse is true for persons who select low-priced

items in the same product categories. Thus, although information on psychological factors

involved in purchasing may be difficult to obtain, marketing managers must at least con-

sider the effects of such factors on their desired target market and marketing strategy.2

Most analyses of the price of a product focus on the amount of money a buyer must pay to purchase. However, there are other costs involved that can strongly influence purchase decisions. Here are three types of costs marketing analysts should consider when making pricing decisions. Time Costs. Time is valuable to most people. Time involved in purchasing products often could be used for more pleasant activities. Waiting in a long checkout line or waiting for a pizza to be delivered can be considered a waste of time too. Many people are willing to pay more money to reduce the time they have to wait to get a product. Vending machine sales often depend on buyers who will pay more money to get a product sooner and with less hassle. People who want a product immediately are often willing to finance the purchase on a credit card to reduce the time waiting to get it. Psychological Costs. The mental energy and stress in making important purchases and accepting the risks of products not performing as expected can make buyers uncomfort- able. Purchasing complex or expensive products can involve investigating and evaluating lots of information and worrying about making the right choices. Car dealers that offer “no haggle” sales do so in order to lower buyers’ psychological costs of negotiating. Behavioral Costs. Buying products and services usually requires some level of physical activity. These costs can increase if buyers have to drive a long way to make a purchase, park far away in a large mall parking lot and have to walk to the store, hunt through many aisles looking for products, and stand for long periods waiting to check out. One way buy- ers reduce this cost is by shopping and buying from catalogs or the Internet even if they have to pay more money because of shipping charges. If buyers in a target market are sensitive to these costs, it is possible for marketers to get a competitive advantage by reducing them. These strategies include such things as sell- ing through multiple channels, free shipping, fast delivery, in-store credit, no-hassle return policies, and money-back quarantees. Another strategy is to reduce the monetary price of products in order to compensate for higher time, psychological, or behavioral costs. For example, Walmart’s lower monetary prices help offset the additional costs to buyers of hav- ing to drive longer distances to get to the stores that are located on the outskirts of most markets.

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174 Part C The Marketing Mix

There are three types of psychological pricing strategies. First there is prestige pricing, in which a high price is charged to create a signal that the product is exceptionally fine. Prestige

pricing is commonly used for some brands of cars, clothing, perfume, jewelry, cosmetics,

wine and liquor, and crystal and china. Second, there is odd pricing, or odd-even pricing, in which prices are set a few dollars or a few cents below a round number. For example, Frito-

Lay’s potato chips are priced at 69 cents a bag rather than 70 cents to encourage consumers

to think of them as less expensive (60 some-odd cents rather than 70 cents). Hertz economy

cars are rented for $129 rather than $130 to appear less expensive. Third, there is bundle pricing, in which several products are sold together at a single price to suggest a good value. For example, travel agencies offer vacation packages that include travel, accommodations,

and entertainment at a single price to connote value and convenience for customers.

Price Elasticity Both demographic and psychological factors affect price elasticity. Price elasticity is a measure of consumers’ price sensitivity, which is estimated by dividing relative changes in

the quantity sold by the relative changes in price:

e 5 Percent change in quantity demanded }}}}

Percent change in price

Although price elasticity is difficult to measure, two basic methods are commonly used

to estimate it. First, price elasticity can be estimated from historical data or from price/

quantity data across different sales districts. Second, price elasticity can be estimated by

sampling a group of consumers from the target market and polling them concerning various

price/quantity relationships. Both of these approaches provide estimates of price elasticity;

but the former approach is limited to the consideration of price changes, whereas the lat-

ter is often expensive and there is some question as to the validity of subjects’ responses.

However, even a crude estimate of price elasticity is a useful input to pricing decisions.3

SUPPLY INFLUENCES ON PRICING DECISIONS

For the purpose of this text, supply influences on pricing decisions can be discussed in terms

of three basic factors. These factors relate to the objectives, costs, and nature of the product.

Pricing Objectives Pricing objectives should be derived from overall marketing objectives, which in turn

should be derived from corporate objectives. Since it is traditionally assumed that busi-

ness firms operate to maximize profits in the long run, it is often thought that the basic

pricing objective is solely concerned with long-run profits. However, the profit maximiza-

tion norm does not provide the operating marketing manager with a single, unequivocal

guideline for selecting prices. In addition, the marketing manager does not have perfect

cost, revenue, and market information to be able to evaluate whether or not this objec-

tive is being reached. In practice, then, many other objectives are employed as guidelines

for pricing decisions. In some cases, these objectives may be considered as operational

approaches to achieve long-run profit maximization.

Research has found that the most common pricing objectives are (1) pricing to achieve

a target return on investment, (2) stabilization of price and margin, (3) pricing to achieve a

target market share, and (4) pricing to meet or prevent competition.

Cost Considerations in Pricing The price of a product usually must cover costs of production, promotion, and distribution,

plus a profit, for the offering to be of value to the firm. In addition, when products are

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175

priced on the basis of costs plus a fair profit, there is an implicit assumption that this sum

represents the economic value of the product in the marketplace.

Cost-oriented pricing is the most common approach in practice, and there are at least

three basic variations: markup pricing, cost-plus pricing, and rate-of-return pricing.

Markup pricing is commonly used in retailing: A percentage is added to the retailer’s invoice price to determine the final selling price. Closely related to markup pricing is cost- plus pricing, in which the costs of producing a product or completing a project are totaled and a profit amount or percentage is added on. Cost-plus pricing is most often used to

describe the pricing of jobs that are nonroutine and difficult to “cost” in advance, such as

construction and military weapon development.

Rate-of-return pricing is commonly used by manufacturers. With this method, price is determined by adding a desired rate of return on investment to total costs. Generally, a

breakeven analysis is performed for expected production and sales levels and a rate of return

is added on. For example, suppose a firm estimated production and sales to be 75,000 units

at a total cost of $300,000. If the firm desired a before-tax return of 20 percent, the selling

price would be (300,000 1 0.20 3 300,000) 4 75,000 5 $4.80.

11–2 MARKETING INSIGHT Retail Pricing Strategies: EDLP or

High/Low?

There are two common pricing strategies at the retail level: EDLP, which stands for “everyday low pricing,” and high/low, which means that the retailer charges prices that are sometimes above competitors’ but promotes frequent sales that lower prices below them. Four successful U.S. retailers—Home Depot, Walmart, Office Depot, and Toys ‘R’ Us—have adopted EDLP, while many fashion, grocery, and drug stores use high/low. The following is a list of the advantages of each of these pricing strategies.

