Marketing Management, 16th Edition by Philip Kotler,Lane, Alexander INSTRUCTOR'S MANUAL

INSTRUCTOR’S MANUAL Marketing Management, 16th edition Kotler Chapter 1

Course Background and Syllabus for a Case/Lecture-Oriented Course Background: Case Analysis and Case Selection If you choose to focus on cases and lectures in the course, selecting the appropriate case(s) is (are) important. Recency, popularity, relevance to the topic, availability of teaching notes, as well as other supplements such as video and computer software aids, should be considered.

Appropriately chosen, cases not only stimulate the mind but also create an in-depth feel for the application of the course material. The Kotler/Keller/Chenev text will create sensitivity and awareness for what is critical and important in the case, and the case will reinforce concepts presented in the text. Cases call for a decision and very often with less than perfect information concerning the problem, the environment, the actors, and the consequences of various actions.

As such, the case nurtures management skills although the text and the other application-oriented tools discussed above can diffuse perspective and technical knowledge. There are a number of articles that discuss methods for using the case study approach. The following are suggested: 1. ―Because Wisdom Can‘t Be Told,‖ (Harvard Note 9-451-005). This article argues for the beneficial effect the case method has on both teachers and students and suggests the proper role of the instructor as a leader of the group.

2. ―Learning by the Case Method,‖ (Harvard Note 9-376-241). This article, prepared for executive education, identifies the issues to be confronted in the course of reaching a decision. It also provides useful guidelines for individual analysis of a case method teaching generally.

3. ―Teaching and the Case Method,‖ (9-387-001), by Roland Christensen. A very useful textbook and instructor‘s guide (5-387-010), available through the Harvard Business School. This book includes text, cases, and readings for classes and seminars.

The Harvard Business School Publishing (HBSP) website (hbsp.harvard.edu) will provide you with listings of current marketing and marketing management cases, and related materials. HBSP can also package the selected cases to accompany the text. This can also be accomplished by visiting the Pearson Collections website at collections.pearsoned.com.

Sample Case Analysis An example of a case analysis follows, which can be utilized early in the course to provide a basis for written cases and class case discussions. If you choose to use cases in the course, an example is the O‘Brien Candy Company, a medium-size candy company located in the Midwest.

In the past two years, its sales and profits have barely held their own. Top management feels that the trouble lies with the sales force because that they do not ―work hard or smart enough.‖ To correct the problem, management plans to introduce a new incentive-compensation system and CS-1 Copyright © 2022 Pearson Education, Inc.

Case-Oriented Syllabus

hire a trainer to educate the sales force in modern merchandising and selling techniques. Before doing this, however, they decide to hire a marketing consultant to carry out a marketing audit.

The auditor interviews managers, customers, sales representatives, and dealers, and examines various sets of data.

The auditor‘s findings are as follows: •

•

•

•

•

The company‘s product line consists primarily of 18 products, mostly candy bars. Its two leading brands are mature and account for 76 percent of the company‘s total sales. The company has looked at the fast-developing markets of chocolate snacks but has not made any moves yet.

The company recently researched its customer profile. Its products appeal especially to lower-income and older people. Respondents who were asked to assess O‘Brien‘s chocolate products in relation to competitors‘ products described them as ―average quality and old-fashioned.‖ O‘Brien sells its products to candy jobbers and large supermarkets. Its sales force calls on many of the small retailers reached by the candy jobbers, to fortify displays and provide ideas; its sales force also calls on many small retailers not covered by jobbers. O‘Brien enjoys good penetration of small retailing, though not in all segments, such as the fastgrowing restaurant areas. Its major approach to intermediaries is a ―sell-in‖ strategy discount, exclusive contracts, and stock financing. At the same time, O‘Brien has not adequately penetrated the mass-merchandise chains. Its competitors rely more heavily on mass-consumer advertising and in-store merchandising and are more successful with the mass merchandisers.

O‘Brien‘s marketing budget is set at 15 percent of its total sales, compared with competitors‘ budgets of close to 20 percent. Most of the marketing budget supports the sales force, and the remainder supports advertising. Consumer promotions are very limited. The advertising budget is spent primarily in reminder advertising for the company‘s two leading products. New products are not developed often, and when they are, they are introduced to retailers via a push strategy.

The marketing organization is headed by a sales vice-president. Reporting to the sales VP is the sales manager, the market research manager, and the advertising manager. Having come up from the ranks, the sales VP is partial to sales-force activities and pays less attention to the other marketing functions. The sales force is assigned to territories headed by area managers.

The marketing auditor concluded that O‘Brien‘s problems would not be solved by actions taken to improve its sales force. If you were the auditor, what short-term and long-term recommendations would you make to O‘Brien‘s top management?

Short-term recommendations: •

Examine the current product line and weed out marginal performers with limited growth potential.

• • • •

•

Shift some marketing expenditures from supporting mature products to supporting new products.

Shift the marketing-mix emphasis from direct selling to national advertising, especially for new products.

Conduct a market-profile study of the fastest growing segments of the candy market and develop a plan to break into these areas.

Instruct the sales force to drop some of the smaller outlets and not to take orders for under 20 items. Also, cut out the duplication efforts of sales reps and jobbers calling on the same accounts.

Initiate sales-training programs and an improved compensation plan.

Medium to long-term recommendations: • • • • • • • • •

Hire an experienced marketing VP from the outside.

Set formal and operational marketing objectives.

Introduce the product manager concept into the organization.

Initiate effective new-product development programs.

Develop strong brand names.

Find ways to market its brands to chain stores more effectively.

Increase the level of marketing expenditures to 20 percent of sales.

Reorganize the selling function by specializing sales reps by distribution channels.

Set sales objectives and base sales compensation on gross profit performance.

Note: This analysis is designed to help students recognize some of the marketing and sales management relationships that can occur in case and applied situations. If students apply the type of thinking utilized in this example, they should be able to improve their approaches to this and other marketing cases and related contemporary business analysis settings.

You might suggest that prior to each class students take a few moments to think about the topics covered in each related chapter, using an approach similar to that utilized in this case. Based on this, they can spend 10 to 15 minutes writing down how the case concepts, theories, and applications integrate and complement what they have learned. Ask them to be as specific as possible with their analytical notes, bring those notes to class, and be prepared to discuss how they have integrated the specific ideas covered in the text, lectures, and discussions, based on the O‘Brien case and the auditor‘s comments.

In addition, this case and the apparent questions bring up an important point because it may appear that the questions and issues are somewhat vague and lack focus. This is intentional because that is the way things operate in the real world. In previous cases and casework, students likely focused on a specific topic. Here, however, it is up to them to choose a specific focus, CS-3 Copyright © 2022 Pearson Education, Inc. Browsegrades.net

Case-Oriented Syllabus

reflect on it, show how it relates to what they have already learned or experienced, and examine how they can apply it in the future.

MBA students tend to value this exercise. It gives them a chance to discover relationships between what they read and hear and what they experience at work or in internships. After a few weeks of using this approach, they should be able to identify with the course material and begin to comment on how ―good the text is,‖ that they are actually reading the text, and that there is a reason why this and other courses are in the business program. Sometimes, the hardest part of the instructor‘s job is to cut off the opening class discussion and move on to new material.

This exercise is more difficult for undergraduates because they have had little practical business experience. This activity, however, can still be valuable if you ask the students to apply the concepts to their part-time work experiences, campus clubs, or other applied experiences.

Note to Instructor: It would be useful to bring this case and/or the analysis back into the course occasionally. For example, if students deal with the question occasionally it provides an effective way for them to recall and review prior materials, filter it, and discover new applications.

Matching list of Harvard Business School Publishing cases for Kotler/Keller/Chernev, MARKETING MANAGEMENT, 16E Pearson Education, Inc. 2022 Note: This is a partial list of relevant cases from Harvard Business School Publishing. The cases bridge topics, as noted in the Topics field. To explore alternatives, or to obtain more information on the cases listed here, please visit www.hbsp.harvard.edu and use the searching functions.

Case Title Tanishq: Positioning to Capture the Indian Woman's Heart

Topics Brands; International marketing; Product positioning; Strategic alignment; Strategy; Target markets

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Brief Description The firm has to choose between an established brand, Tanishq, and a new skunkworks brand, GoldPlus, to go after the Indian plain gold jewelry market: Tanishq, initially targeted at a western customer, has undergone strategic retooling and has currently been repositioned to serve the "traditional yet modern" Indian woman. The brand still carries some baggage from its past. GoldPlus, on the other hand, is a new brand that is positioned to serve the plain gold wedding jewelry market. A variety of strategic, economic, organizational and brand investment reasons make the decision an important one.

Westlake Lanes: How Can This Business Be Saved?

Entrepreneurship; Growth strategy; Marketing strategy; Operations management; Small & medium-sized enterprises; Strategy; Transformations; Turnarounds

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Shelby Givens, a new MBA, is the general manager of Westlake Lanes, a near-bankrupt bowling alley that her grandfather founded decades earlier.

Givens has been given one year to turn a profit; if the goal is not met, Westlake will close. During the first few days on the job, Givens learns that the business is in worse shape financially than she or the board - thought. She also finds that Westlake's employees exhibit minimal productivity.

TruEarth Healthy Foods: Market Research for a New Product Introduction

Brands; Consumer marketing; Market research

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Montreaux Chocolate USA: Are Americans Ready for Healthy Dark Chocolate?

Competition; Consumer behavior; Consumer marketing; Coopetition; Food assistance; Forecasting; International R&D; Market research; Organizational behavior analysis; Product development; Product positioning; Quantitative analysis

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TruEarth Healthy Foods, a maker of gourmet pastas, sauces, and meals, wants to build on its successful introduction of fresh whole grain pasta by introducing a similar product concept for pizza. In an increasingly competitive market, TruEarth is focused on beating its competition and wants to act quickly and decisively.

The company conducts extensive market research, first using focus groups to test the concept and then following up with take-home trials.

Acting as brand managers, students must complete a quantitative analysis of the available data to project the sales volume for pizza and then decide whether to bring the new product to market.

Andrea Torres, director of new product development at a high-end chocolate confectionery company, leads her team through a carefully sequenced program of market research to support the development and launch of a new product, healthy dark chocolate with fruit. This is the first time Montreaux USA, an offshoot of a Swiss confectioner, has created a product specifically for U.S. chocolate consumers.

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Brannigan Foods: Strategic Marketing Planning

Consumer behavior; Consumer marketing; Decision making; Forecasting; Management; Marketing; Marketing strategy; Planning; Product development; Products; Quantitative analysis; Resource allocation; Risk; Risk management; Strategic planning; Strategy

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The soup division at Brannigan Foods contributes over 40% of the firm's revenue. The general manager is concerned that the soup industry is declining and that the soup division shows declining profits and market share, especially among the important baby boomer segment. Hoping to reverse these trends, he asks four key managers to review a consultant's analysis of the soup industry and recommend a turnaround strategy.

Rosewood Hotels and Resorts: Branding to Increase Customer Profitability and Lifetime Value

Brand management; Brands; Customer retention; Quantitative analysis

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Olympic Rent-A-Car U.S.: Customer Loyalty Battles

Competitive strategy; Customer relationship management; Customer retention; Marketing; Operations management; Quantitative analysis

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Rosewood Hotels & Resorts, a small luxury private hotel management firm running a collection of 12 individually branded hotels and resorts in multiple countries, is wondering how to foster customer retention and loyalty and capture the maximum value from its 115,000 guests. Rosewood had always allowed each hotel to stand as its own individual brand, with the Rosewood name presented as a muted sub-brand, if at all. Now Rosewood's new leadership is contemplating whether the firm should significantly increase the prominence of the corporate identity, making Rosewood a corporate brand.

The marketing and operations managers for Olympic Rent-A-Car meet to decide how to respond to changes in the loyalty rewards program at the market-leading competitor. The competitor's program gives awards based on dollars spent instead of days rented and eliminates blackout dates.

Olympic expects the program to capture more of the valuable business traveler segment, which rents cars more frequently and generally pays higher premiums than the leisure traveler segment.

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EMC2: Delivering Customer Centricity

Business to business; Customer relationship management; Marketing; Marketing strategy; Sales force management; Social media; Technology

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This case introduces the concept of customer centricity and traces its development at EMC, the world's leading data storage hardware and information management software company. EMC's customers had historically relied on EMC salespeople to guide them through the complex, consultative buying process. However, with the rise of social media, prospective customers are getting more of the information they require earlier in the purchase process online. As they do so, their physical interactions with EMC salespeople are decreasing, while their digital interactions are increasing.

FormPrint Ortho500

Business to business marketing; Customer relationship management; Marketing channels; Marketing strategy; Product introduction; Sales; Sales force management; Segment marketing

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The Senior Vice President of FormPrint's Medical Products business unit is considering issues raised by the upcoming introduction of a new 3D printing system, the Ortho500, which could print custom exoskeletal orthopedic splints, braces, and casts that conform to a patient's body. The potential market extends beyond large urban hospitals (the Ortho's existing market) to high-volume outpatient offices in the U.S., with a long-term goal of expanding internationally.

Levendary Café: The China Challenge

Cross cultural relations; Entrepreneurship; Foreign subsidiaries; General managers; Globalization; International management; Management styles; Multinational corporations; Product adaptation; Relationships; Retail; Strategic planning; Strategy

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Just weeks into her new job, Mia Foster, a first time CEO with no international management experience, is faced with a major challenge at Levendary Café, a $10 billion U.S.based fast food chain. Strategically, many of her corporate staff have become concerned that the company's major expansion into China is moving too far from Levendary's well-defined concepts of store design and menu.

Organizationally, Foster has been frustrated by the apparent unwillingness of Louis Chen, president of Levendary China, to conform to the company's planning and reporting processes. Meanwhile, financial evidence shows that Chen's efforts have produced strong results and suggests that he knows China far better than U.S headquarters does.

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Cottle-Taylor: Expanding the Oral Care Group in India

Advertising; Budgeting; Budgets; Consumer behavior; Emerging markets; Forecasting; Health; International marketing; Marketing plans; Marketing strategy; Product development; Product planning & policy; Products; Sales promotions

13

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Alpen Bank: Launching the Credit Card in Romania

Consumer credit; Global business; International business; International marketing; Marketing strategy; Personal finance; Product introduction; Product positioning; Service management

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Louis Vuitton Moet Hennessy: Expanding Brand Dominance in Asia

Brand management; Business models; Competitive advantage; Expansion; International business; Marketing channels; Marketing strategy; Pricing

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Brinda Patel, director of oral care products for the India division of a consumer home-care product company, develops a data-driven marketing plan for toothbrushes. She believes her plan can support a 20% increase in unit sales based on rising demand for modern oral-care products in India. Her boss, the VP of Marketing, believes her forecast is too conservative and suggests spending more money on promotions to boost sales by 30%.

Patel must develop a new plan to meet this higher growth rate by increasing the advertising budget and revising the distribution of the budget across three targeted advertising messages.

In 2006, the country manager for Alpen Bank in Romania, Gregory Carle, considers whether to recommend the launch of a credit card business. The firm rejected the idea several years earlier because of poor economic conditions in Romania. However, Romania is experiencing a period of economic growth after joining the European Union and Carle believes it is time to reconsider the opportunity despite continued skepticism within the company.

Explores the predicament Louis Vuitton Moet Hennessy (LVMH), one of the world's leading luxury products makers, faces with respect to brand management while expanding operations in China. LVMH, a $13 billion group of companies with operations across the world—1,500 retail stores in about 60 countries—had conquered the luxury goods market successfully in Europe, the United States, and some parts of Asia. In the early 1990s, LVMH decided to expand its operations in China and South Korea. A decade later, LVMH made its entry into India. In 2004, Asia accounted for about 40% of the sales of LVMH. LVMH is determined to capture the growing Asian market.

The Fashion Channel

Change management; Consumer marketing; Market research; Market segmentation; Quantitative analysis

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The new Senior Vice President of Marketing for The Fashion Channel (TFC), a cable television network dedicated to round-the-clock, fashionoriented programming, is preparing to recommend a change in the company's traditional marketing approach by introducing a market segmentation program. This program is, in part, a response to the intensifying competitive environment for TFC, and it needs to strengthen the company's brand and positioning with viewers and advertisers.

Clean Edge Razor: Splitting Hairs in Product Positioning

Conflict management; Leadership; Marketing strategy; New product marketing; Organizational change; Product development; Product positioning; Profitability analysis; Quantitative analysis; Relationships

10

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After three years of development, Paramount Health and Beauty Company is preparing to launch a new technologically advanced vibrating razor called Clean Edge. The innovative new design of Clean Edge provides superior performance by stimulating the hair follicles to lift the hair from the skin, allowing for a closer shave. The company has already decided to introduce Clean Edge into the men's market, where it has a strong presence. Jackson Randall, the product manager for Clean Edge, struggles with how best to position the product for the launch.

Dove: Evolution of a Brand

Branding; Internet; Marketing; Networking

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Examines the evolution of Dove from functional brand to a brand with a point of view, after Unilever designated it as a masterbrand, and expanded its portfolio to cover entries into a number of sectors beyond the original bath soap category. The development causes the brand team to take a fresh look at the clichés of the beauty industry. The result is the controversial Real Beauty campaign. As the campaign unfolds, Unilever learns to use the internet, and particularly social network media like YouTube, to manage controversy.

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Eileen Fisher: Repositioning the Brand

Brand management; Brand positioning; Cause marketing; Market segmentation; Media relations; Multibranding; Personal characteristics; Retail; Revenue growth; Social enterprise; Social media; Social responsibility; Strategic positioning; Target markets

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Well-established fashion brand Eileen Fisher has traditionally appealed to older women. However, to drive growth, Eileen Fisher's management team wants to target a younger demographic and has revamped its Fall product line to offer more fashionable styles to appeal to younger women.

But, repositioning the brand has proven to be harder than expected. This case explores the challenges of appealing to new target markets, without alienating existing customers. The case follows Eileen Fisher's initial forays into social media as they chase a younger demographic, and demonstrates the opportunities and pitfalls that await big brands when they enter the world of Web 2.0.

Introducing iSnack 2.0: The New Vegemite

Brand management; Conflict Management; Marketing management; Multibranding; Product introduction; Social media

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Vegemite is an iconic Australian breakfast spread and is often seen as a quintessential Australian product. This case focuses on Kraft's decision to revitalize brand performance through the introduction of a brand extension.

Drawing on extensive social media analysis of brand image, the brand team led by Simon Talbot identified a gap in the market for a line extension involving a blend of Vegemite and Kraft's other iconic brand, Philadelphia Cream Cheese. Following a high profile campaign involving a competition to name the new extension, Talbot's team chose the name iSnack 2.0 for the new product.

The case starts two days after the public unveiling of this name and subsequent nationwide backlash against it. Talbot needs to consider whether to continue with the brand name or change it in light of the public outcry.

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Reed Supermarkets: A New Wave of Competitors

Brands; Business growth; Competitive strategy; Consumer behavior; Consumer marketing; Market positioning; Market segmentation; Marketing strategy; Product positioning

12

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Reed Supermarkets is a high-end supermarket chain with operations in several Midwestern states. Meredith Collins, vice president of marketing, is concerned about increased competition from dollar stores and limitedassortment stores offering very low, appealing price points. Reed's market research shows that as a result of the economic downturn, customer loyalty is dwindling, and consumers are willing to go to multiple stores to get the best deals. Collins must decide whether to change the current marketing and positioning plan in an effort to increase market share to meet challenging corporate targets.

In a Bind: Peak Sealing Technologies' Product Line Extension Dilemma

Competition; Disruptive innovation; Product introduction; Product lines; Sales compensation; Target markets

10

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Crescent Pure

Advertising campaigns; Marketing; Marketing research process; Marketing strategy; Product introduction; Product positioning

12

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Peak Sealing Technologies (PST), a manufacturer of premium carton sealing tapes, stresses technological innovation as the company's core value. But when a new regional competitor introduces a less expensive and inferior product, PST is faced with a decision that could conflict with their values.

Executives from Portland Drake Beverages (PDB) are meeting to determine the appropriate product positioning and advertising campaign for the launch of Crescent Pure, a specialty organic beverage. They have 3 options for positioning: should Crescent Pure be positioned as an energy drink, a sports drink, or should it adopt broader positioning as an "organic health and wellness" beverage?

ARISE: A Destination for a Day Spa

Advertising; Collaborative innovation; Compensation; Competitive strategy; Employee empowerment; Innovation; Organizational culture; Organizational design; Service management; Service strategy

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A new Dallas-based health and beauty spa aims to use a highly distinctive human resource system as the foundation of its competitive strategy.

By encouraging employees to act as "personal wellness coaches" (PWCs) with high commitment and broad responsibilities, the leadership intended to provide a level of client service that would justify premium rates. However, the system is not working. Issues include: tips are lower than expected, reducing expected compensation; scheduling issues create bottlenecks; and the level of commitment varies among PWCs.

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Altius Golf and the Fighter Brand

Brands; Competitive advantage; Competitive strategy; Distribution; Distribution channels; Global corporate cultures; Market segmentation; Pricing strategy; Product lines; Quantitative analysis; Social responsibility; Sustainable competitive advantage

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Altius Golf is the clear leader in the golf ball market despite a long-term decline in the number of golfers and a drop in sales following the financial crisis. The firm has maintained its position by introducing generations of advanced, super-premium golf balls that allow their customers to emulate professional golfers. The company has been losing market share to lowerpriced competitors and the CEO wants to introduce a new program called Elevate to foster the next generation of golfers. With Elevate, the firm will introduce a ball that is more forgiving and easier to drive for distance and offer it at a price 40% below the company's flagship brand.

Soren Chemical: Why Is the New Swimming Pool Product Sinking?

Branding; Communication strategy; Marketing channels; Marketing mix; Marketing strategy; New product marketing; Pricing

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The issue is poor sales performance of Coracle, a new clarifier for residential swimming pools. The performance is puzzling because Coracle is chemically similar to another Soren product that has sold well for treatment of larger pools. Soren distributes the other product B2B through "chemical formulators" serving the commercial pools market, but Soren uses wholesale distributors to sell Coracle. Given the slow start in establishing Coracle as a consumer brand, Moritz suspects that the go-to-market strategy may be flawed, but she is unsure where the problem lies; she examines channel strategy, distribution partners, the Coracle pricing scheme, the threat of competitors' offerings, and other potential problem sources.

Atlantic Computer: A Bundle of Pricing Options

Business to business; Marketing; Pricing; Pricing strategy

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Atlantic Computer, a leading player in the high-end server market, has detected a marketplace opportunity in the basic server segment. They have developed a new server, the Tronn, to meet the needs of this segment. In addition, they have created a software tool, called the "Performance Enhancing Server Accelerator," or PESA, that allows the Tronn to perform up to four times faster than its standard speed. The central question revolves around how to price the Tronn and PESA.

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Metabical: Pricing, Packaging, and Demand Forecasting for a New Weight-Loss Drug

Brands; Consumer behavior; Demand planning; Forecasting; Marketing strategy; Pricing policies; Return on investment

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Metabical is a new weight loss drug from Cambridge Sciences Pharmaceuticals intended for moderately overweight individuals. In anticipation of final FDA approval, the senior director of marketing, Barbara Printup, prepares for the product launch and must make several critical decisions. First, she must select the optimal packaging size for the drug, which typically requires a 12-week course of treatment. Next, she must determine the appropriate pricing.

Since most insurance companies do not cover weight-loss medications, price has a direct impact on the sales forecast.

Natureview Farms

Margins; Market share; Marketing; Marketing channels; Pricing; Quantitative analysis; Sales promotions; Value chains

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Explores channel management issues in the U.S. food industry. The immediate decision point that the protagonist, Natureview's vice president of marketing, faces is whether to achieve $7 million in revenue growth by expanding into the supermarket channel.

IKEA Invades America

Brands; Catalogs; Consumer marketing; Market research; Marketing campaigns; Marketing strategy; Packaging; Pricing; Product management; Suppliers; Target markets

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In 2002, the IKEA Group is the world's top furniture retailer, with 154 stores worldwide. In the United States, IKEA operates 14 stores, all of which have been enormously popular despite their self-service requirements. The company's goal is to have 50 stores in operation in the United States by 2013.

Explores various options for managing this growth strategy.

Building a Social Media Culture at Dell

Marketing; Marketing strategy; Social media; Technology

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As Michael Dell refocuses his newlyprivate company on services and solutions, the entire corporation is pushed to embrace social media.

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Designs by Kate: Direct Sales

Compensation; Consumer marketing; Direct sales; Incentive programs; Incentives; Marketing management; Marketing strategy; Personal selling; Sales compensation; Sales force management; Sales organization

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The sales representatives at Designs by Kate (DBK) sell private label jewelry at hosted parties and through online social media channels. They are also responsible for recruiting, training, and managing new sales reps. CEO and founder Kate Creevey designed the commission plan to encourage sales reps to build teams and become "leaders" for their teams. The strategy has been very successful over the company's first five years. Now the CEO is concerned that growth in topline revenue is slowing, possibly due to an unwillingness by current sales representatives to build and manage their own sales teams.

Sepora Direct: Investing in Social Media, Video, and Mobile

Budget management; Communication strategy; Election 2008; Internet marketing; Marketing; Return on investment

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Julie Bornstein, senior vice president of Sephora Direct, is seeking to double her budget for social media and other digital marketing initiatives for 2011.

A number of digital efforts implemented in the past two years seem to be bearing fruit, and there is a desire to intensify Sephora's social media, online video, and mobile presence. Bornstein must justify the need for the additional funding, determine how best to allocate the money across the various platforms, and establish effective ways to measure return on investment (ROI) for digital marketing spending. She must also take into account that the funding requested will likely come at the expense of Sephora's traditional marketing programs. Importantly, Bornstein needs to begin thinking about a cohesive long-term strategy that clearly identifies the role digital platforms play and how they help Sephora maintain its leadership position in the prestige beauty care space.

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Patagonia Sur: For-Profit Land Conservation in Chile

Capital; Energy; Entrepreneurship; Finance; Institutional investments; Real estate investments; Risk; SWOT analysis; Uncertainty

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Warren Adams founded Patagonia Sur in 2007 as one of the world's first forprofit land conservation businesses. His goal was to purchase over 100,000 acres of land in southern Chile and to run a variety of sustainable businesses to generate annual returns for investors.

Patagonia Sur planned to derive various streams of revenue from the land, including eco-tourism, sustainable land development, carbon credits, water rights, and ecobrokerage, thereby giving a financial return to investors on top of achieving a positive environmental impact.

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MARKETING MANAGEMENT FALL SEMESTER Instructor: Email:

Website:

Campus:

OFFICE HOURS Or by Appointment at Either Location Course Credits: 3 (Three) Class:

REQUIRED MATERIALS Marketing Management, 16th edition, by Kotler/Keller/Chernev, Pearson Education, Inc. 2022, ISBN 0-13-588715-1 and Harvard Case Coursepack.

COURSE PREREQUISITES:

COURSE DESCRIPTION The characteristics and management of markets are described in topics that include the marketing environment, components of the marketing mix, market segmentation, and planning.

COURSE PERSPECTIVE The course focuses on formulating and implementing marketing management strategies and policies, a task undertaken in most companies at the strategic business unit level. The marketing management process is important at all levels of the organization, regardless of the title applied to the activity. Typically it is called corporate marketing, strategic marketing, or marketing management. For our purposes, they all involve essentially the same process, even though the actors and activities may differ. The course will provide you with a systematic framework for understanding marketing management and strategy.

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Accordingly, the course emphasizes the following: • • • •

Primary and changing perspectives on marketing management in the New Economy.

The impact of interactive media on marketing management.

Applied marketing management and strategy, domestic and global.

An international focus in developing marketing management and strategy.

The course is intended for: • •

Marketing concentration students who wish to deepen their understanding of marketing management in a strategy-planning context.

Non-marketing concentration students who desire a course in marketing strategy, with a management and planning orientation.

COURSE GOALS To further disseminate and develop the knowledge and skills in the essential aspects of marketing management, marketing strategy, and emerging marketing applications, with a focus on the development and execution of programs, audits, and plans.

COURSE OBJECTIVES This course is concerned with the development, evaluation, and implementation of marketing management in complex environments. The course deals primarily with an in-depth analysis of a variety of concepts, theories, facts, analytical procedures, techniques, and models. The course addresses strategic issues such as: • • • • • • • •

What business should we be in?

What are our long-term objectives?

What is our sustainable marketing competitive advantage?

Should we diversify?

How should marketing resources be allocated?

What marketing opportunities and threats do we face?

What are our marketing organizational strengths and weaknesses?

What are our marketing strategic alternatives?

To ensure that students have a solid foundation of the fundamental marketing decision-making tools and management of all the elements of the marketing plan, students will be provided the opportunity to apply those marketing planning and decision-making skills to case analyses. We will be building upon these principles throughout this course, especially those principles that you have learned in Marketing MAR XXX. CS-17 Copyright © 2022 Pearson Education, Inc. Browsegrades.net

Case-Oriented Syllabus

LEARNING OBJECTIVES To become familiar with the range of decisions implicit in strategic marketing management and planning. In addition, to develop skill in using a variety of analytical frameworks for making such decisions. To develop an understanding of how markets contrast in terms of: • •

Their ―enduring characteristics.‖ Their stage of development and how the nature of competition in such markets is impacted.

To develop skills in planning a variety of marketing management tools, ranging from new product entry strategy to international market product life cycle management and strategy.

To develop skill in organizing for effective strategic marketing and in implementing the market planning process.

COURSE STRUCTURE Case Analyses An effective way to help students learn about marketing management is through practice making marketing decisions and applying the concepts you have learned. Case analyses throughout the semester will help you gain experience with marketing decision making. Everyone will read and come prepared to discuss each case. In the second half of the semester, you will work with a team to present a case and submit a written analysis of the case you present.

Chapter Material Exams In addition to the cases, we will have two exams (see schedule). Students are responsible for all of the material covered from the textbook, lectures, outside speakers, and any videos/DVDs shown.

METHOD OF INSTRUCTION The course is highly interactive between the class and the instructor. Through case studies/presentations, problems, and specific company client activities, students will have the opportunity to use the concepts, ideas, and strategies presented in class. Problem-solving sessions occur in both individual (primarily) and team (occasionally) settings.

This upper level undergraduate course will incorporate a lecture and case-based approach to marketing management. The textbook used in this course will be used as a reference point for the discussion(s) of the marketing management project. Students are encouraged to read and inculcate the major principles found in the textbook.

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To ensure compliance with the University‘s policy on academic performance, during examination periods, once one student completes his/her exam, no additional student(s) will be allowed to enter the classroom to take the exam.

•

Cell phones, calculator watches, and/or tablets cannot be used as calculators during exams. Students must have a separate business calculator.

Note that occasionally, changes in the schedule of the course, or in the assignments, are announced during class. It is your responsibility to ensure that you have received all of the changes and you will still be responsible for this information.

The University is committed to a policy of honesty in academics. Conduct, which compromises a breach of this policy, may result in academic and/or disciplinary action. Cheating is a violation of student academic behavior standards. Any student who violates or knowingly helps another student violate academic behavior standards will be pursued through the Office of the Dean of the College of Business Administration and through the Dean of Students at .

Please note that the sharing of information with other class members or with other sections of the course is considered cheating.

I will make all the necessary accommodations for class members with disabilities. Those students who require or who wish to request special accommodations are encouraged to contact the instructor after the first class of the semester and Student Disability Services immediately.

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Case-Oriented Syllabus

EVALUATION Evaluation will be based on two examinations, the submission of all of the marketing plan material, and your final group oral and written presentation. Exams # 1 and # 2 (the final exam) will consist of: 50-75 multiple choice, true/false, and short-answer questions. You will need a Brown Scantron and a University ID card or driver‘s license.

The weightings for the individual components are as follows: 1) Exam # 1 @ 100 points 2) Exam # 2 @ 100 points 3) Submitted case analyses (due at time stated in schedule) 4) Oral case presentations 5) Written case submission Total:

100 points 100 points 150 points 100 points 150 points 600 points

Grading for this course is as follows: Numerical Grade Letter Equivalent 540 – 600 points

A

450 – 539 points

B

360 – 449 points

C

270 – 359 points

D

Below 270 points

F

NOTE: Grades of C- or lower do not count toward a Business Degree.

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CASE PRESENTATION’S ORAL PRESENTATION RUBRIC Individual presentations will be graded based upon the following set of criteria: •

Content (45 possible points) Included here is whether the student has substantially and fully examined all of the issues and problems, and understands all aspects of the facts of the case. Does the student fully understand the dynamics of the case and have they presented realistic alternatives, realistic objectives, and sound implementation strategies.

•

Presentation itself (30 possible points) Included here are the layout, content, and readability of the slides or other forms for electronically presenting the material. Encompasses the applicable Excel® slides, a situation analysis, problem definitions, alternatives, and recommendations. Also takes into account the professionalism of the presenters.

•

Completeness (25 possible points) Includes the correctness of answering questions from the instructor and/or audience members, as well as preparation by the student member of all of the relevant facts, figures, assumptions, recommendations, and strategies of the student.

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Case-Oriented Syllabus

TENTATIVE COURSE SCHEDULE MARKETING MANAGEMENT FALL SEMESTER Week 1

Read Chapter 1

Chapter Topic

2

2

Market Planning and Management

2 3 3 4

3 4 5 6

4

7

5 5 6 6

8 9 10

Analyzing Consumer Markets Analyzing Business Markets Conducting Market Research Identifying Market Segments and Target Customers Crafting a Value Proposition and Positioning Exam 1 Designing and Managing Products Designing and Managing Services Building Strong Brands

7

11

7 8

12 13

8 9

14 15

10 11

16 17

12 13 14 14 14

18 19 20 21 n/a

15

n/a

Defining Marketing for the New Realities

Managing Pricing and Sales Promotion Managing Marketing Communications Designing an Integrated Marketing Campaign in the Digital Age Personal Selling and Direct Marketing Designing and Managing Distribution Channels Managing Retailing Driving Growth in Competitive Markets Developing New Market Offerings Building Customer Loyalty Tapping into Global Markets Socially Responsible Marketing

Final Exam (Exam 2)

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Assignment Due Beginning of Class Group formation; begin the process of selecting the case you will write up and present Submit groups and cases for approval Case 1 Case 5 Case 6 Case 3 Case 8

select

Case 9 Exam 1, Chapters 1-7 Case 12 Case 13 Case 10 Case 15 Case 19 Case 20 Case 21 Case 16 Case 17 Case 11 Case 14 Case 4 Case 7 Case 22 Case Presentations and Write Ups Due (Selected Cases) Chapters 8-23 (inclusive)

CHAPTER

2

MARKETING PLANNING AND MANAGEMENT

LEARNING OBJECTIVES After studying this chapter, you should be able to: 2.1 Identify the key tasks required for company and business unit planning.

2.2 Describe the process of developing a market offering.

2.3 Explain the process of marketing planning.

2.4 Describe the key components of an actionable marketing plan.

2.5 Explain how and when to modify the marketing plan.

CHAPTER SUMMARY 1. Market-oriented strategic planning is the managerial process of developing and maintaining a viable fit between the organization‘s objectives, skills, and resources and its changing market opportunities. The aim of strategic planning is to shape the company‘s businesses and products so that they yield target profits and growth. Strategic planning takes place on three levels: corporate, business unit, and market offering.

2. The corporate strategy establishes the framework within which the divisions and business units prepare their strategic plans. Setting a corporate strategy means defining the corporate mission, establishing strategic business units (SBUs), assigning resources to each, and assessing growth opportunities.

3. Strategic planning for individual business units includes defining their mission, analyzing external opportunities and threats, analyzing internal strengths and weaknesses, and crafting market offerings that will enable the company to achieve its mission.

4. Marketing planning and management can occur on two levels. They can focus on analyzing, planning, and managing the company (or a specific business unit within the company), or they can focus on analyzing, planning, and managing one or more of the company‘s offerings.

5. From the point of view of designing a particular offering, marketing planning is a process defined by five main steps: setting a goal, developing the strategy, designing the tactics, defining the implementation plan, and identifying the control metrics to measure progress toward the set goal. These five steps constitute the G-STIC framework, which is the backbone of market planning.

6. The goal identifies the ultimate criterion for success that guides all company

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Case-Oriented Syllabus

marketing activities. Setting a goal involves identifying the focus of the company‘s actions and defining the specific quantitative and temporal performance benchmarks to be achieved. A company‘s ultimate goal is translated into a series of specific market objectives that stipulate the market changes that must occur in order for the company to achieve its ultimate goal.

7. The strategy delineates the value created by the company in a particular market; it is defined by the company‘s target market and its value proposition for this market. The target market defines the offering‘s target customers, collaborators, company, competitors, and context (the Five Cs). The value proposition specifies the value that an offering aims to create for the relevant market entities— target customers, the company, and its collaborators.

8. The tactics outline a set of specific activities employed to execute a given strategy. The tactics define the key attributes of the company‘s offering: product, service, brand, price, incentives, communication, and distribution. These seven tactics are the means that managers have at their disposal to carry out a company‘s strategy.

9. The implementation plan lays out the logistics of executing the company‘s strategy and tactics. This involves developing the resources necessary to implement the company‘s offering, developing the actual offering that will be introduced in the market, and deploying the offering in the target market.

10. The control delineates the criteria for evaluating the company‘s goal progress and articulates a process for analyzing the changes in the environment in which the company operates, in order to align the action plan with market realities.

11. The marketing plan can be formalized as a written document that communicates the proposed course of action to relevant entities, such as company employees and stakeholders, and is the G-STIC framework, which is complemented by an executive summary, a situation overview, and a set of relevant exhibits. To be effective, the marketing plan must be actionable, relevant, clear, and succinct. Once developed, marketing plans must be updated to remain relevant.

12. To ensure that its marketing plan is adequately implemented, a company must periodically conduct a marketing audit to identify overlooked opportunities and problem areas and to recommend a plan of action to improve the company‘s marketing performance.

OPENING THOUGHT This introduces several perspectives on planning and describes how to draw up a formal marketing plan. The formal marketing plan sample is an excellent resource because it provides an overview of the types of decisions a marketer might make in an effort to create customer value. Provide sufficient class time covering the distinctions between strategy and tactics. The development of a marketing plan can be greatly facilitated by following a logical structure that enables the reader to understand the company‘s goals, the specific activities that the company intends to undertake, and the rationale for the proposed course of action.

TEACHING STRATEGY AND CLASS ORGANIZATION PROJECTS

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1. For the semester-long project, with this chapter, we continue the formation of groups; first presentation of “product” to instructor for approval; review of process; and calendar of “due dates.”

2. Students should be encouraged to review selected companies’ annual reports to collect from these reports the corporations’ mission statements, strategy statements, and target market definitions. The collected material can be discussed in class, comparing the company’s overall business, marketing, and customer strategies.

ASSIGNMENTS Each student is in effect a “product.” Like all products, you (they) must be marketed for success. Have each of your students write their own “mission statement” about their career and a “goal statement” of where they see themselves in 5 years, 10 years, and after 20 years.

Have students read Jon R. Katzenbach and Douglas K. Smith, The Wisdom of Teams: Creating the High-Performance Organization (Boston: Harvard Business School Press, 1993); Hammer and Champy, Reengineering the Corporation, and report on their findings in a written and/or oral presentation.

Select a local firm or have the students select firms with which they are familiar (current employers or past employers, for example) and have them answer the questions posed in Figure 2.8 regarding the organization of the marketing plan.

Make sure the students are specific in their answers.

As a group presentation project, have the students read: Peter Lorange and Johan Roos, Strategic Alliances: Formation, Implementation and Evolution (Cambridge, MA: Blackwell, 1992); Jordan D. Lewis, Partnerships for Profit: Structuring and Managing Strategic Alliances (New York: The Free Press, 1990); and John R. Harbison and Peter Pekar, Smart Alliances: A Practical Guide to Repeatable Success, (San Francisco, CA: Jossey-Bass, 1998); then have each group present their findings.

END-OF-CHAPTER SUPPORT Marketing Spotlight: Google 1. What is Google‘s core business? What are the pros and cons of managing a diverse portfolio of businesses?

Suggested answer: Google came to dominate search and online advertising thanks to its ability to collect and process enormous amounts of data from the internet and make them useful. It used this capability to provide consumers and businesses alike with the information they needed. By applying its computer science and design skills to new problems, Google helped users get things done more efficiently and effectively. Google has grown into a multinational company with almost $100 billion in revenue, almost 90 percent of which is from advertising. So far, though, Google‘s dependence on advertising revenue hasn‘t hurt growth; however, Google, like other big tech companies, faces scrutiny and lawsuits worldwide over privacy issues and censorship questions. Is Google beholden to the views of its advertisers? Doing internet research, students can update this issue.

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Case-Oriented Syllabus

2. With a portfolio as diverse as Google‘s, what are the company‘s core brand values?

Suggested answer: Google‘s brand values are stated in its corporate mission statement: ―To organize the world‘s information and make it universally accessible and useful.‖ By applying its computer science and design skills to new problems, Google helps users get things done more efficiently and effectively. Google applies its expertise to existing categories to create a superior product offering. Google has moved into many categories over its short lifetime, but all of its products are drawn together by the company‘s desire to harness the power of data to create better customer experiences.

3. What‘s next for Google? Where should the company focus its resources?

Suggested answer: In an effort to continue innovating, Google has invested heavily in machine learning and artificial intelligence. These rapidly developing technologies offer the company a way to automatically sift through ever-increasing amounts of data to extract useful information.

Google sees the further development of AI capabilities as pivotal to its future growth. Google aims to create a more varied range of income streams from its investments in sectors like cloud computing, hardware, and artificial intelligence.

Students can discuss where Google should focus its resources.

Marketing Spotlight: Zappos 1. How does Zappos create value for its customers?

Suggested answer: Zappos has made customer service one of its core competencies. CEO Tony Hsieh believes that a strong customer-service experience leads to lasting customer loyalty. In addition, instead of viewing the lifetime value of a customer as a fixed amount, Zappos‘s management believes that the value of a customer can grow because of excellent customer service.

2. What are the key aspects of Zappos‘s corporate culture?

Suggested answer: Zappos places high priority on its customer call team compared to other retailing companies. Zappos‘s scrupulous hiring process and its approach of teaching the ten core values to new call and e-mail center employees have resulted in a highly rated customer service experience. Zappos‘ employees do not work from a script and use their own judgment to determine what is needed to make the customer satisfied. Employees are not forced to ask supervisors for permission about delivering the ―WOW‖ factor and are known to go above and beyond for customers at their own discretion.

3. Can a company stay profitable by being customer-centric? Is Zappos‘s business model sustainable?

Suggested answer: Zappos has been able to stay profitable by being customer-centric; however, its business model has evolved. Since 2009, Zappos has operated as a subsidiary of Amazon and brings in over $1 billion in revenue every year. Amazon acquired Zappos because of its one-of-a-

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kind company culture and its dedication to customer service, which are both valuable assets.

Recognizing this, Amazon has allowed Zappos to operate as an independent entity and to maintain its customer-centric culture.

DETAILED CHAPTER OUTLINE Opening Vignette: Slack offers an unstructured environment where employees can share, collaborate, and see what everyone else is working on. It makes conversation threads easy to search, and customized notifications let users concentrate on tasks without missing something relevant. The features that set Slack apart from similar apps are its speed, functionality, and userfriendly interface. Marketers must prioritize strategic planning in three key areas: managing the company‘s businesses as an investment portfolio, assessing the market‘s growth rate and the company‘s position, and developing a viable business model.

I. Corporate Business Unit Planning and Management (See Fig. 2.1) A. Defining the Corporate Mission i. The company must develop a game plan for achieving the long-run objectives of each business unit. ii. Marketing planning and management can occur on three different levels: corporate, business unit, and specific market offering. iii. A mission is a clear, concise, and enduring statement of the reasons for an organization‘s existence. Often called its core purpose, a company‘s mission is a long-term goal with a shared sense of purpose, direction, and opportunity. iv. Good mission statements have five major characteristics.

• They focus on a limited number of specific goals.

• They stress the company‘s major policies and values.

• They define the major markets that the company aims to serve.

• They take a long-term view.

• They are as short, memorable, and meaningful as possible.

B. Building the Corporate Culture i. Creating a viable corporate culture is often the key to market success. ii. Corporate culture is defined as ―the shared experiences, stories, beliefs, and norms that characterize an organization.‖ Walk into any company and the first thing that strikes you is the corporate culture—the way people dress, talk to one another, and greet customers.

C. Defining Strategic Business Units i. Established using three characteristics • Single business or collection of related businesses that can be planned separately from the rest of the company • Own set of competitors • Manager responsible for strategic planning and profit performance and controls most factors affecting profit ii. A specialized portfolio involves SBUs with fairly narrow assortments consisting of one or a few product lines. iii. A diversified portfolio involves SBUs with fairly broad assortments CS-27 Copyright © 2022 Pearson Education, Inc. Browsegrades.net

Case-Oriented Syllabus

containing multiple product lines. iv. The purpose of identifying the company‘s strategic business units is to develop separate strategies and assign appropriate funding.

D. Allocating Resources Across Business Units i. Once it has defined its SBUs, management decides how to allocate corporate resources to each unit. This is done by assessing each SBU‘s competitive advantage and the attractiveness of the market in which it operates. ii. Portfolio management focuses on two types of factors: (1) opportunities presented by a particular industry or market and (2) the company‘s resources, which determine its ability to take advantage of the identified opportunities. iii. A key aspect in developing portfolio models involves identifying the metrics underlying the performance of a given business unit.

II. Developing Market Offerings i. Strategy involves choosing a well-defined market in which the company will compete and determining the value it intends to create in this market. ii. Tactics, also called the marketing mix, make the company‘s strategy come alive.

A. Developing The Marketing Strategy i. Identifying the Target Market. The target market in which a company aims to create and capture value comprises five factors: • customers whose needs the company intends to fulfill • competitors that aim to fulfill the same needs of the same target customers • collaborators that help the company fulfill the needs of customers • company that develops and manages the offering • context that will affect how the company develops and manages the offering ii. The 5-C Framework (See Fig.2.2) B. The 5 Cs and the Five Forces of Competition i. The Five-C framework is similar to the Five Forces framework originated

by Michael Porter. ii. The Five Forces framework identifies industry competitiveness according to five factors: the bargaining power of suppliers, the bargaining power of buyers, the threat of new entrants, the threat of substitutes, and rivalry among existing competitors. iii. The 5-C framework, on the other hand, defines the market based on customer needs rather than on the industry in which the company competes. iv. Developing a Value Proposition. A successful offering must create superior value not only for target customers but also for the company and its collaborators. See Fig.2.3.

• Customer value is the worth of an offering to its customers and hinges on customers‘ assessment of how well an offering fulfills their needs.