ADVANTAGES OF EDLP

• Assures customers of low prices. Many customers are skeptical about initial retail prices. They have become conditioned to buying only on sale—the main characteristic of a high/low pricing strategy. The EDLP strategy lets customers know that they will get the same low prices every time they patronize the EDLP retailer. Customers do not have to read the ads and wait for items they want to go on sale.

• Reduces advertising and operating expenses. The stable prices caused by EDLP limit the need for the weekly sale advertising used in the high/low strategy. In addition, EDLP retailers do not have to incur the labor costs of changing price tags and signs and putting up sale signs.

• Reduces stockouts and improves inventory management. The EDLP approach reduces the large variations in demand caused by frequent sales with large markdowns. As a result, retailers can manage their inventories with more certainty. Fewer stockouts mean more satisfied customers, resulting in higher sales. In addition, a more predictable customer demand pattern enables the retailer to improve inventory turnover by reducing the average inventory needed for special promotions and backup stock.

ADVANTAGES OF HIGH/LOW

• Increases profits. High/low pricing allows retailers to charge higher prices to customers who are not price-sensitive and will pay the “high” price and to charge lower prices to price-sensitive customers who will wait for the “low” sale price.

• Creates excitement. A “get them while they last” atmosphere often occurs during a sale. Sales draw a lot of customers, and a lot of customers create excitement. Some retailers augment low prices and advertising with special in-store activities, such as product dem- onstrations, giveaways, and celebrity appearances.

• Sells merchandise. Sales allow retailers to get rid of slow-selling merchandise.

Source: Based on Michael Levy and Barton A. Weitz, Retailing Management, 8th ed. (Burr Ridge, IL: McGraw-Hill/Irwin, 2012), p. 373.

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176

Cost-oriented approaches to pricing have the advantage of simplicity, and many practi-

tioners believe that they generally yield a good price decision. However, such approaches

have been criticized for two basic reasons. First, cost approaches give little or no con-

sideration to demand factors. For example, the price determined by markup or cost-plus

methods has no necessary relationship to what people will be willing to pay for the product.

In the case of rate-of-return pricing, little emphasis is placed on estimating sales volume.

Even if it were, rate-of-return pricing involves circular reasoning, since unit cost depends

on sales volume but sales volume depends on selling price. Second, cost approaches fail

to reflect competition adequately. Only in industries where all firms use this approach and

have similar costs and markups can this approach yield similar prices and minimize price

competition. Thus, in many industries, cost-oriented pricing could lead to severe price

competition, which could eliminate smaller firms. Therefore, although costs are a highly

important consideration in price decisions, numerous other factors need to be examined.

Product Considerations in Pricing Although numerous product characteristics can affect pricing, three of the most important

are (1) perishability, (2) distinctiveness, and (3) stage in the product life cycle.

Perishability Some products, such as fresh meat, bakery goods, and some raw materials are physically

perishable and must be priced to sell before they spoil. Typically, this involves discounting

the products as they approach being no longer fit for sale. Products can also be perishable in

the sense that demand for them is confined to a specific time period. For example, high fash-

ion and fad products lose most of their value when they go out of style and marketers have

the difficult task of forecasting demand at specific prices and judging the time period of cus-

tomer interest. While the time period of interest for other seasonal products, such as winter

coats or Christmas trees, is easier to estimate, marketers must still determine the appropriate

price and discount structure to maximize profits and avoid inventory losses or carrying costs.

Distinctiveness Marketers try to distinguish their products from those of competitors and if successful, can

often charge higher prices for them. While such things as styling, features, ingredients, and

service can be used to try to make a product distinctive, competitors can copy such physical

MARKETING INSIGHT Basic Breakeven Formulas 11–3

The following formulas are used to calculate breakeven points in units and in dollars:

BEP(in units) 5 FC

}} (SP 2 VC )

BEP(in dollars) 5 FC

}} 1 2 (VCySP)

where

FC 5 Fixed cost VC 5 Variable cost SP 5 Selling price

If, as is generally the case, a firm wants to know how many units or sales dollars are necessary to generate a given amount of profit, profit (P) is simply added to fixed costs in the formulas. In addition, if the firm has estimates of expected sales and fixed and variable costs, the selling price can be solved for. (A more detailed discussion of breakeven analysis is provided in the financial analysis section of this book.)

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Chapter Eleven Pricing Strategy 177

changes. Thus, it is through branding and brand equity that products are commonly made

distinctive in customers’ minds. For example, prestigious brands like Rolex, Tiffany’s, and

Lexus can be priced higher in large measure because of brand equity. Of course, higher

prices also help create and reinforce the brand equity of prestigious products.

Life Cycle The stage of the life cycle that a product is in can have important pricing implications.

With regard to the life cycle, two approaches to pricing are skimming and penetration price

policies. A skimming policy is one in which the seller charges a relatively high price on a new product. Generally, this policy is used when the firm has a temporary monopoly and

when demand for the product is price inelastic. In later stages of the life cycle, as competi-

tion moves in and other market factors change, the price may then be lowered. Flat screen

TV’s and cell phones are examples of this. A penetration policy is one in which the seller charges a relatively low price on a new product. Generally, this policy is used when the

firm expects competition to move in rapidly and when demand for the product is, at least in

the short run, price elastic. This policy is also used to obtain large economies of scale and

as a major instrument for rapid creation of a mass market. A low price and profit margin

may also discourage competition. In later stages of the life cycle, the price may have to be

altered to meet changes in the market.

ENVIRONMENTAL INFLUENCES ON PRICING DECISIONS

Environmental influences on pricing include variables that the marketing manager cannot

control. Three of the most important of these are the Internet, competition and government

regulation.

The Internet One of the biggest influences on pricing decisions has been the development of the

Internet. Prior to its development, it was difficult for consumers to compare prices effec-

tively. Consumers would have to travel from store to store or call each store and try to find

identical brands and models to compare prices. For many products, like televisions and

appliances, this was difficult to do because competitors seldom carried the same brands

and models. However, consumers now can simply go from store to store online and com-

pare prices, or go to websites that do price comparisons for them and find the best deals

(e.g., kayak.com and expedia.com). Consumers can go to Google, put in the product and

brand they are looking for, hit the Shopping tab, and let the web browser find it for them

at a variety of sites and prices. Consumers can go to Edmunds.com and find out how much

a dealer has paid for an automobile or truck as well as how much customers in their area

have been paying for a particular model. In sum, the Internet has made prices much easier

for consumers and organizational buyers to compare and has forced marketers to be much

more transparent in their pricing strategies.

Competition In setting or changing prices, the firm must consider its competition and how compe-

tition will react to the price of the product. Initially, consideration must be given to such

factors as

1. Number of competitors.

2. Market shares, growth, and profitability of competitors.

3. Strengths and weaknesses of competitors.

4. Likely entry of new firms into the industry.

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178 Part C The Marketing Mix

5. Degree of vertical integration of competitors.

6. Number of products sold by competitors.

7. Cost structure of competitors.

8. Historical reaction of competitors to price changes.

These factors help determine whether the firm’s selling price should be at, below, or

above competition. Pricing a product at competition (i.e., the average price charged by the

industry) is called going-rate pricing and is popular for homogeneous products, since this approach represents the collective wisdom of the industry and is not disruptive of industry

harmony. An example of pricing below competition can be found in sealed-bid pricing, in which the firm is bidding directly against competition for project contracts. Although cost

and profits are initially calculated, the firm attempts to bid below competitors to obtain

the job contract. A firm may price above competition because it has a superior product or

because the firm is the price leader in the industry.

Government Regulations Prices of certain goods and services are regulated by state and federal governments. Public

utilities are examples of state regulation of prices. However, for most marketing managers,

federal laws that make certain pricing practices illegal are of primary consideration in pric-

ing decisions. The following list is a summary of some of the more important legal con-

straints on pricing. Of course, since most marketing managers are not trained as lawyers,

they usually seek legal counsel when developing pricing strategies to ensure conformity to

state and federal legislation.

1. Price fixing is illegal per se. Sellers must not make any agreements with competitors or distributors concerning the final price of the goods. The Sherman Antitrust Act is the

primary device used to outlaw horizontal price fixing. Section 5 of the Federal Trade

Commission Act has been used to outlaw price fixing as an unfair business practice.

2. Deceptive pricing practices are outlawed under Section 5 of the Federal Trade Commission Act. An example of deceptive pricing would be to mark merchandise with

an exceptionally high price and then claim that the lower selling price actually used

represents a legitimate price reduction.

3. Price discrimination (the practice of charging different prices to different buyers for goods of like grade and quality) that lessens competition or is deemed injurious to it

is outlawed by the Robinson-Patman Act. Price discrimination is not illegal per se,

but sellers cannot charge competing buyers different prices for essentially the same

products if the effect of such sales is injurious to competition. Price differentials can be

legally justified on certain grounds, especially if the price differences reflect cost differ-

ences. This is particularly true of quantity discounts.

4. Predatory pricing involves charging a very low price for a product with the intent of driving competitors out of business. It is illegal under the Sherman Act and Federal

Trade Commission Act.4

A GENERAL PRICING MODEL

It should be clear that effective pricing decisions involve considerations of many factors,

and different industries may have different pricing practices. Although no single model

will fit all pricing decisions, Figure 11.1 presents a general model for developing prices for

products and services.5 While all pricing decisions cannot be made strictly on the basis of

this model, it does break pricing strategy into a set of manageable stages that are integrated

into the overall marketing strategy.

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Chapter Eleven Pricing Strategy 179

Set Pricing Objectives Given a product or service designed for a specific target market, the pricing process begins

with a clear statement of the pricing objectives. These objectives guide the pricing strategy

and should be designed to support the overall marketing strategy. Because pricing strategy

has a direct bearing on demand for a product and the profit obtained, efforts to set prices

must be coordinated with other functional areas. For example, production will have to be

able to meet demand at a given price, and finance will have to manage funds flowing in

and out of the organization at predicted levels of production.

Evaluate Product–Price Relationships As noted, the distinctiveness, perishability, and stage of the life cycle a product is in all

affect pricing. In addition, marketers need to consider what value the product has for

customers and how price will influence product positioning. There are three basic value

Change price as needed

Evaluate product–price relationships

Set pricing objectives

Estimate costs and other price limitations

Analyze profit potential

Set initial price structure

FIGURE 11.1 A General Pricing

Model

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180

MARKETING INSIGHT Ten Tips for Managing Pricing Strategy 11–4

1. The more that competitors and customers know about your pricing, the better off you are. In an information age, it is necessary to be transparent about prices and the value of a firm’s offerings.

2. In highly competitive markets, the focus should be on those market segments that provide opportunities to gain competitive advantage. Such a focus leads to a value- oriented pricing approach.

3. Pricing decisions should be made within the context of an overall marketing strategy that is embedded within a business or corporate strategy.

4. Successful pricing decisions are profit oriented, not sales volume or market share oriented.

5. Prices should be set according to customers’ perceptions of value. 6. Pricing for new products should start as soon as product development begins. 7. The relevant costs for pricing are the incremental avoidable, costs. 8. A price may be profitable when it provides for incremental revenues in excess of incre-

mental costs. 9. A central organizing unit should administer the pricing function. Generally, it is better

to avoid letting salespeople set price, especially without access to profitability informa- tion and specific training in pricing and revenue management.

10. Pricing management should be viewed as a process and price setting as a daily man- agement activity, not a once-a-year activity.

Source: From David Cravens and Nigel Piercy, Strategic Marketing 10E, 2013, p. 342. Reprinted with permission of McGraw-Hill Education.

positions. First, a product could be priced relatively high for a product class because it offers

value in the form of high quality, special features, or prestige. Second, a product could be

priced at about average for the product class because it offers value in the form of good

quality for a reasonable price. Third, a product could be priced relatively low for a product

class because it offers value in the form of acceptable quality at a low price. A Porsche

or Nike Air Max are examples of the first type of value; a Honda Accord or Keds tennis

shoes are examples of the second; and Hyundai cars and private label canvas shoes are

examples of the third. Setting prices so that targeted customers will perceive products to

offer greater value than competitive offerings is called value pricing. In addition, research is needed to estimate how much of a particular product the tar-

get market will purchase at various price levels—price elasticity. This estimate provides

valuable information about what the target market thinks about the product and what it is

worth to them.