• Collaborator value is the worth of an offering to the company‘s collaborators.

• Company value is the worth of the offering to the company. v. The term optimal value means that the value of the offering is connected across the three entities, to create value for target customers and

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collaborators and enable the company to achieve its strategic goals.

C. Designing the Marketing Tactics i. The market offering is the actual good that the company deploys in order to fulfill a particular customer need. ii. Marketing managers have seven tactics at their disposal to develop an offering that creates market value: product, service, brand, price, incentives, communication, and distribution. iii. Called the marketing mix, these attributes represent the combination of activities required to transform the market offering‘s strategy into reality.

See Fig. 2.4. iv. The seven marketing tactics can be regarded as a process of designing, communicating, and delivering customer value. See Fig. 2.5.

D. The Seven Ts and The Four Ps i. Four decision areas are represented by the Four Ps: product, price, promotion, and place. Because it is simple, intuitive, and easy to remember, the 4-P framework enjoys wide popularity. ii. Because of that very simplicity, the 4-P framework has significantly limited relevance in the contemporary business environment. iii. The 7-T marketing mix represents a more refined version of the 4-P framework, offering a more accurate and actionable approach to designing a company‘s offering.

E. Creating a Market Value Map i. A market value map can be thought of as a visual representation of the key components of a company‘s business model and the ways in which they are related to one another. ii. The value proposition component of the market value map is central to ensuring the viability of the company‘s business model. See Fig. 2.6.

III. Planning and Managing Market Offerings A. The G-STIC Approach to Action Planning i. Five key activities guide the development of an action plan. These activities include setting a goal, developing a strategy, designing the tactics, defining an implementation plan, and identifying a set of control metrics to measure the success of the proposed action. ii. The G-STIC (Goal-Strategy-Tactics-Implementation-Control) framework comprises these five activities and acts as the lynchpin of marketing planning and analysis.

B. Setting a Goal (See Fig. 2.7) i. Defining the Goal Focus. The goal‘s focus defines the desired outcome of the company‘s activities, an important criterion of a firm‘s success. Based on their focus, goals can be monetary or strategic. ii. Defining Performance Benchmarks. Quantitative and temporal performance benchmarks work in tandem to provide the measurements that track the progress of the company toward reaching its established goal.

C. Developing the Strategy i. The strategy denotes the value that the company intends to create in a particular market and includes the company‘s target market and its value CS-29 Copyright © 2022 Pearson Education, Inc. Browsegrades.net

Case-Oriented Syllabus

proposition for this market.

D. Designing the Tactics i. Implementation is a direct outcropping of the company‘s strategy and tactics. ii. Implementation consists of three key components: development of the company resources, development of the offering, and commercial deployment of the offering.

E. Identifying Controls i. Controls have one primary function: to inform the company whether it should stay with its current course of action, modify the underlying strategy and tactics, or completely abandon its current course of action and develop an offering that better reflects the realities of the market. ii. Controls have two key components: evaluating the company‘s performance and monitoring the market environment.

IV. Developing A Marketing Plan A. The marketing plan serves three main functions: It describes the company‘s goal and proposed course of action, informs the relevant stakeholders about the goal and action plan, and persuades the relevant decision makers of the viability of the goal and the proposed course of action. See Fig. 2.8. i. Marketing plans typically start with an executive summary followed by a situation overview. ii. The core of the marketing plan is contained in the key elements of the GSTIC framework that delineate the company‘s goal and the course of action it proposes.

V. Modifying the Marketing Plan A. Updating the Marketing Plan i. The marketing plan requires updating when the company‘s current course of action is altered. ii. A common reason for updating a company‘s marketing plan is in response to changes in the target market. iii. The key to market success is not only to conceive a viable market plan but also to modify this plan to adapt to market changes.

B. Conducting a Marketing Audit i. A marketing audit is a comprehensive examination of the marketing aspect of an offering or a company‘s marketing department. ii. It is intended to identify overlooked opportunities and problem areas and to recommend a plan of action to improve the company‘s performance. iii. An effective marketing audit should be comprehensive, systematic, unbiased, and periodic. iv. The key difference between the marketing audit and the marketing plan is that the marketing plan faces forward toward the future and plots a course of action that the company should undertake. v. The marketing audit consolidates the company‘s past, present, and future by examining the company‘s current and past performance to determine the right course to ensure its future.

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ANALYZING CONSUMER MARKETS

CHAPTER

3

LEARNING OBJECTIVES After studying this chapter, you should be able to: 3.1 Identify the key factors that influence consumer behavior.

3.2 Explain the role cultural, social, and personal factors play in consumer behavior.

3.3 Explain how consumers‘ needs, emotions, and memory influence their behavior.

3.4 Illustrate the key stages of the buying decision process.

CHAPTER SUMMARY 1. To successfully compete in the market and create customer value, managers must fully understand both the theory and the reality of consumer behavior.

2. Consumer behavior is influenced by three factors: cultural, social, and personal.

Research into these factors can provide clues to help companies reach and serve consumers more effectively. Of these, cultural factors exert the broadest and deepest influence on people‘s perceptions and desires and on how they go about fulfilling their needs and wants.

3. Four main psychological processes that affect consumer behavior are motivation, perception, learning, and memory.

4. Understanding consumer motivation begins with understanding the needs that consumers aim to fulfill with their actions. Some needs are biological and arise from physiological states of tension such as hunger, thirst, or discomfort. Other needs are CS-31 Copyright © 2022 Pearson Education, Inc. Browsegrades.net

Case-Oriented Syllabus

psychological and arise from psychological states of tension such as the need for recognition, esteem, or belonging. A need becomes a motivation when it is aroused to a sufficient level of intensity to drive us to act. Motivation has both direction and intensity.

5. Perception is the process by which we select, organize, and interpret information inputs to create a meaningful picture of the world. In marketing, perceptions are more important than reality because they affect consumers‘ actual behavior. People emerge with different perceptions of the same object because of three perceptual processes: selective attention, selective distortion, and selective retention.

6. Consumer response is not all cognitive and rational; much may be emotional and evoke different kinds of feelings. Emotions are mental states that arise spontaneously rather than from conscious effort and reflect people‘s positive or negative reactions to internal and external stimuli.

7. Memory—the brain‘s ability to record, store, and retrieve information and events—plays an important role in consumers‘ purchasing decisions. There are two types of memory: short-term memory—a temporary and limited repository of information—and long-term memory—a more permanent, potentially unlimited repository. The associative network model views long-term memory as a set of nodes and links. Nodes are stored information connected by links that vary in strength.

8. The typical buying process consists of the following sequence of events: problem recognition, information search, evaluation of alternatives, purchase decision, and postpurchase behavior. Consumers will not necessarily go through the buying process in an orderly fashion: they may skip and reverse stages and alternate between shopping online and offline. The marketers‘ job is to understand the buyer‘s behavior at each stage.

9. Consumers are constructive decision makers and are subject to many contextual influences. They often exhibit low involvement in their decisions, using many heuristics as a result. The attitudes of others and unanticipated situational factors may influence the decision to buy. A consumer‘s decision to modify, postpone, or avoid a purchase decision is heavily influenced by one or more types of perceived risk.

10. Marketers must monitor customer satisfaction and the ways in which customers use the company‘s offerings. Satisfaction is a function of the match between consumer expectations and the product‘s perceived performance. Monitoring satisfaction is important because it reflects the value customers receive from the company‘s offering.

Examining customers‘ postpurchase behavior aims to capture the use and disposal of the offering both to detect potential problems and to identify new market opportunities.

OPENING THOUGHT This chapter explores the buying dynamics of individual consumers. Adopting a holistic marketing orientation requires fully understanding customers and gaining a 360-degree view of both their daily lives and the changes that occur during their lifetimes to ensure that the right products are marketed to the right customers in the right way at the right time.

This chapter perhaps might be the most difficult of all for some to grasp as it delves into psychological theories surrounding our understanding of our own minds. It can be, however, an interesting one for class discussions as it opens up and fosters student participation (as

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consumers). This is a good chapter for such discussions on how students buy, what they buy, how they buy, and so forth.

Students new to marketing or new to psychology as a science need a full and comprehensive review of the theories and ideas expressed in this chapter. The instructor is encouraged to spend a great deal of class time with the four main psychological processes outlined in this chapter: motivation, perception, learning, and memory. Repeated review of the key terms and definitions presented in this chapter is necessary for complete student understanding and knowledge of these concepts.

The second challenge found in this chapter is that of the consumer buying process. It has been shown to be helpful to have the students talk about their buying processes for goods or services that are of interest to them and to then outline these processes on the blackboard. Having the students ―talk through‖ how they buy and then relating these actions to the steps in the consumer buying process seems to make these concepts easier for them to understand and accept. The instructor is encouraged to spend a great deal of class time on the concepts of the consumer buying process and the necessity of marketers to fully understand their consumers‘ preferences and motivations as it forms the basis of all marketing strategies and concepts.

1.

2.

TEACHING STRATEGY AND CLASS ORGANIZATION PROJECTS At this point in the semester-long marketing project, students should present their definitive data on the consumer for the product/service, including all demographic and other pertinent information obtained, and prepare for instructor‘s approval.

A consumer products company ―knows‖ its consumers—it has to in order to be competitive and to market successfully. During the course of the semester, students should choose a consumer product (one sold in supermarkets, mass-merchants, or in drugstores) and contact the manufacturer regarding their definitions, characteristics, demographics, etc. of their consumer. Students should identify themselves as students working on a marketing research project, and for this assignment it may be necessary for the instructor to write an introduction letter on official school letterhead. Students should be ready to present their findings during the latter part of the semester.

ASSIGNMENTS Students should be assigned to survey their local business environment (city, town, campus area) and collect examples of how local area businesses are trying to capture cultural market segments.

For example, the students should collect information regarding the number of cultural restaurants in the area and then compare these numbers to the total amount of eating establishments and the percentage of the population that is of that ethnicity. How do the numbers compare, contrast, and what marketing strategies do they hint at?

Consumers often choose and use brands that have a brand personality consistent with their own actual self-concept, ideal self-concept, or others self-concept. Have the students review their recent purchases of a car, computer, furniture, or clothing and ask them to comment on why they CS-33 Copyright © 2022 Pearson Education, Inc. Browsegrades.net

Case-Oriented Syllabus

purchased this product, who influenced their purchase, and what this purchase says about their own self-concept ideas. What is their definition of the ―brand personality‖ of this recent purchase—as compared to the definition stated in the chapter by Stanford‘s Jennifer Aaker?

Figure 3.1 defines the model of consumer behavior. In an examination of each of these segments, ask the students to rank the importance of each of these characteristics in their purchase behavior. For example, under the box entitled Marketing Stimuli, some students will rank price ahead of products and services as their primary stimulus.

Individually, ask each student to select a print advertisement and identify its behavioral, cognitive, and affective parts and have them discuss how they feel reading the advertisement.

We all belong to some sort of reference group. Students that are members of fraternities, sororities, and clubs are influenced by their members and through their participation. Students should investigate (within their own reference group) who the opinion leaders are, how these opinion leaders affect the overall dynamics of the group, and most importantly, how these opinion leaders affect consumption decisions. Answers should be specific in their definitions of how these opinion leaders influence specific consumption/purchase decisions, and students should share their observations with the class.

END-OF-CHAPTER SUPPORT Marketing Spotlight: Mayo Clinic 1. Explain why Mayo Clinic is exceptional at serving patients. What value does Mayo Clinic create for patients?

Suggested answer: Mayo Clinic has been recognized by many third parties for its independent thinking, outstanding service and performance, and core focus on patient care and satisfaction.

The clinic‘s two interrelated core values can be traced back to its founders and are at the heart of all the organization does: placing the patient‘s interests above all others and practicing teamwork. Every aspect of the patient experience is considered at Mayo Clinic‘s three campuses in Rochester, Minnesota; Scottsdale, Arizona; and Jacksonville, Florida. From the moment patients walk into one of Mayo Clinic‘s facilities, they experience something entirely different.

The Mayo Clinic creates value for its patients. It all starts with Mayo Clinic‘s greeters, who welcome new patients into the building and walk them through the administrative process.

Returning patients are greeted by name with a warm smile. The buildings and facilities themselves are designed and built with the needs of patients in mind. One architect explained that the buildings are meant to make ―patients feel a little better before they see their doctors.‖ For example, the lobby of the Mayo Clinic hospital in Scottsdale has an indoor waterfall and a wall of windows overlooking mountains.

2. What are the key points differentiating Mayo Clinic from other hospitals and medical facilities?

Suggested answer: The Mayo Clinic differentiates itself from its competitors through constant research and innovation. In order to come up with ideas, employees in the clinic‘s Center for

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Innovation observe patients, interview families, and conduct research, as well as test and model possible solutions. For example, when Mayo Clinic called for a major room innovation, the Center used prototype exam rooms in a flexible space so employees and patients could test the new layouts and discover the most efficient and patient-friendly environment. The resulting design was called ―Jack and Jill rooms,‖ a concept that separated the exam space from the conversation space. Two conversation rooms are now located on either side of the exam room and accessed by internal doors. This design benefits both patients and physicians, who like having a separate place to talk away from medical tools and equipment and the space to accommodate family members. In addition, physicians found it beneficial not to have furniture in the exam room. The other significant difference between the Mayo Clinic and other hospitals is the Mayo Clinic‘s concept of teamwork in serving patients.

3. Do conflicts of interest exist between wanting to make patients happy and providing the best medical care possible? Why or why not?

Suggested answer: No, the Mayo Clinic is structured to avoid conflicts of interest. For example, Mayo‘s doctors are on salary instead of being paid by the number of patients seen or tests ordered. As a result, patients receive more individualized attention and care, and physicians work together instead of against one another. As one pediatrician at Mayo explained, ―We‘re very comfortable with calling colleagues for what I call ‗curbside consulting.‘ I don‘t have to make a decision about splitting a fee or owing someone something. It‘s never a case of quid pro quo.‖ Teamwork provides the best medical care and helps satisfy patients. Teams of medical professionals work together to diagnose each patient‘s medical problems. This can involve analyzing and debating test results for hours in order to determine the most accurate diagnosis and most effective treatments. Once a team consensus has been reached, the leader meets with the patient and discusses his or her options. Throughout the process, patients are encouraged to take part in the discussion.

Marketing Spotlight: Intuit 1. Why are consumer research and design thinking so critical to Intuit‘s success?

Suggested answer: Intuit‘s recognition that simplicity rather than in-depth accounting analysis is the key to creating customer value stems from its extensive consumer research. Intuit spends a significant amount of time and money—approximately 20 percent of net revenues—on research and development each year. Consumer research helps Intuit understand exactly how customers use and feel about their products amid the fast-paced world of technology, shifting consumer needs, and increased competition. Field researchers can uncover insights from consumers in a variety of ways. Intuit researchers visit users‘ homes or offices to observe exactly how their products are used, what works well, what frustrates consumers, and how the products could be improved. Intuit conducts about 10,000 hours of these visits annually. Intuit also invites consumers to one of its research labs to test out and experiment with the company‘s new products and ideas.

2. What value does Intuit create for its customers?

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Suggested answer: Intuit recognizes that simplicity rather than in-depth accounting analysis is the key to creating customer value. For example, Intuit employees watched younger consumers get frustrated using an Intuit tax software program because they couldn‘t complete their taxes via their mobile device. This frustration and Intuit‘s keen empathy for the consumer led to the development of the tax app SnapTax. 3. What are the challenges Intuit faces in the near future?

Suggested answer: Intuit faces the challenge of making tax preparation as user friendly as possible. Realizing the importance of streamlining the data entry process, Intuit acquired Mint— an online personal finance management service that enables customers to enter their bank password and download all their spending information automatically, eliminating data entry and showing them a pie-chart view of their finances. Understanding that tax preparation is an effortful and highly emotional process, Intuit began to focus not only on software functionality but also on the emotional payoff of reducing effort and speeding up the process by which customers receive their tax refunds.

DETAILED CHAPTER OUTLINE Opening vignette: Marketers must have a thorough understanding of how consumers think, feel, and act and must offer clear value to each and every target consumer. Understanding consumer needs is the key to designing a value proposition that creates value for each and every customer.

One of India‘s fastest growing brands, Patanjali, has achieved phenomenal market success by developing products tailored to the needs of its customers. This chapter explores individual consumers‘ buying dynamics.

I. The Model of Consumer Behavior?

A. Research on consumer behavior explores how individuals, groups, and organizations select, buy, use, and dispose of goods, services, ideas, or experiences to satisfy their needs and wants. i. To create customer value, marketers must fully understand both the theory and the reality of consumer behavior. ii. The starting point for understanding consumer behavior is the model in Fig. 3.1.

II. Consumer Characteristics A. Cultural Factors. A consumer‘s buying behavior is influenced by cultural, social, and personal factors. i. Of these, cultural factors exert the broadest and deepest influence. ii. Culture is the fundamental determinant of a person‘s wants and behavior. iii. Through family and other key institutions, a child growing up in the United States is exposed to values such as achievement and success, activity, efficiency and practicality, progress, material comfort, individualism, freedom, external comfort, humanitarianism, and youthfulness. iv. Marketers must closely attend to cultural values in every country to understand how to best market their existing products and find opportunities for new products.

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v. Each culture consists of smaller subcultures that provide more specific identification and socialization for their members. vi. Subcultures include nationalities, religions, racial groups, and geographic regions. vii. When subcultures grow large and affluent enough, companies often design specialized marketing programs to serve them.

B. Virtually all human societies exhibit social stratification, most often in the form of social classes, relatively homogeneous and enduring divisions in a society, hierarchically ordered and with members who share similar values, interests, and behavior. i. The United States has lower, middle, and upper classes. ii. Social class members show distinct product and brand preferences in many areas.

C. Social Factors. In addition to cultural factors, social factors such as reference groups, family, and social roles and statuses affect our buying behavior. i. A person‘s reference groups are all the groups that have a direct (face-to-face) or indirect influence on their attitudes or behavior such as family, friends, neighbors or coworkers. ii. Individuals may also be influenced by groups to which they do not belong, such as aspirational groups that they hope to join and dissociative groups whose values orbehavior they reject. iii. An opinion leader, or an influencer, is a person who offers informal advice or information about a specific product or product category, such as which of several brands is best or how a particular product may be used. Opinion leaders are often highly confident, socially active, and frequent users of the category. iv. Marketers try to reach them by identifying their demographic and psychographic characteristics, identifying the media they read, and directing messages to them. v. The family, as the most influential primary reference group, is the most important consumer buying organization in society. The family of orientation consists of parents and siblings. Even if the buyer no longer interacts with parents, parental influence on behavior can be a significant determinant of purchases. vi. A more direct influence on everyday buying behavior is the family of procreation— namely, the person‘s spouse and children.

D. Personal Factors i. Personality and Self-concept. Characteristics that influence buyers‘ decisions include their age and stage in the life cycle, occupation and economic circumstances, personality and self-concept, and lifestyle and values. ii. Consumption is shaped by the family life cycle and the number, age, and gender of people in the household at any given time. iii. Psychological life-cycle stages may matter. Adults experience transformations as they go through life, causing their behavior to adapt. iv. Marketers should consider critical life events or transitions—marriage, childbirth, illness, divorce, career change, retirements—as giving rise to new needs. v. Consumers typically choose brands with a brand personality consistent with: 1. their actual self-concept (how we view ourselves), CS-37 Copyright © 2022 Pearson Education, Inc. Browsegrades.net

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2. their ideal self-concept (how we would like to view ourselves), 3. or even on others’ self-concept of us (how we think others see us) vi. Values and Lifestyle. Consumer behavior is guided by a value system—a set of principles and notions of ―right and wrong‖—that determines what is meaningful and important to consumers and how they choose to live and interact with others.

III. Consumer Psychology i. The marketer‘s task is to understand what happens in the consumer‘s consciousness between the arrival of the outside marketing stimuli and the ultimate purchase decisions. ii. Four key psychological processes—motivation, perception, learning, and memory— fundamentally influence consumer responses.

A. Consumer Motivation i. Needs are the basic human requirements, such as air, food, water, clothing, and shelter.

1.

Biological needs arise from physiological states of tension such as hunger, thirst, or discomfort.

2.

Psychological needs arise from psychological states of tension such as the need for recognition, esteem, or belonging. ii. Abraham Maslow theorized that human needs are arranged in a hierarchy from most to least pressing—from physiological needs to safety needs, social needs, esteem needs, and self-actualization needs. See Fig. 3.2. iii. Needs become wants when directed to specific objects that might satisfy the need. iv. Demands are wants for specific products backed by an ability to pay. v. A need becomes a motivation when aroused to a sufficient level of intensity to drive us to act. vi. Another motivation researcher and cultural anthropologist, Clotaire Rapaille, worked on breaking the ―code‖ behind product behavior—the unconscious meaning people give to a particular market offering.

B. Perception i. Perception is the process by which we select, organize, and interpret information inputs to create a meaningful picture of the world. ii. People emerge with different perceptions of the same object because of three perceptual processes: selective attention, selective distortion, and selective retention.

1.

Selective attention: marketers must work hard to attract the notice of consumers.

2.

Subliminal perception: marketers embed covert, subliminal messages in ads or packaging that consumers are not consciously aware of but that affect their behavior.

3.

Selective distortion is the tendency to interpret information to fit our preconceptions.

C. Emotions i. Consumer response is not all cognitive and rational. Many responses may be emotional and evoke different kinds of feelings. ii. Just as products and brands can elicit certain emotions, different emotional states can influence people‘s judgments and decisions. iii. Seeing the emotions of others can also be used as a marketing tool.

D. Memory i. Cognitive psychologists distinguish between short-term memory—a temporary and limited repository of information—and long-term memory—a more permanent, potentially unlimited repository.

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ii. All the information and experiences we encode as we go through life can end up in our long-term memory. iii. Researchers distinguish three types of long-term memory: episodic, semantic, and procedural. iv. Brand associations consist of all brand-related thoughts, feelings, perceptions, images, experiences, beliefs, and attitudes that become linked to the brand node. v. Memory encoding describes how and where information gets into memory. Memory retrieval is the way we reclaim information from memory. vi. Because of selective retention, we‘re likely to remember only the positive aspects of a product we like, forgetting its negative aspects and the good points about competing products.

IV. The Buying Decision Process A. Key consumer behavior questions marketers should ask: Who buys our product or service?

Who makes the decision to buy the product or service?

Who influences the decision to buy the product or service?

How is the purchase decision made? Who assumes what role?

What does the customer buy? What needs must be satisfied?

What wants are fulfilled?

Why do customers buy a particular brand? What benefits do they seek?

Where do they go or look to buy the product or service?

How is our product or service perceived by customers?

What are customers‘ attitudes toward our product or service?

What social factors might influence the purchase decision?

Do customers‘ lifestyles influence their decisions?

How do personal, demographic, or economic factors influence the purchase decision? i. The buying decision process includes all the experiences in learning, choosing, using, and even disposing of a product. ii. The consumer typically passes through five stages: problem recognition, information search, evaluation of alternatives, purchase decision, and postpurchase behavior. iii. Consumers don‘t always pass through all five stages—they may skip or reverse some. iv. The model in Figure 3.3 captures the considerations that arise when a consumer contemplates a new purchase or a high-involvement product that entails functional, psychological, or monetary risk.

B. Problem Recognition i. With an internal stimulus, one of the person‘s normal needs—hunger, thirst, sex—rises to a threshold level and becomes a drive. ii. A need can also be aroused by an external stimulus. iii. Marketers need to identify the circumstances that trigger a particular need by gathering information from a number of consumers so they can then develop marketing strategies that spark consumer interest.

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i. A mild search state is called heightened attention (the consumer becomes more receptive to information about a product). See Fig. 3.4. ii. Active information search includes: looking for reading material, phoning friends, going online, and visiting stores to learn about the product. iii. Major information sources to which consumers will turn fall into four groups: 1.

Personal: Family, friends, neighbors, acquaintances 2.

Commercial: Advertising, websites, emails, salespersons, dealers, packaging, displays 3.

Public: Mass media, social media, consumer-rating organizations iv. The greatest quantity of information is received from commercial sources. v. The most effective information often comes from personal or experiential sources or public sources that are independent authorities. vi. Only the consideration set will meet initial buying criteria.

D. Evaluation of Alternatives i. The consumer is trying to satisfy a need. ii. The consumer is looking for certain benefits from the product solution. iii. The consumer sees each product as a bundle of attributes with varying abilities to deliver the benefits. The attributes of interest to buyers vary by product. iv. Consumers will pay the most attention to attributes that deliver the sought-after benefits. v. Through experience and learning, people acquire beliefs and attitudes that influence buying behavior.

1.

A belief is a descriptive thought that a person holds about something.

2.

Attitude is a person‘s enduring favorable or unfavorable evaluations, emotional feelings, and action tendencies toward some object or idea.

3.

Attitudes economize on energy and thought so they can be very difficult to change.

4.

Information processing. The most current models see the consumer forming judgments largely on a conscious and rational basis.

5.

Consumers will pay the most attention to attributes that deliver the sought-after benefits.

6.

Consumers will expend brainpower, time, and effort only in proportion to the importance of the decision task. vi. The Expectancy-Value Model of attitude formation posits that consumers evaluate products and services by combining their brand beliefs—both positive and negative—according to importance. vii. Strategies to improve attitudes under the Expectancy-Value Model: 1.

Redesign by changing functional attributes, modifying its form, and improving service.

2.

Alter consumers‘ beliefs by better communicating benefits.

3.

Alter beliefs about competitors‘ offerings by communicating its drawbacks.

4.

Alter consumers‘ beliefs about product attributes by persuading buyers to weigh the attributes in which the brand excels.

E. Purchase Decision

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i. (brand

Decision heuristics. A consumer may make as many as five sub-decisions: brand A) , dealer (dealer 2), quantity (one computer), timing (weekend), and payment

method ii.

card).

Non-compensatory models of consumer choice, positive and negative attribute considerations, don‘t necessarily net out. Evaluating attributes in isolation facilitates decision making for consumers, but it also increases the likelihood that they would

have made a different choice if they had deliberated in greater detail. iii. Rather than calculating the perceived importance of every attribute across products in a consideration set, consumers often take ―mental shortcuts,‖ called heuristics or rules of thumb, in the decision process. iv. The elaboration likelihood model, an influential model of attitude formation and change, describes how consumers make evaluations in both low- and high-involvement circumstances. v. Involvement: the elaboration likelihood model 1.

The central route: attitude formation or change stimulates much thought and is based on the consumer‘s diligent, rational consideration of the most important product information.

2.

The peripheral route: attitude formation or change provokes much less thought and results from the consumer‘s association of a brand with either positive or negative peripheral cues.

3.

Consumers follow the central route only if they possess sufficient motivation, ability, and opportunity.

4.

We buy many products under conditions of low involvement and without significant brand differences.

5.

Evidence suggests we have low involvement with most low-cost, frequently purchased products. vi. Marketers use four techniques to try to convert a low-involvement product into one that encourages higher involvement. Four techniques to try to convert a low-involvement product into one of higher involvement: 1.

They can link the product to an engaging issue; 2.

They can link the product to a personal situation; 3.

They might design advertising to trigger strong emotions related to personal values or ego defense; 4.

They might add an important feature. vii. Intervening Factors: Attitudes of others can intervene in the purchase process if the other person‘s negative attitude toward our preferred alternative is intense and our motivation to comply with the other person‘s wishes is high. See Fig. 3.5. viii. The second intervening factor involves the situational considerations that may erupt to change the purchase intention. ix. A consumer‘s decision to modify, postpone, or avoid a purchase decision is heavily influenced by one or more types of perceived risk.

1.

Functional risk—The product does not perform to expectations.

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2.

Physical risk—The product poses a threat to the physical well-being or health of the user or others.

3.

Financial risk—The product is not worth the price paid.

4.

Social risk—The product results in embarrassment in front of others.

5.

Psychological risk—The product affects the mental well-being of the user.

6.

Time risk—The failure of the product results in an opportunity cost of finding another satisfactory product.

F. Postpurchase Behavior i. Postpurchase Satisfaction is a function of the closeness between expectations and the product‘s perceived performance.

1.

Some consumers magnify the gap when the product isn‘t perfect and are highly dissatisfied; others minimize it and are less dissatisfied.

2.

A satisfied consumer is more likely to purchase the product again and will also tend to say good things about the brand to others.

3.

Dissatisfied consumers may abandon or return the product. They may seek information that confirms its high value.

4.

They may take public action by complaining to the company, going to a lawyer, or complaining directly to other groups (such as business, private, or government agencies) or to many others online.

5.

Private actions include deciding to stop buying the product (exit option) or warning friends (voice option). ii. Postpurchase communications to buyers have been shown to result in fewer product returns and order cancellations. iii. Marketers should also monitor how buyers use and dispose of the product.

CHAPTER

4

ANALYZING BUSINESS MARKETS

LEARNING OBJECTIVES After studying this chapter, you should be able to: 4.1 Explain the key aspects of the organizational buying process.

4.2 Define the role of the buying center in an organization.

4.3 Describe the stages of the decision process in business markets.

4.4 Explain how organizations develop marketing programs to attract and retain business customers.

4.5 Describe how business-to-business marketers build and maintain relationships with customers.

CHAPTER SUMMARY

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1. Organizational buying is the decision-making process by which formal organizations establish the need for purchased products and services, then identify, evaluate, and choose among alternative brands and suppliers. The business market consists of all the organizations that acquire goods and services used in the production of other products or services that are sold, rented, or supplied to others.

2. Compared with consumer markets, business markets generally have fewer and larger buyers, a closer customer–supplier relationship, and more geographically concentrated buyers. Demand in the business market is derived from demand in the consumer market and fluctuates with the business cycle. Nonetheless, the total demand for many business goods and services is quite price inelastic.

3. The buying center is the decision-making unit of a buying organization. It consists of initiators, users, influencers, deciders, approvers, buyers, and gatekeepers. To influence these parties, marketers must consider environmental, organizational, interpersonal, and individual factors.

4. Successful business-to-business marketing requires that marketers determine not only the types of companies on which to focus their selling efforts but also whom to concentrate on within the buying centers in those organizations. In developing selling efforts, business marketers can also consider their customers‘ customers, or end users.

5. The buying process consists of eight stages: problem recognition, need description, product specification, supplier search, proposal solicitation, supplier selection, contract negotiation, and performance review. Business marketers must ensure that the value of their offerings comes through at each stage of the buying process.

6. Business-to-business marketers are using a variety of marketing tools to attract and retain customers. They are strengthening their brands and using technology and other communication tools to develop effective marketing programs. They are also using systems selling and are adding services to provide customers added value.

7. Business marketers must form strong bonds and relationships with their customers. Building trust is one prerequisite to enjoying healthy long-term relationships. Trust depends on factors such as the firm‘s perceived competence, integrity, honesty, and benevolence. Business marketers need to be aware of the role of professional purchasers and their influencers, the need for multiple sales calls, and the importance of direct purchasing, reciprocity, and leasing.

8. The institutional market consists of schools, hospitals, retirement communities, nursing homes, prisons, and other institutions that provide goods and services to people in their care.

Buyers for government organizations tend to require a great deal of paperwork from their vendors and to favor open bidding and domestic companies. Suppliers must be prepared to adapt their offers to the special needs and procedures found in institutional and government markets.

OPENING THOUGHT Students unfamiliar with business and business operations will have a difficult time understanding the concept of organizational buying. The major differences between the consumer market and the B2B market lie in the complexity of the decision process and the amount of people involved in the final purchasing decision.

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Instructors can best serve their student audiences by incorporating guest speakers from the business community who are responsible for purchasing products and/or services to help students understand the complexity in the buying process for businesses. Salespeople, who sell to businesses, are also good resources to have as guest speakers when covering this chapter.

Instructors can also use university situations or other common business examples to get across the concept of organizational buying to their students.

TEACHING STRATEGY AND CLASS ORGANIZATION PROJECTS 1. At this point in the semester-long marketing project, no presentations are necessary unless the instructor has approved a business-to-business product or service.

2. Students should compare and contrast the complexity of that buying process to the ones noted in Chapter 3—Analyzing Consumer Markets. How and where are the major points of difference between the two markets in their purchase intensions? Can a firm market its products to both the industrial and consumer markets with one strategy? Are there sufficient differences between markets for different products and strategies to be developed?

ASSIGNMENTS Ad Age recently reported on a study done by B2B which talks about how much of the decisionmaking process occurs in business buying before salespeople are involved: http://adage.com/article/btob/branding-key-filling-sales-pipeline/288911/?btob=1. In small groups or individually, ask the students to interview local business managers/ owners to see: a) how they reach the right customers at the right time, and b) how they build awareness.

Have each of the students read Bob Donath‘s ―Emotions Play Key Role in Biz Brand Appeal,‖ Marketing News, June 1, 2006, p. 7, and comment on their perception of how effective ―biz‖ is in their lives and in their purchasing of products.

Contact your local Pearson Higher Education sales representative and ask him/her to make a presentation to the class on how he/she sells to your college or university.

In small groups (five students suggested as the maximum), have the students visit your college or university‘s Central Purchasing or Procurement Department (you may have to clear this with your administration before assigning). Have the students conduct interviews with purchasing personnel on how they buy, who is involved in a purchase decision, and what characteristics the best salespeople who call on them share. Students should format their questions to the key concepts contained in this chapter. Student reports should also characterize the differences found between government or institutional buying, business-to-business buying, and consumer purchasing.

To improve effectiveness and efficiency, business suppliers and customers are exploring different ways to manage their relationships. Have the students visit each of the company‘s

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websites mentioned throughout the chapter. Which ones do the students feel most effectively and efficiently address the needs of the corporate buyer? Which websites do not? Why and what in their opinion is missing from the least effective websites? How can the firm do better in its execution?

Have the students visit GE‗s Medical Systems® website (www.gehealthcare.com/). In context to the major points of this chapter, have the students define how GE is addressing the needs of their hospital customers by the design of this website? Where and what is GE doing right, what is GE doing wrong, and where can GE improve?

Small businesses have been described as the ―lifeblood‖ of the economy. Students who have after-school jobs in small business should be assigned to interview their employers, managers, or purchasing departments to understand how small businesses purchase goods and services. How many of the concepts in this chapter do small business owners actually employ (for example, are the purchasing habits of the student‘s small business owner organized, how many decision makers are involved in purchasing, how important is the customer-supplier relationship to them, is their purchasing just transactional, etc.)? Students should prepare to present their findings to the class in either an oral or a written report. Students not employed should be prepared to question the presenting students as to their understanding of the ―whys‖ for such actions.

END-OF-CHAPTER SUPPORT Marketing Spotlight: Alibaba 1. What are the key factors contributing to Alibaba‘s market success?

Suggested answer: Jack Ma offers two key insights on why Alibaba.com has become such a massive B2B marketplace. First, Ma believes that Chinese sellers are extremely frugal.

Sellers and buyers would not be interested in a marketplace that entails high monetary costs.

With this in mind, Alibaba made all of the basic services on its platform free to use. Ma‘s second insight is that Chinese users are wary of trusting strangers on websites. To avoid this problem, Alibaba.com established a service in which third parties verify the claims made by sellers to ensure legitimacy. In addition, Alibaba created the Alipay system, which takes buyers‘ money up front and puts it in escrow so that the seller can be assured of payment.

2. How does Alibaba create value in business markets?

Suggested answer: Alibaba.com benefits from the network-ranking effect. The impressive scale of Alibaba and its various platforms typically means it comes up as the top link when prospective buyers search for goods on Baidu, China‘s equivalent of Google. This results in a greater number of buyers for Alibaba. More buyers create the need for more sellers, and more sellers create greater options and variety for new buyers, forming a positive feedback loop.

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3. Which of the two core markets—business or consumer— should Alibaba prioritize in the future? Why? Suggested answer: Students can debate which core market to prioritize in the future. It seems that the B2B market offers more opportunity for growth. Alibaba.com is simply a platform that connects buyers with Chinese suppliers; the company itself carries no inventory from the B2B marketplace. Alibaba charges sellers a commission for each transaction and features a wide variety of products that overseas businesses can purchase. Available products include machinery, oil, plastics, furniture, luggage, clothing, food and agricultural products, and service equipment. Alibaba.com‘s expansive selection is an attractive option for many types of businesses, from hotels to farms to clothing shops.

Marketing Spotlight: Salesforce.com 1. Why has Salesforce.com been so successful? What did the company do particularly well when it created and expanded Salesforce.com‘s offerings?

Suggested answer: Salesforce.com innovated the CRM software market by offering applications completely online, a system called ―on-demand CRM.‖ Based on cloud computing, Salesforce.com stored and delivered its software on central servers.

Customers gained access to the company‘s software by purchasing monthly or yearly plans.

Simply by logging onto the Salesforce.com website, customers were able to use CRM applications. Because no software had to be installed, the cloud-based platform allowed customers to access their applications on any device connected to the internet.

Saleforce.com‘s cloud computing platform addressed many of the issues of the traditional practice of purchasing software licenses. Customers no longer had to invest in expensive IT employees and the upfront cost of hardware infrastructure to use CRM applications.

2. What are some of the challenges Salesforce.com faces moving forward?

Suggested answer: Following the success of software as a service, industry leaders that dominated software licensing began adding on-demand CRM applications to their own portfolios. Salesforce.com maintained its position as the market leader by developing innovative software that gave it the competitive edge. Salesforce.com launched applications such as force.com, which allowed external developers to create applications and host them on Salesforce.com servers. However, a market leader must always be concerned about market challengers—companies that could compete with Salesforce.com. Although Salesforce.com secured a strong foothold in the CRM software market and maintained its dominance by developing new and innovative CRM applications, other innovators could arise.

3. What other products and services might Salesforce.com expand into next? Why? Suggested answer: Students can offer their ideas about new products and services for Salesforce.com. They can offer suggestions for creating a CRM environment tailored

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specifically to their needs. New products are essential to remain competitive in the marketplace.

DETAILED CHAPTER OUTLINE Opening vignette: Caterpillar ranks number one or number two in every industry it serves. Its products have a reputation for high quality and reliability, and the company has maintained a strong focus on innovation while expanding its product portfolio. Its distinctive yellow machines are found all over the globe and have helped make the brand an American icon. Some of the world‘s most valuable brands, such as Caterpillar, belong to business marketers. Many principles of basic marketing also apply to business marketers. They need to embrace holistic marketing principles, such as building strong loyalty relationships with their customers, just like consumer marketers. But they also face some unique challenges in selling to other businesses. In this chapter, we will highlight some of the crucial similarities and differences for marketing in business markets.

I. The Organizational Buying Process A. Organizational buying is the decision-making process by which formal organizations establish the need for purchased products and services and identify, evaluate, and choose among alternative brands and suppliers.

B. Understanding Business Markets i. The business market consists of all the organizations that acquire goods and services used in the production of other products or services that are sold, rented, or supplied to others. ii. Some of the major industries making up the business market are aerospace; agriculture, forestry, and fisheries; chemical; computer; construction; defense; energy; mining; manufacturing; construction; transportation; communication; public utilities; banking, finance, and insurance; distribution; and services. iii. More dollars and items change hands in sales to business buyers than to consumers. iv. The biggest enemy to business-to-business marketers is commoditization.

• Commoditization eats away margins and weakens customer loyalty.

• Commoditization can be overcome only if target customers are convinced that meaningful differences exist in the marketplace and that the unique benefits of the firm‘s offerings are worth the added expense. v. A critical step in business-to-business marketing is to create and communicate relevant differentiation from competitors. vi. Business marketers face many of the same challenges as consumer marketers, especially understanding their customers and what they value. vii. The three biggest hurdles for B2B marketing are: • building stronger interfaces between marketing and sales • building stronger innovation-marketing interfaces • extracting and leveraging more granular customer and market knowledge CS-47 Copyright © 2022 Pearson Education, Inc. Browsegrades.net

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viii. Four additional imperatives are: • demonstrating marketing‘s contribution to business performance • engaging more deeply with customers and customers‘ customers • finding the right mix of centralized versus decentralized marketing activities • finding and grooming marketing talent and competencies ix. Business marketers contrast sharply with consumer markets in some ways, however. They have: • Fewer, larger buyers • Close supplier–customer relationships • Professional purchasing • Multiple buying influences • Multiple sales calls • Derived demand • Inelastic demand • Fluctuating demand • Geographically concentrated buyers • Direct purchasing C. Types of Buying Situations i. The number of decisions faced by a business buyer depends on the complexity of the problem being solved, newness of the buying requirement, number of people involved, and time required. ii. Three types of buying situations are the straight rebuy, modified rebuy, and new task.

• Straight rebuy: the purchasing department reorders items like office supplies and bulk chemicals on a routine basis and chooses from suppliers on an approved list.

• Modified rebuy: the buyer in a modified rebuy wants to change product specifications, prices, delivery requirements, or other terms. This usually requires additional participants on both sides.

• New task: A new-task purchaser buys a product or service for the first time (an office building, a new security system). The greater the cost or risk, the larger the number of participants, and the greater their information gathering—the longer the time to a decision.

• The business buyer makes the fewest decisions in the straight rebuy situation and the most in the new-task situation. iii. The buying process passes through several stages: awareness, interest, evaluation, trial, and adoption.

• Mass media can be most important during the initial awareness stage.

• Salespeople often have their greatest impact at the interest stage.

• Technical sources can be most important during evaluation.

• Online selling efforts may be useful at all stages. iv. In the new-buy situation, the buyer must determine product specifications, price limits, delivery terms and times, service terms, payment terms, order quantities, acceptable suppliers, and the selected supplier.

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•

Many companies use a missionary sales force consisting of their most effective salespeople.

• The marketer also tries to reach as many key participants as possible with information and assistance.

• In-suppliers are continually seeking ways to add value to their market offer to facilitate rebuys.

II. The Buying Center A. Who buys the trillions of dollars‘ worth of goods and services needed by business organizations?

• Purchasing agents are influential in straight-rebuy and modified-rebuy situations, whereas other employees are more influential in new-buy situations.

• Engineers are usually influential in selecting product components, and purchasing agents dominate in selecting suppliers.

B. The Composition of the Buying Center i. The buying center is the decision-making unit of a buying organization. It consists of ―all those individuals and groups who participate in the purchasing decision-making process, who share some common goals and the risks arising from the decisions.‖ • Initiators: Users or others in the organization who request that something be purchased.

• Users: Those who will use the product or service.

• Influencers: People who influence the buying decision, often by helping define specifications and providing information for evaluating alternatives.

• Deciders: People who decide on product requirements or on suppliers.

• Approvers: People who authorize the proposed actions of deciders or buyers.

• Buyers: People who have formal authority to select the supplier and arrange the purchase terms.

• Gatekeepers: People who have the power to prevent sellers or information from reaching members of the buying center. For example, purchasing agents, receptionists, and telephone operators may prevent salespersons from contacting users or deciders. ii. Several people can occupy a given role such as user or influencer, and one person may play multiple roles A buying center typically has five or six members and sometimes dozens.

C. The Role of the Buying Center in the Organization i. Recent competitive pressures have led many companies to upgrade their purchasing departments and elevate administrators to vice-presidential rank. ii. These new, more strategically oriented purchasing departments have a mission to seek the best value from fewer and better suppliers. iii. Some multinationals have even elevated purchasing departments to ―strategic supply departments‖ with responsibility for global sourcing and partnering.

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D. Buying Center Dynamics i. Participants have differing interests, authority, status, susceptibility to persuasion, and sometimes very different decision criteria. ii. Business buyers also have personal motivations, perceptions, and preferences influenced by their age, income, education, job position, personality, attitudes toward risk, and culture. iii. Individuals, not organizations, make purchasing decisions. iv. Businesspeople are buying solutions to two problems: the organization‘s economic and strategic problem and their own personal need for achievement and reward.

E. Selling to Buying Centers • Business marketers may divide the marketplace in many different ways to choose the types of firms to which they will sell.

• Finding the sectors with the greatest growth prospects, most profitable customers, and most promising opportunities for the firm is crucial.

• Once it has identified the type of businesses on which to focus marketing efforts, the firm must then decide how best to sell to them.

• Whatever information the business salesperson can obtain about personalities and interpersonal factors is useful.

• Small sellers concentrate on reaching the key buying influencers.

• Larger sellers go for multilevel, in-depth selling.

• Companies must rely more heavily on their communications programs to reach hidden buying influences and keep current customers informed.

III. Understanding the Buying Process. See Fig. 4.1.

A. Problem recognition • Triggered by internal or external stimuli • Business marketers can stimulate B. General need description C. Product specification i. Product value analysis is an approach to cost reduction that studies whether components can be redesigned, standardized, or made by cheaper methods of production without adversely affecting product performance.

D. Supplier search • Includes electronic marketplaces like catalog sites, vertical markets, auction sites, spot markets, private exchanges, barter markets, buying alliances • Online business buying shaves transaction costs for both buyers and suppliers, reduces time between order and delivery, consolidates purchasing systems, and forges more direct relationships between partners and buyers.

• For disadvantages, it may help to erode supplier–buyer loyalty and create potential security problems.

• E-procurement: websites are organized around two types of e-hubs and used in a variety of ways o Vertical hubs centered on industries (plastics, steel, chemicals, paper)

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o Functional hubs (logistics, media buying, advertising, energy management) E. Proposal Solicitation: the buyer next invites qualified suppliers to submit written proposals and invites a few suppliers to make formal presentations F. Supplier Selection i. Business buyers seek the highest benefit package (economic, technical, service, and social) in relationship to a market offering‘s costs. ii. The strength of their incentive to purchase is a function of the difference between perceived benefits and perceived costs. iii. The attributes that buyers commonly use to evaluate vendors include price, reputation, reliability, and agility. iv. Before selecting a supplier, the buying center will specify and rank desired supplier attributes, often using a supplier-evaluation model to rate suppliers based on their performance on the attributes valued by the buyer. v. Companies are increasingly reducing the number of their suppliers.

G. Contract Negotiation i. After selecting suppliers, the buyer negotiates the final order, listing the technical specifications, the quantity needed, the expected time of delivery, return policies, and warranties. ii. Many industrial buyers lease rather than buy heavy equipment such as machinery and trucks. iii. For maintenance, repair, and operating items, buyers are moving toward blanket contracts rather than periodic purchase orders. iv. Companies that fear a shortage of key materials are willing to buy and hold large inventories. v. Some companies shift the ordering responsibility to their suppliers.

H. Performance Review i. Periodic reviews of the performance of the chosen supplier(s) using one of three methods: • Contact end users and ask for their evaluations • Rate the supplier on several criteria using a weighted-score method • Aggregate the cost of poor performance to come up with adjusted costs of purchase, including price IV. Developing Effective Business Marketing Programs A. Business-to-business marketers are using every marketing tool at their disposal to attract and retain customers. i. They are embracing systems selling, adding valuable services to their product offerings, employing customer reference programs, and utilizing a wide variety of online and offline communication and branding activities.

B. Transitioning from Products to Solutions i. Systems buying originated with government purchases of major weapons and communications systems. ii. Sellers have increasingly recognized that buyers like to purchase in this way, and many have adopted systems selling as a marketing tool. iii. One variant of systems selling is systems contracting, in which a single supplier provides the buyer with its entire requirement of MRO supplies.

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• •

Customer benefits from reduced procurement and management costs.

Seller achieves lower operating costs thanks to steady demand and reduced paperwork.

C. Enhancing Services i. Services play an increasing strategic and financial role for many business-tobusiness firms selling primarily products. ii. Adding high-quality services to their product offerings allows them to provide greater value and establish closer ties with customers. iii. Technology firms and others are bundling services to improve customer satisfaction and increase profits.

D. Building Business-to-Business Brands i. Business marketers are increasingly recognizing the importance of their brands. Brands ensure product quality and make it easier to justify the purchase of established brands to the company stakeholders. ii. In business-to-business marketing, the corporate brand is often critical because it is associated with so many of the company‘s products.

E. Overcoming Price Pressures i. Marketers can counter requests for a lower price in a number of ways, including the use of framing. ii. They may also be able to show that the total cost of ownership—that is, the life-cycle cost of using their product—is lower than that for competitors‘ products. iii. They can cite the value of the services the buyer now receives, especially if it is superior to that offered by competitors. iv. Improving productivity helps alleviate price pressures. v. Collaboration can further help alleviate price pressure.

F. Managing Communication i. Companies need to inform business customers about the benefits of their offerings as well as coordinating their activities with collaborators. ii. As in consumer markets, business communications are increasingly moving online, using search engine optimization (SEO) and search engine marketing (SEM) to connect with buyers.

V. Managing Business-to-Business Relationships A. Loyalty is driven in part by supply chain management, early supplier involvement, and purchasing alliances. i. Business-to-business marketers are honing in on their targets and developing one-to-one marketing approaches.

B. Understanding the Buyer-Supplier Relationship i. Much research has advocated greater vertical coordination between buying partners and sellers so that they can transcend merely transacting and instead create more value for both parties. ii. Another study suggests that greater vertical coordination between buyer and seller through information exchange and planning is usually necessary only when high environmental uncertainty exists and specific investments (described below) are modest. iii. Four relevant ways to develop a relationship include: availability of

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alternatives, importance of supply, complexity of supply, and supply market dynamism. iv. Closest relationships between customers and suppliers arose when supply was important to the customer and there were procurement obstacles, such as complex purchase requirements and few alternate suppliers.

C. Managing Corporate Trust, Credibility, and Reputation i. Building trust is one prerequisite to enjoying healthy long-term relationships. ii. Trust is a firm‘s willingness to rely on a business partner. iii. Building trust can be especially tricky in online settings, and firms often impose more stringent requirements on their online business partners than on others. iv. Corporate credibility is the extent to which customers believe a firm can design and deliver products and services that satisfy their needs and wants. It reflects the supplier‘s reputation in the marketplace and is the foundation of a strong relationship. v. Corporate trustworthiness reflects the extent to which a company is seen as motivated to be honest, dependable, and sensitive to customer needs. vi. Corporate likability reflects the extent to which a company is seen as likable, attractive, prestigious, and dynamic.

D. Risks and Opportunism in Business Relationships i. Establishing a customer–supplier relationship creates tension between safeguarding (ensuring predictable solutions) and adapting (allowing for flexibility for unanticipated events). ii. Vertical coordination can facilitate stronger customer–seller ties but may also increase the risk to the customer‘s and supplier‘s specific investments. iii. Specific investments are expenditures tailored to a particular company and value-chain partner (investments in company-specific training, equipment, and operating procedures). iv. Specific investments entail considerable risk to both customer and supplier. v. Opportunism is a ―form of cheating or undersupply relative to an implicit or explicit contract.‖ vi. Opportunism is a concern because firms must devote resources to control and monitoring that they could otherwise allocate to more productive purposes. vii. The presence of a significant future time horizon and/or strong solidarity norms causes customers and suppliers to strive for joint benefits. viii. Their specific investments shift from expropriation (increased opportunism on the receiver‘s part) to bonding (reduced opportunism).

E. Managing Institutional Markets i. The institutional market consists of schools, hospitals, nursing homes, prisons, and other institutions that must provide goods and services to people in their care. ii. Many of these organizations are characterized by low budgets and captive clienteles. iii. In most countries, government organizations are a major buyer of goods and services. iv. Different types of agencies—defense, civilian, intelligence—have different CS-53 Copyright © 2022 Pearson Education, Inc. Browsegrades.net

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needs, priorities, purchasing styles, and time frames. v. The federal government has been trying to simplify the contracting procedure and make bidding more attractive.

CHAPTER

5

CONDUCTING MARKETING RESEARCH

LEARNING OBJECTIVES After studying this chapter, you should be able to: 5.1 Define the scope of marketing research.

5.2 Explain the marketing research process, how to gather and analyze market data, and how to develop a research plan.

5.3 Explain how to measure and forecast market demand.

5.4 Define the different approaches to measuring marketing productivity.

CHAPTER SUMMARY 1. Marketing research is all about generating insights. Marketing insights provide diagnostic information about how and why we observe certain effects in the marketplace and what that means to marketers. Good marketing research is characterized by the scientific method, creativity, multiple research methods, accurate model building, cost–benefit analysis, healthy skepticism, and an ethical focus.

2. The marketing research process consists of defining the problem, developing the research plan, collecting information, analyzing the information, and making the decision. In conducting research, firms must decide whether to collect their own (primary) data or use data that already exist (secondary data). They must also choose a research approach (observational, focus group, survey, or behavioral) and research instruments (questionnaires, qualitative measures, or technological devices). In addition, they must decide on a sampling plan, contact methods (online, in person, mail or e-mail, or telephone), and data-mining strategies.

3. To estimate current demand, companies need to determine the size, growth, and profit potential of each market opportunity. To estimate future demand, companies survey buyers‘ intentions, solicit the input of their sales forces, gather expert opinions, analyze past sales, or engage in market testing. Mathematical models, advanced statistical techniques, and computerized data collection procedures are essential to all types of demand and sales forecasting.

4. Marketing research must assess the efficiency and effectiveness of marketing activities. Two complementary approaches to measuring marketing productivity

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are (1) marketing metrics to assess marketing effects and (2) marketing-mix modeling to estimate causal relationships and measure how marketing activity affects outcomes. The insights gleaned from these two approaches must be disseminated within the organization. Marketing dashboards provide all the up-to- the-minute information necessary to run the business operations for a company—such as actual sales versus forecast, distribution channel effectiveness, brand- equity evolution, and the development of human capital. Company input to the marketing dashboard should include two key market-based scorecards that reflect performance and provide possible early warning signals.

OPENING THOUGHT Marketing research is a process in which consumers‘ thoughts, actions, and purchase intentions are collected to form the basis of marketing decisions. Most students will relate to marketing research techniques where the insights are gained directly from a process of transcribing and reviewing responses—focus groups, for instance—but will shy away from the quantitative techniques/number crunching. If the analysis is presented as a ―means to an end‖—a way to gain insights that make marketing decision making easier— then the process should be accepted with greater enthusiasm.

In today‘s world of marketing, marketing managers are increasingly being asked to justify their expenditures. As a result, good marketing managers and good students of marketing should be very comfortable with the analyses presented in this chapter.

To many of the students enrolled in marketing, the topics of statistics, analysis, and financial modeling will cause their eyes to ―roll in their heads‖ as the thought of calculating numbers creates stress. The instructor is encouraged to assign practice with real-world examples, which will make the numbers more meaningful, and to emphasize to the students that good marketers need fluency with these techniques in order to get results that enable better marketing decisions.

TEACHING STRATEGY AND CLASS ORGANIZATION PROJECTS 3. At this point in the semester-long marketing plan project, the students‘ initial marketing research parameters should be completed, demand forecasted, and target market selections defined.

4. Commission a marketing research study on topics of interest to the students at your institution. During the course of the semester (15-16 weeks), have the students develop the questionnaire, collection method, conduct the survey, and tabulate the results. The students can be divided into groups for this project. Suggested topics can include the students‘ opinions of campus issues such as the athletic program, sale of alcohol, use and availability of technology, or students‘ perceptions of their current educational experiences.

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ASSIGNMENTS Ask students to contact a local marketing research firm in the area for the purpose of an interview regarding research techniques, methods, and the difficulties in conducting research.

Pre-approve the set of questions prepared by the students prior to the appointment. Ensure that the students will be able to collect information from the research company regarding how information is collected. Once it is collected, what are some of the difficulties faced by the researcher in presenting this information to the client?

The American Airlines case shows the power of conducting marketing research before offering a service. In small groups for an in-class discussion, have the students comment on the case in light of the marketing research process examined in the chapter.

Have students watch this video on the concept of ―neuromarketing‖ and comment on whether such brain research is ethical, as it may lead to more marketing manipulation: https://www.youtube.com/watch?v=LpJvuPOG40M. See also http://www.businessweek.com/articles/2013-10-10/will-companies-one-day-use-brainwaves-tofind-ideal-prices Carolyn Yoon, Angela H. Gutchess, Fred Feinberg, and Thad A. Polk, ―A Functional Magnetic Resonance Imaging Study of Neural Dissociations Between Brand and Person Judgments,‖ Journal of Consumer Research, 33 (June 2006), pp. 31-40; Samuel M. McClure, Jian Li, Damon Tomlin, Kim S. Cypert, Latané M. Montague, and P. Read Montague, ―Neural Correlates of Behavioral Preference for Culturally Familiar Drinks,‖ Neuron, 44 (October 14, 2004), pp. 379-387.

END-OF-CHAPTER SUPPORT Marketing Spotlight: IDEO 1. Why has IDEO been so successful?

Suggested Answer: IDEO strives to design products that consumers actively want. They gain insights through a variety of human-centered research methods.

2. What is the most difficult challenge that IDEO faces in conducting its research and designing its products?

Suggested Answer: IDEO strives to design products that consumers actively want. In many cases they have to ―dig deep‖ because they are trying to create consumer-friendly solutions and the consumers often don‘t know what they want or what they need.

3. In the end, IDEO creates great solutions for companies that then receive all the credit.

Should IDEO try to create more brand awareness for itself? Why or why not?

Suggested Answer: Students‘ answers will vary—some will say ―yes‖ and others will say ―no.‖ Answers should reflect on the nature of the company, its products, and its core competency.

What does the company do very well? It designs solutions for others. Good answers will note that IDEO has created and commands a very well-defined ―niche‖ in the business world and is

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very successful in that niche, and any movement out of that niche can be difficult and dangerous.

Marketing Spotlight: LEGO 1. How does LEGO manage to constantly reinvent its business?

Suggested answer: To revive the popularity of LEGO toys, Knudstorp focused heavily on innovation and emphasized market and consumer research. Knudstorp believed that in order to rekindle the emotional connection between customers and LEGO toys, LEGO had to deeply understand each customer‘s desires and behavior. LEGO‘s shift toward basing decisions on extensive research reduced complexity in production and ensured the success of its product releases. In 2011, the company launched the LEGO Friends line, an effort to attract more girls to the brand.

2. What role did marketing research play in LEGO‘s market success?

Suggested answer: LEGO established the Future Lab, a secretive research and development team that is responsible for creating some of its most innovative and successful toy lines ever. Future Lab teams are made up of industrial designers, programmers, marketers, and even master builders, who brainstorm to generate modern products. Future Lab teams extensively brainstorm and produce prototypes from bins of bricks, animation software, and professional-quality digital cameras.

3. What differentiates LEGO from its competitors? Is LEGO‘s competitive advantage sustainable?

Suggested answer: LEGO differentiates itself from its competitors through innovation. Though LEGO has enjoyed great financial success since its all-time low in 2003, company studies have indicated that kids spend less and less time playing with physical toys every year. In an increasingly digital age, LEGO continues researching its customers and experimenting with innovative product lines to stay at the top of the toy industry. If LEGO continues to use market research and develops innovative products, it will sustain its competitive advantage.

DETAILED CHAPTER OUTLINE To make the best possible tactical decisions in the short run and strategic decisions in the long run, marketers need timely, accurate, and actionable information about consumers, competition, and their brands. One company that helps marketers gain market insight and better understand of ever-changing customer needs is Qualtrics. Qualtrics is the leader in online marketing research software, offering an online platform that companies use to collect, manage, and act on experience data. In this chapter, we review the scope of marketing research and the steps involved in the marketing research process. We also consider how marketers can develop effective metrics for measuring marketing productivity.

I.

The Scope of Marketing Research A. Marketing research is the function that links the consumer, customer, and public to the marketer through information.

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i.

II.

The information is used to identify and define marketing opportunities and problems; generate, refine, and evaluate marketing actions; monitor marketing performance; and improve understanding of marketing as a process. ii.

Marketing research specifies the information required to address these issues, designs the method for collecting information, manages and implements the data collection process, analyzes the results, and communicates the findings and their implications.

B. Importance of Marketing Insights i.

Marketing insights provide diagnostic information about how consumers and markets behave, why we observe certain effects in the marketplace and what that means to marketers. ii.

Marketing insights can form the basis for successful marketing programs, and gaining insights is crucial for marketing success.

C. Who Does Marketing Research? i.

Most large companies have their own marketing research departments, which often play crucial roles within the organization. ii.

Smaller companies use everyone to carry out marketing research, including customers, and they hire research firms or use affordable methods like: • Government sources • Using the internet • Observing competitors • Buying mailing lists • Tapping into employee creativity and wisdom iii. Marketing research firms fall into three categories: • Syndicated-service research firms • Custom marketing research firms • Specialty-line marketing research firms The Marketing Research Process (See Fig. 5.1) A. Defining the Problem i. Do not define the problem too broadly or too narrowly. ii. Some research is exploratory – the goal is to identify the problem and to suggest possible solutions. iii. Some research is descriptive—it seeks to quantify demand. iv. Some research is causal—it tests a cause-and-effect relationship.

B. Developing the Research Plan i.

Develop the most efficient plan for gathering needed information. ii.

Discover what it will cost to execute the plan. iii. Consider data sources.

• Secondary data—collected for another purpose; already exists • Primary data—freshly gathered for a specific purpose or project iv.

Consider research approaches.

• Observational research • Ethnographic research • Focus group research

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• Survey research • Behavioral research v.

Research instruments include: • Questionnaires o Closed-end questions specify all the possible answers, and the responses are easier to interpret and tabulate. o Open-end questions allow respondents to answer in their own words.

• Qualitative measures o Word association o Projective techniques o Visualization o Brand personification o Laddering • Measurement devices o Technology enables marketers to use skin sensors, brain wave scanners, and full-body scanners to get consumer responses.

C. Collecting the Information i. Most expensive and error-prone phase ii. Need to achieve consistency is one of the biggest obstacles iii. Choose a sampling plan • Sampling unit: whom should we survey?

• Sample size: How many people should we survey?

• Sampling procedure: How should we choose the respondents? iv. Contact methods • Mail contacts • Telephone contacts • Personal contacts • Online contacts • Online research pros: inexpensive, expansive, fast, honest responses, versatile • Online research cons: samples small, skewed, technological problems v. Data Mining. Through data mining, marketing statisticians can extract from the mass of data useful information about individuals, trends, and segments. vi. Companies use data mining to: • Identify prospects • Decide which customers should receive a particular offer • Deepen customer loyalty • Reactivate customer purchases • Avoid serious customer mistakes D. Analyzing the Information and Making the Decision i. Extract findings by tabulating the data and developing summary measures. ii. Test hypotheses and theories, applying sensitivity analysis to test assumptions/strength of conclusions.

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i. The company must measure and forecast the size, growth, and profit potential of each new opportunity. ii. Sales forecasts are used by finance to raise cash for investment and operations, by manufacturing to establish capacity and output, by purchasing to acquire the right amount of supplies, and by human resources to hire the needed workers.

A. Key Concepts in Demand Measurement i. Market demand for a product is the total volume that would be bought by a defined customer group in a defined geographical area, in a defined time period, and in a defined marketing environment under a defined marketing program. ii. Company demand is the company‘s estimated share of market demand at alternative levels of company marketing effort in a given time period. iii. The market demand corresponding to the actual level of industry marketing expenditure is called the market forecast. iv. The company sales forecast is the expected level of company sales based on a chosen marketing plan and an assumed marketing environment. v. Total market potential consists of the maximum sales available to all firms in an industry during a given period, under a given level of industry marketing effort, and under extant environmental conditions. vi. Company sales potential is the sales limit approached by company demand as company marketing effort increases relative to that of competitors.

B. Forecasting Market Demand i. Forecasting is the art of anticipating what buyers are likely to do under a given set of conditions. For major consumer durables such as appliances, research organizations conduct periodic surveys of consumer buying intentions. ii. Companies commonly prepare a macroeconomic forecast first, followed by an industry forecast, followed by a company sales forecast. iii.The macroeconomic forecast projects inflation, unemployment, interest rates, consumer spending, business investment, government expenditures, net exports, and other variables (forecast GDP). iv. Companies buy forecasts from someone else. v. They build a forecast on what people say, what people do, or what people have done.

• Survey of buyers‘ intentions • Composite of sales force opinions • Expert opinion • Past sales analysis • Market-test method IV. Measuring Marketing Productivity A. Marketing research must assess the efficiency and effectiveness of marketing activities. i. Two approaches to measuring marketing productivity are (1) marketing metrics to assess marketing effects and (2) marketing-mix modeling to estimate causal relationships and measure how marketing activity affects outcomes.

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ii. Marketing dashboards are a structured way to disseminate the insights gleaned from these two approaches.

B. Marketing Metrics i. Help marketers quantify, compare, and interpret performance ii. Marketers choose one or more measures based on the issues they face.

• Website analytics detail site navigation and online interaction • Social media presence shows demographic and geographic responses to social media channels across different markets.

• Permission marketing statistics measure interactions and engagement with consumers from automated e-mails.

C. Marketing-Mix Modeling i. Marketing-mix models analyze data from a variety of sources such as retailer scanner data and company shipment data, as well as pricing, media, and promotion expenditure data, to understand more precisely the effects of specific marketing activities. ii. Limitations: • Marketing-mix modeling focuses on incremental growth instead of on baseline sales or long-term effects.

• The integration of important metrics such as customer satisfaction, awareness, and brand equity into marketing-mix modeling is limited.

• Marketing-mix modeling generally fails to incorporate metrics related to competitors, the trade, or the sales.

D. Marketing Dashboards i. ―A concise set of interconnected performance drivers to be viewed in common throughout the organization‖; a structured way to disseminate insights gleaned from marketing metrics and marketing-mix modeling. ii. Company input to the marketing dashboard should include two key marketbased scorecards: one that reflects performance and one that provides possible early warning signals. iii. An effective dashboard will focus thinking, improve internal communications, and reveal where marketing investments are paying off and where they aren‘t. iv. Measurement pathways include: • Customer metrics • Unit metrics • Cash-flow metrics • Brand metrics

CHAPTER

6

SEGMENTS AND IDENTIFYING MARKET TARGET CUSTOMERS

LEARNING OBJECTIVES CS-61 Copyright © 2022 Pearson Education, Inc. Browsegrades.net

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After studying this chapter, you should be able to: 6.1 Explain the essence of targeting.

6.2 Define the key principles of strategic targeting.

6.3 Describe how to effectively communicate and deliver offerings to target customers.

6.4 Explain how to develop strategies to target multiple market segments.

6.5 Describe how to segment consumer markets.

6.6 Describe how to segment business markets.

CHAPTER SUMMARY 1. Targeting is the process of identifying customers for whom the company will optimize its offering. Targeting reflects the company‘s choice of which customers it will prioritize and which customers it will ignore when designing, communicating, and delivering its offering. Targeting involves two types of decisions: strategic and tactical.

2. Strategic targeting involves identifying which customers (segments) to serve and which to ignore. Strategic targeting is guided by two key factors: target compatibility and target attractiveness.

3. Target compatibility reflects a company‘s ability to create value for customers. It is a function of a company‘s resources, including business infrastructure, scarce resources, skilled employees, collaborator networks, know-how, strong brands, an established ecosystem, and capital.

4. Target attractiveness reflects customers‘ potential to create value for the company. It is a function of monetary factors such as the revenues generated by a particular customer segment and the costs associated with serving this segment, as well as strategic factors such as a segment‘s social value, scale value, and information value.

5. A key principle of strategic targeting is that the company should be able to create superior value for its customers relative to the competition. To this end, a company must identify markets in which it has superior resources relative to the competition.

6. Tactical targeting involves identifying effective and cost-efficient ways to reach strategically viable customers. Tactical targeting links the (typically unobservable) value-based segments to specific observable and actionable characteristics. Such observable characteristics, also referred to as the customer profile, include demographic (e.g., age, gender, and income), geographic (e.g., permanent residence interests and lifestyle), and behavioral (e.g., permanent residence and current location), psychographic (e.g., moral values, attitudes, purchase frequency, purchase quantity, and price sensitivity) factors.

7. Tactical targeting is guided by two key factors: effectiveness (a company‘s ability to reach all target customers) and cost efficiency (a company‘s ability to deploy its resources in a way that reaches only its target customers).

8. Segmentation is a categorization process that groups customers by focusing on those differences that are relevant for targeting and ignoring those differences that are irrelevant. Segmentation enables managers to group customers into larger segments and develop offerings for the entire segment, rather than for each individual customer.

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OPENING THOUGHT The first challenges presented in this chapter are the concepts of market segmentation and the segmentation processes used by marketing firms. Students may have difficulty understanding the various steps of the segmentation process as well as differentiating between target markets and market positioning. The instructor is urged to use personal examples of target markets—the differences between the instructor‘s age cohort or their parents‘ cohort and that of his/her students—as examples in illustrating the different markets.

Second, the concepts of consumer characteristics and responses may be new to many students as it applies across different age groups and different consumers. Students who have little contact with other people outside their sphere of influence may have a hard time realizing that other consumers hold differing views and have different usages for products and services. Some students will reject the notion that all consumers can be categorized. If this idea arises, it would be a good opportunity to talk about microsegments and real-time marketing based on behavior/predictive analytics.

Suggestions to help students understand the degree of sophistication used by marketers include using the Claritas PRIZM website during the class lecture, pinpointed by a student‘s zip code for example, to show the amount of information available to marketers. Additional examples for classroom demonstrations include asking students to research information on the internet on their particular favorite product and information by their zip code or other criteria. Many firms provide differing products to different consumers; Toyota, for example, offers the Toyota line of cars and the Lexus family of cars. Both of these brands can be used to illustrate product differentiation and target marketing.

TEACHING STRATEGY AND CLASS ORGANIZATION PROJECTS 5. Students should turn in the market segmentation section of their semester-long new product or service report.

6. Students should select a product or service that they are familiar with, such as jeans, computers, or smartphones. Once these items are selected, the students must undertake research into the specific items: target market and market segmentation. Student reports should contain information as to: How large is the target market, what is the future growth potential of this target market, how does the marketer reach this target market and so on? The second section of this project is for the students to ―re-position‖ this product to another market segment. For example, if the students select smartphones as their product of choice, and confirm that the target market for this is Millennials, then the students should define how the manufacturers of smartphones will attempt to reposition the product to attract the Baby Boomer generation to increase their purchases of smartphones.

ASSIGNMENTS

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The population of the United States will rise to 438 million in 2050. In small groups, have the students detail the demographic information on this group of Americans (ages, buying power, perception of themselves, etc.) and suggest some key marketing opportunities mined from this information. For example, if seniors often make buying decisions based on lifestyle and not age, as the vignette mentions, does this information present marketing opportunities for such industries as travel, bio-medical industries, at-home exercise equipment, and automobiles? If so, who is going to be affected and to what extent? Student answers should contain detailed demographic information about this target market and should draw a connection between what the information says and what is the potential for marketers. Hispanics will be the largest ethnic minority, comprising an estimated 29% of the population in 2050.

Assuming that this is true, either in small groups or individually, ask the students to comment on how this demographic shift will change the segmentation in: a) the grocery industry, b) the fastfood industry, and c) the casual dining industry. Student answers should include key demographic and lifestyle facts and figures about these markets and their consumers.

The firm Claritas, Inc. has developed a geoclustering system called PRIZM®. Assign students the task of visiting this site and collecting the marketing information available for their particular zip code (home or school). In a report, ask the students to comment on the accuracy, implications, and usefulness of this information for marketers. How can a marketer ―target‖ his/her audience using PRIZM? The chapter discusses the VALS™ framework. Students are asked to characterize either themselves, family members, or others and place them in one of these groups (http://www.strategicbusinessinsights.com/vals/ustypes.shtml). How closely does the person the student selected ―fit‖ the profile? If so, can the marketer rely on these characterizations in mapping out marketing plans? Are there major differences? If major differences exist, what impact does this have on marketers‘ developing marketing plans?

Marketing Insight, Chasing the Long Tail, is a compilation of thoughts and notes from a number of sources. Ask the students to read each of these sources and be prepared to share their thoughts as well as comments about what they have read in class. Specifically, are these authors ―ontarget‖ when it comes to the significance of the value of the long tail? Why has the 80-20 rule given way to a 50-50 rule? Ask them to weigh in on whether the long tail is as important as hit products. Are there any ―missing insights‖ from these readings that will have a profound impact on future marketing strategies?

Effective segmentation criteria are necessary for target market identification. Market segments must be measurable, substantial, accessible, differentiable, and actionable. However, not all segmentation schemes are useful. Students are to provide three examples of those products or services in which segmentation criteria are not necessary, and three examples where segmentation criteria are an absolute necessity. Students are to exchange their findings and explain these differences.

END-OF-CHAPTER SUPPORT

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Marketing Spotlight: L’Oréal 1. Review L‘Oréal‘s brand portfolio. What are the different customer segments targeted by these brands?

Suggested answer: L‘Oréal has a richly endowed portfolio of international brands that responds to the diverse needs of consumers the world over. Its brands are grouped into four divisions based on the profile of its target customers. Consumer Products produces 52 percent of sales and offers a wide range of competitively priced, mass-marketed hair-care, makeup, and skin-care products. L’Oréal Luxe makes up 27 percent of sales and offers upscale skin-care, makeup, and perfume brands. Professional Products is responsible for 14 percent of sales and offers professional-quality products to hairdressers and skin-care professionals. Active Cosmetics, which accounts for 7 percent of sales, is the world leader in dermocosmetics.

2. What are the keys to successful local product launches (e.g., Maybelline‘s Wondercurl in Japan)?

Suggested answer: L‘Oréal scientists study consumers in laboratory bathrooms and in their own homes, sometimes achieving scientific beauty milestones. In Japan, for example, L‘Oréal developed specially formulated Wondercurl mascara to curl Asian women‘s eyelashes, which are usually short and straight. Within three months, Wondercurl mascara had become Japan‘s number-one-selling mascara, and girls excitedly lined up in front of stores to buy it. L‘Oréal continued to research the market and developed nail polish, blush, and other cosmetics aimed at this new generation of Asian girls.

3. What‘s next for L‘Oréal? Who are its biggest competitors? If you were its CEO, how would you sustain the company‘s leadership position?

Suggested answer: L‘Oréal purchased its biggest competitors—Soft Sheen Products and Carson Products—and merged both companies. Backed with a deep portfolio of brands and products, SoftSheen-Carson is now the market leader in the ethnic hair care industry. L‘Oréal can sustain its leadership position by understanding the unique beauty routines and needs of different cultures, climates, traditions, and physiologies. This is critical to L‘Oréal‘s global success. Hair and skin differ greatly from one part of the world to another, so L‘Oréal listens to and observes consumers across the globe to gather a deep understanding of their beauty needs.

Marketing Spotlight: Chase Sapphire 1.Who are the customers targeted by Chase with the Sapphire card? What are the key value and profile characteristics of these customers?

Suggested answer: Chase Sapphire appealed to affluent consumers by offering competitive rewards and top-tier customer service. These features were attractive to the businesspeople and vacationers who made up a significant portion of the affluent segment. According to the research, this demographic represented 15 percent of U.S. cardholders at the time but generated over 50 percent of total credit card spending.

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2. What value does the Sapphire card create for customers? From a customer‘s perspective, what are the pros and cons of the Sapphire card compared to other credit cards?

Suggested answer: To gain entry into the market, Chase earned 2 points per dollar spent on airline travel and 1 point per dollar spent elsewhere. Customers who spent $500 on the card during the first three months received 10,000 bonus points, easily redeemed on a user-friendly website called Ultimate Rewards. In addition, all calls made by Chase Sapphire card holders were answered by live advisors without customers having to enter their credit card number. By the end of the year, over 905 of Sapphire cardholders reported overall satisfaction with the card, and 85 percent indicated they would recommend it to others.

3. What role did promotional incentives such as the bonus points play in creating customer demand? Would Millennials remain loyal customers once they had taken advantage of the initial offer? Would the Sapphire card continue to be attractive to Millennials if its promotional incentives were reduced and became similar to other credit card offerings?

Suggested answer: Promotional incentive did create customer demand. Chase viewed the costs as an investment that dedicated and engaged customers would pay off in the years to come. This sentiment was confirmed after one year, when Chase revealed that the Reserve renewal rate was extremely high at approximately 90 percent, thus addressing the churner issue. Millennials would remain loyal customers although promotional incentives are important. Chase recognized that Millennials were bargain minded and that they looked for experiences over material things. The Sapphire line perfectly addressed this—from the weight of the card to the excellent customer service and market-leading rewards programs. Chase created a cult brand by designing an attractive product that fit into the Millennial lifestyle.

DETAILED CHAPTER OUTLINE Companies need to identify the market segments they can serve effectively. To stop the sales slide, Campbell set out to better understand the 18-to-34-year-olds who make up 25 percent of the U.S. population and will profoundly affect the company‘s future. Effective target marketing requires that marketers: 1. Identify and profile distinct groups of buyers who differ in their needs and wants (market segmentation).

2. Select one or more market segments to enter (market targeting).

3. For each target segment, establish, communicate, and deliver the right benefit(s) for the company‘s market offering (market positioning). This chapter will focus on the first two steps: how to segment the market and identify target customers.

I

Identifying Target Customers A. Targeting is the process of identifying customers for whom the company will optimize its offering. Simply put, targeting reflects the company‘s choice of which customers it will prioritize and which customers it will ignore when designing, communicating, and delivering its offering.

B. The Logic of Targeting

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i. In mass marketing, the firm ignores segment differences and goes after the whole market with one offer. It designs a marketing program for a product with a superior image that can be sold to the broadest number of buyers via mass distribution and mass communications. ii. The argument for mass marketing is that it creates the largest potential market, which leads to the lowest costs, which in turn can lead to lower prices or higher margins. iii. When different groups of consumers have different needs and wants, marketers can define multiple segments. iv. The ultimate level of targeting is the one-to-one approach in which each market segment comprises a single customer, although one-to-one marketing is not for every company. v. Mass customization is the ability of a company to meet each customer‘s requirements—to prepare on a mass basis individually designed products, services, programs, and communications. vi. Services are also a natural setting for customized marketing.

C. Strategic and Tactical Targeting i. Strategic targeting focuses on customers whose needs the company can fulfill by ensuring that its offerings are customized to their needs. ii. Tactical targeting identifies the ways in which the company can reach these strategically important customers.

II. Strategic Targeting A. Identification of target customers is directed by the company‘s capability to develop an offering that can meet the needs of these customers more effectively than the competition, while also creating value for the company.

B. Target Compatibility i. Target compatibility is a reflection of the company‘s ability to outdo the competition in fulfilling the needs of target customers—in other words, to create superior customer value. ii. Essential resources for the success of a company‘s targeting strategy include factors such as: • Business infrastructure • Skilled employees • Technological expertise • Strong brands • Collaborator networks iii. A core competency has three characteristics: • It is a source of competitive advantage and makes a significant contribution to perceived customer benefits.

• It has applications in a wide variety of markets.

• It is difficult for competitors to imitate.

C. Target Attractiveness i. Target attractiveness reflects the ability of a market segment to create superior value for the company. ii. Monetary value consists of the capability of customers to engender profits for the company. Monetary value includes both the revenues a particular CS-67 Copyright © 2022 Pearson Education, Inc. Browsegrades.net

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customer segment generates and the costs of serving these customers. iii. Strategic value refers to nonmonetary benefits that customers bring to the company. The three main types of strategic value are social value, scale value, and information value.

III. Tactical Targeting A. Tactical targeting involves identifying target customers, determining which customers to target and which to ignore, and determining how the company‘s offering can be effectively and cost-efficiently communicated and delivered to the target customers.

B. Defining the Customer Profile i. The customer profile involves demographic, geographic, behavioral, and psychographic descriptors. ii. The importance of psychographics, like that of geolocation factors, has been sharpened by the proliferating use of online communication and e-commerce, which have made the moral values, attitudes, interests, and lifestyles of customers more transparent to companies.

C. Aligning Customer Value with Customer Profile i. An essential element of tactical targeting is ascertaining the profile characteristics of strategically important customer segments. ii. To achieve optimal outcomes when evaluating the company‘s tactical targeting options, marketing managers should follow the two main principles of tactical targeting: effectiveness and cost efficiency.

D. Bringing Target Segments to Life with Personas i. Personas are detailed profiles of one, or perhaps a few, hypothetical target consumers, imagined in terms of demographic, psychographic, geographic, or other descriptive attitudinal or behavioral information. ii. Characterizing the target segment with a representative individual makes it easier to visualize the company‘s target customers and better understand how likely they are to respond to the company‘s offering.

IV. Single-Segment and Multi-Segment Targeting A. Single-Segment Marketing i. With single-segment concentration, the firm markets to only one particular segment (e.g., Porsche). ii. The niche market is fairly small but has size, profit, and growth potential. It also is unlikely to attract many competitors, and it gains certain economies through specialization.

B. Targeting Multiple Segments i. As markets become more fragmented, an increasing number of companies develop offerings targeting a greater number of smaller customer segments. ii. With product specialization, the firm sells a certain product to several different market segments. iii. With market specialization, on the other hand, the firm concentrates on assortment of products only to university laboratories. iv. Some companies make the mistake of not aligning the attributes of their offerings with the distinct value sought by target customers in each segment. V. Segmenting Consumer Markets

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A. Market segmentation divides a market into well-defined slices. A market segment consists of a group of consumers who share a similar set of needs and/or profile characteristics.

B. Demographic Segmentation • Age • Stage in the Life Cycle • Gender • Income • Race and Culture C. Geographic Segmentation i. Geographic segmentation divides the market into geographic units such as nations, states, regions, counties, cities, or neighborhoods. ii. Claritas has developed a geoclustering approach called PRIZM Perimeter that defines households with 68 demographically and behaviorally distinct segments reflecting consumers‘ likes, dislikes, lifestyles, and purchase behaviors. iii. Geoclustering helps capture the increasing diversity of the U.S. population.

D. Behavioral Segmentation i. In behavioral segmentation, marketers divide buyers into groups on the basis of their actions. Variables related to users or their usage are: • user status • usage rate • buyer-readiness stage • loyalty status • occasions ii. Theses variables are good starting points for constructing market segments.

E. Psychographic Segmentation i. In psychographic segmentation, buyers are divided into groups on the basis of psychological traits, lifestyle, or values. ii. The main dimensions of the VALS segmentation framework are consumer motivation and consumer resources. iii. Consumers are inspired by one of three primary motivations: ideals, achievement, and self-expression. iv. Psychographic segmentation can also be based on consumers‘ sexual orientation and gender identification.

VI. Segmenting the Business Market A. Business markets are segmented with some of the same variables used in consumer markets: geography, benefits sought, and usage rate. i. Business marketers also use other variables: • Demographic factors • Operating variables • Purchasing approaches • Situational factors • Personal characteristics ii. Finding the sectors with the greatest growth prospects, most profitable customers, and most promising opportunities for the firm is crucial.

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CHAPTER

7

CRAFTING A CUSTOMER VALUE PROPOSITION AND POSITIONING

LEARNING OBJECTIVES After studying this chapter, you should be able to: 7.1 Explain how a company should develop a value proposition and a positioning strategy.

7.2 Describe how a company chooses a frame of reference.

7.3 Discuss how a company identifies points of parity and points of difference.

7.4 Define the key strategies for creating a sustainable competitive advantage.

7.5 Identify alternative strategies to communicate the positioning of a company‘s offerings.

CHAPTER SUMMARY 1. A key aspect of marketing strategy is the development of a value proposition and positioning a company‘s offering to target customers. By clearly articulating its value proposition and positioning, companies can deliver high customer value and satisfaction, which lead to high repeat purchases and ultimately to greater company profitability.

2. Depending on the needs of consumers, an offering can create value across three domains: functional value, which consists of the benefits and costs that are directly related to an offering‘s performance; psychological value, which encompasses the psychological benefits and costs associated with the offering; and monetary value, which includes the financial benefits and costs associated with the offering. Across all three dimensions, consumer value is the difference between the consumers‘ evaluation of all the benefits and costs of an offering and their evaluation of the benefits and costs of the perceived alternatives.

3. The value proposition consists of the whole cluster of benefits the company promises to deliver. It is based on the difference between benefits customers get and costs they assume with respect to the company‘s offering. The value proposition is customer specific; customer segments with different needs require distinct value propositions.

4. Positioning is the act of designing a company‘s offering and image to occupy a distinctive place in the minds of the target customers. Unlike the value proposition, which articulates all benefits and costs of the offering, the positioning zeroes in on the key benefits that will provide consumers with a reason to choose the company‘s offering.

5. Consumers determine the value of an offering relative to a frame of reference used to assess its benefits and costs. An offering can be viewed as attractive in comparison to an inferior offering, and the same offering can be perceived as unattractive when compared

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to a superior offering. Marketers must carefully select a frame of reference that highlights the value of their offering.

6. A key component of developing a positioning strategy is identifying the points of difference—attributes or benefits that are unique to the company‘s offering—and the points of parity—attributes or benefits that the company‘s offering has in common with the competition. Three criteria determine whether a brand association can truly function as a point of difference: desirability, deliverability, and differentiability.

7. Competitive advantage is a company‘s ability to perform in one or more ways that competitors cannot or will not match. An offering‘s competitive advantage gives customers a reason to choose this offering rather than the available alternatives.

The competitive advantage reflects the offering‘s points of difference that are valued by customers. Any product or service benefit that is sufficiently desirable, deliverable, and differentiating can serve as a point of difference and hence create a competitive advantage.

8. Three core strategies are integral to designing a value proposition that makes an offering stand out from the competition and creates a competitive advantage.

These strategies are differentiating on an existing attribute, introducing a new attribute, and building a strong brand.

9. Once marketers have designed an offering‘s positioning strategy, they develop a positioning statement to communicate this positioning to everyone in the organization and ensure that it guides their market actions. The key aspects of crafting an effective positioning statement include communicating an offering‘s category membership, points of parity, and points of difference, and developing a narrative to convey the offering‘s positioning.

OPENING THOUGHT A barrier to effective learning that can be experienced by students in this chapter comes from the concept of ―positioning.‖ Students will be familiar with different products or services, but having them realize what the products‘ and services‘ ―positions‖ are within their frame of references is challenging to verbalize. The instructor is encouraged to use a number of examples of products or services familiar to the students to get this concept fully across.

Secondly, the understanding of the terms points of difference (PODs) and points of parity (POPs) can easily be confused. The instructor is encouraged to use a number of similar products (computers, cell phones, pens, and tablets, for example) and ask students to differentiate these products in terms of the product‘s POPs and PODs, and why these concepts are so important to the marketing of products.

The third challenge presented in this chapter is an understanding that products and markets have a life cycle and undergo changes throughout that process. Again, the use of product or service examples familiar to the students is encouraged in order to communicate the different stages of a product‘s life cycle.

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7. At this point in the semester, student projects should be completed to include their fictional product or service‘s brand positioning. In relationship to the material contained in the chapter, students should have delineated and designed a differentiated brand positioning for their project.

8. Students are to devise a positioning and differentiation strategy for their own local PBS system (radio or television). Students should arrange to meet with local PBS management to elicit information on what challenges their local station/s is/are having in increasing their viewership/listeners. In what stage of the product‘s life cycle (PBS is the product) does your local station fall? What level of competitive advantage, if any, commensurate with the position in the life cycle, does your local PBS station(s) command? What can be done to reverse or continue these trends?

ASSIGNMENTS From the website https://medium.com/@thelogocreative/10-examples-of-powerful-globalbranding-43c5ec35bb12, assign students the objective of reading four articles about branding products and commenting in class about the information contained in the articles and what new information about branding they learned.

Most campus communities have their own radio and/or television broadcasting station. If one is present on your campus, students are to define the college or university‘s station in terms of positioning and differentiation strategy. What stage in the product‘s life cycle is the station?

What can be done to reposition the station to attract more viewership? What is the competitive advantage present in their operations?

Determining the proper competitive frame of reference requires understanding consumer behavior and the consideration sets that consumers use in making brand choices. For a set of three products or services (selected by the students), students should research these companies and provide the companies‘ (and its products‘) value proposition in a matrix.

Consultants Michael Treacy and Fred Wiersema, in their book, The Disciplines of Market Leaders (Reading, MA: Addison-Wesley, 1994) proposed a positioning framework called value disciplines. Within its industry, a firm could aspire to be the product leader, an operationally excellent firm, or a customer intimate firm. Choosing an industry, each student is to identify one or more firms operating within that industry that fits each of these three value disciplines.

Students should define their reasoning for selecting each firm and its placement as either product leader, operationally excellent, or customer intimate.

Points of difference and points of parity are two important concepts of brand development and are driven by two differing strategies—inclusion and differentiation. Students should devise a list of at least five other products/services that they believe demonstrate points of difference and points of parity in their brand positioning. Students must include their reasoning behind the inclusion of these products/services into a category. Good responses will present ―proof‖ of the correct selection by including advertising copy supporting the product or service‘s POD or POP.

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Styles, fashions, and fads fall into special categories when talking about product life cycles.

Some may have a product life cycle measured in weeks, others in months, and yet others in years. Ask the students to list the current fads, fashions, and styles prevalent around campus today. Do any of these fashions, styles, or fads meet or satisfy a strong need? If so, can they predict the length of the life cycle of the ones that satisfy a strong need? Which of the fashions, styles, or fads do the students predict will have longevity? Why or why not?

END-OF-CHAPTER SUPPORT Marketing Spotlight: Unilever: Axe and Dove 1. What are the customer value propositions for Dove and Axe? What are the similarities and differences between the brands?

Suggested answer: The value proposition consists of the whole cluster of benefits the company promises to deliver. It is based on the difference between benefits customers get and costs they assume with respect to the company‘s offering. The value proposition is customer specific; customer segments with different needs require distinct value propositions. Although the Axe and Dove campaigns couldn‘t be more different, and both have sparked much controversy and debate, the two brands have been credited with effectively targeting their consumer base with personal marketing strategies and spot-on messages. Axe‘s success in personal marketing has lifted the brand to become the leader in what many had thought was the mature deodorant category. And, in the 15 years that Dove focused on changing the attitudes of women and promoting positive self-esteem, sales jumped from $2.5 billion to $6 billion.

2.Is there a conflict in the way Unilever markets to women and the way it markets to young men? Is making women sex symbols in Axe ads undoing all the good that might be done in the ―Dove Campaign for Real Beauty‖?

Suggested answer: Answers will vary. There isn‘t a conflict between the way Unilever markets to men and women because the company uses personal marketing messages for both groups. Axe effectively broke through the clutter by finding the right target group and luring these customers with personal marketing messages that hit home. As Axe did for men, the Dove brand smashed stereotypes of what usually appeared in advertising and, as a result, touched a chord with the majority of women worldwide. Students can debate the use of women as sex symbols in Axe ads.

3. How should Unilever manage these brands in the future? Should it try to find a universal positioning that fits both brands?

Suggested answer: For the future, Unilever understands that it must keep the Axe brand fresh, relevant, and cool in order to stay current with its fickle young audience. As a result, the company launches a new fragrance annually and refreshes its online and advertising communications constantly, realizing that new males enter and exit its target market each year.

Perhaps even more important than updating its product line is keeping the brand relevant and in tune with the social trends. Dove should continue to address women‘s self-esteem issues. ―Real Beauty‖ celebrated ―real‖ women and spoke personally to women about the notion that beauty CS-73 Copyright © 2022 Pearson Education, Inc. Browsegrades.net

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comes in all shapes, sizes, ages, and colors. The campaign arose from research revealing that only 4 percent of women worldwide think they are beautiful. Unilever should not try to find a universal positioning that fits both brands. Each brand should focus on developing customers with personal marketing messages that hit home.

Marketing Spotlight: Warby Parker 1. What is Warby Parker‘s customer value proposition? Is this value proposition sustainable?

Suggested answer: The value proposition consists of the whole cluster of benefits the company promises to deliver. It is based on the difference between benefits customers get and costs they assume with respect to the company‘s offering. The value proposition is customer specific; customer segments with different needs require distinct value propositions. Warby Parker‘s founders believed that there was significant opportunity in selling designer glasses at low prices and using the internet to make its sales. Warby Parker set low prices by vertically integrating the company. By creating its own collections of eyeglass frames, Warby Parker avoided licensing fees from designer companies and the need to purchase frames from Luxottica. The company acquired its materials from a family-owned Italian producer and outsourced its manufacturing to China. The production process was completed in New York. The use of pre-made frames reduced costs dramatically. These factors resulted in eyeglasses starting at $95. The value proposition can be sustainable if Warby Parker keeps production costs down.

2. What are the points of parity and the points of difference for Warby Parker relative to its competitors?

Suggested answer: Points of parity are attributes or benefits that the company‘s offering has in common with the competition. Warby Parker has brick-and-mortar locations in common with the competition. Potential customers can try on different glasses by having several styles mailed to them. Warby Parker offers policies such as free shipping and a 30-day, ―no questions asked‖ return policy.

Points of difference are attributes or benefits that are unique to the company‘s offering. Warby Parker offers customized eyeglasses at far lower prices than its competitors: $95 vs. $500.

Eyeglasses are sold online. Online shopping is more convenient. Customers can try on different styles, which are mailed to them. Warby Parker designs its glasses to appeal to fashion-forward and trendy customers looking to express their individualism.

Warby Parker practices social responsibility through the program called ―Buy a Pair, Give a Pair‖. Customer-friendly policies have helped Warby Parker establish its footing in e-commerce and become a giant in the online eyeglass market.

3. What role does direct-to-consumer distribution play in Warby Parker‘s business model? What are the pros and cons of Warby Parker making its products available in traditional eyewear stores?