Estimate Costs and Other Price Limitations The costs to produce and market products provide a lower bound for pricing decisions and

a baseline from which to compute profit potential. If a product cannot be produced and

marketed at a price to cover its costs and provide reasonable profits in the long run, then

it should not be produced in its designed form. One possibility is to redesign the product

so that its costs are lower. In fact, some companies first determine the price customers are

willing to pay for a product and then design it so that it can be produced and marketed at a

cost that allows targeted profits.

Other price limitations that need to be considered are government regulations and the

prices that competitors charge for similar and substitute products. Also, likely competitive

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Chapter Eleven Pricing Strategy 181

reactions that could influence the price of a new product or a price change in an existing

one need to be considered.

Analyze Profit Potential Analysis in the preceding stages should result in a range of prices that could be charged.

Marketers must then estimate the likely profit in pricing at levels in this range. At this

stage, it is important to recognize that it may be necessary to offer channel members quan-

tity discounts, promotional allowances, and slotting allowances to encourage them to

actively market the product. Quantity discounts are discounts for purchasing a large num- ber of units. Promotional allowances are often in the form of price reductions in exchange for the channel member performing various promotional activities, such as featuring the

product in store advertising or on in-store displays. Slotting allowances are payments to retailers to get them to stock items on their shelves. All of these can increase sales but also

add marketing cost to the manufacturer and affect profits.

Set Initial Price Structure Since all of the supply, demand, and environmental factors have been considered, a mar-

keter can now set the initial price structure. The price structure takes into account the

price to various channel members, such as wholesalers and retailers, as well as the recom-

mended price to final consumers or organizational buyers.

Change Price as Needed There are many reasons why an initial price structure may need to be changed. Channel

members may bargain for greater margins, competitors may lower their prices, or costs

may increase with inflation. In the short term, discounts and allowances may have to be

larger or more frequent than planned to get greater marketing effort to increase demand

to profitable levels. In the long term, price structures tend to increase for most products as

production and marketing costs increase.

SUMMARY

Pricing decisions that integrate the firm’s costs with marketing strategy, business con-

ditions, competition, demand, product variables, channels of distribution, and general

resources can determine the success or failure of a business. This places a very heavy

burden on the price maker. Modern-day marketing managers cannot ignore the com-

plexity or the importance of price management. Pricing strategies must be continually

reviewed and must take into account that the firm is a dynamic entity operating in a

very competitive environment. There are many ways for money to flow out of a firm in

the form of costs, but often there is only one way to bring in revenues and that is by the

price–product mechanism.

Additional Resources

Macdivitt, Harry, and Mike Wilkinson. Value-Based Pricing. New York: McGraw-Hill, 2012. Mazumdar, Tridib, S. P. Raj, and Indrajit Sinha. “Reference Price Research: Review and

Propositions.” Journal of Marketing, October 2005, pp. 84–102. Monroe, Kent B. Pricing: Making Profitable Decisions. 3rd ed. New York: McGraw-Hill, 2003. Nagle, Thomas T., John Hogan, and Joseph Zale. The Strategy and Tactics of Pricing. 5th ed. Englewood Cliffs, NJ: Prentice Hall, 2011.

Smith, Tim. Pricing Strategy. Mason, OH: Thomson South-Western, 2012. Winer, Russell S. Pricing. Cambridge, MA: Marketing Science Institute, 2005.

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182 Part C The Marketing Mix

Key Terms and Concepts

Bundle pricing: A form of psychological pricing that involves selling several products together at a single price in order to suggest a good value.

Cost-plus pricing: A cost-oriented pricing approach that involves totaling up the costs of producing a product or completing a project and then adding on a percentage or fixed profit amount. This

approach is used when costs are difficult to estimate in advance such as military weapon development.

Deceptive pricing: Illegal under the Federal Trade Commission Act, an approach that involves price deals that mislead the consumer. For example, putting a fake price on a product much higher

than the product sells for in the market, crossing it out, and then offering the product at the market

price and claiming a price reduction could easily mislead consumers.

Going-rate pricing: Pricing a product at the average charged in the industry.

Markup pricing: A cost-oriented pricing approach that involves adding a percentage to the invoice price in order to determine the final selling price . For example, if a retailer used a

50 percent markup on a product that was bought from a wholesaler for $1, the selling price to

the consumer would be $1.50.

Odd pricing: Also called odd-even pricing, a form of psychological pricing in which the prices are set at one or a few cents or dollars below a round number in order to create the perception that

the price is low, for example, 99 cents or $129 rather than $1 or $130.

Penetration pricing policy: Approach to pricing in which the seller charges a relatively low price on a new product initially in order to grow a market, gain market share, and discourage competition

from entering the market.

Prestige pricing: A form of psychological pricing that involves charging a high price to create a signal that the product is exceptionally fine.

Predatory pricing: Practice that involves charging a very low price for a product with the intent of driving competitors out of business. It is illegal under the Sherman Act and Federal Trade

Commission Act.

Price discrimination: The practice of charging different prices to different buyers for goods of like grade and quality which is illegal under the Robinson-Patman Act if it lessens or is deemed

injurious to competition.

Price elasticity: A measure of consumers’ price sensitivity that is estimated by dividing relative changes in the quantity sold by relative changes in price. If demand is elastic, a slight lowering of

price will result in a relatively large increase in quantity demanded.

Price fixing: An unfair business practice outlawed by the Sherman Antitrust Act and the Federal Trade Commission Act that involves competitors in a market colluding to set the final price of a

product.

Promotional allowance: Price reduction offered to channel members in exchange for performing various promotional activities such as featuring the product in store advertising or on in-store displays.

Quantity discounts: Discounts offered for purchasing a large number of units.

Rate-of-return pricing: Cost-oriented approach to pricing that involves adding a desired rate of return on investment to total costs. Generally, a breakeven analysis is performed for expected

production and sales levels and a rate of return is added on.

Sealed-bid pricing: Bidding process in which each seller submits a sealed bid and attempts to price below competition in order to get the contract. Many large construction and military projects

are bid this way.

Skimming pricing policy: Approach to pricing in which the seller charges a relatively high price on a new product initially in order to recover costs and make profits rapidly and then lowers the

price at a later date to make sales to more price-sensitive buyers.

Slotting allowances: Payments to retailers to get them to stock items on their shelves, a common tactic for getting new products into stores.