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Suggested answer: By using direct-to-customer distribution, Warby Parker keeps the cost down and gives the company a competitive advantage. By making products available in eyewear stores, Warby Parker can reach more potential customers and increase sales; however, the cost of the eyewear to the customer would go up because of additional retailing fees. An increased price would negatively affect Warby Parker‘s competitive advantage. Other low-cost eyewear producers could threaten Warby Parker‘s market share.

DETAILED CHAPTER OUTLINE Opening vignette: The strategic investment in developing customer-centric offerings, the competitive positioning of its brand, and the merger with Sprint in 2020, enabled T-Mobile to become the second largest wireless carrier in the United States, with over 100 million customers.

As the success of T-Mobile demonstrates, a company can reap the benefits of carving out a unique position in the marketplace. Creating a compelling, well-differentiated brand position requires a keen understanding of consumer needs and wants, company capabilities, and competitive actions. It also requires disciplined but creative thinking. In this chapter, we outline a process by which marketers can discover the most powerful brand positioning.

I. Develop a Value Proposition and Positioning A. Developing a Value Proposition i. Depending on the needs of customers, an offering can create value across three domains: functional, psychological, and monetary. ii. The customer value proposition is based on the difference between benefits the customer gets and the costs he or she assumes for different choices. iii. Often, managers conduct a customer value analysis to reveal the company‘s strengths and weaknesses relative to those of various competitors.

The steps in this analysis are: • Identify the relevant attributes and benefits that customers value.

• Assess the relative importance of these attributes and benefits.

• Assess the company‘s and competitors‘ performance on the key attributes/benefits.

• Monitor customer value over time.

B. Developing a Positioning Strategy i. Marketing strategy is built on segmentation, targeting, and positioning (STP). ii. Positioning is the act of designing a company‘s offering and image to occupy a distinctive place in the minds of the target market. iii. The goal is to instill the brand in the minds of consumers to maximize the potential benefit to the firm. iv. Positioning zeroes in on the key benefits that will provide consumers with a reason to choose the company‘s offering.

II. Choosing a Frame of Reference A. A frame of reference can serve as a benchmark against which customers can evaluate the benefits of a company‘s offering. i. A good starting point in defining a competitive frame of reference for brand positioning is category membership—the products or sets of products with which a brand competes and that function as close substitutes.

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ii. Actual and potential competitors may not be obvious, and broad competitive frames can result in advantageous comparisons.

III. Identify Potential Points of Difference and Points of Parity A. Identifying Points of Difference: i. Points of difference (PODs) are attributes or benefits that consumers strongly associate with a brand, positively evaluate, and believe they could not find to the same extent with a competitive brand. ii. Strong brands often have multiple points of difference. iii. Creating strong, favorable, and unique associations is a real challenge, but an essential one for competitive brand positioning. iv. Three criteria determine whether a brand association functions as a point of difference: • Desirability • Deliverability • Differentiability B. Identifying Points of Parity (POPs) i. Points of parity are attribute or benefit associations that are not necessarily unique to the brand but may in fact be shared with other brands. ii. These types of associations come in three basic forms: • Category points of parity • Correlational points of parity • Competitive points of parity iii. Often, the key to positioning is not so much about achieving a point of difference as achieving points of parity.

C. Aligning the Frame of Reference, Points of Parity, and Points of Difference i. It is not uncommon for a brand to identify more than one actual or potential competitive frame of reference if competition widens or the firm plans to expand into new categories. ii. If competition is too diverse, however, it may be necessary to prioritize competitors and then choose the most important set of competitors to serve as the competitive frame. iii. Straddle positions allow brands to expand their market coverage and potential customer base. iv. Often a good positioning will have several PODs and POPs. v. Perceptual maps are visual representations of consumer perceptions and preferences. They provide quantitative pictures of market situations and the way consumers view different products, services, and brands along various dimensions. vi. By overlaying consumer preferences with brand perceptions, marketers can reveal ―holes‖ or ―openings‖ that suggest unmet consumer needs and marketing opportunities.

IV. Creating a Sustainable Competitive Advantage A. Sustainable Competitive Advantage as a Marketing Concept i. Competitive advantage is a company‘s ability to perform in one or more ways that competitors cannot or will not match. ii. A leverageable advantage is one that a company can use as a springboard

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to new advantages, much as Microsoft has leveraged its operating system with Microsoft Office and networking applications. iii. Sometimes changes in the marketing environment can open up new opportunities to create a means of differentiation. iv. Often a brand‘s positioning transcends its performance considerations.

B. Strategies for Creating a Sustainable Competitive Advantage i. Three core strategies are integral to designing a value proposition that makes an offering stand out from the competition: • Differentiate on an existing attribute • Introduce a new attribute • Build a strong brand ii. Besides influencing customer beliefs about the offering, a strong brand can actually drive customer behavior when it is the first option that pops into a customer‘s mind as a way to fulfill a given need. iii. Top-of-mind brand awareness creates a competitive advantage in that the brand considered first often becomes a reference point for consumers, the default option against which the other brands are evaluated.

V. Communicating the Offer‘s Positioning A. Crafting a Positioning Statement i. A positioning statement clearly articulates the offering‘s target customers and the key benefit that will provide customers with a reason to choose the company‘s offering. ii. An important question in developing a positioning statement is deciding whether to promote the specific attributes describing a company‘s offering or to focus on the ultimate benefits delivered by these attributes. iii. Multiple attributes may support a certain benefit, and they may change over time.

B. Communicating Category Membership i. Sometimes consumers may know the category membership but not be convinced that the brand is a valid member of the category. ii. The typical approach to positioning is to inform consumers of a brand‘s membership before stating its point of difference. iii. Three main ways to convey a brand‘s category membership are: • Announcing category benefits • Comparing to exemplars • Relying on the product descriptor C. Communicating Conflicting Benefits i. One common challenge in positioning is that many of the benefits that make up points of parity and points of difference are negatively correlated. ii. Individual attributes and benefits often have positive and negative aspects (e.g., La-Z-Boy recliners‘ brand heritage could suggest experience, wisdom, and expertise or it could imply being old-fashioned). iii. The challenge is that consumers typically want to maximize both of the negatively correlated attributes or benefits.

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describe positioning a brand as telling a narrative or story. ii. Narrative branding is based on deep metaphors that connect to people‘s memories, associations, and stories. iii. Five elements of narrative branding: • The brand story in terms of words and metaphors • The consumer journey or the way consumers engage with the brand over time and touch points where they come into contact with it • The visual language or expression for the brand • The manner in which the narrative is expressed experientially or the brand engages the senses • The role the brand plays in the lives of consumers iv. Framework for a brand story: • Setting: time, place, and context • Cast: the brand as a character, including its role in the life of the audience, its relationships and responsibilities, and its history or creation myth • Narrative arc: the way the narrative logic unfolds over time, including actions, desired experiences, defining events, and the moment of epiphany • Language: the authenticating voice, metaphors, symbols, themes, and leitmotifs

CHAPTER

8

DESIGNING AND MANAGING PRODUCTS

LEARNING OBJECTIVES After studying this chapter, you should be able to: 8.1 Explain how companies use product differentiation to create market value.

8.2 Explain the role of product design in differentiating market offerings.

8.3 Discuss the key aspects of designing product portfolios and product lines.

8.4 Describe the key decisions involved in managing product packaging.

8.5 Explain how companies design and manage product guarantees and warranties.

CHAPTER SUMMARY 1. The product is a key element of the marketing mix. Along with services and brands, products are the core drivers of customer benefits and are the reason why consumers are willing to purchase a particular offering.

2. To successfully compete in the market, products must be differentiated. Attributes on the basis of which to differentiate include core functionality, features, performance quality, conformance quality, durability, reliability, form, style, and customization.

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3. Product design—the way a product looks, feels, and functions—offers a potent way to differentiate and position a company‘s products and services. Design is not just a phase in creating a product, service, or application. It‘s a way of thinking that permeates all aspects of the marketing program so that all design aspects work together. Design offers functional and aesthetic benefits and influences both the rational and emotional aspects of consumers‘ decision making.

4. Most products exist as a part of a company‘s product portfolio and/or product line. Each product must be related to other products to ensure that a firm is offering the optimal set of products to fulfill the needs of its different customer segments.

5. A product portfolio encompasses all products offered by a company, including various product categories and product lines. A company‘s product portfolio has a certain width, length, depth, and consistency. These four dimensions are the tools for developing the company‘s marketing strategy and deciding which product lines to grow and which to maintain, harvest, or divest.

6. A product line is a group of related products sold by the same company. A company‘s product line typically contains products that appeal to different layers of customer needs. In offering a product line, companies normally develop a basic platform and modules that can be added to meet different customer requirements and lower production costs. To analyze a product line and decide how many resources to invest in it, product line managers need to look at sales, profits, and market profile.

7. Company objectives influence product line length—the total number of items in the product line. Product lines tend to lengthen over time. A company lengthens its product line in two ways: line stretching and line filling. Line stretching occurs when a company lengthens its product line beyond its current range, whether down- market, up-market, or both. Line filling occurs when a firm adds more items within the existing range.

8. Packaging includes all the activities of designing and producing the container for a product.

Packaging must achieve a number of objectives: identify the brand, con- vey descriptive and persuasive information, facilitate product transportation/protection/storage, and aid consumption. A good package draws the consumer in and encourages product choice.

9. The label can be a simple attached tag or an elaborately designed graphic that is an inherent part of the package. A label performs several functions: it identifies the product or brand; it might describe the product (who made it, where and when, what it contains, how it is to be used, and how to use it safely), and it might promote the product through persuasive messaging.

10. Guarantees and warranties are explicit or implicit promises by sellers that the product will perform as specified or the seller will fix it or refund the customer‘s money during a specified period. Guarantees reduce the buyer‘s perceived risk by suggesting that the product is of high quality and that the company and its service performance are dependable. Whether expressed or implied, warranties and guarantees are legally enforceable.

OPENING THOUGHT Students will be familiar with the ―idea‖ of a tangible product—the physical manifestation—a cell phone or a pair of favorite jeans or shoes. However, students may have trouble understanding the ―totality‖ of the product physically demonstrated—the core benefit, the basic product, expected product, augmented, and potential product. The instructor is encouraged to use

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the class period to allow the students to try to uncover or explore these additional components of the ―product‖ concept so that the students will begin to understand these dimensions better.

Students should have no problems understanding the concepts of durability and reliability, nor should they have problems with brand differentiation or product line depth and breadth. Perhaps the most challenging concept of the chapter is the concept of line stretching and/or line filling.

Be sure to differentiate between up market and down market stretching. Again, the instructor is encouraged to use examples from manufacturers‘ and/or personal experience to communicate these concepts successfully.

Finally, the labeling of a product includes both advertising copy and governmental regulations.

This will be new material for many students.

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TEACHING STRATEGY AND CLASS ORGANIZATION PROJECTS 9. At this point for the semester-long project, students should have set their group project‘s product or service strategy. Instructors are to evaluate their submissions on the product‘s (or service‘s) features, quality, and price, and the other considerations of ―product‖ found in this chapter.

10. In planning its market offering, the marketer needs to address five product levels: core benefit, basic product, expected product, augmented product, and potential product. Students should select a firm within an industry and through research (internet and other formats) outline the firm‘s five product levels for its products. In their research, students should be challenged to discover the firm‘s perception of the customer‘s value hierarchy and total consumption system.

ASSIGNMENTS Convenience items and capital good items can be seen as two ends of the ―product continuum.‖ Convenience items are purchased frequently, immediately, and with minimum effort. Capital goods are those items that last a long period of time and are purchased infrequently by consumers. Students should select a convenience good and a capital good of their choice and compare and contrast the consumers‘ value hierarchy and users‘ total consumption system for each item using the concepts presented in this chapter.

Assign the following readings to students: Robert Bordley, ―Determining the Appropriate Depth and Breadth of a Firm‘s Product Portfolio,‖ Journal of Marketing Research, 40 (February), 2003, pp. 39-53 or Peter Boatwright and Joseph C. Nunes, ―Reducing Assortment: An Attribute-Based Approach,‖ Journal of Marketing, 65 (July), 2001, pp. 50-63.‖How social media influencers affect behavioural intentions towards recommended brands: the role of emotional attachment and information value,‖ Journal of Marketing Management, Published online: 19 Jan 2021 https://www.tandfonline.com/doi/full/10.1080/0267257X.2020.1866648 After reading each article, students should submit a paper summarizing their findings and illustrating the concepts exposed in these papers to the material covered in this chapter.

When the physical product cannot easily be differentiated, the key to competitive success may lie in adding valued services and improving their quality. Examples of adding value in the service component of a product include computers, education, and pizzas. Each student is to select a product in which they think the additional value lies in the service and quality components.

Students should be prepared to defend their selections using the material presented in this chapter.

Product differentiation is essential to the branding process. In choosing to differentiate a product, a marketer has the choice of form, features, performance quality, conformance quality,

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durability, reliability, repairability, and style. Collect examples of currently produced products that have been differentiated and branded for each of these design parameters.

END-OF-CHAPTER SUPPORT Marketing Spotlight: Apple 1. What are the key factors contributing to Apple‘s phenomenal success?

Suggested answer: Apple achieved its impressive market domination through a combination of shrewd product innovation and clever marketing. The marketing effort appealed both to Apple fans and to people who had not used Apple products in the past. To reach such a broad consumer base, the company had to shift its channel strategies. Apple added ―mass electronic‖ retailers such as Best Buy to its existing channels, which quadrupled its number of outlets. Besides enhancing the ―push‖ effort, Apple also developed memorable, creative ―pull‖ advertising that helped drive the popularity of the iPod. Apple‘s next-largest product launch after the iPod was the iPhone, its 2007 entry into the cell phone industry. The iPhone, with its touch-screen pad, virtual keyboard, and internet and e-mail capabilities, launched to huge consumer excitement.

2. Apple‘s product launches over the past decade have been monumental. What makes the company so good at innovation?

Suggested answer: Apple‘s investment in research and development is one way the company remains a leader in this cutthroat industry. Apple spent over $18 billion on research and development in 2020 and continues to increase its R&D budget in order to stay ahead of the competition. Creating, producing, and launching new products is a top priority for Apple. Supported by creative marketing, the company‘s pioneering is the reason why consumers and analysts stay on their toes awaiting news of Apple‘s latest products.

3. How important was the iPhone to Apple‘s current success? Discuss the significance of the iPad and Apple Watch launches to Apple‘s new-product development strategy.

Suggested answer: The iPhone was critical to Apple‘s success. The iPhone, with its touch-screen pad, virtual keyboard, and internet and e-mail capabilities, launched to huge consumer excitement: people lined up for hours to be among the first to buy one. Seventy-four days after the product‘s debut, Apple had sold its one-millionth iPhone.

In fact, half the iPod buyers switched to AT&T just to have a chance to own an iPhone.

In 2015, Apple introduced its first wearable device, Apple Watch, offering fitness tracking and health-oriented capabilities. Apple Watch ultimately became one of Apple‘s fastest growing product categories, selling over 30 million units in 2019. Apple remains true to its mission of staying at the forefront of user-friendly consumer technologies.

Marketing Spotlight: Casper 1. What makes Casper‘s products desirable to consumers? What are the specific product attributes that are particularly valued by consumers?

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Suggested answer: Casper founders believed that mattresses sold by competitors were priced too high. The price of a queen mattress at the time from one of these companies could go as high as $2500. In addition, most mattresses were purchased in stores. Casper‘s founders believed that the in-store purchasing process was one of the worst buying experiences found anywhere. Customers weren‘t able to do much more than lie on the mattress in the store for a couple of minutes.

Casper applied the business model of Warby Parker to the mattress industry—offering designer sunglasses at radically low prices and its online sales model. By selling mattresses online, Casper eliminated the traditional painful consumer experience of purchasing a mattress in stores and benefited from low prices. Casper also offered free delivery and a 100-night free trial to customers.

2. How should Casper compete with established companies and start-ups ramping up their direct-to-consumer offerings? Should Casper shift some of its efforts from product innovation to more aggressive communication and brand building?

Suggested answer: Answers will vary. Casper should continue its social media advertising.

Casper‘s social media team frequently engages with costumers on platforms such as Facebook, Instagram, and Twitter. Casper uploaded popular ―unboxing‖ videos on these platforms that show consumers how their tiny mattress remarkably unfurls and expands to full size when moved from the box. Casper also ran a weekly series on the Instagram Stories platform, where the company appealed to customers suffering from Monday morning blues by destroying alarm clocks in spectacular fashion. Casper launched the website Insomnobot 3000, where a chatbot sends funny text messages to those who have trouble falling sleep at night. The customer engagement and advertising efforts resulted in high net promoter scores, a common metric for consumer satisfaction. Casper should use more aggressive communication and brand building.

3. Should Casper focus on extending its product line to try to offer a mattress ―for every purse and purpose‖? Or should it focus on offering a single type of mattress (in different sizes) in order to streamline innovation efforts and simplify consumer choice?

Suggested answer: Answers will vary. Casper could extend the product line somewhat and still offer innovation efforts. For example, My Pillow offers different types and sizes of pillows but has also branched out into mattress toppers and sheets.

DETAILED CHAPTER OUTLINE Opening vignette: At the heart of a great brand is a great product. To achieve market leadership, firms must offer products and services of superior quality that provide unsurpassed customer value. Tesla has conquered the electric car market in the United States, thanks in part to a relentless focus on product innovation and performance.

The customer will judge the offering on three basic elements: product features and quality, service mix and quality, and price, which must be meshed into a competitively attractive market offering.

I. Product Differentiation A. To successfully compete in the market, products must be differentiated. i. Attributes on the basis of which to differentiate include: CS-83 Copyright © 2022 Pearson Education, Inc. Browsegrades.net

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• Core functionality • Features • Performance quality • Conformance quality • Durability • Reliability • Form • Style • Customization II. Product Design A. Design is the totality of features that affect the way consumers perceive a product‘s look, feel, and function. i. Design offers functional and aesthetic benefits and appeals to both our rational and emotional sides.

B. Power of Design i. In a visually oriented culture, transmitting brand meaning and positioning through design is critical. ii. Holistic marketers recognize the emotional power of design and the importance to consumers of look and feel as well as function.

C. Approaches to Design. A well-designed product is easy to manufacture and distribute. i. To the customer, it is pleasant to look at and easy to open, install, use, repair, and dispose of. The designer must take all these goals into account. ii. Design thinking is a very data-driven approach with three phases: observation, ideation, and implementation.

III. Product Portfolios and Product Lines A. Product Portfolio Design i. A product portfolio encompasses all products offered by a company, including various product categories and product lines. ii. A company‘s product portfolio has a certain width, length, depth, and consistency.

B. Product Line Analysis i. A product line is a group of related products sold by the same company. ii. Companies develop a basic platform and modules that can be added to meet different customer requirements and lower production costs. See Fig. 8.1. iii. A product map allows a company to see its main competitors at a glance and helps identify market segments and spot market opportunities. See Fig. 8.2.

C. Product Line Length i. Company objectives influence product line length—the total number of items in the product line. ii. A company lengthens its product line in two ways: line stretching and line filling. iii. Line Stretching occurs when a company lengthens its product line beyond its current range, whether down-market, up-market, or both ways.

• Down-Market Stretch: A company positioned in the middle market may want to introduce a lower-priced line for any of three reasons:

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o The company may notice strong growth opportunities. o The company may wish to tie up lower-end competitors who might otherwise try to move up-market. o The company may find the middle market stagnating or declining.

• Marketers face a number of naming choices in deciding to move a brand downmarket. o Use the parent brand name on all its offerings. o Introduce lower-priced offerings using a sub-brand name. o Introduce the lower-priced offerings under a different name (expensive to implement and means brand equity will have to be built from scratch, but the equity of the parent brand name is protected).

• Risks associated with down-market stretching: o Not pricing low enough o Cannibalizing sales o Consumers not understanding how different offerings are compartmentalized/differences between them • Up-market stretch: enter the high end of the market to achieve more growth, realize higher margins, or simply position themselves as full-line manufacturers. o Some companies use their own names. o Some companies create new names. o Some brands have used modifiers to signal a quality improvement.

• Two-way stretch: companies serving the middle market might stretch their line in both directions. iv. Line filling: lengthening the product line by adding more items within the present range; overdone if it results in cannibalization and confusion.

IV. Managing Packaging and Labeling A. Packaging i. Includes all the activities of designing and producing the container for a product. ii. Packaging is important because it is the buyer‘s first encounter with the product.

• Draws the consumer in and encourages product choice • Acts as a ―five-second commercial‖ for the product • Affects consumers‘ later product experiences when they open it and use what‘s inside • Packaging may be an important part of a brand‘s equity iii. Several factors contribute to the growing use of packaging as a marketing tool.

• Self-service (more choices; less explanation) • Consumer affluence (increases willingness to pay for the convenience, appearance, dependability, and prestige of better packages) • Company and brand image (recognition of the company or brand) • Innovation opportunity (make products more convenient and easier to use) iv. Packaging must achieve a number of objectives.

• Identify the brand.

• Convey descriptive and persuasive information.

• Facilitate product transportation and protection.

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• Assist at-home storage.

• Aid product consumption. v. Packaging color is important because color carries different meanings in different cultures and market segments. vi. Packaging updates and redesigns can occur frequently to keep the brand contemporary, relevant, or practical. vii. After the company designs its packaging, it must test it.

B. Labeling i. A label performs several functions. ii. It identifies the product or brand. iii. The label might describe the product: who made it, where and when, what it contains, how it is to be used, and how to use it safely. iv. The label might promote the product through attractive graphics. v. In 1914, the Federal Trade Commission Act held that false, misleading, or deceptive labels or packages constitute unfair competition. vi. The Fair Packaging and Labeling Act, passed by Congress in 1967, set mandatory labeling requirements, encouraged voluntary industry packaging standards, and allowed federal agencies to set packaging regulations in specific industries. vii. The Food and Drug Administration (FDA) has required processed-food producers to include nutritional labeling that clearly states the amounts of protein, fat, carbohydrates, and calories contained in products, as well as vitamin and mineral content as a percentage of the recommended daily allowance. viii. The FDA has also taken action against potentially misleading uses of such descriptions as ―light,‖ and ―low fat.‖ V. Managing Guarantees and Warranties A. A guarantee ensures that if a product fails to function as promised by the company or as customers expect, the company will provide some type of compensation to the purchaser. i. Many sellers offer either general or specific guarantees. ii. A company can provide customers with an overall satisfaction guarantee that applies to any facet of the product experience, whether it involves the actual quality of the product or the customer‘s assessment of product quality. iii. A company might provide a specific attribute guarantee that applies to a particular aspect of the product, such as performance, reliability, or durability.

B. Warranties provide customers and the company with much the same benefits as guarantees do. i. Warranties and guarantees differ on two key dimensions.

• Warranties usually cover the repair or replacement of the purchased item.

•Warranties usually do not allow the customer to return the product for a refund, which is the case with guarantees.

• Guarantees are free of charge. ii. Extended warranties and service contracts can be extremely lucrative for manufacturers and retailers. iii. Effective product guarantees and warranties should have three traits:

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• • •

Relevant Easily understood Easy for the customer to invoke

CHAPTER

9

DESIGNING AND MANAGING SERVICES

LEARNING OBJECTIVES After studying this chapter, you should be able to: 9.1 Define the distinctive characteristics of services.

9.2 Explain the new realities that service firms face.

9.3 Identify the key strategies to achieve service excellence.

9.4 Explain how service firms can manage quality effectively.

CHAPTER SUMMARY 1. A service is an act that one entity performs for another that is essentially intangible and does not result in the ownership of anything. It may or may not be tied to a physical product.

2. Because services are generally high in experience and credence qualities, there is more risk in their purchase, and consumers tend to rely heavily on price, provider, and physical cues to judge quality. Switching costs for many services tend to be high because customers are very loyal to service providers who satisfy them.

3. Services are intangible, inseparable, variable, and perishable. Each characteristic poses challenges and requires certain strategies. Marketers must find ways to give tangibility to the intangible, increase the productivity of service providers, enhance and standardize the quality of the service provided, and match the supply of services with market demand.

4. The marketing of services faces new realities in the 21st century because of customer empowerment, customer coproduction, and the need to satisfy employees as well as customers. The digital era has clearly altered customer relationships. Customers do not merely purchase and use a service; they play an active role in its delivery.

5. Achieving excellence in service marketing calls not only for external marketing, but also for internal marketing to motivate employees and for interactive marketing to emphasize the importance of both ―high tech‖ and ―high touch.‖ 6. Top service companies adopt a strategic concept, have a history of top-management commitment to quality, institute high standards, establish profit tiers, and pay attention to their systems for monitoring service performance and customer complaints. They also differentiate their brands through primary and secondary service features and continual innovation.

7. Superior service delivery requires managing customer expectations and incorporating CS-87 Copyright © 2022 Pearson Education, Inc. Browsegrades.net

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self-service technologies. Customers‘ expectations play a critical role in their service experiences and evaluations. Companies must manage service quality by understanding the effects of each service encounter. Well-managed service companies that achieve marketing excellence have in common a focus on customer-centricity, a commitment to service quality, and the aim of catering to high-value customers.

8. Service differentiation is a crucial component of a company‘s marketing success. The main service differentiators are ease of ordering; speed and timing of delivery; installation, training, and consulting; maintenance and repair; and returns.

9. Service quality is a key driver of customer satisfaction. There are five determinants of service quality: reliability, responsiveness, assurance, empathy, and tangibles. To create customer value, a company must strive to deliver superior service on all of these dimensions, while focusing on those services that customers value most.

OPENING THOUGHT The teaching of ―services marketing‖ can pose a challenge to the instructor by the very nature of a ―service‖—its intangibility, inseparability, variability, and perishability. A challenge to the instructor in teaching this course lies in connecting these concepts to the students in ways that they will relate to and understand. Students use services every day in their role as students; it means that they are receiving a service—instruction.

The instructor is encouraged to use the example of ―instruction‖ or the university setting to demonstrate the four dimensions of services that differentiate it from a physical product: intangible, inseparable, variability, and perishability. Most students will understand that a service cannot be felt, touched, or inventoried; some students will not fully understand the interconnectedness between the service provider and the service ―receiver‖ or consumer.

Students may have some difficulty in conceptualizing the service dimensions of reliability, responsiveness, assurance, empathy, and tangibles as part of the service marketing dimensions.

The instructor is encouraged to use multiple examples of excellent service companies, guest speakers, and personal or student real-life examples to illustrate the challenges facing the marketing of services to the public.

The interaction or role that the customer plays in the delivery of a service may pose a barrier because many students (and of course actual consumers) do not fully understand their part in the service process or maximize their participation in the process. This topic is a good one for an inclass discussion or outside assignment. Students, as well as instructors, can and do like to tell service stories (positive or negative) that can illustrate and/or demonstrate good and bad service marketing.

TEACHING STRATEGY AND CLASS ORGANIZATION PROJECTS 11. At this point in the semester-long project, those students who have selected a ―service‖ idea for the marketing plan must submit their offering. Students whose project is a ―productbased‖ component do not have anything to submit for this chapter.

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12. Using the information on marketing research covered in this text, ask the students to prepare a teaching SERVQUAL® form to be administered in all the classes taught in your department. This SERVQUAL survey should focus on evaluating the students‘ understanding of their role in the service delivery process of teaching. If your college or university has a standardized form for evaluating students‘ perceptions of learning, ask the students to compare and contrast these two measures. Where are they different and where are they similar?

ASSIGNMENTS The Mayo Clinic has been built as one of the most powerful services brands on its firmly held belief in and focus on the experience of the patient. As one staff member explained, ―People don‘t come to the hospital alone.‖ In small groups, students should review their local hospitals (especially the one on campus) to see if their local hospital adheres to the tenants of a good service provider. A starting point is an examination of the hospital‘s mission statement, beliefs, and patient rights policies (if available).

We all have ―service failure‖ stories to tell. As a matter of fact, most people love to tell about the time that such-and-such firm provided sub-par service to us as consumers. Sometimes these stories are humorous and other times they are sad. Ask the students to think about such stories and prepare to tell these stories in class. These stories can be their own stories or those of a close friend or family member. In preparing to recount the story line, students should first analyze the incident in terms of the concepts and tenants presented in this chapter. For example, when the restaurant did not address the customer‘s ―cold food,‖ it was a service failure. However, was that service failure due to insufficient training, inadequate hiring practices, or an inability of the restaurant to monitor customer expectations? Students should come to class prepared to identify (as close as possible) the causes of the service failure.

Search and experience qualities are two characteristics of service providers, yet each provides consumers with differing ―clues‖ as to the competency of the service provider. In this assignment, students are to identify two different service providers—one that is high in search qualities and one that is high in experience qualities. Students should outline their understanding of how consumers select a service high in search qualities and high in credence qualities.

Have students read Elisabeth Sullivan, ―Happy Endings Lead to Happy Returns,‖ Marketing News, October 30, 2009, p. 20. and interview five people about service failures and how they reacted (e.g., did nothing, told friends, etc.). Ask the students to analyze the responses, summarize the results, and list the implications for firms.

END-OF-CHAPTER SUPPORT Marketing Spotlight: The Ritz-Carlton 1. How does The Ritz-Carlton service match up against competitive hotels? What are the key differences?

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Suggested answer: The Ritz-Carlton occupies a distinctive ―niche‖ in consumer/customer expectations and performance—ultimate luxury and unparalleled customer service. The Ritz-Carlton invented this niche by revolutionizing how the U.S. traveler views and experiences customer service and luxury in a hotel. The Ritz-Carlton fulfills its customer service promise by providing impeccable training, and in its 12 service values, which also include self-reflection and respect in the employee‘s professional appearance and behavior.

2. Discuss the importance of the ―Wow!‖ stories in customer service for a luxury hotel like The Ritz-Carlton.

Suggested answer: The ―wow stories‖ serve as a way to highlight and make real/concrete one of The Ritz-Carlton‘s 12 service values. By communicating individual ―wow stories‖ to all employees, it communicates to them that everyone has the power to ―wow‖ a guest.

3. What are the key aspects of The Ritz-Carlton corporate culture? What role does the corporate culture play in enabling the company to deliver a superior customer experience?

Suggested answer: The customer service experience is defined by The Ritz-Carlton‘s Gold Standards, which reflect the values and philosophy by which The Ritz-Carlton operates. The Gold Standards can best be described by its mission statement: ―The Ritz-Carlton is a place where the genuine care and comfort of our guests is our highest mission.‖ The role of corporate culture is important because the values of The Ritz-Carlton are seen in the behavior of its employees. For example, a distinct feature of The Ritz-Carlton‘s customer service is that employees are fully empowered to provide unique and personalized service. Employees are encouraged to make guests happy using any means, without having to consult a supervisor first.

Marketing Spotlight: Nordstrom 1. What role does service play in Nordstrom‘s positioning? Does service play the same role in online and in-store experiences?

Suggested answer: Nordstrom has positioned itself as the premiere service provider in the fashion industry. Stories of Nordstrom‘s exceptional service abound. There are many examples of exceptional customer service, and Nordstrom‘s ―no questions asked‖ return policy remains intact today. Its sales representatives send thank-you cards to customers who shop there, warm up their customers‘ cars on cold days, and have hand-delivered special orders to customers‘ homes. Nordstrom installed a tool called Personal Book at its registers that enables salespeople to record and (later) review and recall customers‘ specific preferences to better personalize their shopping experience. Service plays the same vital role in online and in-store experiences.

2. How else can Nordstrom continue to provide exceptional customer service and increase brand loyalty?

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Suggested answer: Students can share ideas for good customer service. Nordstrom‘s focuses on building relationships with customers. For example, Nordstrom‘s sales associates have the freedom to sell merchandise in any department, giving them even more opportunities to develop their relationship with the customers. Nordstrom also provides customers with multiple channels for shopping, allowing them to buy something online and pick it up at a store within an hour.

Nordstrom‘s also has personal shoppers to assist those who are too busy to shop. These service features increase brand loyalty.

3. How should Nordstrom address the growing popularity of online shopping? Can it successfully compete in the online space? Who are Nordstrom‘s biggest competitors, and how do they stack up?

Suggested answer: Nordstrom can offer its excellent service to online customers by offering chat capabilities to answer questions, targeted messages based on past purchase behavior, free shipping, discounts, and benefits for preferred customers. Nordstrom‘s biggest competitors are other luxury goods department stores. However, Nordstrom remains the market leader because of its commitment to service. Many customers choose to shop at Nordstrom, rather than at its competitors, because of their existing relationship and the hassle-free return policy. Nordstrom remains strategically focused on customer service and constantly looks for new ways to deepen and develop its customer–salesperson relationship.

DETAILED CHAPTER OUTLINE Opening vignette: As companies find it harder to differentiate their physical products, they turn to service differentiation, whether that means on-time delivery, better and faster response to inquiries, or quicker resolution of complaints. Top service providers know these advantages well and also how to create memorable customer experiences. One service business that understands how to keep customers satisfied is Publix. Publix has been one of Fortune magazine‘s ―100 Best Companies to Work For‖ since the list‘s inception. By passionately focusing on creating superior customer value, Publix aims to stay true to its mission to be the premier quality food retailer in the world. It is critical to understand the special nature of services and what that means to marketers. In this chapter, we systematically analyze services and how to market them most effectively.

I. The Nature of Services i. Service is any act or performance one party can offer to another that is essentially intangible and does not result in the ownership of anything. ii. Service industries are everywhere.

• The government sector, with its courts, employment services, hospitals, loan agencies, military services, police and fire departments, postal service, regulatory agencies, and schools, is in the service business.

• The private nonprofit sector—museums, charities, churches, colleges, foundations, and hospitals—is in the service business.

• A good part of the business sector, with its airlines, banks, hotels, insurance companies, law firms, management consulting firms, medical practices, motion picture companies, plumbing companies, and real estate firms, is in the CS-91 Copyright © 2022 Pearson Education, Inc. Browsegrades.net

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service business. iii. Many workers in the manufacturing sector, such as computer operators, accountants, and legal staff, are really service providers.

A. The Service Aspect of an Offering i. A pure tangible good, such as soap, toothpaste, or salt, with no accompanying services ii. A tangible good with accompanying services (typically, the more technologically advanced the product, the greater the need for high-quality supporting services) iii. A hybrid offering of equal parts goods and services iv. A major service with accompanying minor goods and services v. A pure service, primarily an intangible service vi. Because services are generally high in experience and credence qualities, there is more risk in their purchase, with several consequences.

• Service consumers generally rely on word of mouth rather than advertising.

• They rely heavily on price, provider, and physical cues to judge quality.

• They are highly loyal to service providers who satisfy them.

• Because switching costs are high, consumer inertia can make it challenging to entice business away from a competitor.

B. Distinctive Characteristics of Services i. Intangibility: unlike physical products, services cannot be seen, tasted, felt, heard, or smelled before they are bought. ii. To reduce uncertainty, buyers will look for evidence of quality by drawing inferences from the place, people, equipment, communication material, symbols, and price. iii. The service provider‘s task is to ―manage the evidence,‖ to ―tangibilize the intangible‖ through any number of marketing tools. iv. All aspects of the service delivery process can be branded. v. Service providers often choose brand elements—logos, symbols, characters, and slogans—to make the service and its key benefits more tangible. vi. Inseparability: services are typically produced and consumed simultaneously. vii. Variability: quality of services depends on who provides them, when and where, and to whom; services are highly variable. Here are three steps service firms can take to increase quality control: • Invest in good hiring and training procedures.

• Standardize the service-performance process throughout the organization.

• Monitor customer satisfaction. viii. Perishability: services cannot be stored, so their perishability can be a problem when demand fluctuates. See Fig. 9.1. ix. Demand or yield management means that the right services must be available to the right customers at the right places at the right times and right prices to maximize profitability. x. On the demand (customer) side: • Differential pricing will shift some demand from peak to off-peak periods.

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• Nonpeak demand can be cultivated.

• Complementary services can provide alternatives to waiting customers.

• Reservation systems are a way to manage the demand level. xi. On the supply side: • Part-time employees can serve peak demand.

• Peak-time efficiency routines can allow employees to perform only essential tasks during peak periods.

• Increased consumer participation frees service providers‘ time.

• Shared services can improve offerings.

• Facilities for future expansion can be a good investment.

II. The New Services Realities A. Increasing Role of Technology i. Technology is changing the rules of the game for services in a very fundamental way. ii. The Covid-19 pandemic accelerated the digital transformation of services by forcing companies to transform their businesses by integrating digital technology to change how they deliver value. iii. Technology also has great power to make service workers more productive. iv. The internet and cloud computing enable firms to improve their service offerings and strengthen their relationships with customers by allowing for true interactivity, customer-specific and situational personalization, and realtime adjustments of the firm‘s offerings.

B. Customer Empowerment i. Customers are becoming more sophisticated about buying product-support services, are pressing for ―unbundled services‖ and the right to select the elements they want, and can give feedback with a mouse click. ii. The reality is that customers do not merely purchase and use a service; they play an active role in its delivery. iii. Solving a customer‘s problem quickly and easily goes a long way toward winning long-term loyal customers.

C. Customer Coproduction i. Customers do not merely purchase and use a service; they play an active role in its delivery. ii. Their words and actions affect the quality of their service experiences and those of others, as well as the productivity of frontline employees. iii. Customers often feel they derive more value, and feel a stronger connection to the service provider, if they are actively engaged in the service process. iv. To avoid service failures: • Redesign processes and redefine customer roles to simplify service encounters.

• Incorporate the right technology to aid employees and customers.

• Create high-performance customers by enhancing their role clarity, motivation, and ability.

• Encourage ―customer citizenship‖ so customers help each other. At golf courses, players can not only follow the rules by playing and behaving appropriately, they can encourage others to do so.

D. Satisfying Employees as Well as Customers i. Excellent service companies know that positive employee attitudes will CS-93 Copyright © 2022 Pearson Education, Inc. Browsegrades.net

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strengthen customer loyalty. ii. Employees thrive in customer-contact positions when they have an internal drive to: • pamper customers • accurately read their needs • develop a personal relationship with them • deliver high-quality service to solve customers‘ problems iii. Companies must audit employee job satisfaction regularly.

III. Achieving Serving Excellence i. Marketing excellence in services requires excellence in three broad areas: • External marketing describes the normal work of preparing, pricing, distributing, and promoting the service to customers.

• Internal marketing describes training and motivating employees to serve customers well.

• Interactive marketing describes the employees‘ skill in serving the client.

A. Best Practices of Top Service Companies i. Top service companies have a clear sense of their target customers and their needs and have developed a distinctive strategy for satisfying them. ii. Customer-centricity means seeing the world in general, and a company‘s services in particular, from the customer‘s point of view. iii. The best service providers set high quality standards. iv. Top firms audit their own service performance, as well as that of competitors. v. Firms coddle big spenders to retain their patronage. Customers in highprofit tiers get special discounts, promotional offers, and lots of special services; those in lower-profit tiers who barely pay their way may get more fees, stripped-down service, and voice messages to process their inquiries. vi. Managing Customer Complaints. On average, 40 percent of customers who suffer through a bad service experience with a company stop doing business with it. vii. Customers evaluate complaint incidents in terms of the outcomes they receive, the procedures used to arrive at those outcomes, and the nature of interpersonal treatment during the process.

B. Differentiating Services i. The main service differentiators are ease of ordering; speed and timing of delivery; installation, training, and consulting; maintenance and repair; and returns. ii. When the physical product cannot easily be differentiated, the key to competitive success may lie in adding valued services and constantly improving their quality. iii. Ease of Ordering. Ordering ease reflects how simple it is for the customer to place an order with the company. iv. As markets become increasingly competitive, many companies focus on making the ordering process as convenient as possible. v. Striving to simplify the ordering process is not limited to consumer markets. It plays a major role in business markets as well.

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vi. Speed and Timing of Delivery. Delivery entails how well the product or service is brought to the customer, including the speed, accuracy, and care that characterizes the process. vii. Installation, Training, and Consulting. Ease of installation is a true selling point for technology novices and for buyers of complex products like heavy equipment. viii. Maintenance and Repair. Maintenance and repair programs help customers keep purchased products in good working order. These services are critical in business-to-business settings. ix. Returns. A nuisance to customers, manufacturers, retailers, and distributors alike, product returns are also an unavoidable reality of doing business, especially for online purchases.

C. Innovation with Services i. New service categories are constantly being introduced to satisfy unmet needs and wants. ii. The following service categories have emerged and organizations have found creative solutions in existing categories: • Online travel • Retail health clinics • Private aviation IV. Managing Service Quality A. Flawless service delivery is the ideal output for any service organization. Two important activities are managing customer expectations and incorporating selfservice technologies.

B. Managing Customer Expectations i. Customers form service expectations from many sources, such as past experiences, word of mouth, and advertising. ii. In general, they compare perceived and expected service. iii. If the perceived service falls below the expected service, customers are disappointed. iv. Successful companies add benefits to their offering that not only satisfy customers but surprise and delight them by exceeding expectations. v. Five gaps that prevent successful delivery: • Gap between consumer expectation and management perception • Gap between management perception and service-quality specification • Gap between service-quality specifications and service delivery • Gap between service delivery and external communications • Gap between perceived and expected service C. Five determinants of service quality, in descending order of importance See Fig.9.2.

• Reliability—the ability to perform the promised service dependably and accurately • Responsiveness—the willingness to help customers and provide prompt service • Assurance—the knowledge and courtesy of employees and their ability to convey trust and confidence • Empathy—the provision of caring, individualized attention to customers CS-95 Copyright © 2022 Pearson Education, Inc. Browsegrades.net

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• Tangibles—the appearance of physical facilities, equipment, staff, and

communication materials i. Based on these five factors, researchers developed the 21-item SERVQUAL scale. ii. They noted the presence of a zone of tolerance—a range in which a service will be deemed satisfactory, anchored at one end by the minimum level of service that consumers are willing to accept and, at the other end, by the level they believe can and should be delivered. iii. Tests of the dynamic process model reveal that the two different types of expectations have opposite effects on perceptions of service quality.

• Increasing customer expectations of what the firm will deliver can lead to improved perceptions of overall service quality.

• Decreasing customer expectations of what the firm should deliver can also lead to improved perceptions of overall service quality.

D. Managing Self-Service i. Incorporating Self-Service Technologies (SSTs) provides convenience. ii. Every company needs to think about improving its service using SSTs. iii. Successfully integrating technology into the workforce thus requires a comprehensive reengineering of the front office to identify what people do best, what machines do best, and how to deploy them separately and together. iv. Some companies have found the biggest obstacle is not the technology itself, but convincing customers to use it, especially for the first time.

E. Managing Product-Service Bundles i. No less important than service industries are product-based industries that must provide a service bundle. ii. Manufacturers of equipment—ranging from small appliances and office machines to tractors, mainframes, and airplanes—must all provide product-support services, now a battleground for competitive advantage. iii. In the global marketplace, companies that make a good product but provide poor local service support are seriously disadvantaged. iv. The quality of customer-service departments varies greatly. At one extreme are those that simply transfer customer calls to the appropriate person for action with little follow-up. At the other extreme are departments that are eager to receive customer requests, suggestions, and even complaints and that handle them expeditiously. v. Manufacturers usually start by running their own parts-and-service departments. vi. Many equipment manufacturers price their equipment low and compensate by charging high prices for parts and service. vii. Over time, manufacturers switch more maintenance and repair service to authorized distributors and dealers. viii. Customer-service choices are increasing rapidly, however, and equipment manufacturers increasingly must figure out how to make money on their equipment, independent of service contracts.

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CHAPTER

10

BRANDS STRONG BUILDING

LEARNING OBJECTIVES After studying this chapter, you should be able to: 10.1 Explain the role of brands in creating market value.

10.2 Describe the key principles in designing brand elements and associations.

10.3 Discuss how a company should design the hierarchy of its brands.

10.4 Explain how a company should manage its brands over time.

10.5 Describe the key aspects of luxury branding.

CHAPTER SUMMARY 1. A brand is a name, term, sign, symbol, design, or some combination of these elements that is intended to identify the goods and services of one seller or group of sellers and to differentiate them from those of competitors. The ultimate purpose of the brand is to create, for consumers, the company, and its collaborators, value that goes beyond the value created by the product and service aspects of the offering.

2. Brands are valuable intangible assets that offer a number of benefits to customers and firms and that need to be managed carefully.

3. The value created by a brand is captured by two key concepts: brand equity and brand power.

Brand equity reflects the premium that is placed on a company‘s valuation because of its ownership of the brand. It encompasses the net present value of the total financial returns that the brand will generate over its lifetime. Brand power reflects the degree to which the brand influences the way consumers think, feel, and act with respect to the brand. It is thus the differential effect that brand knowledge has on consumer response to the marketing of that product or service.

4. Brand elements are devices that identify and differentiate the brand. Common brand elements include brand names, logos, symbols, mottos, and packaging. Effective brand elements are memorable, meaningful, likable, transferable, adaptable, and protectable.

5. To build strong brands, marketers link brands to other information in memory that conveys meaning to consumers. These ―secondary‖ brand associations link the brand to sources such as the company itself, to countries or other geographic regions, and to channels of distribution, as well as to other brands, characters, spokespeople, sporting or cultural events, or other third-party sources.

6. Brand hierarchy reflects the way a company‘s brands are related to a company‘s products and services, as well as to one another. Developing a meaningful brand hierarchy is particularly important for companies that are managing diverse brand portfolios. The hallmark of an optimal brand portfolio is the ability of each brand to maximize equity in combination with all the other

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brands in the portfolio. Three general brand-portfolio strategies are house-of-brands, brandedhouse, and sub- branding strategies.

7. Marketers often combine their brands with brands from other companies to create superior market value. Cobranding involves two or more brands marketed together. Ingredient branding is a special case of cobranding involving materials, components, or parts that are necessarily contained within other branded products.

8. Brands evolve over time. The two most common ways in which brands evolve are through brand repositioning and through brand extensions. Brand repositioning involves changing the meaning of an existing brand without necessarily associating it with new products or services. In contrast, brand extension involves using an established brand to introduce a new product in a different category or price tier.

9. Brands play a key role in designing luxury offerings, because the brand and its image are often key competitive advantages that create significant value for both the company and its customers.

All marketing decisions associated with luxury brands—product, service, pricing, sales incentives, communication, and distribution—must be aligned to ensure that purchase and consumption experiences are consistent with the image of the brand.

OPENING THOUGHT This chapter will present some challenges to students new to marketing. The concept of a ―brand‖ is discussed in depth in the chapter and because that concept is much more than a product, some students will have difficulty in understanding the total concept of a ―brand.‖ The instructor is urged to use a number of concrete examples gleaned from the student‘s personal experiences of what a ―brand‖ is. The instructor is urged to spend a considerable amount of time trying to differentiate between the symbol or package, and the total ―brand.‖ The instructor is cautioned to ensure that the concept of a ―brand‖ has been satisfactorily understood by the students before proceeding further with the chapter material.

The second challenge presented in the chapter is the fact that ―brands‖ represent financial assets to a company and are valuable intangible assets that need to be managed, as well as representing perceived differences in product performances. The instructor is encouraged to use numerous examples of competing products in a category to demonstrate to the students the differences and perceived differences among and between like products. An in-class exercise could include asking students to mention products or services that they are loyal to and eliciting their reasons for this loyalty, comparing and contrasting these opinions with other students in the class to demonstrate brand loyalty and brand switching. This chapter also contains a number of definitions that the instructor is urged to define and differentiate clearly so that the students understand.

TEACHING STRATEGY AND CLASS ORGANIZATION PROJECTS 13. At this point in the semester, students are to have their ―branding‖ strategy developed for their project. Questions to have been completed include the brand name, its equity position, and the decisions in developing the brand strategy.

14. In small groups (five students suggested as the maximum), have them list their favorite branded product or service (Google, Nike, or others). Based upon the information contained

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in this chapter, the students are to collect information, via on-campus research, on the brand‘s brand equity based upon the Brand Asset Valuator, developed by Young and Rubicam.

ASSIGNMENTS Individually, have the students visit Brandchannel (www.brandchannel.com) and a) choose a brand listed and summarize the views regarding the brand as expressed by brandchannel.com, or b) choose the ―papers‖ icon and read and summarize one of the papers listed.

Either in small groups or individually, ask the students to conduct a small research project with students on campus regarding the student‘s brand knowledge of a particular brand (again, the students can select their ―brand‖ for this exercise). In their research, the students are to delineate the brands: unique brand association, the thoughts, feelings, images, experiences, and beliefs elicited by the brand. This exercise builds on the concepts of marketing research covered in Chapter 4 of this text. Important information for the students to postulate is why in their research some of the respondents held such beliefs about the brand and why others did not.

In Seth Godin‘s book, Permission Marketing: Turning Strangers into Friends, and Friends into Customers, New York: Simon & Schuster, 1999, he lists five steps in developing effective permission marketing. After reading Mr. Godin‘s book, comment on whether or not you believe that ―permission marketing‖ will work for all products and services in the future. Specifically, explore whether or not the proliferation of ―permission marketing‖ will wear out its effectiveness, similar to the experiences of spam, ―pop-ups,‖ and other forms of customer specific marketing techniques.

From a reading of Scott Bedbury‘s book, A New Brand World, Viking Press, 2002, students are to comment on the appropriateness of his eight branding principles to the future of marketing.

Specifically, are Mr. Bedbury‘s principles ―on target,‖ and therefore applicable to all brands? Or just to emerging brands? If you were asked to implement Mr. Bedbury‘s principles to the ―branding‖ of an existing product (say your school or university), how and what would you change in order to follow these principles?

END-OF-CHAPTER SUPPORT Marketing Spotlight: Louis Vuitton 1. What are the key aspects of the Louis Vuitton brand? How does it create value for customers?

Suggested answer: Louis Vuitton has built the world‘s most valuable luxury brand by maintaining a fine balance of timeless design and fresh products. The legendary LV monogram appears on all its products, whether luggage, a handbag, or a belt. By modifying its product line to fit the needs of its elite customers while preserving its iconic designs, Louis Vuitton has continued offering products that are synonymous with luxury, wealth, and fashion. Through frequent collaborations with celebrities and fashion icons, Louis Vuitton‘s clothing and accessories have been embraced by Hollywood and pop culture stars all over the world. With these new changes, LVMH became the world‘s largest luxury conglomerate. This is how Louis Vuitton creates value for customers.

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2. How does an exclusive brand such as Louis Vuitton grow and sell more, while remaining fresh and retaining its cachet?

Suggested answer: Answers will vary. Louis Vuitton has employed many different strategies to maintain its luxury brand status. Louis Vuitton does not advertise sales or offer sales promotions.

Its pricing strategy reflects the concept that owning an LV product is a true luxury. When Louis Vuitton goods fail to sell, the company discontinues the item line. Excess inventory is burned to stop products from being stolen or sold at a lower price. Prices are kept high because customers are willing to pay a premium for the status associated with owning a Louis Vuitton product.

Louis Vuitton is also careful not to dilute its brand through excessive communications. This presents the company with the challenge of trying to sell as much as possible, while maintaining an aura of exclusivity and luxury. Louis Vuitton doesn‘t use television for mass advertising.

Instead, it advertises on billboards and in fashion magazines featuring high-profile imagery displaying the prestige of owning an LV product.

3.Is the counterfeiting of Louis Vuitton products always a negative? Are there any circumstances in which counterfeiting can be seen as having some positive aspects?

Suggested answer: Students can discuss the pros and cons of knock-offs. Counterfeited items allow those who cannot afford the high prices to have a LV product. In this way, the brand is expanded to many more customers. By having counterfeited items seen, the LV brand is advertised. On the other hand, knock-offs reduce the prestige of the genuine LV product. It lowers the exclusivity of the brand.

Marketing Spotlight: MUJI 1. What are the key drivers of MUJI‘s market success? What are MUJI‘s points of parity and points of difference relative to the competition?

Suggested answer: By promoting itself as the ―no brand‖ brand, MUJI has created a niche that has allowed the company to successfully expand globally. Even though the company offers over 7,000 items, MUJI does not customize its products for particular countries and regions. Rather, MUJI products are designed to fit into households all over the world. Each MUJI product is built for a specific purpose, so it is simple to use. MUJI also employs the same style of store design, layout, and merchandising for all its locations around the world. The uniformity in both retail location and products cuts the costs of regional adaptation.

MUJI has stuck to a policy of adding more stores in new countries only when existing ones are running profitably, which has kept profits high and growth stable. Points of difference relative to the competition: lower prices, uniformity in both retail location and products, products that are simple to use. Points of parity: product line and standardized global marketing.

2. What are the pros and cons of using the ―no brand‖ strategy?

Suggested answer: Pros: MUJI‘s insistence that its brand values permeate all aspects of the company has contributed to a strong, consistent brand and a sustainable business model. The ―brandless‖ design of its products creates a unique aesthetic: although MUJI intends its products to look indistinct, they are at the same time recognizable among heavily branded products. Cons:

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Some customers believe in brands they can trust and that have value to them. Some customers are willing to pay higher prices for well-packaged products, sold in a well-designed store in a pleasing location.

3. How should MUJI grow its brand?

Suggested answer: Answers will vary. Growth will come by expanding globally and by expanding the number of products from 7,000. Maintaining the current pricing structure, keeping production costs down, maintaining simple, no-frills packaging, and keeping low advertising costs will help grow the brand. Adherence to its three core principles keeps the price of MUJI products low. Combining these advantages with the products‘ simplicity in function and form, MUJI has created a winning combination for global expansion. Since its first store opened in 1983, MUJI has added over 1,000 locations worldwide.

DETAILED CHAPTER OUTLINE Opening vignette: A strong brand commands intense consumer loyalty—and at its heart is a great product or service. Building a strong brand is a never-ending process, as the marketers of Gatorade found out. Strategic brand management combines the design and implementation of marketing activities and programs to build, measure, and manage brands to maximize their value.

It has four main steps: 1. Identifying and establishing brand positioning 2. Planning and implementing brand marketing 3. Measuring and interpreting brand performance 4. Growing and sustaining brand value I. How Does Branding Work?

A. A brand is ―a name, term, sign, symbol, or design, or a combination of them, intended to identify the goods or services of one seller or group of sellers and to differentiate them from those of competitors.‖ B. The Essence of Branding i. A brand is thus a product or service whose dimensions differentiate it in some way from other products or services designed to satisfy the same need. ii. Branding is the process of endowing products and services with the power of a brand. It‘s all about creating differences between products. iii. For branding strategies to be successful and create brand value, consumers must be convinced that there are meaningful differences among brands in the product or service category. iv. Successful brands are seen as genuine and authentic in what they sell and who they are.

C. The Role of Brands i. Brand‘s role for consumers: identify the maker of a product and allow consumers to assign responsibility for its performance to that maker or distributor.

• A brand is a promise between the firm and the consumer.

• It is a means to set consumers‘ expectations and reduce their risk.

• Brands simplify decision making.

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•

Brands can also take on personal meaning to consumers and become an important part of their identity. ii. Brand‘s role for firms: • It simplifies product handling by helping organize inventory and accounting records.

• A brand also offers the firm legal protection for unique features or aspects of the product.

• Brand loyalty provides predictability and security of demand for the firm, and it creates barriers to entry that make it difficult for other firms to enter the market.

• Brand loyalty can translate into customer willingness to pay a higher price.

• Branding can be a powerful means to secure a competitive advantage.

• To firms, brands represent enormously valuable pieces of legal property that can influence consumer behavior, be bought and sold, and provide their owner the security of sustained future revenues.

D. Brand Equity and Brand Power i. The monetary value of a brand is called brand equity and reflects the premium that is placed on a company‘s valuation because of its ownership of the brand. ii. Understanding the concept of brand equity, managing its antecedents and consequences, and developing methodologies to assess brand equity are of the utmost importance for ensuring a company‘s financial well-being. iii. Brand equity is included in the accounting term goodwill, which is the monetary value of all intangible assets of a company. iv. Goodwill not only documents the company‘s tangible assets, such as property, infrastructure, materials, and investments, but also incorporates intangible assets, including brands, patents, copyrights, know-how, licenses, distribution arrangements, company culture, and management practices. v. Measuring Brand Equity. Several methods exist to gauge brand equity: • The cost approach • The market approach • The financial approach vi. Brand power, also referred to as customer-based brand equity, is the ancillary value contributed by the brand to a product or a service. vii. Brand power arises from differences in consumer response that a brand evokes. viii. Brand power is reflected in the way consumers think, feel, and act with respect to the brand, as well as in the prices, market share, and profitability a brand commands. ix. The challenge for marketers is ensuring that customers have the right kinds of experiences with products, services, and marketing programs to create the desired thoughts, feelings, and brand knowledge. x. Measuring Brand Power • An indirect approach assesses potential sources of brand power by identifying and tracking consumer brand knowledge.

• A direct approach assesses the actual impact of brand knowledge on consumer response to different aspects of the marketing. xi. Marketers need to fully understand the sources of brand equity (brand audits) and how these sources (brand tracking) and outcomes change.

• A brand audit is a focused series of procedures to assess the health of the brand,

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uncover its sources of brand equity, and suggest ways to improve.

• In brand tracking, the brand audit inputs quantitative data from consumers, providing information about how brands and marketing programs are performing.

II. Designing the Brand A. Defining the Brand Mantra i. A brand mantra is a three- to five-word articulation of the heart and soul of the brand and is closely related to other branding concepts like ―brand essence‖ and ―core brand promise.‖ See Fig. 10.3. ii. The mantra‘s purpose is to guide all employees and external marketing partners, by ensuring that they understand what the brand represents to consumers. iii. Brand mantras must economically communicate what the brand is and what it is not.

B. Choosing Brand Elements i. Choosing brand elements, or devices, which can be trademarked, identify and differentiate the brand. ii. Most strong brands employ multiple brand elements. iii. Marketers should choose brand elements to build as much brand equity as possible. iv. The test is what consumers would think or feel about the product if the brand element were all they knew. v. The first three brand element choice criteria are brand building.

• Memorable • Meaningful • Likable vi. The latter three are defensive and preserve brand equity against challenges.

• Transferable • Adaptable • Protectable vii. Brand characters represent a special type of brand symbol—one with human characteristics that both enhance likability and tag the brand as interesting and fun. viii. Because they are colorful and rich in imagery, brand characters break through marketplace clutter and communicate a key product benefit.

C. Choosing Secondary Associations i. To build strong brands, marketers link brands to other meaningful information in the memories of consumers. See Fig. 10.1. ii. These ―secondary‖ brand associations can link the brand to sources such as: • The company itself (through branding strategies) • Countries or other geographical regions (through identification of product origin) • Channels of distribution (through channel strategy) • Other brands (through ingredient or co-branding) • Characters (through licensing) • Spokespeople (through endorsements) • Sporting or cultural events (through sponsorship) • Some other third-party sources (through awards or reviews) CS-103 Copyright © 2022 Pearson Education, Inc. Browsegrades.net

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iii. A brand‘s secondary associations must be aligned with the brand’s personality, the specific mix of human traits that we can attribute to a particular brand.

III. Brand Hierarchy i. Brand hierarchy reflects the way in which brands are related to a company‘s products and services, and to one another. Developing a meaningful brand hierarchy is important for companies managing diverse brand portfolios.

A. Managing Brand Portfolios i. The brand portfolio is the set of all brands and brand lines that a particular firm offers for sale in a particular category or market segment. ii. The principle in designing a brand portfolio is to maximize coverage so target customers are not ignored but to minimize overlap so brands are not competing for customer approval. iii. Three general brand portfolio strategies are popular: • A house-of-brands strategy involves individual or separate family brand names.

• A branded-house strategy involves a corporate umbrella or company brand name.

• A sub-brand strategy combines two or more corporate, family, or individual product brand names. iv. With a branded house strategy, it is useful to have a well-defined flagship product, one that best represents or embodies the brand as a whole. v. Many companies are introducing branded variants, which are specific brand lines supplied to specific retailers or distribution channels.

IV. Cobranding i. Marketers often combine their brands with brands from other companies to create superior market value. Cobranding—also called dual branding—involves two or more brands marketed together. ii. The Essence of Cobranding • Same-company cobranding • Joint-venture cobranding • Multiple-sponsor cobranding iii. Cobranding advantages: • Product can be convincingly positioned by virtue of the multiple brands.

• Cobranding can generate greater sales from the existing market and open opportunities for new consumers and channels.

• It can also reduce the cost of product introduction because it combines two wellknown images and speeds adoption.

• Cobranding may be a valuable means to learn about consumers and how other companies approach them. iv. Cobranding disadvantages: • There is a risk and lack of control in becoming aligned with another brand in consumers‘ minds.

• Consumer expectations of cobrands are likely to be high, so unsatisfactory performance could have negative repercussions for both brands.

• If the other brand enters a number of cobranding arrangements, overexposure may dilute the transfer of any association. It may also result in a lack of focus on existing brands.

• Consumers may feel less sure of what they know about the brand.

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v. For cobranding to succeed, the two brands must separately have brand equity—adequate brand awareness and a sufficiently positive brand image.

• The most important requirement is a logical fit between the two brands, to maximize the advantages of each while minimizing disadvantages.

• Consumers are more apt to perceive cobrands favorably if they are complementary and offer unique quality, rather than being overly similar and redundant.

• Managers must enter cobranding ventures carefully, looking for the right fit in values, capabilities, and goals and an appropriate balance of brand equity.

• There must be detailed plans to legalize contracts, make financial arrangements, and coordinate marketing programs. vi. Ingredient branding: special case of cobranding that creates brand equity for materials, components, or parts that are necessarily contained within other branded products.

• For host products whose brands are not that strong, ingredient brands can provide differentiation and important signals of quality.

• An interesting take on ingredient branding is self-branded ingredients that companies advertise and even trademark.

• Ingredient brands try to create enough awareness and preference for their product so consumers will not buy a host product that doesn‘t contain it.

• Many manufacturers make components or materials that enter final branded products but lose their individual identity.

• For successful ingredient branding, consumers must believe the ingredient matters to the performance of the end product.

• Consumers must be convinced that the ingredient is superior.

• A distinctive symbol or logo must clearly signal that the host product contains the ingredient. vii. The brand value chain is a structured approach to assessing the sources and outcomes of brand equity and the way marketing activities create brand value based on several premises. See Fig. 10.2. viii. Brand value creation begins when the firm targets actual or potential customers by investing in a marketing program to develop the brand, including marketing communications, trade or intermediary support, and product research, development, and design. ix. Customers‘ mind-sets will affect buying behavior and the way consumers respond to all subsequent marketing activity—pricing, channels, communications, and the product itself—and the resulting market share and profitability of the brand. x. The investment community will consider this market performance of the brand to assess shareholder value in general and the value of a brand in particular. xi. Three multipliers increase or decrease the value that can flow from one stage to another.

• The program multiplier determines the marketing program‘s ability to affect the customer mind-set and is a function of the quality of the program investment.

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• The customer multiplier determines the extent to which value created in the minds and hearts of customers affects market performance. This result depends on competitive superiority and other intermediary support, and customer size and profile (how many and what types of customers are attracted to the brand).

• The market multiplier determines the extent to which the value shown by the market performance of a brand is manifested in shareholder value. It depends, in part, on the actions of financial analysts and investors.

V. Brand Dynamics A. Brand Repositioning i. A number of brands have managed to make impressive comebacks in recent years. ii. The first thing to do in repositioning a brand is to understand what the sources of brand equity were to begin with. iii. Sometimes the marketing program is the source of the problem because it fails to deliver on the brand promise. Then a ―back to basics‖ strategy may make sense. iv. In other cases, the old positioning is just no longer viable, and a reinvention strategy is necessary. v. The challenge is often to change enough to attract some new customers, but not so much as to alienate old ones.

B. Brand Extensions i. When a firm uses an established brand to introduce a new product in a different category or price tier, the resulting offering is called a brand extension. ii. When marketers combine a new brand with an existing brand, the brand extension can also be called a sub-brand. iii. In a line extension, the parent brand covers a new product within a product category it currently serves, such as with new flavors, forms, colors, ingredients, and package sizes. iv. Most new products are in fact brand extensions. v. When to Extend a Brand? Marketers must judge each potential brand extension by how effectively it leverages existing brand equity from the parent brand, as well as by how effectively it contributes to the parent brand‘s equity. vi. Marketers should ask these questions when weighing the success of an extension: • Does the parent brand have strong equity?

• Is there a strong basis of fit?

• Will the extension have the optimal points-of-parity and points-of-difference?

• How can marketing programs enhance extension equity? vii. Key research insights on brand extensions: • Successful brand extensions occur when the parent brand is seen as having favorable associations and there is a perception of fit between the parent brand and the extension product.

• A brand that is seen as prototypical of a product category can be difficult to extend outside the category.

• Vertical extensions require sub-branding strategies to prevent negative brand associations and brand dilution and product cannibalization.

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viii. Advantages of Brand Extension • Setting up positive expectations reduces risk.

• Extensions can reduce launch costs.

• Positive feedback benefit • Similar or identical packages and labels lower production costs for extensions. ix. Disadvantages of Brand Extensions • Brand dilution occurs when consumers no longer associate a brand with a specific or highly similar set of products and start thinking less of the brand.

• If a firm launches extensions consumers deem inappropriate, they may question the integrity of the brand or become confused or even frustrated.

• Cannibalizing the parent brand • Firm forgoes the chance to create a new brand with its own unique image and equity.

C. Managing a Brand Crisis i. Marketing managers must assume a brand crisis will someday arise. ii. The stronger the brand and corporate image—especially for credibility and trustworthiness—the more likely the firm can weather the storm. iii. Careful preparation and a well-managed crisis management program are critical. iv. The longer the firm takes to respond, the more likely consumers are to form negative impressions from unfavorable media coverage or word of mouth. v. The more sincere the firm‘s response, the less likely it is that consumers will form negative attributions. vi. External crises such as economic recessions, natural disasters, and major geopolitical events can threaten the brand and require an appropriate brand response. vii. The Covid-19 pandemic forced all brands to rethink what and how they were selling. viii. Four guidelines help firms manage a brand through a crisis: • Empathy: Get even closer to consumers and customers.

• Value: Put forth the most compelling value proposition.

• Strategy: Be authentic and true to the brand promise.

• Innovation: Engage in ―Stop, Start, and Continue (But Improve)‖ exercises and activities.

VI. Luxury Branding A. Characteristics of Luxury Brands i. Higher priced, they are often about social status and who a customer was—or perhaps wanted to be. ii. Luxury for many has become more about style and substance, combining personal pleasure and self-expression. iii. Common denominators of luxury brands are quality and uniqueness. iv. The winning formula for many is craftsmanship, heritage, authenticity, and history, often critical to justifying an extravagant price.

B. Managing Luxury Brands i. Globalization, new technologies, financial crises, shifting consumer cultures, and other forces require luxury brand marketers to be skillful and adept at brand CS-107 Copyright © 2022 Pearson Education, Inc. Browsegrades.net

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stewardship to succeed. ii. Key principles of luxury brand management: • All marketing decisions associated with luxury brands—product, service, pricing, sales incentives, communication, and distribution—must be aligned to ensure that purchase and consumption experiences are consistent with the image of the brand.

• Luxury branding typically includes the creation of a premium, aspirational image.

• Luxury brands frequently span categories, and as a result, their competitors are often defined broadly. Luxury brands must protect their identity and aggressively combat trademark infringement and counterfeits.

• All attributes of luxury brands must be aligned with the image of the brand. This includes brand identifiers such as names, logos, symbols, and packaging, as well as brand associations such as personalities, events, countries, and other entities. iii. The trend for luxury brands is to wrap personal experiences around the products. iv. Some luxury marketers have struggled to find the appropriate online selling and communication strategies for their brand. v. Success depends on getting the right balance of classic and contemporary imagery, and continuity and change in marketing programs and activities.

CHAPTER

11

MANAGING PRICING AND SALES PROMOTIONS

LEARNING OBJECTIVES After studying this chapter, you should be able to:

11.1 Describe the role that pricing plays in marketing management.

11.2 Identify the key psychological factors that influence how consumers perceive prices.

11.3 Explain the factors that a manager must consider when setting prices.

11.4 Discuss how to respond to competitive prices cuts.

11.5 Explain how to design and manage incentives.

CHAPTER SUMMARY 1. Price is the only marketing element that produces revenue; the others produce costs.

Pricing decisions have become more challenging in a changing economic and technological environment.

2. Purchase decisions are based on how consumers perceive prices, rather than just on the offering‘s stated price. Understanding how consumers arrive at their perceptions of prices—and, specifically, the role of reference prices, price–quality inferences, and price endings—can help the company set the optimal market price.

3. In setting pricing policy, a company follows a six-step procedure. It selects its pricing objective. It estimates the demand curve, the probable quantities it will sell at each possible price. It estimates how its costs vary at different levels of output, at different

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levels of accumulated production experience, and for differentiated marketing offers. It examines competitors‘ costs, prices, and offers. It selects a pricing method, and it sets the final price.

4. When setting a price, a company can pursue different objectives: current profit, market penetration, market skimming, and leadership in product quality. The clearer a firm‘s objectives, the easier it is to set price.

5. The demand curve shows the market‘s probable purchase quantity at alternative prices, summing the reactions of many individuals with different price sensitivities. Marketers need to know how responsive, or elastic, demand is to a change in price.

6. Price setting is driven by three major considerations: costs, competitors, and customers.

Costs set a floor for the price. Competitors‘ prices and the price of substitutes provide an orienting point. Customers‘ assessment of unique features establishes the price ceiling.

Common price-setting methods include markup pricing, target-rate-of-return pricing, economic-value-to-customer pricing, competitive pricing, and auction pricing.

7. Marketers must modify their price-setting logic when the product is part of a product mix and the company‘s goal is to maximize the profits on the total mix. Common scenarios for product-mix pricing include loss-leader pricing, optional-feature pricing, captive- product pricing, two-part pricing, by-product pricing, and product bundling.

8. To gain market position and grow profits, companies often take aggressive pricing actions, either lowering their prices, typically to lure competitors‘ customers, or raising prices to capture greater value from its current customers. Companies must anticipate competitor price changes and prepare contingent responses, which may include maintaining or changing price or quality.

9. The firm facing a competitor‘s price change must try to understand the competitor‘s intent and the probable duration of the change. A market leader attacked by lower-priced competitors can seek to better differentiate itself, to introduce its own low-cost competitor, or to transform itself completely.

10. Incentives consist of a collection of incentive tools, mostly short-term, designed to stimulate quicker or greater purchase of particular products or services by consumers or the trade. In using incentives, a company must establish its objectives, select the tools, develop the program, implement and control it, and evaluate the results.

11. In designing incentives, a firm must decide how much effort to devote to push strategies and to pull strategies. A push strategy uses the manufacturer‘s sales force, trade promotion money, or other means to induce intermediaries to carry, promote, and sell the product to end users. In a pull strategy, the manufacturer uses advertising and incentives to persuade consumers to demand the product from intermediaries, thus inducing the intermediaries to order it. Selecting the right mix of push and pull strategies is an important ingredient in securing trade support.

OPENING THOUGHT Students should have a good understanding of ―price‖ in their role as consumers. The instructor is encouraged to expand the students‘ definition of ―a price‖ by using examples of different pricing structures (cell phone plans, for example), promotional pricing, geographical pricing, and price discrimination.

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the ―role‖ of a competitor and formulating defensive and/or offensive plans to price changes.

Sufficient classroom time should be spent in clarifying these roles.

Discriminatory pricing is also an area that students new to marketing can have some difficulty understanding for the first time. Although discriminatory pricing is not illegal, per se, the distinctions are sometimes porous between the two.

TEACHING STRATEGY AND CLASS ORGANIZATION PROJECTS 15. At this point in the semester-long marketing plan project, students should be prepared to hand in their pricing strategy decisions for their fictional product/service. In reviewing this section, the instructor should make sure that the students have addressed all or most of the material concerning pricing covered in this chapter.

16. Consumer perceptions of prices are also affected by alternative pricing strategies. Marriott Hotels, for example, has different brands for differing price points. Building upon the Marriott example, students are to scan the environment to find examples of a company whose pricing strategy is closely tied to its branding strategy. Caution: students may want to list just the different price points in the same company, such as Ford automobiles. What this project is designed to accomplish is that students should note that the Lincoln line of cars are priced at a premium to the Ford and Mercury divisions. Good projects will also include the actual percentage difference between the three divisions.

ASSIGNMENTS Marketers recognize that consumers often actively process price information, interpreting prices in terms of their knowledge from prior purchasing experience, formal communications, informal communications, points-of-purchase, or online resources. Purchase decisions are based on how consumers perceive prices and what they consider to be the current actual price—not the marketer‘s stated price. In small groups, ask the students to choose a service good, such as education, legal advice, tax advice, or other such services, and have them map out their perception of prices and what they consider to be the current actual price. Finally, students should compare and contrast their perceptions with the stated or published prices for these services. In completing this assignment, students should explain the differences between perception and stated prices in terms of consumer buying behavior models from Chapter 6 of this text.

Many consumers use price as an indicator or quality. As a group assignment, students should choose a product produced by a firm. Subsequently, the students should conduct a small research project (utilizing the material learned from Chapter 4) and either confirm or deny this relationship for the chosen product. For example, do more women or men rely on price as an indicator of quality for product X? If there is a difference, what is the quantifiable difference in terms of marketing research data? Does this difference suggest that marketers must or can revise or revamp price clues to reach their target market?

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Katherine Heires in Business Week 2.0, October 2006, wrote ―Why it Pays to Give Away the Store.‖ Either in small groups or individually, have the students read Ms. Heires‘ article and comment on the validity/invalidity of these nine suggestions as being applicable to key service companies.

Table 11.1 lists some possible consumer reference prices and students should comment on whether or not these consumer reference prices are applicable today. Is this list inclusive or are there new reference points caused by the increased use of such websites like eBay or Craigslist?

Table 11.3 lists nine factors that the authors contend leads to less price sensitivity in consumers.

Choose a product that is available online and in stores (books or tires, for example) and ask the students to research the various pricings choices available online. After collecting this data, ask the students to comment on whether the variety of price points found lowers their price sensitivity.

For many firms, pricing is the domain of the financial disciplines in the company. Using accepted accounting and financial processes, some companies‘ price strictly according to these models. Assign students the assumed role of ―defenders‖ of this practice and others as ―innovators,‖ challenging these models and supporting some of the newer pricing models such as ―perceived‖ and ―value‖ pricing for products. Have the students come prepared to defend their positions using the concepts developed in this chapter.

Paul W. Farris and David J. Reibstein, in their article, ―How Prices, Expenditures, and Profits Are Linked,‖ Harvard Business Review (November-December 1979), pp. 173-184, found a relationship between relative price, relative quality, and relative advertising (their findings are summarized in the chapter). Students should read the full report, and then be prepared to discuss the validity of this study in light of the consumer information explosion that has occurred due to the emergence of the internet. Are these relationships still valid today? If not, why or what has caused them to change?

END-OF-CHAPTER SUPPORT Marketing Spotlight: Priceline 1. How important was the Name Your Own Price approach to Priceline‘s market success?

Suggested answer: Very important! Priceline‘s model of online bookings proved valuable to airlines, because the carrier is anonymous throughout the buying process and doesn‘t have to dilute its brand by selling tickets at large discounts while also maintaining its own established prices. The model was also attractive to budget-conscious travelers because, on average, customers found lower prices than they otherwise would have through their own online searches.

Priceline expanded its Name Your Own Price system to selling automobiles, hotel rooms, home financing, and even groceries.

2.What are the pros and cons of the Name Your Own Price approach to setting an offering‘s price?

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Suggested answer: Pros: Much of Priceline‘s success can be attributed to the company‘s focus on businesses in the most profitable segments of online travel. Hotels account for over 85 percent of Priceline‘s gross bookings, compared to 48 percent for Expedia, Priceline‘s closest competitor. The hotel market is less concentrated than air travel, so Priceline can generate more profit by concentrating on hotel bookings, for which it can charge a 15 percent to 20 percent commission, compared to about 3 percent for air bookings. Priceline‘s data analytics processes also create a competitive advantage. Priceline carefully researches how and where it purchases online ads. Priceline‘s research of customer demographics and behaviors allows it to leverage personalized ads on websites and in e-mails.

Cons: There is a lot of competition in online travel sites such as Expedia, Travel Zoo, and One Travel. They all offer low airline fares, hotel rooms, rewards programs, and promotions. Also, many people do not want to name a price on an airline without identifying the carrier. Priceline faced financial disaster, forcing the company to quit the non-travel businesses. Finally, as a result of the pandemic, people are not flying and not staying in hotels. This has negatively affected Priceline‘s bottom line.

3. Is setting prices based on one‘s willingness to pay fair? Does it create value for customers? Does it create value for the firm?

Suggested answer: Answers will vary. Setting prices based on one‘s willingness to pay is fair as long as purchasers understand the name-your-own-price system. Priceline‘s approach creates value for customers because they are paying a discounted price for an airline ticket or hotel room. Priceline‘s approach creates value for the firm by generating high profits. The foundation of Priceline‘s success is its focus on profitable market segments and rigorous dedication to data analytics. This strategy enables the company to achieve high profit margins.

Marketing Spotlight: Uber 1. What were the key factors that contributed to Uber‘s phenomenal market success?

Suggested answer: The key to Uber‘s success is its ease of use: riders simply need to download the app, create an account, and enter their payment information. The app displays available drivers nearby. To summon one, riders simply input their destination and press a button to be matched with a driver. The customer can track the location of the matched driver, view the driver‘s name and car information, and look at the driver‘s quality rating. Within minutes of being matched with a driver, the customer can be on his or her way. At the end of the ride, the cost is automatically deducted from the rider‘s payment method, with Uber retaining 25 percent of the fare in addition to a booking fee—a flat fee that covers regulatory, safety, and operational costs.

2.What was Uber‘s customer value proposition? What role did Uber‘s pricing play in its ability to attract riders?

Suggested answer: The value proposition is an innovation, service, or feature intended to make a company or product attractive to customers. Uber‘s value proposition is its convenient, hassle-

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free service. The Uber App is downloaded, easily matching customers with drivers, automatically deducting payment, and offering fair prices. Uber‘s pricing and ease of payment is a huge attraction for riders who can avoid high-priced taxi rides.

3.Is surge pricing fair? What alternative strategies could Uber use to balance supply and demand?

Suggested answer: Answers will vary. To balance supply and demand, Uber charges a ―Surge Pricing Premium‖ during times with high rider traffic, a practice that can multiply the normal fare by as much as seven times. Uber‘s surge pricing has been met with some customer dissatisfaction and concerns about price fairness. When the East Coast was experiencing heavy snow in 2013, customers submitted screen shots of their surged bills on social media; some were as high as $400 for a single ride. Despite customer concerns, Uber has retained surge pricing as a source of customer segmentation and as an incentive to attract drivers to specific locations during times of high demand. One strategy that Uber has used during the Covid-19 pandemic to increase demand is to offer food delivery. This is a good way to increase demand since fewer people are traveling.

DETAILED CHAPTER OUTLINE Opening vignette: Netflix‘s belief that the consumer benefits provided by its streaming service outweigh the corresponding costs. Price is all relative to value. Netflix is continuing to increase the content offering and seeing this practice reflected in viewing around the world. Price is the one element of the marketing mix that produces revenue; the other elements produce costs. Price also communicates the company‘s intended value positioning of its product or brand. A welldesigned and marketed product can still command a price premium and reap big profits. But new economic realities have caused many consumers to reevaluate what they are willing to pay for products and services, and companies have had to carefully review their pricing strategies as a result.

Pricing decisions are complex and must take into account many factors—the company, the customers, the competition, and the marketing environment. Holistic marketers know their pricing decisions must also be consistent with the firm‘s marketing strategy and its target markets and brand positions.

I. Understanding Pricing A. Price also has many components. i. Price has operated as a major determinant of buyer choice. ii. Consumers and purchasing agents who have access to price information and price discounters put pressure on retailers to lower their prices. iii. Retailers put pressure on manufacturers to lower their prices. iv. The result can be a marketplace characterized by heavy discounting and sales promotion. v. For over 25 years, the internet has been changing the way buyers and sellers interact. vi. The internet has enabled buyers to make instant price comparisons from thousands of vendors. vii. The internet also enables sellers to optimize their pricing.

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viii. In many small companies, the owner sets prices. In large companies, division and product line managers do. ix. For any organization, effectively designing and implementing pricing strategies require a thorough understanding of buyers‘ pricing psychology and a systematic approach to setting, adapting, and changing prices.

II. Consumer Psychology and Pricing A. Marketers recognize that consumers often actively process price information. i. Consumers often actively process price information, interpreting it from the context of prior purchasing experience, formal communications (advertising, sales calls, and brochures), informal communications (friends, colleagues, or family members), point-of-purchase or online resources, and other factors. ii. Purchase decisions are based on how consumers perceive prices and what they consider the current actual price to be—not on the marketer‘s stated price. iii. Understanding how consumers arrive at their perceptions of prices is an important marketing priority.

B. Reference Prices i. Few consumers can accurately recall specific prices. ii. Consumers often employ reference prices, comparing an observed price to an internal reference price they remember or an external frame of reference such as a posted ―regular retail price.‖ Possible reference prices include: • ―Fair price‖ (what consumers feel the product should cost) • Typical price • Last price paid • Upper-bound price (reservation price or the maximum most consumers would pay) • Lower-bound price (lower threshold price or the minimum most consumers would pay) • Historical competitor prices • Expected future price • Usual discounted price iii. Sellers often attempt to manipulate reference prices. iv. Many consumers use price as an indicator of quality. v. Image pricing is especially effective with ego-sensitive products such as perfumes, expensive cars, and designer clothing.

• When information about true quality is available, price becomes a less significant indicator of quality.

• Exclusivity and scarcity can also affect quality inferences and justify premium pricing. vi. Pricing cues are also important in the psychology of pricing. Many sellers believe prices should end in an odd number.

• Consumers tend to process prices ―left to right‖ rather than by rounding.

• Another explanation for the popularity of ―9‖ endings is that they suggest a discount or bargain, so if a company wants a high-price image, it should probably avoid the odd-ending tactic.

• Prices that end with 0 and 5 are also popular and are thought to be easier for

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consumers to process and retrieve from memory.

• Total category sales are highest when some, but not all, items in a category have sale signs; past a certain point, sale signs may cause total category sales to fall.

• Pricing cues such as sale signs and prices that end in 9 are more influential when consumers‘ price knowledge is poor, when they purchase the item infrequently or are new to the category, and when product designs vary over time, prices vary seasonally, or quality or sizes vary across stores.

III. Setting the Price i. The firm must decide where to position its product on quality and price. ii. Having a range of price points allows a firm to cover more of the market and to give any one consumer more choices. iii. The pricing process involves six main steps: defining the pricing objective; determining demand; estimating costs; analyzing competitors‘ costs, prices, and offers; selecting a pricing method; and setting the final price.

A. Defining the Pricing Objective • Short-term Profit. Many companies try to set a price that will maximize current profits.

• Market Penetration. Companies that choose penetration pricing want to maximize their market share. Conditions: the market is highly price sensitive, and a low price stimulates market growth; production and distribution costs fall with accumulated production experience; and a low price discourages actual and potential competition.

• Market Skimming. Companies unveiling a new technology favor setting high prices to maximize market skimming—setting a relatively high price in an attempt to make the offering affordable only to customers with the highest willingness to pay.

• Quality Leadership. A company might aim to be the quality leader in the market. i. Nonprofit and public organizations may have other pricing objectives.

B. Determining Demand i. Each price will lead to a different level of demand and have a different impact on a company‘s marketing objectives. ii. The normally inverse relationship between price and demand is captured in a demand curve: the higher the price, the lower the demand. iii. Marketers need to know how responsive, or elastic, demand is to a change in price. iv. Price elasticity of demand reflects the degree to which a change in price leads to a change in quantity sold. v. The lower the price elasticity, the less sensitive consumers are to price increases and the more likely it is that raising the price can increase sales revenues. See Fig. 11.1. vi. The higher the elasticity, the greater the volume growth resulting from a 1 percent price reduction. vii. Price elasticity of demand depends on the magnitude and direction of the contemplated price change. viii. There may be a price indifference band within which price changes have little or no effect. ix. Generally speaking, price elasticity is low when: • the product is distinctive and there are few or no substitutes or competitors.

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• • •

consumers do not readily notice the higher price. consumers are slow to change their buying habits. consumers think the higher prices are justified by factors such as the cost of creating the product, product scarcity, and government taxation.

• the expenditure is a smaller part of the buyer‘s total income or of the total cost of the end product.

• part or all of the cost is borne by another party.

C. Estimating Costs i. Demand sets a ceiling on the price the company can charge for its product. Costs set the floor. ii. Fixed, Variable, and Total Costs. A company‘s costs take two forms, fixed and variable.

• Fixed costs, or overhead, are costs that do not vary with production level or sales revenue.

• Variable costs vary directly with the level of production.

• Total costs consist of the sum of the fixed and variable costs for any given level of production.

• Average cost is the cost per unit at that level of production; it equals total costs divided by production. iii. Experience Curve Effects. As a company gains experience, its methods improve. The decline in the average cost with accumulated production experience is called the experience curve. iv. Experience-curve pricing nevertheless carries major risks. v. Aggressive pricing might give the product a cheap image or assume competitors are weak followers. vi. The company builds more plants to meet demand, but a competitor may innovate with a lower-cost technology.

D. Analyzing Competitors‘ Prices i. If the competitor‘s offer contains some features not offered by the firm, the firm should subtract their value from its own price. ii. Companies offering the powerful combination of low price and high quality are capturing the hearts and wallets of consumers all over the world. iii. One idea is that companies should set up their own low-cost operations to compete with value-priced competitors only if: • their existing businesses will become more competitive.

• the new business will derive some advantages it would not have gained if independent.

E. Selecting a Pricing Method i. Costs set a floor to the price. ii. Competitors‘ prices and the price of substitutes provide an orienting point. iii. Customers‘ assessment of unique features establishes the price ceiling. iv. Price-setting methods: • Markup pricing: add a standard markup to the product‘s cost • Target-rate-of return pricing: sets a price that will yield the desired rate of return. See Fig. 11.2.

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•

Economic-value-to-customer pricing: takes into account inputs, such as the buyer‘s image of the product • Competitive pricing (or going-rate pricing): the firm bases its price largely on competitors‘ prices • Auction pricing: growing more popular, especially with scores of electronic marketplaces selling everything, as firms dispose of excess inventories or used goods F. Setting the Final Price i. Companies develop a pricing structure that reflects variations in geographical demand and costs, market-segment requirements, purchase timing, order levels, delivery frequency, guarantees, service contracts, and other factors. ii. As a result of discounts, allowances, and promotional support, a company rarely realizes the same profit from each unit of a product that it sells. iii. The phenomenon of offering different pricing schedules to different consumers and dynamically adjusting prices is exploding. iv. Price discrimination occurs when a company sells a product or service at two or more prices that do not reflect a proportional difference in costs.

• In first-degree price discrimination, the seller charges a separate price to each customer depending on the intensity of his or her demand.

• In second-degree price discrimination, the seller charges less to buyers of larger volumes.

• In third-degree price discrimination, the seller charges different amounts to different classes of buyers. o Customer-segment pricing: Different customer segments pay different prices for the same product or service. o Product-form pricing: Different versions of the product are priced differently, but not in proportion to their costs. o Channel pricing: Coca-Cola carries a different price depending on whether the consumer purchases it from a fine restaurant, a fast-food restaurant, or a vending machine. o Location pricing: The same product is priced differently at different locations, even though the cost of offering it is the same at all locations. o Time pricing: Prices vary by season, day, or hour. o Yield pricing: Offers discounted but limited early purchases, higher-priced late purchases, and the lowest rates on unsold inventory just before it expires. v. Constant price variation can be tricky where consumer relationships are concerned.

G. Product-Mix Pricing i. In product-mix pricing, the firm searches for a set of prices that maximize profits on the total mix. ii. Six main situations calling for product-mix pricing: • Loss-leader pricing. A company can set the price of a specific product or service in a way that maximizes the profitability of its entire product line. Supermarkets often drop the price on well-known brands to stimulate additional store traffic.

• Optional-feature pricing. Many companies offer optional products, features, and services with their main product.

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•

Captive pricing. Some products require the use of ancillary or captive products.

Manufacturers of razors often price them low and set high markups on razor blades.

• Two-part pricing. Service firms engage in two-part pricing, consisting of a fixed fee plus a variable usage fee.

• By-product pricing. The production of certain goods—meats, petroleum products, and other chemicals—often yields by-products that should be priced on their value.

• Product-bundling pricing. Sellers often bundle products and features. Pure bundling occurs when a firm offers its products only as a bundle.

IV. Initiating and Responding to Price Changes A. Initiating Price Cuts i. One is excess plant capacity. The firm needs additional business and cannot generate it through increased sales effort, product improvement, or other measures. ii. Companies sometimes initiate price cuts in a drive to dominate the market through lower costs. iii. Either the company starts with lower costs than its competitors, or it initiates price cuts in the hope of gaining market share and lower costs. iv. A price-cutting strategy can lead to drawbacks: • Consumers assume quality is low.

• A low price buys market share but not market loyalty. The same customers will shift to any lower-priced firm that comes along.

• Competitors match the lower prices but have longer staying power because of deeper cash reserves.

• Competitors respond by lowering their prices even more, triggering a price war.

B. Initiating Price Increases i. A successful price increase can raise profits considerably. ii. Cost inflation and overdemand can provoke price increases. iii. Companies often raise their prices by more than the cost increase in anticipation of further inflation or government price controls, a practice called anticipatory pricing. iv. In passing price increases on to consumers, the company must avoid looking like a price gouger. v. Several techniques help avoid sticker shock and a hostile consumer reaction when prices rise.

• Maintain a sense of fairness by giving consumers advance notice.

• Explain sharp price increases in understandable terms.

• Make low-visibility price moves first.

• Eliminate discounts, increase minimum order sizes, and curtail production of lowmargin products.

• Use escalator clauses based on factors such as increases in national price indexes.

C. Responding to Competitors‘ Price Changes i. The competitors, distributors, suppliers, and even government

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ii. Competitors are most likely to react when the number of firms in the category is low, the product is homogeneous, and buyers are highly informed. iii. How a firm responds to a competitor‘s price cut depends on the situation. A firm needs to consider: • Why did the competitor change the price? To steal the market, to utilize excess capacity, to meet changing cost conditions, or to lead an industry-wide price change?

• Does the competitor plan to make the price change temporary or permanent?

• What will happen to the company‘s market share and profits if it does not respond?

Are other companies going to respond?

• What are the competitors‘ and other firms‘ likely responses to each possible reaction? iv. Three possible responses to low-cost competitors are: • Further differentiate the product or service • Introduce a low-cost venture • Reinvent as a low-cost player v. An extended analysis of alternatives may not always be feasible when the attack occurs.

V. Managing Incentives A. Incentives as a Marketing Device i. Incentives are sales promotion tools, mostly short-term, designed to stimulate quicker or greater purchase of particular products or services by consumers or the trade. ii. The fastest-growing area of sales promotion includes digital coupons and discounts, redeemed via smartphone or downloaded to a consumer‘s printer. iii. Sales promotions can produce a high sales response in the short run but little permanent gain over the longer term. iv. Sales promotions prompt consumers to engage in stockpiling—purchasing earlier than usual or buying extra quantities. As a result, after the initial peak, sales hit a postpromotion dip. v. Not all sales promotions are detrimental to the company‘s brand image. Some sales promotion tools are consumer franchise building. vi. A net price analysis shows at the ―real price‖ of the offering—affected not only by discounts but also by other expenses that reduce the realized price.

B. Major Incentive Decisions i. Establishing the Objectives of Incentives. The objectives of incentives derive from basic marketing objectives for the offering.

• For consumer incentives, objectives include encouraging more frequent purchases.

• For retailer incentives, objectives include persuading the retailer or wholesaler to carry the brand. ii. Defining the Size and Approach for Incentives. In deciding to use a particular incentive, marketers must first determine its size.

• The incentive must be meaningful to target customers if the promotion is to succeed.

• The marketing manager must establish conditions for participation. Incentives might be offered to everyone or to select groups.

• The marketer must decide on the duration of the promotion.

• The marketer must choose a distribution vehicle. iii. A push strategy uses the manufacturer‘s sales force, trade promotion money, or other means to induce intermediaries to carry, promote, and sell the product to end users. iv. A pull strategy uses advertising, promotion, and other forms of communication to persuade CS-119 Copyright © 2022 Pearson Education, Inc. Browsegrades.net

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consumers to demand the product from intermediaries, thus inducing the intermediaries to order it. v. Selecting Consumer Incentives. The sales promotion planner should take into account the type of market, the sales promotion objectives, competitive conditions, and each tool‘s costeffectiveness. vi. The main consumer incentives include: • Price reductions are temporary price discounts that aim to foster sales.

• Coupons are certificates entitling the bearer to stated savings on the purchase of a specific product.

• Cash refunds provide a price reduction after purchase rather than at the retailer.

• Price packs offer savings off the regular price of a product.

• Premiums (bonus offerings) are merchandise offered at a relatively low cost or free as an incentive to purchase a particular product.

• Frequency programs provide rewards related to the consumer‘s frequency of purchase.

• Prizes are offers of the chance to win cash, trips, or merchandise.