Value pricing: Setting prices so that targeted customers will perceive products to offer greater value than competitive offerings. For existing products, this can be accomplished by offering more

product or service while maintaining or decreasing the dollar price.

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S e c ti

o n

I

E ss

e n ti a ls

o f

M a rk

e ti n g

M a n a g e m

e n t

Marketing in Special

Fields

12 The Marketing of Services

13 Global Marketing

D Part

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184

Chapter

12 The Marketing of Services

Over the course of the past 40 years, the fastest-growing segment of the American econ-

omy has not been the production of tangibles but the performance of services. Spending

on services has increased to such an extent that today it captures more than 50 cents of the

consumer’s dollar. In addition, the service sector in the United States produces a balance-of-

trade surplus and is expected to be responsible for all net job growth in the forseeable future.1

The dominance of the service sector is not limited to the United States. The service sector

accounts for more than half the GNP and employs more than half the labor force in most

Latin American and Caribbean countries. Over the course of the next decade, the service

sector will spawn whole new legions of doctors, nurses, medical technologists, physical

therapists, home health aids, and social workers to administer to the needs of an aging popu-

lation, along with armies of food servers, child care providers, and cleaning people to cater

to the wants of two-income families. Also rising to the forefront will be a swelling class of

technical workers, including computer engineers, systems analysts, and paralegals.

Many marketing textbooks still devote little attention to program development for the

marketing of services, especially those in the rapidly changing areas of health care, finance,

and travel. This omission is usually based on the assumption that the marketing of products

and services is basically the same, and, therefore, the techniques discussed under products

apply as well to the marketing of services. Basically, this assumption is true. Whether sell-

ing goods or services, the marketer must be concerned with developing a marketing strategy

centered on the four controllable decision variables that comprise the marketing mix: the

product (or service), the price, the distribution system, and promotion. In addition, the

use of marketing research is as valuable to service marketers as it is to product marketers.

However, because services possess certain distinguishing characteristics, the task of deter-

mining the marketing mix ingredients for a service marketing strategy may raise different

and more difficult problems than those encountered in marketing products.

The purpose of this chapter is fourfold. First, the reader will become acquainted with

the special characteristics of services and their strategy implications. Second, key con-

cepts associated with providing quality services will be discussed. Third, obstacles will be

described that in the past impeded and still continue to impede development of services

marketing. Finally, current trends and strategies of innovation in services marketing will

be explored. With this approach, the material in the other chapters of the book can be inte-

grated to give a better understanding of the marketing of services.

Before proceeding, some atte ntion must be given to what we refer to when using the

term services. Probably the most frustrating aspect of the available literature on services is

P a rt D

M

a rke

tin g in

S p e cia

l F ie

ld s

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Chapter Twelve The Marketing of Services 185

that the definition of what constitutes a service remains unclear. The fact is that no com-

mon definition and boundaries have been developed to delimit the field of services. The

American Marketing Association has defined services as follows:2

1. Service products, such as a bank loan or home security, that are intangible, or at least substantially so. If totally intangible, they are exchanged directly from producer to user,

cannot be transported or stored, and are almost instantly perishable. Service products

are often difficult to identify, since they come into existence at the same time they are

bought and consumed. They are composed of intangible elements that are in separable;

they usually involve customer participation in some important way, cannot be sold in

the sense of ownership transfer, and have no title. Today, however, most products are

partly tangible and partly intangible, and the dominant form is used to classify them as

either goods or services (all are products). These common, hybrid forms, whatever they

are called, may or may not have the attributes just given for totally intangible services.

2. Services, as a term, is also used to describe activities performed by sellers and others that accompany the sale of a product and that aid in its exchange or its utilization (e.g.,

shoe fitting, financing, an 800 number). Such services are either presale or postsale and

supplement the product but do not comprise it.

The first definition includes what can be considered almost pure services, such as

insurance, banking, entertainment, airlines, health care, telecommunications, and hotels;

the second definition includes such services as wrapping, financing an automobile, pro-

viding warranties on computer equipment, and the like because these services exist in

connection with the sale of a product or another service. This suggests that marketers of

goods are also marketers of services. For example, one could argue that McDonald’s is not

in the hamburger business. Its hamburgers are actually not very different from those of the

competition. McDonald’s is in the service business.

More and more manufacturers are also exploiting their service capabilities as stand-

alone revenue producers. For example, General Motors, Ford, and Chrysler all offer

financing services. Ford and General Motors have extended their financial services offer-

ings to include a MasterCard, which offers discounts on purchases of their au tomobiles.

The reader can imagine from his or her own experience that some purchases are very

tangible (a coffeemaker) while others are very much intangible (a course in marketing).

Others have elements of both (lunch on a flight from New York to Chicago). In other

words, in reality there is a goods–service continuum, with many purchases including both

tangible goods and intangible services. Figure 12.1 illustrates such a continuum. On the

goods side of the continuum, the buyer owns an object after the purchase. On the ser-

vices side of the continuum, when the transaction is over, the buyer leaves with an experi-

ence and a feeling. When the course in marketing is over or the flight from New York to

Chicago is completed, the student or passenger leaves with a feeling.

The examples of services on the right side of Figure 12.1 are mostly or entirely intangi-

ble. They do not exist in the physical realm. They cannot appeal to the five senses.

Golf clubs Car Suit Airplane

Green fees with sleeve of balls included Oil change Suit with alterations Air flight with lunch

Tangible

Green fees Taxi ride Alterations Air flight

IntangibleMixed FIGURE 12.1 The Goods–Service

Continuum

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186 Part D Marketing in Special Fields

IMPORTANT CHARACTERISTICS OF SERVICES

Services possess several unique characteristics that often have a significant impact on

marketing program development. These special features of services may cause unique

problems and often result in marketing mix decisions that are substantially different

from those found in connection with the marke ting of goods. Some of the more impor-

tant of these characteristics are intangibility, inseparability, perishability and fluctuating

demand, a client relationship, customer effort, and uniformity. They are presented in

Figure 12.2.

Intangibility The obvious basic difference between goods and services is the intangibility of services,

and many of the problems encountered in the marketing of services are due to intangibility.

To illustrate, how does an airline make tangible a trip from Philadelphia to San Francisco?

These problems are unique to service marketing.