• Tie-in promotions involve a scenario in which two or more brands or companies team up on coupons, refunds, and contests to increase pulling power.

• Seasonal discounts are price reductions for those who buy merchandise or services out of season.

• Financing involves providing favorable financing terms. vii. Selecting Trade Incentives. Manufacturers award trade incentives to increase the attractiveness of the offering for the members of the distribution channel.

• Allowances are extra payments offered in return for the retailer‘s performing certain functions.

• Free goods are free merchandise to intermediaries who buy a certain quantity or who feature a certain flavor or size.

• Price-off is a straight discount off the list price on each case purchased during a stated time period.

• A payment discount is a price reduction to buyers who pay bills promptly. viii. The growing power of large retailers has increased their ability to demand trade promotions. ix. Forward buying is buying a greater quantity during the deal period than can immediately be sold. x. Manufacturers handle forward buying and diverting by limiting the amount they sell at a discount or producing and delivering less than the full order to smooth production. xi. Selecting Sales Force Incentives. Companies spend billions of dollars on sales force promotion tools to gather leads, impress and reward customers, and motivate the sales force. xii. Sales force incentives aim to encourage the sales force to support a new product or model, boosting prospecting and stimulating off-season sales.

CHAPTER

12

MANAGING MARKETING COMMUNICATIONS Browsegrades.net

LEARNING OBJECTIVES After studying this chapter, you should be able to: 12.1 Explain the role of marketing communications.

12.2 Define meaningful communication objectives.

12.3 Describe how a company should identify target customers and craft the communication message.

12.4 Explain how a company should decide on the communication media mix and develop a media plan.

12.5 Describe the creative strategies involved in developing an effective communication campaign.

12.6 Identify actionable metrics for measuring communication effectiveness.

CHAPTER SUMMARY 1. Modern marketing calls for more than developing a good product, pricing it attractively, and making it accessible to target customers. Companies must also communicate with current and potential stakeholders and with the general public.

2. The marketing communication mix consists of nine major modes of communication: advertising, online and social media, mobile communication, direct marketing, events and experiences, word of mouth, publicity and public relations, personal selling, and packaging.

3. The communication process consists of nine elements: sender, receiver, message, media, encoding, decoding, response, feedback, and noise. To get their messages through, marketers must take into account how the target audience usually decodes messages.

They must also transmit the message through efficient media that reach the target audience and develop feedback channels to monitor responses to the message.

4. Developing effective communication requires eight steps: (1) identify the target audience, (2) choose the communication objectives, (3) design the communication, (4) select the communication channels, (5) set the total communication budget, (6) choose the communication mix, (7) measure the communication results, and (8) manage the integrated marketing communication process.

5. In identifying the target audience, the marketer needs to close any gap that exists between current public perception and the image sought. Communication objectives can be to create a need for the category, to increase brand awareness, to improve attitude toward the brand, or to boost intension to purchase the brand.

6. Designing effective communication requires making three key decisions: what to say (message strategy), how to say it (creative strategy), and who should say it (message source). Communication channels can be personal (advocate, expert, and social channels) or nonpersonal (media, atmosphere, and events).

7. Although other methods exist, the objective-and-task method of setting the communication budget, which calls on marketers to develop their budgets by defining specific objectives, is typically the most effective.

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8. In choosing the marketing communication mix, marketers must examine the distinct advantages and costs of each communication tool and the company‘s market rank. They must also consider the type of market in which they are selling, how ready consumers are to make a purchase, and the offering‘s stage in the company, brand, and product life cycle.

9. Measuring the effectiveness of the marketing communication mix requires asking members of the target audience whether they recognize or recall the communication, how many times they saw it, what points they recall, how they felt about the communication, what their previous attitudes toward the company, brand, and product were, and what those attitudes are now.

OPENING THOUGHT Perhaps the most challenging aspect of this chapter is the section on the nine elements of the communications process: sender, receiver, message, media, encoding, decoding, response, feedback, and noise. Students not previously exposed to these concepts in other marketing or communications‘ courses will find these concepts somewhat difficult to fully understand and perceive without good use of examples and trial. The instructor is encouraged to use examples gleaned from advertisers‘ websites, television or print commercials to demonstrate via dissection these concepts, especially encoding and decoding.

The remainder of the chapter covers material previously reviewed such as identifying the target market and designing the marketing message. What is different in this chapter is the integration of the ―mix,‖ or elements of communicating to the target audience in a consistent and effective manner.

Finally, the coordination and integration of all the elements of the communication mix and their effect on the total message (evaluation of their effectiveness) remains a challenge to prove. The fact is that the concept of the combined effectiveness of the integration of all marketing communications is difficult to prove in the real business world. Instructors are encouraged to use examples of non-effective communication(s) to highlight what the ―possibilities‖ could be with an integrated marketing communications process.

TEACHING STRATEGY AND CLASS ORGANIZATION PROJECTS 17. At this point in the semester-long marketing plan project, students should have agreed upon their integrated marketing communications matrix. The instructor is encouraged to evaluate the submissions vis-à-vis the material presented in this chapter. In reviewing the submissions, the instructor should evaluate the continuity of the message across all possible communication media. (Students will tend to concentrate their media to television or the internet and exclude other forms such as personal selling and radio.)

18. With the instructor‘s guidance and attendance, set up a field trip to a local advertising agency in the community to gather from management the agency‘s views on the topic of integrated marketing communications. Especially, what services have their clients requested that the ad agency performs to build an integrated marketing communications program? Today, many

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progressive ad agencies are including among their services print, marketing intelligence, personal selling training, and strategy development in their portfolios.

ASSIGNMENTS Have the students read the following articles: Tim Nudd, ―Inside Oreo‘s Adorable Triple Play for Father‘s Day,‖ Adweek, June 10, 2013; Jennifer Rooney, ―Behind the Scenes of Oreo‘s RealTime Super Bowl Slam Dunk,‖ Forbes, February 4, 2013; T. L. Stanley, ―Brand Genius: Lisa Mann, VP Cookies, Mondelēz International,‖ Adweek, October 29, 2012; Stuart Elliott, ―For Oreo Campaign Finale, a Twist on Collaboration,‖ New York Times, September 24, 2012; Rohit Nautiyal, ―Cookie Time,‖ The Financial Express, June 28, 2011. After reading, have the students share their impressions on the effectiveness of its communications with the target market.

This chapter states that the marketing communication mix consists of six major modes of communication and that every brand contact delivers an impression that can strengthen or weaken a customer‘s view of the company. In small groups, have the students select a company and see if its messages are consistent across all major modes of media: advertising, sales promotion, events and experiences, public relations, direct marketing, and personal selling.

The starting point in planning marketing communications is an audit of all the potential interactions that customers in the target market may have with the brand and the company.

Students should select a brand of their choosing and in their papers ―map‖ out or create an audit of all the potential interactions that customers in the target market have with the brand and company. Students should, for the purpose of this assignment, assume that they are a member of the target market.

DVR usage: https://www.hawthornedirect.com/wp-content/uploads/2020/01/DVR-UsageTrends-Over-Time-and-Implications-for-Advertisers-Using-Linear-TV.pdf Have the students read the following articles: ―Don‘t Touch That Remote.‖: Merrill Barr, ―In a World of DVR Monsters, Do Time Slots Still Matter?,‖ Forbes, November 1, 2013; ―Over Half of Multi-Channel Video Households Have a DVR,‖ www.leichtmanresearch.com, November 30, 2012; Andrew O‘Connell, ―Advertisers: Learn to Love the DVR,‖ Harvard Business Review, April 2010, p. 22; Erik du Plesis, ―Digital Video Recorders and Inadvertent Advertising Exposure,‖ Journal of Advertising Research 49 (June 2009); S. Adam Brasel and James Gips, ―Breaking Through Fast-Forwarding: Brand Information and Visual Attention,‖ Journal of Marketing 72 (November 2008), pp. 31–4; Kenneth C. Wilbur, ―How Digital Video Recorder Changes Traditional Television Advertising,‖ Journal of Advertising 37 (Summer 2008), pp.

143–49. After reading the articles, ask them to write a memo that summarizes how DVRs are affecting the way marketers should engage consumers, including at least three specific recommendations. They should write the memo from the perspective of a brand management team member for a consumer packaged goods brand (of their choice) that uses television advertising.

Have the students read the following articles: ―Playing Tricks to Build a Brand,‖ Will Burns, ―Samsung ‗Stare Down‘ the Latest Great Reality Prank,‖ Forbes, May 31, 2013; Will Burns, ―LG Ultra HDTV: A Product Demo for the Ages,‖ Forbes, September 5, 2013; Salvador CS-123 Copyright © 2022 Pearson Education, Inc. Browsegrades.net

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Rodriguez, ―LG Hidden-Camera Prank Ad for Its Ultra HD TV Goes Viral,‖ Los Angeles Times, September 7, 2013. After reading these articles, ask the students to take a position: for or against using tricks to build a brand.

END-OF-CHAPTER SUPPORT Marketing Spotlight: Red Bull 1. What are Red Bull‘s greatest competitive strengths as more companies (like Coca-Cola, Pepsi, and Monster) enter the energy drink category and gain market share? What are the risks of competing against such powerhouses?

Suggested Answer: Red Bull‘s greatest strength is its integrated marketing communication mix and its ability to reach a select target market with success. It has first-mover advantage in the energy category. It has independent distribution, so it is not relying on distribution partners that may be more focused on other brands. The independent distributors also give it unique distribution touch points (e.g., bars and events). Its integrated marketing communication mix eschews traditional forms of media—mass media and print. Risks associated with market saturation include reduced shelf space in traditional retail formats, increased sales costs, and lower margins. Legal issues focused on health concerns related to energy drink consumption— especially among children—also present a risk. As the market leader, Red Bull may be a more visible target for legal action by consumer advocacy groups.

2. Discuss the pros and cons of Red Bull‘s nontraditional marketing tactics. Should Red Bull do more traditional advertising? Why or why not?

Suggested Answer: Student answers will vary. To address costumer confusion, Red Bull successfully focused its product positioning around an adventurous lifestyle. Red Bull‘s endeavors in sponsoring international athletes and sporting events helped make Red Bull a global brand. With over five million subscribers, Red Bull‘s YouTube channel is home to thousands of featurettes on Red Bull athletes and sporting events. Red Bull‘s content marketing has pushed awareness of its brand to greater heights. However, students will note that as a product moves through its product life cycle, advertising messages and media must adapt to meet the changing demographics and demands of its target market. So, as Red Bull‘s target market (young adults) age, they‘ll be looking for their product in and through traditional media and traditional marketplaces featuring traditional media.

3. Discuss the effectiveness of Red Bull‘s sponsorships. Where should the company draw the line?

Suggested Answer: Student answers will vary. Red Bull‘s content marketing has pushed awareness of its brand to greater heights and has further increased the association between an active lifestyle and the company. However, students will note that it would only take one fatality or disaster to negate all the good public opinion and goodwill built up by Red Bull’s sponsorships in the past.

Marketing Spotlight: The Best Job in the World

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1. What were the key reasons for the phenomenal popularity of SapientNitro‘s ―The Best Job in the World‖ campaign?

Suggested answer: Three main reasons explain why the low-budget promotion resulted in explosive numbers of views. First, the promotion was hosted almost exclusively on their website that reaches across the globe. Second, the majority of the ad content was provided by the applicants, who submitted over 550 hours of videos. The most notable applicants received millions of views on YouTube. And third, Tourism Queensland earned media coverage, instead of having to buy it.

2. Was the campaign successful in generating tourist traffic to Queensland? How should one measure the success of this publicity campaign?

Suggested answer: The clever advertising campaign generated over $250 million in media value and brought worldwide attention to Queensland tourism. ―The Best Job in the World‖ received 8 Cannes Lions awards for distinguished creativity in advertising and marketing and was inducted into Pr News‘s Platinum Hall of Fame in 2014. There are several measures of success: generating awareness about Queensland, number of visits by tourists, and the change in the level of sales revenue following the ad campaign.

3. What should Queensland do in the future to promote tourism?

Suggested answer. Answers will vary, but certainly the successful use of social media should continue, and visitors to the website should be encouraged to submit videos of their experiences.

DETAILED CHAPTER OUTLINE Modern marketing calls for more than developing a good product, pricing it attractively, and making it accessible. Companies must also communicate with present and potential stakeholders and the general public. For most marketers, therefore, the question is not whether to communicate but rather what to say, how and when to say it, to whom, and how often. To achieve their strategic goals, holistic marketers must craft communication campaigns that can break through the clutter and reach customers on a personal level. Consider Unilever‘s experience in positioning its Dove brand and developing the ―Campaign for Real Beauty.‖ Rather than feeding on women‘s insecurities and encouraging them to strive to be more attractive, Dove took the opposite approach, encouraging women to look beyond the skin-deep beauty offered by most cosmetic products to the attributes that have already made them beautiful.

I. The Role of Marketing Communications i. Marketing communications are the means by which firms attempt to inform, persuade, and remind consumers—directly or indirectly—about the products and brands they sell. ii. They represent the voice of the company and its brands; they are a means by which the firm can establish a dialogue and build relationships with consumers. iii. By strengthening customer loyalty, they can contribute to customer equity.

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iv. Marketing communications also work by showing consumers how and why a product is used, by whom, where, and when. v. Consumers can learn who makes the product and what the company and brand stand for, and they can become motivated to try or use it. vi. Marketing communications allow companies to link their brands to other people. vii. They can contribute to brand equity—by establishing the brand in memory and creating a brand image—as well as drive sales and even affect shareholder value.

A. The Communications Process i. To achieve their strategic goals, holistic marketers must craft communication campaigns that can break through the clutter and reach customers on a personal level. ii. The macromodel of marketing communication articulates the interaction between the sender (company) and the recipient (consumer) of the communication message. Fig. 12.1 shows nine key factors of communication.

• Two represent the major parties—sender and receiver.

• Two represent the major tools—message and media.

• Four represent major communication functions—encoding, decoding response, and feedback.

• The last element in the system is noise—random and competing messages that may interfere with the intended communication. iii. Micromodel of Marketing Communication. A micromodel of marketing communication concentrates on consumers‘ specific responses to communications. iv. Several steps are involved in generating a consumer response.

• Awareness. To take any kind of action, customers must be aware of the existence of the company‘s offering.

• Knowledge. The target audience might have awareness but not know much more about the offering.

• Liking. Members of the target audience may know the brand, but how do they feel about it?

• Preference. The communicator must try to build consumer preference by comparing the product‘s quality, value, performance, and other features to those of competitors.

• Conviction. The target audience might prefer a particular product but not develop a conviction about buying it.

• Purchase. The communicator must lead these consumers to take the final step, perhaps by offering the product at a low price, offering a premium, or letting them try it out.

B. Developing an Effective Communication Program i. Basics: identifying the target audience, setting the communication objectives, designing the communications, selecting the communication channels, and establishing the total marketing communications budget (See Fig. 12.2.) ii. The ultimate success of a company‘s communication campaign depends on the viability of the overall strategy and tactics for managing the company‘s offering, which serve as a basis for developing a communication plan.

II. Setting the Communication Objectives

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A. Setting the objectives of a communication campaign involves three key decisions: defining the focus of company communications, setting communication benchmarks, and determining the communication budget.

B. Defining the Focus of Company Communications i. A communication objective is a specific task and achievement level to be accomplished with a specific audience in a specific period of time. ii. Communication objectives are classified according to whether they create awareness by informing and persuading the target audience of the benefits of the offering, or inciting action that benefits the company and its offering.

• Creating awareness provides a foundation for brand equity.

• Building preferences involves communicating an offering‘s ability to meet a currently relevant consumer need.

• Inciting action involves motivating consumers to decide to purchase the brand or take purchase-related action. iii. Communication objectives for the company‘s offering also depend on the current consumer state of awareness. See Fig. 12.3.

C. Setting the Communication Benchmarks i. Without such well-articulated benchmarks, a company will find it challenging to design an effective communication campaign aligned with strategic goals. ii. Broadly speaking, there are two types of communication benchmarks: quantitative and temporal. iii. Defining quantitative and temporal benchmarks is important, because without knowing what outcome needs to be achieved and the timeframe for achieving it, a company will find it difficult to design an effective communication program.

D. Determining the Communication Budget i. Objective-and-task budgeting calls for marketers to develop a communication budget by defining specific objectives, identifying the tasks to be performed, and estimating costs. ii. The main factors to consider when setting the communication budget follow.

• Stage in the product life cycle. New products merit large communication budgets to build awareness. Established brands have lower budgets.

• Product differentiation. Offerings in less differentiated categories (beer, soft drinks) require more advertising to establish a unique image.

• Market share. High-market-share brands require less advertising.

Building share by increasing market size requires larger expenditures.

• Message complexity. The number of repetitions needed to get the company‘s message across impacts the communication budget.

• Reach. A company‘s ability to reach consumers in an effective and costefficient manner. Communications to customers who are difficult to reach require a larger budget.

• Competitive communication. In markets with many competitors, a brand must advertise more heavily.

• Available resources. The communication budget is limited by the company‘s resources.

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iii. In competitive-parity budgeting, companies set their communication budgets at parity with competitors. iv. Some companies set communication expenditures at a specified percentage of current or anticipated sales revenues.

III. Identifying the Target Audience and Crafting the Communication Message A. Identifying the Target Audience i. Start with a clear target audience in mind: potential buyers of the company‘s products, current users, deciders, or influencers, as well as individuals, groups, particular publics, or the general public. ii. The target audience is a critical influence on the communicator‘s decisions about what to say, how, when, where, and to whom. iii. The target market and the target audience do not always fully overlap. The target audience can differ from the target market.

B. Crafting the Communication Message i. Marketers are always seeking the ―big idea‖ that resonates with consumers rationally and emotionally, distinguishes the brand from competitors, and is broad and flexible enough to translate into different media, markets, and time periods. ii. A creative brief is an elaboration of the positioning strategy, which includes considerations such as key message, target audience, communication objectives, key brand benefits, support for the brand promise, and media. iii. The more messages explored, the higher the probability of finding an excellent one. iv. Management searches for appeals, themes, or ideas that will tie into the brand positioning and help establish points of parity or points of difference.

IV. Deciding on the Communication Media i. Companies must allocate their marketing communication budget over the nine major modes of communication.

A. Defining the Communication Media Mix i. Customers come to know a brand through a range of touch points, including online clubs and consumer communities, trade shows, event marketing, sponsorship, factory visits, public relations and press releases, and social cause marketing. ii. Key aspects of communication formats • Advertising—Any paid form of nonpersonal presentation and promotion of ideas, goods, or services by an identified sponsor via print media (newspapers, magazines, brochures, books, leaflets, directories), broadcast media (radio and television), network media, and display media (billboards, signs, posters, outer packaging, packaging inserts, ad reprints, and point-of-purchase displays) • Events and experiences—Company-sponsored activities and programs designed to create daily or special brand-related interactions with consumers, including sports, arts, entertainment, and cause events as well as less formal activities • Publicity and public relations—A variety of programs directed internally to employees of the company or externally to consumers, other firms, the

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government, and media to promote or protect a company‘s image or its individual product communications • Online and social media marketing—Activities and programs designed to engage customers or prospects and directly or indirectly raise awareness, improve image, or elicit sales of products and services • Mobile communication—A special form of online marketing that places communications on consumer‘s cell phones, smart phones, or tablets • Direct marketing— Use of mail, phone, e-mail, online messaging, or in-person interaction to communicate directly with, or solicit response or dialog from, specific customers and prospects • Word of mouth—The passing of information from person to person by oral communication. Social media can be viewed as a specific instance of word of mouth, where personal communication occurs online and is observable by others.

• Personal selling—Face-to-face interaction with one or more prospective purchasers for the purpose of making presentations, answering questions, and procuring orders • Packaging—The product‘s styling and price, the shape and color of the package, the salesperson‘s manner and dress, the store décor, and the company‘s stationery all communicate something to buyers.

B. Developing a Media Plan i. Media planners must consider factors such as audience size, composition, and media cost and then calculate the cost per thousand persons reached.

• First, consider audience quality.

• Second, consider audience-attention probability.

• Third is the medium‘s editorial quality, meaning its prestige and believability.

• Fourth, consider the value of ad placement policies and extra services, such as regional or occupational editions, and lead-time for magazines. ii. Determining the Media Reach, Frequency, and Impact. Media selection aims to find the most cost-effective media to deliver the desired number and type of exposures to the target audience. iii. The number of exposures needed to reach a certain level of audience awareness is contingent on the reach, frequency, and impact of the media chosen.

• Reach (R). The number of different persons or households exposed to a particular media schedule at least once during a specified time period • Frequency (F). The number of times within the specified time period that an average person or household is exposed to the message • Impact (I). The qualitative value of an exposure through a given medium (for example, a food ad should have a higher impact in Bon Appetit than in Fortune magazine) iv. Selecting Media Timing and Allocation. When choosing media, the advertiser must make both a macroscheduling and a microscheduling decision.

• The macroscheduling decision is related to seasons and the business cycle.

• The microscheduling decision calls for allocating communication expenditures within a short period to obtain maximum impact. v. When launching a new product, the advertiser must choose among four strategies: CS-129 Copyright © 2022 Pearson Education, Inc. Browsegrades.net

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continuity, concentration, flighting, and pulsing.

V. Developing the Creative Approach A. Determining the Message Appeal i. We can broadly classify creative strategies as either informational or transformational appeals.

• An informational appeal elaborates on product or service attributes or benefits, and assumes strictly rational processing of the communication; logic and reason rule. o Two-sided informational messages may be more appropriate than one-sided when negative associations must be overcome. o Two-sided messages are more effective with more educated audiences and those who are initially opposed. o In a one-sided message, presenting the strongest argument first arouses attention and interest, important in media where the audience often does not attend to the whole message. o For a two-sided message, if the audience is initially opposed, start with the other side‘s argument and conclude with your strongest argument.

• A transformational appeal elaborates on a nonproduct-related benefit or image and often attempts to stir up emotions that will motivate purchase. o Communicators use negative appeals such as fear, guilt, and shame to get people to do things or stop doing things. o Messages are most persuasive when they moderately disagree with audience beliefs. ii. Motivational or ―borrowed interest‖ devices are often employed to attract attention and raise involvement with an ad. iii. These techniques are thought necessary in the tough new media environment of low-involvement processing and competing messages. iv. Attention-getting tactics may also detract from comprehension, however, or wear out their welcome fast or overshadow the product.

B. Selecting the Message Source i. Research has shown that the source‘s credibility is crucial to a message‘s acceptance. ii. The three most often identified sources of credibility are expertise, trustworthiness, and likability.

• Expertise is the specialized knowledge the communicator possesses to back the claim.

• Trustworthiness describes how objective and honest the source is perceived to be.

• Likability describes the source‘s attractiveness, measured in terms of candor, humor, and naturalness. iii. The most credible source will score high on all three dimensions—expertise, trustworthiness, and likability. iv. The principle of congruity implies that communicators can use their good image to reduce some negative feelings toward a brand but that, in the process, they might lose some esteem with the audience.

C. Developing the Creative Execution i. Creative output is given by the ADPLAN framework:

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•

Attention indicates whether an advertisement will garner interest from the target audience.

• Distinction assesses whether an advertisement uses themes, content, or creative devices that distinguish it from other advertisements in the category or in general.

• Positioning describes whether an advertisement situates the brand in the right category, provides a strong benefit, and anchors the benefit with a reason for customers to believe the message.

• Linkage communicates whether the target audience will remember the creative execution.

• Amplification captures whether individuals‘ thoughts about an advertisement are positive or negative.

• Net equity pertains to how an advertisement fits with a brand‘s heritage and established associations.

VI. Measuring Communication Effectiveness i. Communication effectiveness can be measured from two perspectives: supply side and demand side.

• On the supply side, measuring communication effectiveness aims to assess the media coverage.

• Although supply-side methods provide quantifiable measures, equating media coverage with advertising exposure ignores the content of the respective communications.

• On the demand side, measuring communication effectiveness aims to assess the effect a company‘s campaign has on the target audience.

• Members of the target audience are asked whether they recognize or recall the message, how many times they saw it, what points they recall, how they felt about the message, what their previous attitudes toward the product and the company were, and what their current attitudes are. ii. Companies often examine the effectiveness of their communication campaigns to determine whether they are overspending or underspending on advertising. See Figure 12.4. iii. A company‘s share of advertising expenditures produces a share of voice (proportion of company advertising of that product to all advertising of similar competitive products) that earns a share of consumers’ minds and hearts and, ultimately, a share of market. iv. To increase the effectiveness of its communication campaign, marketers pretest their advertisements. v. Marketers might measure whether and how the communication campaign influences sales.

• The historical approach uses advanced statistical techniques to correlate past sales to past advertising expenditures.

• Experimental data measure advertising‘s sales impact.

• The sales effect of advertising expenditures is measured, instead of settling for

DESIGNING AN INTEGRATED MCSA-13R1 KETING CAMPAIGN

measures of communication effect.

CHAPTER

13

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IN THE DIGITAL AGE

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LEARNING OBJECTIVES After studying this chapter, you should be able to:

13.1 Describe the key principles in managing an integrated marketing campaign.

13.2 Define the key aspects of managing an effective advertising campaign.

13.3 Explain how to design and manage online communications.

13.4 Describe the key aspects of managing social media.

13.5 Explain how to manage mobile communications.

13.6 Explain how to design meaningful events and experiences.

13.7 Describe the role of word of mouth in marketing communications.

13.8 Summarize how to manage publicity and public relations.

13.9 Discuss the role of product packaging as a communication tool.

CHAPTER SUMMARY 1. Managing and coordinating the entire communications process calls for integrated marketing communications. Effective marketing communications recognizes the added value of a comprehensive plan to evaluate the strategic roles of a variety of communication disciplines and combines these disciplines to provide clarity, consistency, and maximum impact through the seamless integration of discrete messages.

2. The development of an integrated communication campaign requires a clear understanding of the specifics of the alternative media formats in order to create a consistent consumer experience. The most popular communication formats are advertising; online, social media, and mobile communication; events and experiences; word of mouth; publicity and public relations; and packaging.

3. Advertising is any paid form of nonpersonal presentation and promotion of ideas, goods, or services by an identified sponsor. Advertisers include not only business firms but also

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charitable, nonprofit, and government agencies. The advertiser typically purchases media time or space to convey the company‘s message to its target audience. The most popular forms of advertising are television, print, radio, online, and place advertising.

4.

An important form of online communication is a company‘s owned media. There are two common approaches to drive traffic: (1) search engine optimization (SEO), which aims to boost the likelihood that a link to a company‘s content will appear at the top of

the organic (nonpaid) search results; and (2) search engine marketing (SEM), which involves paying search engine companies to feature one‘s content in the results of a particular key-word search.

5. Social media have become an influential form of marketing communication. They come in many forms: online communities and forums, blogs, social networks, and customer reviews.

Social media reinforce other communications and offer marketers the opportunity to have a public voice and presence online for their brands. Marketers can build or tap into online communities, inviting participation from consumers and creating a long-term marketing asset in the process.

6. Mobile communications are an increasingly important form of interactive marketing by which marketers can use text messages, apps, and ads to connect with consumers via their smartphones, tablets, and wearable devices. A key appeal of this form of interactive marketing is that it enables marketers to personalize messages on the basis of demographics, geolocation, and behavior.

7. Events and experiences are a means to become part of special and more personally relevant moments in consumers‘ lives. Events can broaden and deepen the sponsor‘s relationship with its customers by connecting a company‘s product or service with unique and engaging experiences.

8. Word-of-mouth marketing aims to engage customers to share with others their views and experiences about products, services, and brands. Positive word of mouth sometimes happens organically with little advertising, but it can also be managed and facilitated. Viral marketing relies on word of mouth that encourages consumers to pass along audio, video, or written information about company-developed products and services to others online.

9. Publicity aims to promote a company and its offerings. Unlike advertising, where the company pays for the media, publicity uses editorial space and does not incur media costs. Common forms of publicity include news stories, articles, and editorials. The CS-133 Copyright © 2022 Pearson Education, Inc. Browsegrades.net

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primary goal of publicity is to attract attention to the company or its offerings.

10. Public relations (PR) aims to manage the overall reputation of the company and its offerings, while building relationships with the community. The main tools of PR are publications, events, sponsorships, news, speeches, public service activities, and identity media. PR departments perform several functions: fostering positive press coverage about the organization, managing internal and external corporate communications, and regulation.

11. Packaging is similar to advertising in that it aims to inform buyers about the benefits of the company‘s offering. Unlike advertising, which typically aims to create a memorable impression of an offering in the minds of future purchasers, packaging often is designed to have a more direct visual impact on the buyer.

Because of its ability to influence consumer perceptions at the point of purchase, many companies use packaging strategically to create distinct customer value and differentiate their products from those of the competition.

OPENING THOUGHT To facilitate one-stop shopping for marketers, media companies and ad agencies have acquired promotion agencies, public relations firms, package-design consultancies, website developers, social media experts, and direct-mail houses. They are redefining themselves as communication companies that help clients improve their overall communication effectiveness by offering strategic and practical advice on many forms of communication. These expanded capabilities make it easier for marketers to assemble various media properties—as well as related marketing services—in an integrated communication program.

Marketers must go where the customers are, and increasingly that‘s online. Of the total time U.S. consumers spend with all media, more than half is spent online. Customers define the rules of engagement, however, and insulate themselves with the help of agents and intermediaries if they so choose. They define what information they need, what offerings they‘re interested in, and what they‘re willing to pay. Students can share their online experiences regarding online shopping, information search, and their use of Facebook, Twitter, Instagram, and other social media websites. Students can discuss how social media allows consumers to become engaged with a brand at perhaps a deeper and broader level than ever before.

TEACHING STRATEGY AND CLASS ORGANIZATION PROJECTS 1. At this point in the semester-long marketing plan project, students should have agreed upon their use of social media as part of the integrated marketing communications matrix. The instructor is encouraged to evaluate the submissions vis-à-vis the material presented in this chapter. In reviewing the submissions, the instructor should evaluate the continuity of the message across all possible digital communication media.

2. With the instructor’s guidance and attendance, contact a local advertising agency that specializes in the use of social media to gather from the agency’s management, their (ad agency) views on the topic of integrated marketing communications. Especially, what digital

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services have their clients requested that the ad agency performs to build an integrated marketing communications program?

ASSIGNMENTS Companies are adopting integrated marketing communications as an approach to designing, communicating, and delivering a message through multiple strategies that work together and reinforce one another. One company that has successfully used diverse means of disseminating its message is Beats by Dr. Dre, described in the opening vignette. Beats controls some 70 percent of the headphones market, thanks to lightning-fast marketing and a smart grasp of pop culture. Have students read,“ How Dr. Dre's Headphones Company Became a Billion-Dollar Business‖ by Burt Helm. https://www.inc.com/audacious-companies/burt-helm/beats.html Have the students read the following sources listed in the Marketing Insight: Rose Leadem, ―The ROI of Social Media,‖ Entrepreneur, July 7, 2018; Josh Bernoff, ―A Balanced Perspective on Social ROI,‖ Marketing News, February 28, 2011; Frahad Manjoo, ―Does Social Media Have a Return on Investment?,‖ Fast Company, July/August 2011; David A. Schweidel, Wendy W. Moe, and Chris Boudreaux, ―Social Media Intelligence: Measuring Brand Sentiment from Online Conversation,‖ MSI Report 12-100 (Cambridge, MA: Marketing Science Institute, 2012).

After reading the articles, ask them to write a memo that summarizes how social media affects the way marketers engage consumers and include suggestions on how to measure social media‘s effect on financial returns.

END-OF-CHAPTER SUPPORT Marketing Spotlight: Burger King 1. What were the key factors that undermined the effectiveness of Burger King‘s communications over the years?

Suggested answer: Some of these factors included a series of ineffective advertising campaigns, an overly complicated menu, and changes in customer preferences. Burger King revamped its advertising style to be riskier and incorporate more tongue-in-cheek humor. This strategy was successful. Then the advertising campaigns became ineffective. The ―SpongeBob Square Butt‖ advertisement was controversial because the highly sexualized ad primarily targeted young consumers. Mental health organizations took offense at advertisements such as ―The King‘s Gone Crazy‖ because of its crude depiction of mental illness. Although some advertisements succeeded in increasing sales, Burger King was becoming less successful at leaving a good impression on fans.

2. How should Burger King balance cost-cutting initiatives with investing in an integrated marketing campaign to create and sustain top-of-mind awareness and gain market share?

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Suggested answer: Burger King began to grow once more after rediscovering its roots and streamlining its marketing communications. The chain has focused heavily on maintaining relevance in the minds of customers, constantly releasing topical and impressionistic advertising campaigns. Burger King‘s approach to managing integrated marketing communications was also recognized by industry professionals.

3. How should Burger King use traditional, online, and mobile communications to build a loyal customer base?

Suggested answer: Burger King should return to its traditional form of advertising, taking it back to its tongue-in-cheek roots. The media team launched a series of creative campaigns that offered topical political or cultural commentary. Burger King mocked artificial intelligence‘s capacity for creativity by releasing a bizarre set of advertisements completely generated by machine-learning algorithms. Many advertisements were also more lighthearted and humorous: Burger King offered Whoppers with holes cut out of the center to celebrate National Donut Day.

Marketing Spotlight: AccorHotels 1. What was the key to Accor‘s market success?

Suggested answer: The company has stayed competitive and successful by investing heavily in modernizing its digital experience. Because of a streamlined website and mobile application, customers can easily book, check into, and review a hotel room with a click of a button. Accor‘s upgraded CRM database allows employees to deliver a personalized experience to every guest.

In 2019, Accor hotels operated 4,200 hotels in over 100 countries worldwide and was the largest hotel group in the world outside of the United States.

2. What role did Accor‘s online strategy play in its ability to gain and retain loyal customers?

Suggested answer: Accor‘s purchase of Wipolo in 2014 provided the company with a dynamic mobile application that could function as the primary customer-booking channel and increase the share of mobile bookings. The Wipolo application allowed customers to browse different properties, easily book a room, use hotel digital services, give feedback, and utilize Accor‘s loyalty program. Accor centralized its customer relationship management databases into one single platform. The new database aided employees in providing personalized service for guests

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and featured a recommendation engine that automatically generated custom offers to customers based on their profile and traveling behavior.

3.How should Accor balance its resources across traditional, online, and mobile communications?

Suggested answer: While maintaining traditional communications. Accor should put more resources in online and mobile communications. Research showed that when Accor streamlined its customer and check-out, targeted offers, and personalized welcomes, it reported that over 93 percent of customers who tried the welcome service wanted to use it again.

DETAILED CHAPTER OUTLINE As the communication landscape becomes ever more complex, companies are faced with the growing challenge of coordinating communication activities to ensure that they deliver a consistent message across different channels—and do so in a way that enables them to achieve their strategic goals. As a result, companies are adopting integrated marketing communications as an approach to designing, communicating, and delivering a message through multiple strategies that work together and reinforce one another. One company that has successfully used diverse means of disseminating its message is Beats by Dr. Dre. Beats headphones are a must for many music lovers despite costing nearly 10 times what ordinary earbuds sell for. Their appeal is in the thumping, bass-heavy sound and sleek look.

I. Managing Integrated Marketing Communications A. Integrated marketing communications (IMC) is an approach to managing a communication campaign through a coordinated use of different communication tools that reinforce one another to achieve strategic goals. i. IMC can occur on four distinct levels: horizontal, vertical, internal, and external.

• • •

Horizontal integration involves coordinating all relevant marketing actions with the communication campaign to achieve maximum customer impact.

Vertical integration involves aligning the communication objectives with the higher-level goals.

Internal integration involves sharing the relevant information from different departments with the communication team to create an effective

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campaign.

•

External integration coordinates a company‘s communication activities with those of the external collaborators.

ii. The following criteria ensure that communications are integrated.

• • • • •

•

Coverage. Coverage is the proportion of the audience reached by each communication option employed, as well as the amount of overlap among those options.

Contribution. Contribution is the ability of a marketing communication to elicit the desired response from consumers, and to exert communication effects on them, without exposure to any other communication option.

Commonality. Commonality is the extent to which common associations are reinforced across communication options.

Complementarity. Communication options are often more effective when used in tandem. Complementarity involves emphasizing different associations and linkages across communication options.

Conformability. In any integrated communication program, the message will be new to some consumers and familiar to others. Conformability reflects the extent to which a marketing communication option works for both groups of consumers.

Cost. Marketers must evaluate marketing communications on all these criteria against their cost to arrive at the most effective and most efficient communications program.

iii. An integrated communication campaign requires an understanding of the specifics of alternative media formats which create a consistent experience for target customers.

II. Advertising i. Advertising consists of any presentation and promotion of ideas, goods, services, and brands by an identified sponsor using paid media.

A. Television Advertising i. Television is generally acknowledged as the most powerful advertising medium and reaches a broad spectrum of consumers at low cost per exposure. ii. TV can vividly demonstrate product attributes and persuasively explain corresponding consumer benefits. iii. TV can dramatically portray user and usage imagery, brand personality, and other intangibles.

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iv. Television has the opportunity to tap a captive audience during live programming at important events. v. Product-related messages and the brand itself can be overlooked. vi. High volume of nonprogramming material on television creates clutter that makes it easy for consumers to ignore or forget ads. vii. Another consideration is the relatively high cost of television advertising. viii. With online streaming, television programming has expanded to streaming to computers, laptops, tablets, and mobile phones.

B. Print Advertising i. Print media can provide detailed product information and effectively communicate user and usage imagery. ii. The static nature of the visual images in print media makes dynamic presentations or demonstrations difficult, and print media can be fairly passive. iii. Newspapers are timely and pervasive, magazines are typically more effective at building user and usage imagery. iv. Print advertising has steadily declined in recent years. v. Although advertisers have some flexibility in designing and placing newspaper ads, relatively poor reproduction quality and short shelf life can diminish the impact. vi. A print ad should be clear, consistent, and well branded.

C. Radio Advertising i. Radio’s main advantage is flexibility—stations are very targeted, ads are relatively inexpensive to produce and place, and short closings for scheduling them allow for quick response. ii. Radio can engage listeners through a combination of popular brands, local presence, and strong personalities. iii. It is a particularly effective medium in the morning; it can also let companies achieve a balance between broad and localized market coverage. iv. Radio advertising is benefiting from the growing popularity of podcasts. v. Radio’s obvious disadvantages are its lack of visual images and the relatively passive nature of the consumer processing that results.

D. Online Advertising i. Advantages of Online Marketing Communications • The variety of online communication options means companies can offer or send tailored information or messages that engage consumers by reflecting their special interests and behavior.

• Marketers can easily trace their effects by noting how many unique visitors click on a page or ad, how long they spend with it, what they do on it, and where they go afterward.

• Contextual placement means marketers can buy ads on sites related to their own offerings or place advertising based on keywords customers type into search engines to reach people when they’ve actually started the buying process. ii. Disadvantages of Online Marketing Communications CS-139 Copyright © 2022 Pearson Education, Inc. Browsegrades.net

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• •

Consumers can effectively screen out most messages.

Marketers may think their ads are more effective than they really are if bogus clicks are generated by software-powered websites.

• Advertisers also lose some control over their online messages, which can be hacked or vandalized. iii. Native advertising involves materials resembling the publication‘s editorial content but is intended to promote the advertiser‘s product. iv. With its non-disruptive approach, native advertising has grown in popularity worldwide. v. Although it is utilized primarily in online communications, native advertising is also used in traditional media formats including print, television, and radio.

E. Place Advertising i. Place advertising includes creative and unexpected forms to grab consumers‘ attention where they work, play, and shop. ii. Billboards use colorful, digitally produced graphics, backlighting, sounds, movement, and unusual—even 3D—images. iii. Public Spaces. Movie screens, airplane bodies, and fitness equipment, as well as in classrooms, sports arenas, office and hotel elevators, and other public places iv. As the effectiveness of traditional means of communication declines, advertisers use public spaces to create a memorable impression of the company and its offerings. v. Product Placement. Marketers pay hundreds of thousands of dollars for their products to make cameo appearances in movies and on television. vi. Point of Purchase. The appeal of point-of-purchase advertising is that consumers make many brand decisions in the store (e.g., shopping carts, cart straps, aisles, and shelves and instore demonstrations, live sampling, and instant coupon machines).

III. Online Communication A. Customers are increasingly online. Of the total time U.S. consumers spend with all media, more than half is spent online.

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B. Company Website • Companies must design websites that embody or express their purpose, history, products, and vision and that are attractive on first viewing and interesting enough to encourage repeat visits.

• Companies employ microsites, individual webpages or clusters of pages that function as supplements to a primary site.

C. Driving Online Traffic i. Search engine optimization (SEO) describes activities designed to improve the likelihood that a link for a brand ranks as high as possible in the order of all nonpaid links when consumers search for relevant terms.

• SEO is less costly to implement than search engine marketing. ii. Search engine marketing (SEM) describes activities whereby the company pays search engine companies to be featured in the results of particular keyword searches that serve as a proxy for the consumer‘s product or consumption interests.

• •

Advertisers pay only if people click on the links, but marketers believe consumers who have expressed interest by engaging in search are prime prospects.

The cost per click depends on how high the link is ranked on the page and the popularity of the keyword.

IV. Social Media i. Social media are a means for consumers to share text, images, audio, and video information with one another and with companies, and vice versa.

• • •

Social media allow marketers to establish a public voice and presence online.

They can cost-effectively reinforce other communication activities.

Because of their day-to-day immediacy, they can also encourage companies to stay innovative and relevant.

• Marketers can build or tap into online communities, inviting participation from consumers and creating a long-term marketing asset in the process.

A. The Growth of Social Media i. Social media allow consumers to become engaged with a brand at a deeper and broader level.

•

Research suggests that brands and products vary in how social they are online.

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•

Only some consumers want to engage with some brands online—and even then, only some of the time.

ii. One challenge is the speed with which social media marketers are expected to react to relevant news and events.

• The internet permits scrutiny and criticism from consumers and organizations. iii. Firms can create a strong online presence and offer alternative points of view if negative feedback occurs.

• If the firm has a strong online community, members will defend the brand and play a policing role regarding inaccurate or characterizations.

B. Social Media Platforms include: • online communities and forums • blogs (individual blogs and blog networks) • social networks (like Facebook, Twitter, and YouTube) • customer reviews i. Online Communities and Forums. Often created by consumers or groups of consumers with no commercial interests or company affiliations.

• Others are sponsored by companies whose members communicate with the company and with each other through postings, text messaging, and chat discussions about special interests related to the company’s products and brands.

• Online communities and forums can be a valuable resource for companies and fill multiple functions by both collecting and conveying key information.

• A key for success in online communities is to create individual and group activities that help form bonds among community members.

• Information flow in online communities and forums is two-way and can provide companies with useful, hard-to-get customer information and insights. ii. Blogs, regularly updated online journals or diaries, have become an important outlet for word of mouth.

• Blogs bring together people with common interests.

• Some consumers use blogs to get retribution for bad service or faulty products. iii. Social networks have become an important force in business-to-consumer and business-to-business marketing.

• Influencer marketing refers to the use of a popular online figure to promote a product, service, or brand within his or her social media feed.

•

The high fees collected by influencers and the lack of accurate measures of their market impact have created a global marketplace for social media fraud.

iv. Customer reviews can be especially influential in shaping customer preferences and buying decisions.

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v. Research has shown that social influence can lead to disproportionally positive online ratings, and subsequent raters are more likely to be influenced by previous positive ratings than negative ones.

• Consumers posting reviews are susceptible to conformity pressures and adopting norms of others.

• Positive online reviews or ratings are often not as influential or valued as much as negative ones.

V. Mobile Communication A. Characteristics of a Mobile Device • It is uniquely tied to one user.

• It is virtually always “on‖ given it is typically carried everywhere.

• It allows for immediate consumption because it is in effect a channel of distribution with a payment system.

• It is highly interactive given it allows for geotracking and picture and video taking. i. With the increased capabilities of smartphones, however, mobile ads can be more than just a display medium using static ―mini-billboards.‖ ii. Interest has been generated in mobile apps adding convenience, social value, incentives, and entertainment, and making consumers‘ lives a little or a lot better.

• • •

Smart mobile devices are also conducive to boosting loyalty programs.

The ability of mobile to make offers to consumers at the point of purchase (e.g., digital coupons) has interested marketers.

Consumers are more engaged and attentive when using their smartphones than when they are online.

iii. A number of m-commerce companies are eliminating ads to allow consumers to make purchases with as few clicks as possible.

VI. Events and Experiences A. Managing Events i. Becoming part of a personally relevant moment in consumers‘ lives through sponsored events and experiences can broaden and deepen a company‘s or brand‘s relationship with the target market. ii. Marketers report a number of reasons to sponsor events: • To identify with a particular target market or lifestyle. Old Spice sponsors college sports.

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•

To increase the salience of a company or product name. Events offer sustained exposure to a brand, a necessary condition for reinforcing brand salience.

• To create or reinforce perceptions of key brand image associations. Events have associations that help to create or reinforce brand associations.

• To enhance corporate image. Sponsoring and organizing events can improve perceptions that the company is likable and prestigious.

• To create experiences and evoke feelings. The feelings engendered by an exciting or rewarding event may indirectly link to the brand.

• To express commitment to the community or on social issues. Cause-related events sponsor nonprofit organizations and charities.

• To entertain key clients or reward key employees. Many events include lavish hospitality tents and other special services or activities for sponsors and their guests.

• To permit merchandising or promotional opportunities. Many marketers tie contests or sweepstakes, in-store merchandising, direct response, or other marketing activities to an event. iii. Despite these potential advantages, the result of an event can still be unpredictable and beyond the sponsor‘s control.

B. Creating Experiences i. Experiential marketing not only communicates features and benefits but also connects a product or service with unique and interesting experiences.

• Experiential marketing aims to let customers experience how the company‘s offering fits in their life.

• Many firms are creating their own events and experiences to create consumer and media interest and involvement.

• A popular form of experiential marketing involves event sponsorship. ii. Companies can even create a strong image by inviting prospects and customers to visit their headquarters and factories.

VII. Word of Mouth A. Consumers use word of mouth to talk about dozens of brands each day, from media and entertainment products such as movies, TV shows, and publications to food products, travel services, and retail stores. i. Companies are acutely aware of word-of-mouth power. ii. Viral marketing relies on word of mouth that encourages consumers to pass along audio, video, or written information about company-developed products and

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services to others online.

•

Positive word of mouth sometimes happens organically with little advertising, but it can also be managed and facilitated.

• •

Without question, more advertisers now seek greater earned media— unsolicited professional commentary, personal blog entries, social network discussion—as a result of their paid media and owned media efforts.

Products don‘t have to be outrageous or edgy to generate word-of-mouth buzz.

iii. Research has shown that consumers tend to generate positive word of mouth themselves and to share information about their own positive consumption experiences.