The fact that many services cannot appeal to a buyer’s sense of touch, taste, smell, sight,

or hearing before purchase places a burden on the marketing organization. For example,

hotels that promise a good night’s sleep to their customers cannot actually show this ser-

vice in a tangible way. Obviously, this burden is most heavily felt in a firm’s promotional

program, but, as will be discussed later, it may affect other areas. Depending on the type

of service, the intangibility factor may dictate use of direct channels because of the need

for personal contact between the buyer and seller. Since a service firm is actually selling

an idea or experience, not a product, it must tell the buyer what the service will do because

it is often difficult to illustrate, demonstrate, or display the service in use. For example,

the hotel must somehow describe to the consumer how a stay at the hotel will leave the

customer feeling well rested and ready to begin a new day.

The preceding discussion alludes to two strategy elements firms should employ

when trying to overcome the problems associated with service intangibility. First, tangi-

ble aspects associated with the service should be stressed. For example, advertisements

for airlines should emphasize (through text and visuals) the newness of the aircraft, the

Intangibility

Inseparability

Perishability

Client Relationship

Customer Effort

Uniformity

Characteristic Services Goods

The customer owns only memories, out- comes, or feelings such as an airline flight, greater knowledge, or styled hair. Services often cannot be separated from the person providing them. They are often pro- duced and consumed at the same time. Services can be used only at the time they are offered. They cannot be inventoried, stored, or transported. Services often involve a long-term personal relationship between buyer and seller.

Customers are often heavily involved in the production. Because of inseparability and high involve- ment on the part of the buyer, each service may be unique, with the quality likely to vary.

The customer owns objects that can be used, resold, or given to others.

Goods are usually produced and sold by different people.

Goods can be placed in inventory for use at another time.

Goods often involve an impersonal short-term relation- ship although in many instances relationship strength and duration are increasing. Customer’s involvement may be limited to buying the completed product and using it. Variations in quality and variance from standards can be corrected before customers purchase products.

FIGURE 12.2 Unique Characteristics Distinguishing Services from Goods

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187

roominess of the cabin, and the friendliness of the flight attendants. Second, end benefits

resulting from completion of the service encounter should be accentuated. In the case of

air travel, an individual’s ability to make an important meeting or arrive home in time for

a special occasion could be the derived benefit.

Inseparability In many cases, a service cannot be separated from the person of the seller. In other words,

the service must often be produced and marketed simultaneously. Because of the simultane-

ous production and marketing of most services, the main concern of the marketer is usually

the creation of time and place utility. For example, the bank teller produces the service of

receiving a deposit and markets other appropriate bank services at the same time. Many ser-

vices, therefore, are tailored and not mass produced. Often, because a company’s employees

are “the company” at the point of contact, they must be given wide latitude and assistance in

determining how best to tailor a specific service to meet customer needs.

The implication of inseparability on issues dealing with the selection of channels of dis-

tribution and service quality is quite important. Inseparable services cannot be inventoried,

and thus direct sale is the only feasible channel of distribution. Service quality cannot some-

times be completely standardized due to the inability to completely mechanize the service

encounter. However, some industries, through innovative uses of technology, have been able

to overcome or, at least, alleviate challenges associated with the inseparability characteristic.

For example, in the financial services industry, automated teller machines (ATMs)

and home banking, through use of computers and telephones, have contributed greatly to

eliminating the need for the customer to directly interact with a bank teller. Further, many

banks are developing computer applications to allow tellers and other service representa-

tives to think like expert problem solvers. These applications allow for platform banking,

a means of enabling bank representatives in any location to bring up on a screen all the

information the bank has about the customer. Every face-to-face contact with a customer

can mean an opportunity to make a sale and, more importantly, further the relationship

with the customer. Of course, the bank representative is still of critical importance as the

one who might recognize by the customer’s expression or words that this visit is not the

appropriate time to be marketing additional services.

MARKETING INSIGHT What Is an E-Service? 12–1

Source: Copyright © Hewlett Packard Company. All rights reserved.

Service

Application

Business process

Application

is a (an)

available via

and is hosted bythat

The Net Completes tasks

ISPs/ASPs

Solves problems

Conducts transactions Telcos

CompaniesInformation technology resource

An e-service

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188 Part D Marketing in Special Fields

In addition to technology, tangible representations of the service can serve to overcome

the inseparability problem. For example, in the insurance industry, a contract serves as

the tangible representation of the service. The service itself remains inseparable from the

seller (insurance provider), but the buyer has a tangible representation of the service in the

form of a policy. This enables the use of intermediaries (agents) in the marketing of insur-

ance. Another example is in the use of a credit card—the card itself is a tangible represen-

tation of the service that is being produced and consumed each time the card is being used.

Perishability and Fluctuating Demand Services are perishable and markets for most services fluctuate either by season (tourism),

days (airlines), or time of day (movie theaters). Unused telephone capacity and electrical

power; vacant seats on planes, trains, buses, and in stadiums; and time spent by catalog service

representatives waiting for customers to reach them all represent business that is lost forever.

The combination of perishability and fluctuating demand has created many problems for

marketers of services. Specifically, in the areas of staffing and distribution, avenues must be

found to have the services available for peak periods, and new strategies need to be developed

to make use of the service during slack periods. Some organizations are attempting to cope

with these problems through the use of pricing strategy. Off-peak pricing consists of charg- ing different prices during different times or days in order to stimulate demand during slow

periods. Discounts given for weekend calling, Saturday night stay-overs, early-bird dinners,

or winter cruises are all examples of efforts service providers make to redistribute demand.

Other organizations are dealing with issues related to peak period demand through the

use of technology. To illustrate, a well-designed voice mail system allows companies and

callers to cut down on missed phone calls, eliminates long waits on hold, and delivers

clear, consistent messages. In the catalog industry, automated call routing (ACR) is used

to route incoming calls to available service representatives in the order in which they were

received. Finally, in the utilities industry, many electric utilities no longer have to generate

capacity that will meet peak electrical demand. Instead, they rely on buying unused power

from other utilities in other regions of the country.

Client Relationship In the marketing of a great many services, a client relationship, as opposed to a customer

relationship, exists between the buyer and the seller. In other words, the buyer views the seller

as someone who has knowledge that is of value. Examples of this type of relationship are the

physician-patient, college professor–student, accountant–small business owner, and broker-

investor. The buyer, many times, abides by the advice offered or suggestions provided by the

seller, and these relationships may be of an ongoing nature. Also, since many service firms

are client-serving organizations, they may approach the marketing function in a more profes-

sional manner, as seen in health care, finance, legal, governmental, and educational services.

Professionals face at least two marketing challenges. First, in many cases, fear or hostil-

ity is brought to the transaction because the customer is uncertain about how genuine the

professional’s concern for his or her satisfaction is. For example, many unpleasant reasons

exist for consulting doctors, lawyers, bankers, or even visiting a college professor. These

could include having surgery, being sued, having to take out a loan, or doing poorly on an

exam. Second, even high-quality service delivery by the professional can lead to dissatis-

fied customers. For a physician, the ability to provide high-quality medical care may be

overshadowed by a brusque, unfriendly personality. For a college professor, the demand

on students to contact or visit him or her only during office hours, coupled with students’

own hectic work schedules, can diminish the impact of the professor’s classroom presenta-

tions. It is vitally important that the professional service provider strive to build long-term

positive relationships with clients.

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189

MARKETING INSIGHT Expectations of Service Customers in Selected Industries 12–2

Type of Service Type of Customer Principal Expectations

Consumers

Consumers

Consumers

Business customers

Business customers

Business customers

Source: A. Parasuraman, Leonard L. Berry, and Valarie A. Zeithaml, “Understanding Customer Expectations of Service,” Sloan Management Review, Spring 1991, pp. 39–48.

Customer Effort Customers are often involved to a relatively great degree in the production of many types

of service. In some restaurants you clean your table. You may carry your luggage to a cart

parked next to a baggage compartment of the plane. If you wish to enjoy an exhibit at a

local art museum, you must walk around the facility and pay careful attention to what is on

Automobile repair

Automobile insurance

Hotel

Property and casualty insurance

Equipment repair

Truck and tractor rental/leasing

Be competent. Fix it right the first time. Explain things. Explain why the customer needs the suggested repairs—provide an itemized list. Be respectful. “Don’t treat me like an idiot.” Keep me informed. “I shouldn’t have to learn about insurance law changes from the newspaper.” Be on my side. “I don’t want them to treat me like I am a criminal just because I have a claim.” Play fair. “Don’t drop me when something goes wrong.” Protect me from catastrophe. “Make sure my estate is covered in the event of a major accident.” Provide prompt service. “I want a fast settlement of my claims.” Provide a clean room. “Don’t have a deep-pile car- pet that can’t be completely cleaned . . . You can literally see germs down there.” Provide a secure room. Good deadbolts and a peep- hole on the door. Treat me like a guest. “It is almost like they’re looking you over to decide whether or not they’re going to let you have a room.” Keep your promise. “They said the room would be ready at the promised time, but it wasn’t.” Fulfill obligations. Pay up. Learn my business and work with me. “I expect them to know me and my company.” Protect me from catastrophe. Cover risk exposure so there is no single big loss. Provide prompt service. Fast claim service. Share my sense of urgency. Speed of response. “One time I had to buy a second piece of equipment because of the huge downtime with the first piece.” Be prepared. Have all the parts ready. Keep the equipment running. Have equipment working all the time—that is the key. Be flexible. “The leasing company should have the leasing flexibility to rent us equipment when we need it.” Provide full service. Get rid of all the paperwork and headaches.

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190 Part D Marketing in Special Fields

display. If an organization purchases the services of an advertising agency, employees will

have to work with the agency, review its ideas, and make the final selections.

Obviously, not every service requires the same degree of customer effort. Your effort

with a credit card service may be little beyond taking it from your wallet to make a pur-

chase and writing a check once a month to pay the bill.

Uniformity The quality of services can vary more than the quality of goods. Producers of goods have

procedures to prevent, identify, and correct defects. If these procedures are working, cus-

tomers are unlikely to purchase defective products. This is not the case with most services.

Because they are often human performances and often customized to the needs of the buyer,

quality can vary. Each trip to the bank or airline flight or university course can be a different

experience. Many service jobs such as nursing, teaching, and career counseling require a

positive attitude; how employees feel influences their performance.

PROVIDING QUALITY SERVICES

In today’s increasingly competitive environment, quality service is critical to organiza-

tional success. Unlike products in which quality is often measured against standards, ser-

vice quality is measured against performance.3 Since services are frequently produced in

the presence of a customer, are labor intensive, and are not able to be stored or objectively

examined, the definition of what constitutes good service quality can be difficult and, in

fact, continually changes in the face of choices.4 Customers determine the value of service

quality in relation to available alternatives and their particular needs. In general, problems

in the determination of good service quality are attributable to differences in the expecta-

tions, perceptions, and experiences regarding the encounter between the service provider

and consumer. These gaps can be classified as follows:

1. The gap between consumer expectations and management perceptions of consumer

expectations.

2. The gap between management perceptions of consumer expectations and the firm’s

service quality specifications.

3. The gap between service quality specifications and actual service quality.

4. The gap between actual service delivery and external communications about the service.

In essence, the customer perceives the level of service quality as being a function of

the magnitude and direction of the gap between expected service and perceived service.

Management of a company may not even realize that they are delivering poor-quality ser-

vice due to differences in the way managers and consumers view acceptable quality levels.

To overcome this problem and to avoid losing customers, firms must be aware of the deter-

minants of service quality. A brief description of these determinants follows.

1. Tangibles include the physical evidence of the service. For example, employees are always visible in a hotel lobby dusting or otherwise cleaning up. Likewise, clean, shiny,

up-to-date medical equipment or aircraft are examples of tangible elements.

2. Reliability involves the consistency and dependability of the service performance. For example, does a bank or phone company always send out accurate customer statements?

Likewise, does the plumber always fix the problem on his or her first visit?

3. Responsiveness concerns the willingness or readiness of employees or professionals to provide service. For example, will a physician see patients on the same day they call in

to say they are ill? Will a college professor return a student’s call the same day?

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191

MARKETING INSIGHT Relationship Marketing in Service Organizations 12–3

4. Assurance refers to the knowledge and competence of service providers and the ability to convey trust and confidence. This determinant encompasses the provider’s name and

reputation; possession of necessary skills; and trustworthiness, believability, and hon-

esty. For example, a bank will guarantee same-day loan processing; a doctor is highly

trained in a particular specialty.

5. Empathy refers to the service provider’s efforts to understand the customer’s needs and then to provide, as best as possible, individualized service delivery. For example, flight

attendants on a customer’s regular route learn what type of beverages the customer

drinks and what magazines the customer reads.