VIII. Publicity and Public Relations A. Publicity involves securing editorial space—as opposed to paid space—in the media to promote a product, service, idea, place, person, or organization. i. Marketing managers are turning to publicity to build awareness and brand knowledge for both new and established products. ii. Publicity is effective in blanketing local communities and reaching specific groups, and it can be more cost-effective than advertising. iii. Publicity is free—though the advertiser might have to pay an agency to secure media coverage. iv. Because the source of the message is a third party, publicity is more credible and more likely to influence the target audience. v. The downside of publicity is that it cannot be directly controlled by the company. vi. Publicity plays an important role in a variety of tasks: •

Launching new products. The amazing one-time commercial success of toys such as Leap Frog owes a great deal to strong publicity.

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• • • •

Repositioning mature products. In a classic case, New York City had extremely bad press in the 1970s until the ―I Love New York‖ campaign.

Building interest in a product category. Companies and trade associations have used publicity to rebuild interest in declining commodities such as eggs.

Defending products that have encountered public problems. Publicity professionals must be adept at managing crises.

Building the corporate image in a way that reflects favorably on its products. The late Steve Jobs‘s heavily anticipated Macworld keynote speeches helped to create an innovative, iconoclastic image for Apple Corporation.

B. Public Relations i. Public relations (PR) includes a variety of programs to promote or protect a company‘s image among the relevant stakeholders. ii. The wise company takes concrete steps to manage successful relationships with its key publics. iii. Most have a PR department that monitors the attitudes of the firm‘s publics and distributes information and communications to build goodwill. iv. Many companies have PR departments that perform three main functions.

• • •

They provide press coverage by presenting news and information about the organization in the most positive light.

They manage corporate communications by promoting understanding of the organization.

PR departments engage in lobbying.

v. Public relations can involve different media formats.

• • • • •

Publications: Companies rely extensively on published materials to reach and influence their target markets.

Events: Companies can draw attention to new products or other company activities by arranging and publicizing special events.

News: One of the major tasks of PR professionals is to find or create favorable news about the company.

Speeches: Company executives must field questions from the media or give talks at events.

Public Service Activities: Companies can build goodwill by contributing money and time to good causes.

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•

Identity Media: Companies need a visual identity that the public immediately recognizes.

C. Packaging i. Because packaging is perceived during a buyer‘s first encounter with the product, it can be a determining factor in piquing the buyer‘s interest. ii. The label is a highly visible and important element of packaging. iii. Three principles can develop effective packaging that contributes to market success:

•

Visibility. Companies overwhelm consumers with a constant barrage of information. Effective packaging can cut through the information clutter.

•

Differentiation. Effective packaging can differentiate the company‘s offering from the competition.

• Transparency. Effective packaging clearly communicates the value of the offering to its target customers.

CHAPTER

14

PERSONAL SELLING AND DIRECT MARKETING

LEARNING OBJECTIVES After studying this chapter, you should be able to: 14.1 Define the key aspects of the selling process.

14.2 Explain how to design an effective sales force organization.

14.3 Explain how to manage a sales force.

14.4 Discuss the role of direct marketing, and identify the key direct marketing channels.

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CHAPTER SUMMARY 1. Personal selling involves a direct interaction with one or more prospective purchasers for the purpose of making presentations, answering questions, and procuring orders.

Personal selling has three notable qualities: it is customized, relationship oriented, and response oriented.

2. There are several major steps in any effective sales process: prospecting, pre-approach, presentation, persuasion, closing, and servicing. Effective salespeople are trained in methods of analysis and customer management, as well as in the art of sales professionalism.

3. The sales force is a company‘s link to its customers. The salesperson is the company to many of its customers, and it is the rep who brings back to the company much-needed information about the customer. Thoughtful design and management of the sales force is of utmost importance in maximizing the effectiveness and cost efficiency of a company‘s sales efforts.

4. Designing the sales force requires choosing objectives, strategy, structure, size, and compensation. Objectives may include prospecting, targeting, communicating, selling, servicing, information gathering, and allocating. The strategy requires choosing the most effective mix of selling approaches. Structuring the sales force entails dividing territories by geography, product, or market (or some combination of these). To estimate how large the sales force needs to be, the firm estimates the total workload and how many sales hours (and hence salespeople) will be needed.

Compensating sales reps requires deciding what types of salaries, commissions, bonuses, expense accounts, and benefits to give and how much weight customer satisfaction should have in determining total compensation.

5. Managing the sales force involves five key components: (1) recruiting and selecting sales representatives; (2) training the representatives in sales techniques and in the company‘s products, policies, and customer-satisfaction orientation; (3) supervising the sales force and helping reps to use their time efficiently; (4) motivating the sales force and balancing quotas, monetary rewards, and supplementary motivators; and (5) evaluating individual and group sales performance.

6. Direct marketing is the use of consumer-direct channels to reach and deliver goods and services to customers without using marketing intermediaries. Direct marketers can use a number of channels to reach individual prospects and customers: direct mail, catalog marketing, telemarketing, kiosks, websites, and mobile devices. They often seek a measurable response, typically a customer order, through direct-order marketing.

7. Major direct marketing channels include direct mail, catalog marketing, telemarketing, and infomercials. These channels offer several benefits to companies. (1) They provide companies with the option not only to inform target customers about the benefits of the offering but also to generate a sale. (2) Relative to other forms of communication, they are less visible to competitors. And (3) they enable marketers to measure responses to their campaigns to decide which have been the most profitable.

OPENING THOUGHT Students should be very familiar with the marketing systems described in this chapter, especially internet shopping. The challenge to the instructor in this chapter is ensuring that the students

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understand that internet marketing (e-marketing) is just one of the many different avenues available to marketers trying to reach their target markets. Students may be predisposed to believe that ―all‖ marketing or the ―future‖ of marketing is via the electronic channels. The instructor should encourage in-class discussions on this position and he/she is encouraged to take the ―defensive‖ position to help the students understand the many levels of business and consumer marketing.

For those students who are not currently salespeople, or are not interested in a career in sales, their opinions and views of salesmanship (derived from personal experiences, TV, and other forms of communication) can be an interesting source of discussion. Some students will believe that ―all salesmen lie.‖ The section in this chapter concerning the sales force may present a challenge to the instructor in disproving or refuting these common assumptions about salespeople long enough to communicate the material. The instructor is encouraged to spend sufficient time on this section to show/demonstrate to the students the role that the sales force plays in the overall marketing communications mix for many firms. Inviting sales managers and their salespeople to the class as guest speakers will help communicate the professionalism and difficulty of this profession.

TEACHING STRATEGY AND CLASS ORGANIZATION PROJECTS 19. At this point in the semester-long project, students who have decided to market their product/service through direct market channels should submit their proposals. All other groups must decide at this point if they will use a direct sales force and if so to outline the specifics (including financials) for this option.

20. Market demassification has resulted in an ever-increasing number of market niches and the use of direct marketing to reach these niches is growing. In small groups (five students maximum), have students collect as many direct marketing advertising pieces of information sent to them over the course of a month during the semester. After collecting the catalogs, credit card offers, e-mail notices, and other forms, students are to evaluate the effectiveness of these techniques in causing them to purchase. Which one(s) of these direct marketing techniques do they feel is the most successful (caused a purchase) or least effective (caused irritation to them), and why? What can astute marketers do to increase the effectiveness of their direct marketing?

ASSIGNMENTS The direct market offering, according to the text, consists of five elements—the product, offer, medium, distribution method, and creative strategy. Have the students collect direct marketing offerings (sent to them, their families, or close friends). On a scale of 1-5 (1 being does not work, 5 being works very well), rank each of these offerings in terms of these five elements. What is the group‘s consensus as to which offers work the best (or not at all) and why?

Most managers agree that to increase the motivation of their salespeople they have to reinforce the intrinsic and extrinsic rewards offered. However, this is not a universally accepted opinion.

Many managers use one type of reward almost exclusively in their motivation techniques.

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Students should interview three sales managers and ask them if they emphasize intrinsic or extrinsic rewards in their salesperson‘s motivation? Which method do they personally feel is the most effective and why? Which method do they wish they did a better job in and why? From this research, can the students form a casual relationship between the industry, competitive nature of the industry, and the motivation techniques used?

Dell® Computers has begun setting up kiosks demonstrating their products in regional malls across the country. They are also selling their computers in Walmart stores, Best Buy, and other U.S. retailers. Dell will soon be selling through retailers in China. Consumers are no longer directed to their website to place an order. Obviously, Dell has had to change its ―contact‖ with consumers. What effect do you believe this type of change in their direct marketing mantra is having on Dell‘s business? Must other direct marketers make the change?

Students are to assume the role of a salesperson calling on Jones Inc., which is a firm employing 50 salespeople, but currently does not use any customer relationship software. Students are to ―sell‖ the ―buyer‖ on the advantages of ―NOW!‖ by demonstrating situation, problem, implication, and need-payoff questions. Students should reverse roles at appropriate time intervals so that each student has the opportunity to ―play‖ buyer and seller.

Questions for the class: How effective did you find the SPIN method to be in your ―selling situation?‖ How difficult is it to frame questions in terms of situation, problem, implication, and need-payoff? Do you believe that the SPIN method works?

Infomercials can be found selling almost everything possible! As a group, have the students videotape three different infomercials and critically evaluate the effectiveness of these commercials in light of the five elements of the direct market offering. Which one(s) do the students believe is the most (least) effective and why?

END-OF-CHAPTER SUPPORT Marketing Spotlight: Avon 1. What factors contributed to Avon‘s initial market success? How did these factors evolve over time?

Suggested answer: The Avon Ladies who knocked on doors, hosted parties, and enlisted friends were ensured a niche in popular culture. Avon‘s basic direct-selling model hasn‘t changed drastically through the years. The buy-in for an Avon rep is inexpensive. Avon prints a new catalog for every two-week ―campaign‖. Reps shop the catalogs around to customers and prospects, and take orders that they fill from inventory shipped to them from Avon. Customers now can also order directly online. Commissions start at 20 percent for individual and team sales up to $150 and increase incrementally to 50 percent. Ten ―leadership‖ levels offer bonuses and incentives depending on campaign sales levels. Sales reps recruit others to join their team, who then recruit new reps of their own, on down the line, adding up to more commissions for the team leader. This method contributed to Avon‘s success. However, one of the reasons for the decline in Avon‘s market share was that the company was slow to pick up on the proliferation of online marketing and social networking. Also, the company faced increasingly stiff competition both internationally and at home.

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2. What is Avon‘s value proposition for its customers, its sales force, and its stakeholders?

Suggested answer: Avon provides value by offering women a chance to own their own business and earn rewards based on their level of involvement. Customers enjoy the relationships built with Avon reps and other Avon customers. Customers enjoy affordable products purchased conveniently at a party or online. Avon provides additional value through market targeting. For example, Avon created marketing materials specifically for its Hispanic reps, who far outsold their non-Hispanic counterparts. Avon provides value by making social media and online selling more important as face-to-face contact became difficult in a world where women make up almost 50 percent of the workforce. Avon targeted Millennials, a rapidly growing market with annual spending power estimated to reach $1.4 trillion by 2020, who preferred online to in-home events and were paying attention to Facebook, Instagram, and Twitter influencers—the type of social media marketing that Avon had failed to facilitate.

3. How did the role of personal selling change during the past several decades? Can personal selling continue to be a viable business model, given the ubiquity of social media and mobile communications?

Suggested answer: Personal selling has changed significantly over the past decades, changing from face-to-face selling to online selling. Personal selling can continue to be a viable business model for complex industrial products that require explanation or very expensive consumers goods, but it is unknown if face-to-face selling will continue to be a viable business model for low-cost consumer goods. Students can debate this issue.

Marketing Spotlight: Progressive Insurance 1. What has Progressive done well over the years to attract new insurance customers?

Suggested Answer: Progressive has been innovative in the way it communicates about and prices its services. It offers information about its offerings and the offerings of competitors to make price comparisons more convenient and allows consumers to develop products that serve their individual needs. It uses technology to facilitate the customization so it does not increase its costs, and it can continue to compete with other services on price. The ongoing use of Flo in advertisements helps reinforce its message.

2. Discuss Progressive‘s direct marketing campaign, which primarily revolves around the character Flo. Why does it resonate so well with consumers?

Suggested Answer: Consumers find Flo memorable and likable, and her appearance and generous use of white and white space help the ads stand out from other ads (i.e., creates contrast). Progressive uses variations on the same theme, so consumers are less likely to habituate to the messages even as the message‘s repetition helps drive home the brand claims.

Flo also represents traditional service values, similar to what you would find in a diner where you are on a first name basis with the wait staff, using a high-tech approach. She provides a human face for what might otherwise be a completely computer-mediated exchange.

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3. What else should Progressive be doing to ensure that it remains ―top of mind‖ in the competitive insurance industry?

Suggested Answer: Student responses may vary, but Progressive should continue to ensure Flo stays modern and relevant, and that the brand claims made by Progressive, across formats, are important differentiators of this unsought good.

DETAILED CHAPTER OUTLINE Opening Vignette: Although mass and digital communications provide many benefits, there are times when personal communications are needed to be relevant and close a sale. Personal selling is at the core of many multibillion-dollar businesses such as Amway. Amway has expanded from home products to become a global leader in the categories of health and beauty. Amway‘s business model combines direct selling with a multilevel marketing strategy. Amway distributors, commonly referred to as ―independent business owners,‖ earn income from the retail markup on the products they sell directly to customers, as well as a percentage of product sales. Personalizing communications and saying and doing the right thing for the right person at the right time are critical for marketing effectiveness. In this chapter, we consider how companies personalize their marketing communications to have more impact. We begin by evaluating personal selling and then move on to consider direct marketing.

I. Personal Selling i. Personal selling involves direct interaction with one or more prospective buyers for the purpose of making presentations, answering questions, and procuring orders (sales presentations, sales meetings, incentive programs, samples, and fair and trade shows). ii. Personal selling is the most effective tool at later stages of the buying process, particularly in influencing buyer preferences, conviction, and action. iii. Personal selling has three notable qualities: • It is customized, meaning that the message can be designed to appeal to any individual.

• It is relationship oriented, meaning that personal-selling relationships can range from a matter-of-fact selling relationship to a deep personal friendship.

• It is response oriented, meaning that the buyer is often given personal choices and encouraged to respond directly. iv. Companies now spend hundreds of millions of dollars each year to train them in methods of analysis and customer management and to transform them from passive order-takers into active order-getters.

A. Personal Selling as a Process i. Most sales training programs agree on the major steps in any effective sales process. These steps are prospecting, pre-approach, presentation, persuasion, closing, and servicing. See Fig. 14.1.

• Prospecting and Qualifying. The first step in selling is to identify and qualify prospects.

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•

Pre-approach. The salesperson should learn as much as possible about the prospect company.

• Presentation and Demonstration. Features, advantages, benefits, and value (FABV) approach.

• Persuasion. Selling is an interactive process in which buyers pose objections, which stem from two sources: psychological resistance and logical resistance.

• Closing. Without closing, there is no sale.

• Servicing. Follow-up and maintenance are necessary to ensure customer satisfaction and repeat business.

B. Managing the Sale i. Many principles of personal selling and negotiation are transaction oriented in order to close a specific sale. ii. SPIN method builds long-term relationships by asking prospects several types of questions: • Situation questions—these ask about facts or explore the buyer‘s present situation.

• Problem questions—these deal with problems, difficulties, and dissatisfactions the buyer is experiencing.

• Implication questions—these ask about the consequences or effects of a buyer‘s problems, difficulties, or dissatisfactions.

• Need-payoff questions—these ask about the value or usefulness of a proposed solution.

II. Designing the Sales Force (See Fig. 14.2)

i. The original and oldest form of direct marketing is the field sales call. ii. To locate prospects, develop them into customers, and grow the business, companies rely on a professional sales force or hire manufacturers‘ representatives. iii. Salespeople are the company‘s personal link to its customers. iv. In designing the sales force, the company must develop sales force objectives, strategy, structure, size, and compensation.

A. Sales Force Objectives i. Sales reps need to know how to diagnose a customer‘s problem and propose a solution. ii. Salespeople complete one or more specific tasks: • Information gathering. Conducting market research and doing intelligence work.

• Targeting. Deciding how to allocate their time among prospects and customers.

• Communicating. Communicating information about the company‘s products and services.

• Selling. Approaching, presenting, answering questions, overcoming objections, and closing sales.

• Servicing. Providing various services to the customers—consulting on problems, rendering technical assistance, arranging financing, and expediting delivery.

• Allocating. Deciding which customers will get scarce products during product shortages. iii. Too often marketing and sales are in conflict: the sales force complains marketing isn‘t generating enough leads, and marketers complain the sales force isn‘t converting them. iv. Improved collaboration and communication between these two can increase revenues and profits. v. Marketers believe sales forces are more effective in the long run if they understand and appreciate marketing as well as selling.

B. Sales Force Strategy i. Once the company chooses its strategy, it can use a direct or a contractual sales force. See CS-153 Copyright © 2022 Pearson Education, Inc. Browsegrades.net

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Fig. 14.3.

• A direct (company) sales force consists of full- or part-time paid employees who work exclusively for the company. Inside sales people conduct business from the office and receive visits from prospective buyers, and field sales people travel and visit customers.

• A contractual sales force consists of manufacturers‘ reps, sales agents, and brokers who earn a commission based on sales.

C. Sales Force Structure i. A company that sells one product line to one end-using industry with customers in many locations would use a territorial structure. ii. A company that sells many products to many types of customers might need a product or market structure. iii. Four types of sales force: • A strategic market sales force assigned to major accounts • A geographic sales force calling on customers in different territories • A distributor sales force calling on and coaching distributors • An inside sales force marketing and taking orders online and via phone iv. Companies must deploy sales forces strategically so that they call on the right customers at the right time in the right way, acting as ―account managers‖ who arrange fruitful contact between people in the buying and selling organizations. v. Selling increasingly calls for teamwork.

D. Sales Force Size i. Workload approach: • Group customers into size classes according to annual sales volume.

• Establish desirable call frequencies (number of calls on an account per year) for each customer class.

• Multiply the number of accounts in each size class by the corresponding call frequency to arrive at the total workload for the country, in sales calls per year.

• Determine the average number of calls a sales representative can make per year.

• Divide the total annual calls required by the average annual calls made by a sales representative to arrive at the number of sales representatives needed.

E. Sales Force Compensation i. To attract top-quality reps, the company must develop an attractive compensation package. ii. Sales reps want income regularity, extra reward for above-average performance, and fair pay for experience and longevity. iii. Management wants control, economy, and simplicity. iv. Some of these objectives will conflict. v. Four components of sales force compensation: • The fixed amount, a salary, satisfies the need for income stability. Fixed compensation is common in jobs with a high ratio of non-selling to selling duties and jobs where the selling task is technically complex and requires teamwork.

• The variable amount, whether commissions, bonus, or profit sharing, serves to stimulate and reward effort. Variable compensation works best where sales are cyclical or depend on individual initiative.

• Expense allowances enable sales reps to meet the costs of travel and entertaining on

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the company‘s behalf.

• Benefits, such as paid vacations, sickness or accident benefits, pensions, and health and life insurance, provide security and job satisfaction. vi. Fixed and variable compensation give rise to three basic types of compensation plans— straight salary, straight commission, and combination salary and commission.

• Straight-salary plans provide a secure income, encourage reps to complete nonselling activities, and reduce incentive to overstock customers. For the firm, these plans deliver administrative simplicity and lower turnover.

• Straight-commission plans attract higher performers, provide more motivation, require less supervision, and control selling costs. On the negative side, they emphasize getting the sale over building the relationship.

• Combination plans feature the benefits of both plans while limiting their disadvantages.

III. Managing the Sales Force A. Various policies and procedures guide the firm‘s activities directed at managing the sales force. See Fig. 14.4.

B. Recruiting the Sales Force i. It‘s a great waste to hire the wrong people. ii. Sales force turnover leads to lost sales, the expense of finding and training replacements, and often pressure on existing salespeople to pick up the slack. iii. Effective predictors of high performance in sales are composite tests and assessment centers that simulate the working environment and assess applicants in an environment similar to the one in which they would work.

C. Training and Supervising Sales Representatives i. Today‘s customers expect salespeople to have deep product knowledge, add ideas to improve operations, and be efficient and reliable, so companies are investing more in sales training. ii. Training time varies with the complexity of the selling task and the type of recruit. iii. Reps paid mostly on commission generally receive less supervision. iv. Those who are salaried and must cover definite accounts are likely to receive substantial supervision.

D. Managing Sales Force Productivity i. Companies often specify how much time reps should spend prospecting for new accounts. ii. Some companies rely on a missionary sales force to create new interest and open new accounts. iii. In the course of a day, reps plan, travel, wait, sell, and perform administrative tasks (writing reports and billing, attending sales meetings, and talking to others in the company about production, delivery, billing, and sales performance). iv. The best sales reps manage their time efficiently. v. Time-and-duty analysis and hour-by-hour breakdowns of activities help them understand how they spend their time and how they might increase their productivity. vi. To cut costs, reduce time demands on their outside sales force, and leverage technological innovations, many have increased the size and responsibilities of their inside sales force. vii. Inside selling is less expensive and growing faster than in-person selling.

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viii. Virtual meeting software such as WebEx, communication tools such as Zoom, and social media sites such as LinkedIn, Facebook, and Twitter make it easier to sell with few if any face-to-face meetings. ix. Inside sellers don‘t need to be in the office—a growing percentage work at home. x. The inside sales force frees outside reps to spend more time selling to major accounts, identifying and converting new major prospects and obtaining more blanket orders and systems contracts. xi. Inside salespeople spend more time checking inventory, following up orders, and phoning smaller accounts. xii. They typically earn a salary or salary-plus-bonus pay. xiii. Sales and inventory information transferred much more quickly, but specific computerbased decision support systems have been created for sales managers and sales representatives. xiv. Going online with a tablet or laptop, salespeople can prime themselves on backgrounds of clients, call up prewritten sales letters, transmit orders and resolve customer service issues on the spot, and send samples, pamphlets, brochures, and other materials to clients. xv. One of the most valuable digital tools for the sales rep is the company website.

• Defines the firm‘s relationships with individual accounts and identifies those whose business warrants a personal sales call • Provides an introduction to self-identified potential customers and a way to contact the seller • Might receive the initial order xvi. Social media is a valuable digital selling tool.

• Social networking is useful in ―front end‖ prospecting and lead qualification as well as in ―back end‖ relationship building and management.

• Companies can listen to social media to identify needs.

E. Motivating the Sales Force i. The majority of sales representatives require encouragement and special incentives, especially those in the field who encounter daily challenges. ii. Most marketers believe that the higher the salesperson‘s motivation, the greater the effort and the resulting performance, rewards, and satisfaction—all of which in turn further increase motivation. iii. Marketers reinforce monetary and nonmonetary rewards. iv. One research study found the employee reward with the highest value was pay, followed by promotion, personal growth, and sense of accomplishment. v. Least valued were liking and respect, security, and recognition. In other words, salespeople are highly motivated by pay and the chance to get ahead and satisfy their intrinsic needs, and they may be less motivated by compliments and security. vi. Compensation plans may even need to vary depending on the type of salespersons: stars, core or solid performers, and laggards. vii. Stars benefit from no ceiling or caps on commissions, overachievement commissions for exceeding quotas, and prize structures that allow multiple winners. viii. Core performers benefit from multi-tier targets that serve as stepping stones for achievement and sales contests with prizes that vary in nature and value.

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ix. Laggards respond to consistent quarterly bonuses and social pressure. x. Sales Quotas. Companies set annual sales quotas, developed from the annual marketing plan, for dollar sales, unit volume, margin, selling effort or activity, or product type. xi. Compensation is often tied to degree of quota fulfillment. xii. The company first prepares a sales forecast that becomes the basis for planning production, workforce size, and financial requirements. xiii. Management then establishes quotas for regions and territories, which typically add up to more than the sales forecast to encourage managers and salespeople to perform at their best. xiv. Even if they fail to make their quotas, the company nevertheless may reach its sales forecast. xv. Setting sales quotas can create problems.

• If the company underestimates and the sales reps easily achieve their quotas, it has overpaid them.

• If it overestimates sales potential, the salespeople will find it very hard to reach their quotas and be frustrated or quit.

• Quotas can drive reps to get as much business as possible—often ignoring the service side of the business, so the company gains short-term results at the cost of long-term customer satisfaction.

F. Evaluating the Sales Force i. Good feed-forward requires good feedback, which means getting regular information about reps to evaluate their performance.

• The most important source of information about reps is sales reports.

• Additional information comes through personal observation, salesperson self-reports, customer letters and complaints, customer surveys, and conversations with other reps.

• Many companies require representatives to develop an annual territorymarketing plan in which they outline their program for developing new accounts and increasing business from existing accounts.

• Reports provide raw data from which sales managers can extract key indicators of sales performance—number of sales calls per salesperson per day.

IV. Direct Marketing A. The use of consumer-direct (CD) channels to reach and deliver goods and services to customers without using marketing middlemen. i. Advantages • By eliminating the intermediary, it often proves to be more cost-effective than traditional marketing.

• Directly connecting with customers also can provide the company with invaluable information about customers‘ current and potential needs.

• Direct marketing shows the ways in which customers use the company‘s offerings.

• Direct marketing shows what aspects of the company‘s offerings they find particularly beneficial and what aspects need improvement.

• Having the ability to directly interact with customers enables the company to offer a superior service experience and build a stronger brand image.

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ii. Channels used to reach individual prospects and customers: direct mail, catalog marketing, telemarketing, interactive TV, kiosks, websites, and mobile devices. iii. Sales produced through traditional direct marketing channels (catalogs, direct mail, and telemarketing) have been growing rapidly, along with direct-mail sales, which include sales to the consumer market, B2B, and fundraising by charitable institutions.

B. Direct Marking Channels i. Direct Mail. Sending an offer, announcement, reminder, or other item to an individual consumer.

• A popular medium because it permits target market selectivity, can be personalized, is flexible, and allows early testing and response measurement.

• Cost per thousand is higher than for mass media, but the people reached are much better prospects.

• Overuse leads some consumers to disregard the blizzard of solicitations they receive. ii. Direct mail can produce prospect leads, strengthen customer relationships, inform and educate customers, remind customers of offers, and reinforce recent customer purchase decisions. iii. Most direct marketers apply the RFM (recency, frequency, monetary amount) formula to select customers according to how much time has passed since their last purchase, how many times they have purchased, and how much they have spent since becoming a customer. iv. One of the great advantages of direct marketing is the ability to test, under real marketplace conditions, different elements of an offer strategy, such as products, product features, copy platform, mailer type, envelope, prices, or mailing lists. v. Response rates typically understate a campaign‘s long-term impact. vi. To better estimate a promotion‘s impact, some companies measure the impact of direct marketing on awareness, intention to buy, and word of mouth. vii. Direct mail can involve regular mail or e-mail.

• E-mail allows marketers to inform and communicate with customers at a fraction of the cost of regular mail. E-mails can be very productive selling tools.

• The rate at which they prompt purchase has been estimated to be at least three times that of social media ads. viii. Privacy concerns are growing—many consumers refuse to share any personal details with brands even if doing so would bring them better targeted offers and discounts.

C. Catalog Marketing i. Companies send full-line merchandise catalogs, specialty consumer catalogs, and business catalogs, usually in print form but also as DVDs or online. ii. Successfully marketing a catalog business depends on managing customer lists carefully to avoid duplication or bad debts, controlling inventory, offering good-quality merchandise so returns are low, and projecting a distinctive image. iii. Putting their entire catalog online also provides business marketers with better access to global consumers than ever before, saving printing and mailing costs.

D. Telemarketing i. The use of the telephone and call centers to attract prospects, sell to existing customers, and

provide service by taking orders and answering questions. ii. It helps companies increase revenue, reduce selling costs, and improve customer satisfaction.

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iii. Companies use call centers for inbound telemarketing—receiving calls from customers— and outbound telemarketing—initiating calls to prospects and customers. iv. Telemarketing has lost much of its effectiveness, although it is still heavily used in political campaigns. v. Business-to-business telemarketing is increasing, however. This is partly due to the use of videoconferencing, which will increasingly replace field sales calls.

E. Infomercials i. Some companies prepare 30- and 60-minute infomercials to combine the selling power of television commercials with the draw of information and entertainment. ii. Infomercials promote products that are complicated or technologically advanced or that require a great deal of explanation.

F. The Future of Direct Marketing i. Consumers short on time and tired of traffic and parking headaches appreciate toll-free phone numbers, always-open websites, next-day delivery, and direct marketers‘ commitment to customer service. ii. Many chain stores have dropped slower-moving specialty items, creating an opportunity for direct marketers to promote these to interested buyers instead. iii. Sellers can benefit from direct marketing as well. iv. Direct marketers can buy a list containing the names of almost every group imaginable. v. Direct marketing can reach prospects at the moment when they want a solicitation. vi. Direct marketing also makes the company‘s offer and strategy less visible to competitors. vii. Direct marketers can measure responses to their campaigns to decide which have been the most profitable. viii. Direct marketing must be integrated with other communications and channel activities. ix. Direct marketers know enough about each customer to customize offers and messages and develop a plan for lifetime marketing to each customer.

CHAPTER

15

DESIGNING AND MANAGING DISTRIBUTION CHANNELS

LEARNING OBJECTIVES After studying this chapter, you should be able to: 15.1 Define the roles of marketing channels.

15.2 Explain the key channel-management decisions.

15.3 Discuss how firms manage channel cooperation and conflict.

15.4 Discuss how firms manage market logistics.

CHAPTER SUMMARY 1. Most producers do not sell their goods directly to final users. Between producers and final users stands one or more marketing channels, with a host of marketing intermediaries performing a variety of functions. Distribution channels are sets of CS-159 Copyright © 2022 Pearson Education, Inc. Browsegrades.net

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interdependent organizations participating in the process of making a product or service available for use or consumption.

2. Companies use intermediaries when they lack the financial resources to carry out direct marketing, when direct marketing is not feasible, and when they can earn more by doing so. Effective channel management calls for selecting intermediaries and training and motivating them. The goal is to build a long-term partnership that will be profitable for all channel members.

3. Members of the marketing channel perform a number of key functions. Some of these functions (storage and movement, title, and communications) constitute a forward flow of activity from the company to the customer; others (ordering and payment) constitute a backward flow from customers to the company; and some (information, negotiation, finance, and risk taking) occur in both directions.

4. Manufacturers have many alternatives for reaching a market. They can sell direct or use one-, two-, or multi-level channels. Deciding which type(s) of channel to use calls for analyzing customer needs, establishing channel objectives, and identifying and evaluating the major alternatives, including the types and numbers of intermediaries involved in the channel.

5. A growing number of companies employ multichannel distribution, using two or more marketing channels to reach customer segments in one market area. In addition, companies are increasingly employing digital distribution strategies, selling directly online to customers or through e-merchants who have their own websites.

Multichannel distribution calls for the development of an integrated distribution strategy where the activities involved in selling through one channel are aligned with the activities involved in selling through one or more other channels.

6. To design a marketing-channel system, marketers analyze customer needs and wants, establish channel objectives and constraints, and identify and evaluate major channel alternatives. Based on the number of intermediaries, there are three core distribution strategies: exclusive, selective, and intensive distribution. Following the choice of channel intermediaries, a company must select, train, motivate, and evaluate its channel partners.

7. An increasingly popular form of growing distribution channels is franchising. In a franchising system, individual franchisees are a tightly knit group of enterprises whose systematic operations are planned, directed, and controlled by the operation‘s innovator, the franchisor. Franchisees benefit from buying into a business with a well-known and accepted brand name. They find it easier to borrow money for their business from financial institutions, and they receive support in areas ranging from marketing and advertising to site selection and staffing.

8. A company needs to motivate its channel partners by identifying their needs and wants and tailoring its channel offering to provide them with superior value. An important factor here is channel power, which reflects the ability to alter channel members‘ behavior so they take actions they would not have taken otherwise.

Based on the nature of the relationship between the members of the marketing channel, there are three basic forms of channel coordination that can help motivate channel partners: conventional channels, vertical marketing systems, and horizontal marketing systems.

9. All marketing channels have the potential for conflict and competition resulting

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from goal incompatibility, poorly defined roles and rights, perceptual differences, and interdependent relationships. Companies can try to manage conflict through dual compensation, superordinate goals, employee exchange, co-optation, and other means.

10. Producers of physical products and services must decide on market logistics—the best way to store and move goods and services to market destinations and to coordinate the activities of suppliers, purchasing agents, manufacturers, marketers, channel members, and customers. Major gains in logistical efficiency have come from advances in information technology.

11. The supply-chain approach to managing market logistics can help a company identify superior suppliers and distributors, as well as help it improve productivity and reduce costs. The firm must make four major decisions about its market logistics: How should we handle orders (order processing)? Where should we locate our stock (warehousing)? How much stock should we hold (inventory)? and How should we ship goods (transportation)?

OPENING THOUGHT Most students are not familiar with channels of distribution, except, perhaps, from the retailer in which they have bought products. Therefore, the instructor has to ensure that they clarify the various channels of distribution during this chapter lecture. Examples of the various channels for products familiar to the students can help illustrate the complexity of the process.

Second, because marketing channel decisions are mostly hidden from the final consumer, the instructor should make every effort to diagram the decision-making process for each level of channel distribution. Starting with the retail price of the product, then subtracting each distribution level margins or markups shows the effects of distribution to or for the product.

Managing channels of distribution will be new to most students, as will the definitions of channel conflict and channel support. The instructor can best serve the student by fully diagramming a particular product from a channel of distribution perspective and talking about channel roles, conflicts, training, and motivation.

The students will probably be most interested in, or knowledgeable about, e-commerce and see e-commerce as the future of business. The instructor should caution the students about assuming that all business transactions (or a great majority of them) will flow to e-commerce by describing to the students the various consumer demographic groups, buying habits, and comfortableness with technology. An in-class discussion on the merits and demerits of ecommerce should provide for a lively cross-section of opinions.

TEACHING STRATEGY AND CLASS ORGANIZATION PROJECTS 21. At this point in the semester-long project, students should present their channel decisions for getting their product or service to the consumer. In evaluating this section, the instructor should evaluate the completeness of the projects to the material contained in this chapter.

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22. Progressive companies have begun developing a value network system to get products in the hands of consumers. A value network includes a firm‘s suppliers, its suppliers‘ suppliers, its immediate customers, and their end customers. Students should identify a company that has successfully set up a value network, then compare and contrast the components of the value system to a competitor that does not have one. Students should be able to identify the components of the value network that produced the augmented offering.

ASSIGNMENTS Ask the students to comment on the hybrid channel of distribution. The hybrid channel as defined in the chapter poses an interesting channel for future marketers. As students grow into consumers will they or won‘t they rely on purchasing products exclusively through the internet?

Or will they demand hybrid distribution choices like free shipment to store sites (like Walmart) or pick up at the store (like Best Buy)?

Today, some of the country‘s more successful companies are using a hybrid channel system to increase its effectiveness of reaching the consumer. The text uses the examples of IBM, Charles Schwab, and others and notes that channel integration and its features are what the consumer prefers. Students should choose or find one additional example of a firm using the hybrid system, and comment on how they see this system delivering value to the consumer. Student answers should be directed toward the three features of channel integration found in the textbook.

The article entitled, ―Transforming Your Go-to-Market Strategy: The Three Disciplines of Channel Management,‖ V. Kasturi Rangan Boston, MA: Harvard Business School Press, 2006 identifies new opportunities for marketing products through multiple channels by crafting a ―channel steward.‖ Ask the students to read this article and comment on its practicality in light of the changes posed by internet shopping.

Channel members add value to the consumer‘s purchase of certain products and services. Table 15.1 details key channel member functions. Yet some firms have abandoned channel partners and tried to reach the consumer on a one-to-one basis. Selecting a product or firm that (a) is maintaining its channel members, and (b) a firm that has decided to sell directly to the consumer thus bypassing channel intermediaries. Comment on these two systems in terms of the information contained in the chapter.

END-OF-CHAPTER SUPPORT Marketing Spotlight: Zara 1. Would Zara‘s model work for other retailers? Why or why not?

Suggested answer: Zara‘s business model of imitating the latest fashion and providing designs at low prices appealed to Spanish consumers. Zara famously views clothes as a ―perishable commodity,‖ something that should be enjoyed for a couple of weeks or months. Zara‘s apparel appeals to consumers who are looking to keep up with all the latest fashion trends. When a new

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style becomes popular, Zara can imitate it and release a new collection in less than two weeks.

Zara releases over 12,000 styles per year; this wide variety creates a greater likelihood that consumers will find an item they like.

Zara‘s model could work for other retailers provided that they adopted the same philosophy of viewing clothes as a perishable commodity and followed Zara‘s method of producing trendy clothes according to a rigorous production schedule. Fads change and a retailer would have to keep up with the latest fashion fad.

2. What can Zara do to ensure successful growth around the world that maintains the same level of speed and instant fashion?

Suggested answer: Zara can ensure growth by continuing to rely on consumer input. Zara‘s clothing starts with the design process, which includes a heavy focus on consumer input. Store employees and managers listen to customers‘ comments and suggestions and take note of what they‘re wearing in stores. Design teams visit universities, nightclubs, shopping centers, and other areas frequented by fashion trendsetters to observe new fashion choices that could potentially be successful. The trends team follows popular fashion bloggers and tracks Zara customers for new insights.

3. Who are Zara‘s biggest competitors? What should Zara do to build, enhance, and sustain its competitive advantage?

Suggested answer: Zara‘s competitors are other trendy fashion boutiques. Zara maintains its competitive advantage by customizing its clothes for different global customers. Zara offers smaller-sized clothing in Japan, hijab headscarves and long dresses for women in Arab countries, and more breathable apparel for countries in South America. Understanding the varied needs of its customers allows Zara to release a wide variety of successful styles on a frequent basis. Also, Zara retains its competitive advantage because it combines an understanding of its customers with a highly efficient supply chain to create its global success. The company is aware that the consumer is an invaluable resource in the design of its trendy apparel and collections. Coupling this insight with a well-managed and highly profitable inventory strategy, Zara aims to stay on top of fashion retailing.

Marketing Spotlight: Popeyes 1. What are the key aspects of Popeyes‘s franchise model?

Suggested answer: Taking Popeyes‘s advertising national was one of the first steps the company took with its franchisees to increase sales. Popeyes also began focusing on restaurantlevel profitability, investing in data analytics software. Popeyes helped franchisees open new restaurants in more profitable locations. The use of data-driven modeling predicted traffic patterns and the earnings potential of Popeyes locations. Franchisees began opening new locations in areas with more mainstream demographics, which increased their restaurant success rates.

2. What are the key benefits of franchising for Popeyes franchisers and franchisees? What CS-163 Copyright © 2022 Pearson Education, Inc. Browsegrades.net

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are the drawbacks of franchising?

Suggested answer: Benefits. The collaboration with franchisees brought immediate results to Popeyes, which enjoyed massive sales increases and began delivering profits for the first satisfaction rate. This was reflected in the increase of new locations after Popeyes reinvented its franchising strategy. The company opened hundreds of global locations following the turnaround to over 2,600 worldwide. Recent successes demonstrated that the relationship between Popeyes and its franchisees was the key to company success. Drawbacks. One drawback of franchising was the total control of the franchisors, which led to frustration on the part of the franchisees.

Popeyes lacked new-product innovation. Consumer awareness of the restaurant was low because of the company‘s lack of a national advertising campaign. These issues strained Popeyes‘s relationship with its franchisees.

3. How much leeway should Popeyes offer to individual franchisees in deciding on the menu, restaurant appearance, and advertising? Should Popeyes take a centralized approach, or should it let franchisees adapt their strategy to local conditions?

Suggested answer: Answers will vary. The best approach is collaboration. Franchisors can maintain the quality of overall operations, but franchisees can offer local variations that cater to different cultures in different countries. Franchisees can innovate and provide fresh ideas.

Popeyes should avoid centralization as long as company standards are met.

DETAILED CHAPTER OUTLINE Opening vignette: Successful value creation needs successful value delivery. Instead of limiting their focus to their immediate suppliers, distributors, and customers, holistic marketers are examining the whole supply chain as a value network, including their suppliers‘ suppliers upstream and their distributors‘ customers downstream. They are also looking at how technology is changing the way customers shop and retailers sell and finding new and different means to distribute and service their offerings. L.L. Bean develops strong customer ties with a well-executed channel strategy. Sell good merchandise at a reasonable profit. Treat your customers like human beings, and they will always come back for more. The generous return policy helped attract many customers.

I. The Role of Distribution Channels i. Intermediaries between producers and users constitute a marketing channel (also called a trade channel or distribution channel).

• Distribution channels are sets of interdependent organizations participating in the process of making a product or service available for use or consumption.

• They are the set of pathways a product or service follows after production, culminating in purchase and consumption by the final end user.

• Merchants buy, take title to, and resell the merchandise.

• Agents are brokers, manufacturers‘ representatives, sales agents who search for

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customers and may negotiate on the producer‘s behalf but do not take title to the goods. They are facilitators. ii. Marketing channels must not just serve markets, they must also make them; the channels chosen affect all other marketing decisions.

• Pricing depends on whether it uses online discounters or high-quality boutiques.

• Sales force and advertising decisions depend on how much training and motivation dealers need. iii. Holistic marketers ensure that marketing decisions in all these different areas are made to maximize value overall.

A. Distribution Channel Functions i. Members of the marketing channel perform a number of key functions: • Gather information about potential and current customers, competitors, and other actors and forces in the marketing environment.

• Develop and disseminate persuasive communications to stimulate purchasing and foster brand loyalty.

• Negotiate and reach agreements on price and other terms so that transfer of ownership or possession can be effected.

• Place orders with manufacturers.

• Acquire the funds to finance inventories at different levels in the marketing channel.

• Assume risks connected with carrying out channel work.

• Provide buyers with financing and facilitate payment.

• Provide for buyers‘ payment of their bills through banks and other financial institutions.

• Oversee actual transfer of ownership of goods from one organization or person to another. ii. All channel functions have three characteristics: • They use up scarce resources.

• They can often be performed better through specialization.

• They can be shifted among channel members. See Fig. 15.1. iii. Many channel functions involve bi-directional flows of goods and services.

• Some functions (storage and movement, title, and communications) constitute a forward flow of activity.

• Others (ordering and payment) constitute a backward flow from customers to the company.

• The question for marketers is who is to perform channel functions. iv. Changes in channel institutions reflect the discovery of more efficient ways to provide assortments of goods to target customers.

B. Channel Levels i. The number of intermediaries, also referred to as channel levels, define the length and breadth of the distribution channel. See Fig. 15.2.

• A zero-level channel, also called a direct marketing channel, consists of a manufacturer selling directly to the final customer.

• A one-level channel contains one selling intermediary, such as a retailer.

• A dual-level channel contains two intermediaries, a wholesaler and a retailer, and a three-level channel contains three.

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ii. An industrial-goods manufacturer can use its sales force to sell directly to industrial customers, or it can sell to industrial distributors who sell to industrial customers, or it can sell through manufacturers‘ representatives or its own sales branches directly to industrial customers or indirectly to industrial customers through industrial distributors. Zero-, one-, and two-level marketing channels are quite common. iii. Reverse-flow intermediaries include manufacturers‘ redemption centers, community groups, trash-collection specialists, recycling centers, trash-recycling brokers, and central processing warehousing.

C. Multichannel Distribution i. Using two or more marketing channels to reach customer segments in one market • Each channel can target a different segment of buyers, or different need states for one buyer, to deliver the right products in the right places in the right way at the least cost.

• Channel conflict, excessive cost, or insufficient demand can result from bad channel decisions. ii. Research has shown that multichannel customers can be more valuable to marketers.

• Companies are employing digital distribution strategies, selling directly online to customers or through e-merchants who have their own websites.

• Omnichannel marketing—multiple channels work seamlessly together and match each target customer‘s preferred ways of doing business. iii. Multiple distribution channels offer three important benefits.

• Increased market coverage • Lower channel cost • Ability to do more customized selling iv. New channels typically introduce conflict and problems with control and cooperation. v. Managing the online and offline channels is a priority for many firms using three strategies: • Offering different brands or products online and offline • Offering offline partners higher commissions to cushion the negative impact on sales • Taking orders on the website but having retailers deliver and collect payment vi. Companies should use different sales channels for different-sized business customers.

• A direct sales force for large customers • A digital strategy or telemarketing for midsize customers • Distributors for small customers • Should be alert for conflict over account ownership vii. Multichannel marketers also need to decide how much of their product to offer in each of the channels.

II. Channel-Management Decisions i. To design a marketing-channel system, marketers analyze customer needs and wants, establish channel objectives and constraints, and identify and evaluate major channel alternatives.

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ii. After a company has chosen a channel system, it must select, train, motivate, and evaluate intermediaries for each channel. iii. It must also modify channel design and arrangements over time, including the possibility of expansion into international markets.

A. Establishing Channel Objectives i. Marketers should state their channel objectives in terms of the customers they aim to reach, the service output levels they want to provide, and the associated cost and support levels. ii. Consumers may choose the channels they prefer based on price, product assortment and convenience, and shopping goals (economic, social, or experiential). iii. Channel objectives vary with product characteristics. iv. When entering new markets, firms often closely observe what other firms are doing and adapt channel objectives to the larger environment.

B. Selecting Channel Members i. Producers should determine what characteristics distinguish the better intermediaries—number of years in business, other lines carried, growth and profit record, financial strength, cooperativeness, and service reputation. ii. Identifying Major Channel Alternatives • Each channel—from sales forces to agents, distributors, dealers, direct mail, telemarketing, and the internet—has unique strengths and weaknesses.

• Sales forces can handle complex products and transactions, but they are expensive.

• The internet is inexpensive but may not be as effective for complex products.

• Distributors can create sales, but the company loses direct contact with customers.

• Several clients can share the cost of manufacturers‘ reps, but the selling effort is less intense than company reps provide. iii. Three distribution strategies: • Exclusive distribution severely limits the number of intermediaries.

• Selective distribution relies on only some of the intermediaries willing to carry a particular product.

• Intensive distribution places the goods or services in as many outlets as possible. iv. Franchising. Individual franchisees are enterprises whose operations are controlled by the franchisor. v. In a franchise: • The franchisor owns a trade or service mark and licenses it to franchisees in return for royalty payments.

• The franchisee pays for the right to be part of the system.

• The franchisor provides its franchisees with a system for doing business. vi. Franchising benefits both parties.

• The manufacturer-sponsored retailer franchise is the traditional system.

• The service-firm-sponsored retailer franchise is organized by a service firm to bring its service efficiently to consumers.