Each of these determinants plays an important role in how the customer views the service

quality of a firm. Turning service quality into a powerful competitive weapon requires con-

tinuously striving for service superiority—consistently performing above the adequate ser-

vice level and capitalizing on opportunities for exceeding the desired service level. Relentless

efforts to continually improve service performance may well be rewarded by improvements

in customer attitudes toward the firm: from customer frustration to customer preference to

customer loyalty. What should be obvious is that to be successful, a service firm must have

both an effective means to measure customer satisfaction and dedicated employees to pro-

vide high-quality service.

Throughout this book we have stressed the importance of building long-term relationships in which the initial sale is viewed as a beginning step in a process, not an end or goal. For marketers of ser- vices, relationship marketing can present a special set of challenges which require a different new view of the business and a change in strategy.

For decades, most service marketers were concerned with attracting new customers. Promotion programs and convenient locations focused on the acquisition of new customers. During the last two decades, however, service marketers are beginning to think about marketing in a fundamen- tally new way. The idea is that marketing is about having customers, not merely acquiring customers. Service marketers now understand that attracting new customers is only the first step in the process, that making existing customers better customers is marketing too. In other words, service marketers understand the importance of relationship marketing. It is fundamentally different from the tradi- tional view of marketing in service organizations.

Traditional Service Marketing Relationship Service Marketing

1. Marketing focuses on attracting 1. Marketing focuses on “clients.” Customer new “customers.” attraction is a beginning step.

2. Emphasis on selling the service 2. Emphasis on establishing and building a the customer requests. long-term relationship.

3. Need satisfaction is approached from 3. Need satisfaction is approached from the the standpoint of the “part.” For example, standpoint of the “whole.” For example, total haircut, checking account, airline ticket. hair care, day spa, personal banker, travel management.

4. Primary sales contact is through process 4. Primary sales contact is through a trained driven providers. For example, airline ticket marketing professional. agent, bank teller. For example, travel agent, personal banker.

5. Profitability is assessed on individual services. 5. Profitability is assessed on the total For example, individual haircut. relationship. For example, haircut plus shampoos, conditioners, brushes, combs, dryers, etc.

Source: Based on the work of James H. Donnelly Jr., Leonard L. Berry, and Thomas W. Thompson.

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192 Part D Marketing in Special Fields

Customer Satisfaction Measurement As mentioned earlier, satisfied customers can become loyal customers. Service quality

and customer satisfaction are of growing concern to business organizations throughout the

world, and research on these topics generally focuses on two key issues: (1) understanding

the expectations and requirements of the customer, and (2) determining how well a company

and its major competitors are succeeding in satisfying these expectations and requirements.5

As such, an organization’s approach to measuring service quality through customer

satisfaction measurement (CSM) and effectively implementing programs derived from

results of such studies can spell the difference between success and failure. Research on

market leaders’ CSMs found they had the following aspects in common:

1. Marketing and sales employees were primarily responsible (with customer input) for

designing CSM programs and questionnaires.

2. Top management and the marketing function championed the programs.

3. Measurement involved a combination of qualitative and quantitative research methods

that primarily included mail questionnaires, telephone surveys, and focus groups.

4. Evaluations included both the company’s and competitors’ satisfaction performance.

5. Results of all research were made available to employees, but not necessarily to customers.

6. Research was performed on a continual basis.

7. Customer satisfaction was incorporated into the strategic focus of the company via the

mission statement.

8. There was a commitment to increasing service quality and customer satisfaction from

employees at all levels within the organization.

The Importance of Internal Marketing Properly performed customer satisfaction research can yield a wealth of strategic informa-

tion about customers, the sponsoring company, and competitors. However, service quality

goes beyond the relationship between a customer and a company. Rather, as shown by

the last aspect listed, it is the personal relationship between a customer and the particular

employee that the customer happens to be dealing with at the time of the service encounter

that ultimately determines service quality. The importance of having customer-oriented,

frontline people cannot be overstated.6 If frontline service personnel are unfriendly,

unhelpful, uncooperative, or uninterested in the customer, the customer will tend to project

that same attitude to the company as a whole. The character and personality of an organi-

zation reflects the character and personality of its top management. Management must

develop programs that will stimulate employee commitment to customer service. To be

successful, these programs must contain five critical components:

1. A careful selection process in hiring frontline employees. To do this, management has to clearly define the skills the service person must bring to the job.

2. A clear, concrete message that conveys a particular service strategy that front- line people can begin to act on. People delivering service need to know how their

work fits in the broader scheme of business operations.7 They need to have a cause

because servicing others is just too demanding and frustrating to be done well each

day without one.8

3. Significant modeling by managers, that is, managers demonstrating the behavior that they intend to reward employees for performing. For example, some airline executives

regularly travel economy class to talk to customers and solicit ideas for improvement.9

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4. An energetic follow-through process, in which managers provide the training, support, and incentives necessary to give the employees the capability and willingness to pro-

vide quality service.

5. An emphasis on teaching employees to have good attitudes. This type of training usu- ally focuses on specific social techniques, such as eye contact, smiling, tone of voice,

and standards of dress.

However, organizing and implementing such programs will only lead to temporary

results unless managers practice a strategy of internal marketing. We define internal mar- keting as the continual process by which managers actively encourage, stimulate, and sup- port employee commitment to the company, the company’s goods and services, and the

company’s customers. Emphasis should be placed on the word continual. Managers who consistently pitch in to help when needed, constantly provide encouragement and words

of praise to employees, strive to help employees understand the benefits of performing

their jobs well, and emphasize the importance of employee actions on both company and

employee results are practitioners of internal marketing. In service marketing, successful

internal marketing efforts, leading to employee commitment to service quality, are a key to

success.

Federal Express serves as a prime example of the benefits accruing to a company that

successfully practices internal marketing.10 Federal Express is the first service organi-

zation to win the Malcolm Baldrige National Quality Award. The company’s motto is

“people, service, and profits.” Behind its purple, white, and orange planes and uniforms

12–4 MARKETING INSIGHT Customers or Clients, Which One

Will It Be?

Practicing relationship marketing is a challenge for service organizations because there are important differences between “customers” and “clients.” The notion of “client” is critical for relationship marketing to succeed in a service organization.

Customers Clients

1. Customers may be nameless. 1. Clients must have names.