C. Motivating Channel Members i. Channel power is the ability to alter channel members‘ behavior so they take actions they would not have taken otherwise.

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ii. Types of power to elicit cooperation: • Coercive power. A manufacturer threatens to withdraw a resource or terminate a relationship if intermediaries fail to cooperate.

• Reward power. The manufacturer offers intermediaries an extra benefit for performing specific acts or functions.

• Legitimate power. The manufacturer requests a behavior that is warranted under the contract.

• Expert power. The manufacturer has special knowledge the intermediaries value.

• Referent power. The manufacturer is so highly respected that intermediaries are proud to be associated with it. iii. Most producers see gaining intermediaries‘ cooperation as a huge challenge. iv. In many cases, retailers hold the power. v. Channel Partnerships • A conventional marketing channel consists of an independent producer, wholesaler(s), and retailer(s), each wanting to maximize its own profits.

• A vertical marketing system (VMS) includes the producer, wholesaler(s), and retailer(s) acting as a unified system.

• One channel member, the channel captain, called a channel steward, owns or franchises the others or has so much power that they all cooperate.

• Stewards accomplish channel coordination without issuing commands or directives by persuading channel partners to act in the best interest of all.

• Channel stewardship expands value for the steward‘s customers and creates a tightly woven channel, which rewards valuable members. vi. VMSs arose from strong channel members‘ attempts to control channel behavior and eliminate conflict over independent members pursuing their own objectives.

• A corporate VMS combines successive stages of production and distribution under single ownership.

• An administered VMS coordinates successive stages of production and distribution through the size and power of one of the members.

• A contractual VMS consists of independent firms integrating their programs on a contractual basis to obtain economies or sales impact—wholesaler-sponsored voluntary chains, retailer cooperatives, and franchise organizations.

• Horizontal marketing systems involve two or more unrelated companies putting together resources or programs to exploit marketing opportunities.

D. Evaluating Channel Members i. Producers must periodically evaluate intermediaries‘ performance against such standards as sales-quota attainment, average inventory levels, customer delivery time, treatment of damaged and lost goods, and cooperation in promotional and training programs. ii. A producer will occasionally discover it is overpaying particular intermediaries for what they are actually doing. iii. A new firm typically starts as a local operation selling in a fairly circumscribed market, using a few existing intermediaries. iv. If the firm is successful, it might branch into new markets with different channels. v. Early buyers might be willing to pay for high-value-added channels, but later

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buyers will switch to lower-cost channels. vi. The channel system evolves as a function of local opportunities and conditions, emerging threats and opportunities, and company resources and capabilities. vii. A producer must periodically review and modify its channel design and arrangements.

III. Channel Cooperation and Conflict i. Channel conflict is generated when one channel member‘s actions prevent another channel from achieving its goal.

• What types of conflict arise in channels?

• What causes conflict?

• What can marketers do to resolve it?

A. The Nature of Channel Conflicts i. Types of Channel Conflict • Horizontal (same level) • Vertical (different levels) • Multichannel (two or more channels that sell to the same market) ii. Causes of Channel Conflict • Goal incompatibility • Differences in strategy and tactics • Power imbalance • Unclear roles and rights B. Managing Channel Conflict • Strategic justification • Dual compensation • Superordinate goals • Employee exchange • Joint memberships • Co-optation • Diplomacy, mediation, or arbitration • Legal recourse IV. Managing Market Logistics i. Market logistics includes planning the infrastructure to meet demand and then implementing and controlling the physical flows of materials and final goods from points of origin to points of use to meet customer requirements at a profit. ii. Physical distribution has now been expanded into the broader concept of supply chain management (SCM). iii. Supply chain management starts before physical distribution and includes strategically procuring the right inputs (raw materials, components, and capital equipment), converting them efficiently into finished products, and dispatching them to the final destinations. iv. Supply chain perspective can help a company identify superior suppliers and distributors and then help it improve productivity and reduce costs. v. Studying market logistics leads managers to find the most efficient way to deliver value.

A. Market-Logistics Objectives CS-169 Copyright © 2022 Pearson Education, Inc. Browsegrades.net

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i. ―Getting the right goods to the right places at the right time for the least cost.‖ ii. Because of trade-offs, managers must make decisions on a total-system basis. iii. The starting point is to study what customers require and what competitors are offering.

• Customers are interested in on-time delivery, help meeting emergency needs, careful handling of merchandise, and quick return and replacement of defective goods.

• The wholesaler must then research the relative importance of these service outputs.

• The company must also consider competitors‘ service standards.

• The company ultimately must establish some promise it makes to the market.

B. Market-Logistic Decisions • Where should we locate our stock (warehousing)?

• How much stock should we hold (inventory)?

• How should we ship goods (transportation)? i. Order Processing. Most companies are trying to shorten the order-to-payment cycle. ii. Warehousing. Most companies must store finished goods until they are sold because production and consumption cycles rarely match. iii. Inventory. Salespeople would like their companies to carry enough stock to fill orders immediately. Different strategies to control inventory costs include: • Keeping slow-moving items in a central location and fast-moving items in warehouses.

• Near-zero inventory and acquiring stock based on orders saves on warehousing costs; just-in-time inventory management helps cash flow. iv. Transportation. Transportation choices affect product pricing, on-time delivery performance, and the condition of the goods when they arrive, all of which affect customer satisfaction.

• Containerization consists of putting the goods in boxes or trailers that are easy to transfer between two transportation modes.

• Piggyback describes the use of rail and trucks; fishyback, water and trucks; trainship, water and rail; and airtruck, air and trucks.

• Each coordinated mode offers specific advantages (e.g., piggyback is cheaper than trucking alone yet provides flexibility and convenience). v. Some firms are putting items into shelf-ready packaging so they don‘t have to unpack them from a box and place them individually on a shelf. vi. With logistics, every little detail must be reviewed to see how it might be changed to improve productivity and profitability.

CHAPTER

16

MANAGING RETAILING

LEARNING OBJECTIVES After reading this chapter, you should be able to:

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16.1 Explain the key changes defining modern retailing.

16.2 Discuss the marketing decisions that retailers face.

16.3 Describe how a company manages omnichannel retailing.

16.4 Explain the key principles in building and managing private labels.

16.5 Describe the key aspects of wholesaling.

CHAPTER SUMMARY 1. Retailing includes all the activities involved in selling goods or services directly to final consumers for personal, nonbusiness use. Any organization selling to final consumers— whether it is a manufacturer, wholesaler, or retailer—is doing retailing, regardless of how and where the goods or services are sold.

2. The retail market is very dynamic, and a number of new types of competitors and competition have emerged in recent years. The important developments in retailing include the emergence of new retail forms and combinations; retailer consolidation; the growth of mobile, omnichannel, and fast retailing; the increasing role of technology in retailing; and the decline of middle-market retailers.

3. Key retailing decisions include identifying the target market, selecting the product assortment; developing procurement, determining the types and level of services to be offered, designing the store atmosphere and experiences, setting the prices, defining the incentives, and managing communication.

4. Based on the degree to which they have established a physical presence, we can distinguish among brick-and-mortar retailers, online retailers that engage in ecommerce without a physical retail location, and omnichannel companies that have both a physical and an online presence. Managing both online and offline channels has become a priority for many retailers.

5. Private labels are brands developed and managed by retailers and wholesalers.

Private labels are typically (but not always) priced lower than national brands. Retailers sponsor their own brands because it enables them to differentiate themselves from competitors, while at the same time reaching price-sensitive consumers. Because of lower research and development, advertising, sales promotion, and physical distribution costs, private labels can also generate a higher profit margin.

6. Wholesaling includes all the activities involved in selling goods or services to those who buy for resale or business use. Wholesalers can perform functions like warehousing, transportation, financing, risk bearing, dissemination of market information, and provision of management services and consulting.

7. Like retailers, wholesalers must decide on target markets, product assortment and services, price, promotion, and place. The most successful are those that adapt their services to meet suppliers‘ and target customers‘ needs.

OPENING THOUGHT Most students are familiar with the retailer in which they have bought products. What is not so obvious to the students is that retailers, wholesalers, and distributors pass through stages of growth and decline. Students, for the most part, will be familiar with some of the retailer concepts described in the chapter, but not all. Second, non-store retailing may not be a familiar CS-171 Copyright © 2022 Pearson Education, Inc. Browsegrades.net

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concept to some students. Others might have some familiarity with non-store retailing as in summer or part-time jobs at the mall.

The increasing ―power‖ of retailers, especially mega-retailers, on their manufacturers and the channels of distribution will not be evident to the students. Wholesalers and distributors are generally ―unseen‖ by the public and thus the students will probably not have any previous information about how these channels work or even that they exist. Guest speakers from the wholesaling or distribution industry can give insights to the students about the services they perform and the ―value‖ that they add to the end consumer.

Students will be familiar with such industries as trucking and logistics firms but not about inventory management or control. The instructor is encouraged to spend some additional class time on the concepts of the market-logistic formula, order costs, set-up costs, processing costs, and inventory carrying costs. Accounting and financial textbooks would be a good source of additional information and explanations of how these costs affect the overall corporation.

TEACHING STRATEGY AND CLASS ORGANIZATION PROJECTS 23. At this point in the semester-long project for the ―fictional‖ product or service, students should be directed to turn in their retailing, wholesaling, and logistical marketing plans.

Those students who are acting in the role of providing a new ―service‖ should include here their plans for locations, hours of operations, and how their ―service‖ plans on managing demand and capacity issues.

24. This chapter is an appropriate one for out-of-class assignments because many students will not have to be encouraged to ―go shopping.‖ The chapter identifies four levels of service in retailing—self-service, self-selection, limited service, and full-service. Students are to visit at least one of each type of the described retailers. In their shopping trips, did students experience a dissonance between the service they received and their initial characterization of the store? In other words, did the student receive ―better‖ service than they initially expected to receive from a self or limited service retailer? Did the students experience a ―lack‖ of service from the store they perceived as ―full service‖? If either of these conditions occurred, ask the students to postulate a causal relationship for the occurrence.

ASSIGNMENTS Two models for department store success seem to be emerging—one with a strong retail brand approach and one as a showcase store. In small groups, students are to investigate these two differing approaches to department store retailing and comment on the future of these concepts using the concepts defined in this chapter (target market selection, product assortment decisions, etc.).

Atmospherics is an important component of store attractiveness. Every store has its own unique look, feel, and smell. Yet each consumer may react differently to each of these elements. In groups composed of male and female students, ask the students to visit three retailers of their

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own choosing and comment on how the store atmospherics affected them personally and then group the findings by sex. Why are there such differences? What can a store do to appeal to both sexes?

In his 2000 book entitled, “Why We Buy: The Science of Shopping” Simon & Schuster, New York, 2000, Paco Underhill examines the shopping phenomena that consumers and retailers alike need to know. Students should be assigned to read this book and comment on the lessons learned.

New retail forms and combinations is one of the trends in retailing today. Examples include supermarkets with banks, and bookstores featuring coffee shops. After reading the material in this chapter, ask the students to ―speculate‖ on potential new retail forms or retail combinations yet undeveloped. In their selection of a ―new‖ form of retailing or combination of retailers, ask the students to defend their choices using the ideas and concepts presented in this chapter.

Shop—that is, have students visit as many differing types of retailers (and non-store retailers) as they can over the course of a week. For each shopping occasion, ask the students to record their impressions of the store‘s atmospherics, location, service levels, product selections, and others.

Then rank their preferences from best to worst and be able to explain why they assigned the ranking to each store in terms of the material covered in this chapter.

Store brands, or private label brands, account for one of every five items sold in the United States today. Students should purchase differing store brands/private label items (ice cream is a favorite choice for this experiment and can be conducted in class) and the national branded product, and do a taste test comparing the store brand and the national brand. Does the store or private label item meet or exceed the taste and quality of the national brand? What are the implications for national branded products if store/private label items meet or exceed the national brand? What should or could marketers‘ do to differentiate these products?

END-OF-CHAPTER SUPPORT Marketing Spotlight: Uniqlo 1. What are the key aspects of Uniqlo‘s customer value proposition?

Suggested answer: ―Uniqlo is a modern Japanese company that inspires the world to dress casual.‖ Unlike clothing retailers such as Zara and H&M, Uniqlo does not seek to follow fashion trends. Instead, Uniqlo designs and markets its clothing to be accessible and universal, a key ingredient in the company‘s success. This is embodied in Uniqlo‘s brand motto, ―Made for All.‖ Uniqlo has designed its clothing to appeal to all consumers, regardless of age, ethnicity, or gender. The clothing is basic but still allows wearers to express their own sense of style by pairing it with other garments and accessories.

When consumers noticed that Uniqlo was selling high-quality fleece jackets at affordable prices, customer perception of the brand changed—from cheap apparel to high-quality, affordable casual wear. By branding its fashion innovations and emphasizing superior performance and functionality, Uniqlo distinguishes its clothing from that of other low-cost value retailers.

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2. Should Uniqlo stay vertically integrated? Or should it rely more heavily on outsourcing to improve flexibility and achieve economies of scale?

Suggested answer: Answers will vary. Uniqlo should stay vertically integrated. Fast-fashion retailers design their supply chain to respond to rapidly changing fashion trends in as little as two weeks. Uniqlo instead plans its production of essentials and basics months in advance. The company aligns production with its marketing campaigns to adjust quantities based on consumer demand, and staff members visit production plants to ensure that new clothes are of Uniqlo quality. The company should not rely more heavily on outsourcing since the current production of essentials and basics is working successfully.

3. What role does the company culture play in delivering superior customer experience?

Suggested answer: Company culture and philosophy play an important role in delivering superior customer experience. Uniqlo has also committed to creating distinct customer service. It trains its in-store staff for three months, significantly longer than the industry average. Plans are underway to launch Uniqlo University, where more than 1,500 managers will be trained and sent out across the globe every year. Employees are trained to go out of their way to interact with customers and help them find the right product, using six standard phrases that include ―Did you find everything you were looking for?‖ and ―Let me know if you need anything. My name is .‖ Greeters at the entrances of stores wish customers a warm welcome and a friendly goodbye.

Marketing Spotlight: Best Buy 1. What are the keys to Best Buy‘s success? What are the challenges it faces in today‘s retail environment?

Suggested answer: Some of the ―keys to success‖ are its low-pressure sales tactics, its focus on customer service, its extensive marketing research campaign that identified key market shopper segments, called Customer-Centricity. Showrooming is a major challenge. It may be able to offer exclusive products or unique SKUs to overcome challenges associated with price shopping via mobile phones. The shift in consumer spending may result in lower space needs/less sales per square foot in previously lucrative ―browsing‖ categories where consumers may have made unplanned purchases.

2. How else can Best Buy compete against both retail competitors like Walmart and Costco and online competitors like Amazon?

Suggested answer: To compete effectively, Best Buy must increase its concentration on its Customer-Centricity strategy and continue to implement store design, layouts, and merchandising to maximize customer experience and expectations. Secondly, Best Buy must concentrate on logistical and distribution efficiencies to lower overall product and distribution costs and pass those cost savings onto the consumer in terms of lower prices and/or better product warranties. Further, there may be an opportunity to focus on consumers who do not want to purchase online, who may be less comfortable with technology. Geek Squad services, with its high margins, may be particularly useful with the aging consumer segment.

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3. Should Best Buy focus on becoming a showroom for companies that lack their own physical retail outlets? What are the pros and cons of this approach?

Suggested answer: Best Buy should become a showroom for companies that lack physical retail outlets. Pros: Best Buy took advantage of showrooming by partnering with electronics companies such as Apple to feature their products in branded displays. Originally, Best Buy placed products from these companies in the areas that offered different types of electronic products. With its new partnerships, Best Buy presents the products of each of these companies in dedicated kiosks. Employees stationed at these kiosks are well versed in their company products. Because many of Best Buy‘s competitors had shut down, electronics companies turned to Best Buy to showcase their products. These partnerships have increased revenue. After minor changes, customers could have items delivered or picked-up from a store or warehouse. This change decreased shipping times and made the website useful even when warehouses were out of stock. Best Buy‘s website became a more competitive choice for online shoppers.

Cons: Best Buy‘s customer service could not compete with Amazon‘s and had to be revised to give the company a competitive edge. The training of Best Buy‘s management was ineffective.

Best Buy had to retrain its employees in 2012, encouraging better consumer engagement and coaching them to become more knowledgeable about consumer electronics such as virtual reality headsets and smart home appliances. Best Buy also had to improve the Geek Squad, its in-house tech support service that provided repairs and installations.

DETAILED CHAPTER OUTLINE Opening vignette: In the preceding chapter, we examined marketing intermediaries primarily in their capacity as manufacturers that want to build and manage marketing channels. In this chapter, we view these intermediaries—retailers, wholesalers, and logistical organizations—as requiring and forging their own marketing strategies in a rapidly changing world. Intermediaries also strive for marketing excellence and can reap the benefits like any other type of company.

Consider the success of Net-a-Porter.

Net-a-Porter has established itself as the world‘s premier luxury fashion retailer, offering a portfolio of over 800 designer brands. A key to the company‘s success was its business model, which called for merging editorial content and retail capability to create a fashion magazine selling luxury brands. The more successful companies use strategic planning, state-of-the-art technology, advanced information systems, and sophisticated marketing tools. They segment their markets, improve their market targeting and positioning, and connect with their customers through memorable experiences, relevant and timely information, and, of course, the right products and services. In this chapter, we discuss marketing excellence in retailing.

I. The Modern Retail Environment i. Retailing includes all the activities in selling goods or services directly to final consumers for personal, nonbusiness use. ii. A retailer or retail store is any business enterprise whose sales volume comes primarily from retailing. iii. Any organization selling to final consumers—whether it is a manufacturer, wholesaler, or retailer—is doing retailing. iv. New types of competitors and competition have emerged.

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• New Retail Forms and Combinations • Retailer Consolidation • Growth of Mobile Retailing • Growth of Omnichannel Retailing • Growth of Fast Retailing II. Key Retailing Decisions A. Target Market i. Until it defines and profiles the target market, the retailer cannot make consistent decisions about product assortment, store decor, advertising messages and media, price, and service levels. ii. Mistakes in choosing target markets can be costly. iii. To better hit their targets, retailers slice the market into ever-finer segments and introduce new lines of stores to exploit niche markets with more relevant offerings.

B. Product Assortment and Procurement i. The retailer‘s product assortment must match the target market‘s shopping expectations in breadth and depth. ii. Identifying the right product assortment can be especially challenging in fastmoving industries such as technology or fashion. iii. Developing a product-differentiation strategy is a key challenge in defining the store‘s product assortment. iv. After deciding on the product-assortment strategy, the retailer must establish merchandise sources, policies, and practices. v. Retailers are rapidly improving their skills in demand forecasting, merchandise selection, stock control, space allocation, and display. vi. Some stores are using radio frequency identification (RFID) systems made up of ―smart‖ tags—microchips attached to tiny radio antennas—and electronic readers to facilitate inventory control and product replenishment. vii. Stores are using direct product profitability to measure a product‘s handling costs from the time it reaches the warehouse until a customer buys it in the retail store.

C. Services i. Another differentiator is unerringly reliable customer service, whether face to face, across phone lines, or via online chat. ii. Retailers encounter widely different consumer preferences for service levels and specific services. Specifically, they position themselves as offering one of three levels of service: • Self-service—Self-service is the cornerstone of all discount operations. Many customers are willing to carry out their own ―locate–compare–select‖ process to save money.

• Limited service—These retailers carry more shopping goods and offer services such as credit and merchandise-return privileges. Customers typically find their own goods, though they can ask for assistance.

• Full service—Salespeople are ready to assist in every phase of the ―locate– compare–select‖ process. Customers who like to be waited on prefer this type of

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store. The high staffing cost and many services, along with the higher proportion of specialty goods and slower-moving items, result in high-cost retailing. iii. Retailers must also decide on the services mix to offer customers.

• Prepurchase services include product information and enabling shoppers to try and experience products.

• Postpurchase services include shipping and delivery, gift wrapping, adjustments and returns, alterations.

D. Store Atmosphere i. Retailers must consider all the senses in shaping the customer‘s experience. ii. The growth of e-commerce has forced traditional brick-and-mortar retailers to respond. They provide a shopping experience as a strong differentiator. iii. The store atmosphere should match shoppers‘ basic motivations.

• If customers are likely to be in a task-oriented and functional mind-set, then a simpler, more restrained in-store environment may be better.

• On the other hand, some retailers of experiential products are creating in-store entertainment to attract customers who want fun and excitement.

E. Pricing i. Prices are a key positioning factor and must be set in relationship to the target market, product-and-service assortment mix, and competition. ii. Different formats of store retailers have different competitive and price dynamics. iii. Discount stores, for example, historically have competed much more directly with one another than with other formats, although that is changing. iv. Most retailers fall into the high-markup, lower-volume group (fine specialty stores) or the low-markup, higher-volume group (mass merchandisers and discount stores). v. When setting prices, retailers consider a variety of factors.

• Some retailers put low prices on some items to serve as traffic builders (or loss leaders) or to signal their pricing policies.

• Others plan mark-downs on slower-moving merchandise to free up inventory. vi. Retailers must also manage their price image, which reflects the overall perception that consumers have about the level of prices at a given retailer.

F. Incentives i. To make their offerings attractive, retailers use incentives such as price discounts, volume discounts (such as buy one–get one free), bonus offerings, and coupons. ii. Retailers vary in the degree to which they use incentives. Two extreme strategies stand out: everyday low pricing and high–low pricing.

• A retailer using everyday low pricing (EDLP) charges a constant low price with little or no price promotion or special sales.

• In high–low pricing, the retailer charges higher prices on an everyday basis but runs frequent promotions featuring prices temporarily lower than prices at the EDLP level. iii. The most important reason why retailers adopt EDLP is that constant sales and promotions are costly and have eroded consumer confidence in everyday shelf prices. iv. While shopping in brick-and-mortar stores, consumers often use their smart CS-177 Copyright © 2022 Pearson Education, Inc. Browsegrades.net

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phones to find deals or capitalize on promotions. v. Companies are trying to give customers more control over their shopping experiences by bringing digital technologies into the store via mobile apps. vi. Geofencing involves targeting customers with a mobile promotion when they are within a defined geographic space, near or in a store.

G. Communications i. Retailers use a wide range of communication tools to generate traffic and purchases: ads, special sales, coupons, e-mail promotions, reward programs, food sampling, and coupons at check-out points. ii. Retailers use interactive and social media to pass on information and create communities around their brands. iii. With 15 percent of a retailer‘s most loyal customers accounting for half of its sales, reward programs are becoming increasingly sophisticated. iv. Where and how a product is displayed and sold can have a significant effect on sales. v. Retailers are using technology to influence customers as they shop.

III. Managing Omnichannel Retailing i. This increased reliance on multiple channels means that channels should be designed to work together effectively.

A. Brick-and-Mortar Retailers • Department stores such as JCPenney and Bloomingdale‘s carry several product lines.

• Specialty stores such as The Limited, The Body Shop, and Sephora carry a single product line.

• Supermarkets such as Kroger are large, low-cost, low-margin, high-volume, selfservice stores designed to meet a family‘s total needs.

• Convenience stores such as 7-Eleven are small stores in residential areas, often open 24/7.

• Drugstores such as CVS Pharmacy and Walgreens carry prescription drugs, health and beauty aids, and other personal care items.

• Mass merchandisers such as Walmart are low-price, low-margin, high-volume stores that sell routinely purchased food and household items.

• Category killers such as The Home Depot carry a narrow but deep assortment in one category.

• Extreme value or hard-discount stores such as Dollar General carry a limited merchandise mix offered at heavily discounted prices.

• Off-price retailers such as TJ Maxx offer leftover goods, overruns, and irregular merchandise sold at less than retail.

• Warehouse clubs such as Costco offer larger quantities at low prices.

• Automatic vending offers a variety of merchandise, including impulse goods such as soft drinks. Vending machines are found in factories, offices, stores, gasoline stations, hotels, restaurants, etc. i. The three keys to retail success are ―location, location, and location.‖ Retailers can place their stores in any of the following locations.

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•

Central business districts. The oldest and most heavily trafficked city areas, often known as ―downtown.‖ • Regional shopping centers. Large suburban malls containing 40 to 200 stores, typically featuring one or two nationally known anchor stores such as Macy‘s and a number of smaller stores.

• Community shopping centers. Smaller malls with one anchor store and 20 to 40 smaller stores.

• Shopping strips. A cluster of stores, usually in one long building, serving a neighborhood‘s needs.

• A location within a larger store. Smaller concession spaces taken by well-known retailers such as McDonald‘s within larger stores, airports, or schools.

• Stand-alone stores. Some retailers, such as Kohl‘s, favor free-standing storefronts.

B. Online Retailers i. Online retailers can predictably provide convenient, informative, and personalized experiences for vastly different types of consumers and businesses. ii. By saving the cost of retail floor space, staff, and inventory, they can profitably sell low-volume products to niche markets. iii. To drive traffic to a site, many firms employ affiliate marketing, paying online content providers to drive business to their brands‘ sites. iv. Online retailers compete on multiple dimensions: product assortment, convenience, shopping experience, speed of delivery, return policies, and ability to address problems when they occur. v. Business-to-business sites are changing the supplier–customer relationship in profound ways. vi. Business-to-business sites make markets efficient, giving buyers easy access to a great deal of information from a variety of sources, including: • Supplier websites • Infomediaries, third parties that add value by aggregating information about alternatives • Market makers, third parties that link buyers and sellers • Customer communities, where buyers can swap stories about suppliers‘ products and services vii. Suppliers of superior products offset price transparency with value transparency; suppliers of undifferentiated products will drive down their costs in order to compete.

C. Omnichannel Retailing i. Most brick-and-mortar companies have added the internet after seeing how much business is generated online. ii. Omnichannel retailers include non-store retailers that have extended their reach to include online retailing in their portfolio.

• An example of multichannel retailing includes direct-mail marketing, catalog marketing, telemarketing, and infomercial direct-response marketing.

• Companies added e-commerce as another channel to connect with customers and generate sales. iii. The transition to omnichannel retailing was facilitated by the COVID pandemic, CS-179 Copyright © 2022 Pearson Education, Inc. Browsegrades.net

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when brick-and-mortar-only retailers found their sales revenues evaporating.

IV. Managing Private Labels i. A private-label brand (also called a reseller, store, or house brand) is a brand that retailers and wholesalers develop. ii. For many manufacturers, retailers are both collaborators and competitors. iii. Private labels are rapidly gaining ground in a way that has many manufacturers of name brands running scared.

• Brands can be more profitable.

• Retailers can use manufacturers with excess capacity that will produce privatelabel goods at low cost.

• Other costs, such as research and development, advertising, sales promotion, and physical distribution, are also much lower, so private labels can generate a higher profit margin.

• Retailers develop exclusive store brands to differentiate themselves from competitors.

• Different from generics, which are unbranded, plainly packaged, less expensive versions of common products such as spaghetti and paper towels. iv. Retailers are building better quality into their store brands and emphasizing attractive, innovative packaging. v. Supermarket retailers are adding premium store-brand items. vi. The growing power of store brands has benefited from the weakening of national brands. vii. Four strategic recommendations for manufacturers to compete against or collaborate with private labels: • Fight selectively when manufacturers can win against private labels and add value for consumers, retailers, and shareholders.

• Partner effectively by seeking win–win relationships with retailers through strategies that complement the retailer‘s private labels.

• Innovate brilliantly with new products to help beat private labels.

• Create winning value propositions by imbuing brands with symbolic imagery as well as functional quality that beats private labels. viii. Creating strong consumer demand is crucial.

V. Wholesaling i. Wholesaling includes all the activities in selling goods or services to those who buy for resale or business use.

A. The Business of Wholesaling i. Wholesalers differ from retailers in a number of ways.

• Wholesalers pay less attention to promotion, atmosphere, and location because they are dealing with business customers rather than final consumers.

• Wholesale transactions are usually larger than retail transactions, and wholesalers usually cover a larger trade area than retailers.

• Wholesalers and retailers are subject to different legal regulations and taxes. ii. Wholesaler Types • Merchant wholesalers • Full-service wholesalers

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• Limited-service wholesalers • Cash and carry wholesalers • Brokers and agents iii. Wholesalers play a key role by serving as an intermediary between manufacturers and retailers.

B. Key Functions Performed by Wholesalers • Providing access to individual retailers • Buying and assortment building • Bulk breaking • Warehousing • Transportation • Financing • Risk bearing • Market research • Management services and counseling i. Wholesaler–distributors face mounting pressure from new sources of competition, including digital platforms demanding customers, new technologies, and more direct-buying. ii. Manufacturers‘ major complaints against wholesalers: • They do not aggressively promote the manufacturer‘s product line and act more like order takers.

• They do not carry enough inventory and therefore do not fill customers‘ orders fast enough.

• They do not supply the manufacturer with up-to-date market, customer, and competitive information.

• They charge too much for their services. iii. Savvy wholesalers have rallied to the challenge and adapted services to meet their suppliers‘ and target customers‘ changing needs. iv. They recognize that they must add value to the channel. v. Wholesalers have worked to increase asset productivity by better managing inventories and receivables.

• They‘re also reducing operating costs by investing in more advanced materialshandling technology, information systems, and the internet.

• They‘re improving their strategic decisions about target markets, product assortment and services, price, communications, and distribution. vi. Wholesaling remains vulnerable to one of the most enduring trends—fierce resistance to price increases and removing suppliers based on cost and quality. vii. The trend toward vertical integration, in which manufacturers try to control or own their intermediaries, is still strong.

CHAPTER

17

DRIVING GROWTH IN COMPETITIVE

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LEARNING OBJECTIVES After reading this chapter, you should be able to: 17.1 Summarize how a company assesses its growth opportunities.

17.2 Explain how a company gains market position.

17.3 Summarize the strategies a company can use to defend its market position.

17.4 Discuss the key product-cycle marketing strategies.

CHAPTER SUMMARY 1. Assessing growth opportunities involves two main considerations: identifying the types of products and markets a company should focus on and managing the product–market growth strategy over time.

2. Market growth can be achieved by four core strategies that define market opportunities for a firm in terms of current and new products and markets. A firm can pursue one or more of the four product–market growth strategies: market penetration, market development, product development, and diversification.

3. A company can grow in two ways: by increasing output and enhancing revenues and profits internally—an approach commonly referred to as organic growth—or by relying on mergers and acquisitions. Market-penetration and market-development strategies typically follow the path of organic growth, whereas product development and diversification can involve organic growth as well as growth by mergers and acquisitions.

4. Firms with low shares of the total market can become highly profitable by targeting small markets of little or no interest to the larger firms. Targeting niche markets enables firms to know their target customers and meet their needs better than other firms by offering superior value.

5. While trying to expand total market size, a firm must also actively defend its current market position. The particular defensive strategy chosen depends on the needs of the company‘s target customers, the company‘s resources and goals, and its expectations about how competitors will react.

6. Products go through different stages over time, and at each stage they face different challenges and opportunities that require different marketing strategies and tactics. The four distinct stages of the product life cycle are introduction, growth, maturity, and decline. Most products today are in the maturity stage.

7. The introduction stage is marked by slow growth and minimal profits. If successful, the product enters a growth stage marked by rapid sales growth and increasing profits. In the maturity stage, sales growth slows and profits stabilize.

Finally, the product enters a decline stage. The company‘s task is then to identify truly weak products and phase them out with minimal impact on company profits, employees, and customers.

8. Not all products exhibit a bell-shaped product life cycle pattern. To gain and defend their market position, firms need to visualize a market‘s evolutionary path

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and the way it is likely to be influenced by new customer needs, competitors, technology, channels, and other developments.

OPENING THOUGHT This chapter adds the additional element of the complexity of marketing— competitive analysis. Care should be taken not to overdramatize the importance of monitoring competition, however, many firms do not give competitors the attention they merit, so some emphasis is needed.

A key concept introduced in this chapter is that of market nicher—a specialist in small markets underserved by larger corporations. Many large firms today started out as “nichers” and many large firms of tomorrow are our “nichers” today. The concept of “nichers” and the potential of growing them into larger firms can be exciting.

TEACHING STRATEGY AND CLASS ORGANIZATION PROJECTS 25. At this point in the semester-long project, students should be prepared to present their competitive analysis. Who are the market leaders for their chosen product or service? What niche have they identified for their product/service? Is their product or service going to be a leader, follower, or challenger to well-established products or brands?

26. Michael Porter‘s Five Forces model is as applicable today as it was when it was introduced.

Have the students select a market or market segment (jeans, cell phones, etc.) and using Michael Porter‘s model, completely define these five forces for the market or market segment. Who are the potential entrants, who are the suppliers (and how much power do they have), who are the buyers (and what sort of buying power do they have), what are the substitutes and how is the industry segmented (market share is a good indicator of segmentation for this project)? Students‘ analysis and answers should be comprehensive.

ASSIGNMENTS Identify the major competitors in the blue jeans market. Who has the leading market share, whose shares have declined? What segmentation is occurring/has occurred in the blue jeans market and why? Did demographic changes affect the market (from Baby Boomers to Gen X or Gen Y)? What competitive signs, symbols, events, or occurrences did Levi-Strauss miss? What current shifts in competition and channel power is occurring and what can Levi-Strauss do to minimize the impact from these changes?

Have students read ―3 Tools to Help Leaders Steady Their Teams During a Transition” by Victoria M. Grady. Retrieved on March 30, 2021 from: https://hbr.org/2021/03/3-tools-to-helpleaders-steady-their-teams-during-a-transition. Also have them read Tarum Khanna and Krishna G. Palepu, ―Emerging Giants,‖ Harvard Business Review, October 2006, Vol. 84, Issue 10, pp.

60-69 and comment on the emerging competition from India and China on companies in the United States. Specifically, ask the students to comment on whether or not they believe that 1)

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this competition will increase in the future, and 2) how a U.S. company should respond to this threat.

For a market leader, increased sales must come from expanding the total market through adding new customers or increasing the usage of the product. Picking a market leader in an industry (Dell computers for example) explain how your market leader can expand the total market by adding new customers or increasing the usage of the product. Be as specific as possible.

In challenging a market leader, the challenger has a number of differing strategies to employ.

Choosing the right one (or wrong one) could result in a larger market share and increased profits (or disaster) for the challenger. In choosing a specific attack strategy, the challenger must go beyond and develop specific strategies of price, lower price goods, value priced goods and services, and so on. Students should explore these strategies and come prepared to identify one company (or brand) that has chosen each of these strategies to implement and defend their selection(s).

Market nichers avoid large markets and try to be the leader in a small market or niche. Nichers have three tasks: creating niches, expanding niches, and protecting niches. Multiple niching is preferable to single niching. Students should identify three ―nichers‖ (firms and/or brands) and explain why they have identified these as ―nichers‖ based upon the criteria in the chapter.

END-OF-CHAPTER SUPPORT Marketing Spotlight: Airbnb 1. What were the key factors that contributed to Airbnb‘s market success?

Suggested answer: Airbnb‘s website became a listing site and the means of payment for the renter; Airbnb took high-definition photographs because professional displays of locations increased the odds of being rented by a factor of more than 3. Airbnb encouraged hosts and renters to post their experiences on social media, fostering a network between hosts and guests.

The number of renters and hosts dramatically grew in New York City, and Airbnb expanded to major cities across the globe. Airbnb‘s rapid success helped it attract venture capital. Fueled by venture capital, Airbnb was available in 89 countries and reached over one million nights booked less than three years after launch.

2. How was Airbnb able to create and sustain a competitive advantage? What are Airbnb‘s points of parity and points of difference?

Suggested answer: Airbnb‘s competitive advantage stems from several key factors. Points of difference: The company offers a diverse selection of properties located across the globe, and its prices, unlike those of hotels, are not affected by variable costs.

Airbnb designed its website to offer a streamlined booking experience, and trusted guests have access to an instant-booking feature, made available after one successful stay. Airbnb has also taken measures to remedy common concerns of both hosts and guests. To this end, Airbnb implemented a ―Host Guarantee‖ program to ensure that hosts would be reimbursed if their

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properties were damaged by guests. Airbnb also provides 24/7 customer support to both guests and hosts to quickly solve any issue that comes up. In addition, Airbnb benefits from the network effect. The more users Airbnb has, the more inclined people are to list their own property for rental. Guests who have good experiences are also more likely to list their own property. This creates a positive feedback loop, which helps Airbnb grow the number of guests, hosts, and transactions.

Points of parity: Guests can browse through the listed properties on the website. Guests can use the website as a payment vehicle. Guests can see photographs of the property. Guests can rent vacation homes.

3. Going forward, what should Airbnb do to sustain its competitive advantage? How can it gain and defend its market position?

Suggested answer: Airbnb‘s unique short-term rental service has successfully disrupted the hospitality industry. The competitive pricing and wide availability of locations, backed by the network effect, have made it an attractive alternative to traditional hotel rooms and vacation rentals. Airbnb can defend its market position through diversification. Airbnb diversified its list of services by announcing Airbnb Plus, which offers a selection of high-quality, well-equipped homes with hosts known for great reviews and attention to detail, and Beyond by Airbnb, which offers highest-end homes and a travel planning service that pairs customized experiences with luxury listings.

Marketing Spotlight: American Express 1. Evaluate American Express in terms of its competitors. How has its positioning changed over time? Where does American Express face the most competition?

Suggested answer: In the 1960s and 1970s, American Express stepped up its marketing efforts in response to strong competitive pressure from Master Charge (now Mastercard) and BankAmericard (later to become Visa). In the 1990s, the new, leaner American Express focused on its core competencies: charge and credit cards, Travelers Cheques, travel services, and select banking and financial services. In addition, American Express increased the number of merchants that accepted its cards (Walmart was one of them) and developed new card offerings, including co-branded cards. American Express positioned itself as a status symbol signifying success and achievement. To position itself competitively against with Mastercard and Visa, American Express introduced new credit cards. One card contained a chip that enhanced internet security and targeted younger, tech-savvy consumers with a hip image and no annual fee. The other card targeted the most elite clients, who spent more than $150,000 annually and desired amenities such as 24-hour personal concierge service and invitations to exclusive events. The company expanded its Membership Rewards program, which was the world‘s largest card-based rewards program. Cardholders could redeem points for travel, entertainment, gift certificates, and other predetermined offerings.

2. Evaluate American Express‘s integration of its various businesses. What recommendations would you make in order to maximize the contribution to equity of all its business units?

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Suggested answer: American Express has successfully integrated various businesses. In the 1990s, the company rebranded its Small Business Services division as ―OPEN: The Small Business Network‖ and added benefits such as flexible payments, as well as special offers, partnerships, and resources for small businesses. Also, American Express partnered with banks such as MBNA, Citigroup, UBS, and USAA. It launched a handful of strong marketing campaigns and taglines throughout the 2000s to help increase membership. American Express should continue to focus on an affluent customer base and push more cards that carry an annual fee, broaden its marketing focus to bring in new affluent customers, and woo small businesses with ramped-up rewards and new technological innovations. The company should also continue its appeals to millennials. American Express has increased sign-up bonuses, augmented spending rewards, and offered perks such as Uber credit that are squarely aimed at Millennials. It is also redesigning many cards aiming to appeal to Millennials‘ desire to express their personality rather than wealth and status.

3.How should American Express position its offerings to attract and retain new customers? What is the key benefit that it should emphasize in positioning its brand?

Suggested answer: Answers will vary. The success of American Express has been largely due to its customer service. The company can use this dimension of its offerings to attract and retain new customers. In fending off rapidly growing competition, American Express has an important advantage for positioning—the strong brand that the company has developed and nurtured over the years. Bloomberg Businessweek and Interbrand rank American Express in the top 25 ―Most Valuable Brands in the World‖ year after year, Fortune ranks American Express as one of the top ―Most Admired Companies,‖ and J.D. Powers frequently ranks American Express as the top U.S. credit card company. These results are a testament not only to the company‘s ongoing innovation in product development and marketing, but also to its commitment to providing customers with outstanding service anywhere in the world.

DETAILED CHAPTER OUTLINE Opening vignette: Growth is essential for the success of any firm. To be a long-term market leader is the goal of any marketer. Today‘s challenging marketing circumstances often dictate that companies frequently reformulate their marketing strategies and offerings. Economic conditions change, competitors launch new assaults, and buyer interest and requirements evolve.

Through the years, as an interesting competitive battle has been fought between car manufacturers, General Motors has sought to differentiate its vehicles to ensure sustained market growth. By making a significant investment in technologies that promise to shape the future of the automotive industry, General Motors aims to regain its leadership in innovation and strengthen its market position.

I . Assessing Growth Opportunities i. Assessing growth opportunities includes planning new businesses, downsizing, and terminating older businesses. ii. If there is a gap between future desired sales and projected sales, corporate management will need to develop or acquire new businesses to fill it. iii. There are two main considerations in assessing growth opportunities.

• The first concerns the types of products and markets a company should focus on.

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•

The second involves the ways in which a company can manage its product–market growth strategy over time.

A. Product-Market Growth Strategies i. The Product–Market Growth framework outlines four key sales-growth strategies that tie the company‘s customer segments to opportunities for product development. ii. The framework evaluates the strategic growth opportunities for a firm in terms of current and new products and markets. See Fig. 17.1 • The market-penetration strategy, which involves growing sales of the company‘s current offerings to its existing customers, is often the easiest to implement.

• A company can use a market-development strategy. First, it might identify potential user groups. Second, it might seek additional distribution channels. Third, the company might sell in new locations.

• In a product-development strategy, a company could develop new product features, offer different sets of benefits at different price tiers, or research an alternative technology to develop a viable substitute for its current products.

• Growth via a diversification strategy makes sense when good opportunities exist outside the present businesses—i.e., the industry is highly attractive, and the company has the right mix of business strengths to succeed. iii. Several types of diversification: • Concentric strategy: seek new products that have technological or marketing synergies with existing product lines • Horizontal strategy: produce complementary products • Conglomerate strategy: seek new businesses with no relationship to current technology, products, or markets B. Growth Through Mergers and Acquisitions i. A company can grow by increasing output and enhancing revenues and profits internally, organic growth, or through mergers and acquisitions. ii. Product development and diversification can involve both organic growth and growth by mergers and acquisitions. iii. A business can increase sales and profits through backward, forward, or horizontal integration within its industry. iv. To grow, a company might acquire suppliers to gain more control. v. It might acquire profitable wholesalers or retailers. vi. The company might acquire one or more competitors. vii. If these new sources do not deliver the desired sales volume, the company must consider diversification. viii. A company must prune, harvest, or divest itself of tired old businesses to release resources and reduce costs.

C. Growth Through Innovation and Imitation i. Theodore Levitt argues that a strategy of product imitation might be as profitable as a strategy of product innovation. ii. In ―innovative imitation,‖ the innovator bears the expense of developing the new product, getting it into distribution, and informing and educating the market. iii. Another firm can come along and copy or improve on the new product. iv. Many companies prefer to follow rather than challenge the market leader.

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v. Followers must define a growth path, but not invite competitive retaliation. vi. Three broad strategies: • Cloner. The cloner emulates the leader‘s products, name, and packaging with slight variations.

• Imitator. The imitator copies some things from the leader but differentiates on packaging, advertising, pricing, or location.

• Adapter. The adapter takes the leader‘s products and adapts or improves them. vii. Follower strategies are not to be confused with illegal and unethical follower strategies.

II. Gaining Market Position i. An important function of marketing is to drive the growth of company sales and revenue. ii. Good marketing can help to attract consumers, induce them to try the company‘s products, and promote word of mouth and diffusion. iii. A company‘s market position is defined on three dimensions: • Share of market—Market share is measured by the company‘s sales revenue or the number of company units sold relative to the total revenue or total units sold in a specific market.

• Share of mind—This is defined by the percentage of customers who regard the company as the first company that comes to mind in a specific industry.

• Share of heart—The percentage of customers who name the company as the company from which they would prefer to buy a specific product. iv. Companies that make steady gains in mind share and heart share will inevitably make gains in market share and profitability. v. A market leader has the largest market share and usually leads in price changes, new-product introductions, distribution coverage, and promotional intensity. vi. Although marketers assume well-known brands are distinctive in consumers‘ minds, unless a dominant firm enjoys a legal monopoly, it must maintain constant vigilance. vii. To gain and defend market position, • a firm might grow sales from current customers.

• it might expand total market demand by creating new markets.

• it must protect its current share through effective defensive and offensive actions.

A. Growing Sales to Current Customers i. Marketers can try to increase the amount, level, or frequency of consumption. They can sometimes boost the amount through packaging or product redesign. ii. Identifying New Occasions for Usage. A marketing program can communicate the appropriateness and advantages of using the brand. iii. Another opportunity to increase usage arises when consumers‘ perceptions of their usage differ from reality. iv. Other approaches provide consumers information about first using the product or replacing it and gauging product performance. v. Identifying New Uses. The second approach is to identify completely new and different applications.

B. Creating New Markets i. Gaining a Pioneering Advantage. Studies show that a market pioneer can gain great

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advantage. ii. The pioneer‘s brand also establishes what attributes the product class should possess. iii. Researchers have identified five factors underpinning long-term market leadership: • Vision of a mass market • Persistence • Relentless innovation • Financial commitment • Strategic assets iv. Speeding up innovation is essential in an age of shortened product life cycles. v. Marketers have identified several weaknesses among the failing pioneers: • New products were too crude, improperly positioned, or appeared before there was strong demand.

• Product-development costs exhausted resources.

• A lack of resources to compete against larger firms and managerial incompetence. vi. Successful imitators offered lower prices, improved the product, or used market power to overtake the pioneer. vii. Identifying Niche Markets. An alternative to being a follower in a large market is to be a leader in a small market, or niche market. viii. The niche marketer achieves high margin, whereas the mass marketer achieves high volume. ix. The guiding principle in successful nichemanship is specialization.

• Customer specialist. The firm specializes in one type of end-use customer.

• Product or service specialist. The firm carries or produces only one product line or product. x. Nichers have three tasks: creating new markets, expanding current markets, and protecting their market position. xi. The risk is that the niche might dry up or be attacked. xii. Because niches can weaken, the firm must continually create new ones.

C. Expanding Existing Markets i. When the total market expands, the dominant firm usually gains the most. ii. In targeting new customers, the firm should not lose sight of existing ones.

III. Defending the Market Position i. While trying to expand total market size, a dominant firm must actively defend its current business. ii. Comprehensive solutions increase competitive strength and value to customers so that they feel appreciative or even privileged to be a customer, not trapped or taken advantage of. iii. In satisfying customer needs, there are three responses: • A responsive marketer finds a stated need and fills it.

• An anticipative marketer looks ahead to needs customers may have in the near future.

• A creative marketer discovers solutions that customers did not ask for but to which they enthusiastically respond. iv. Proactive companies create new offers to serve unmet—and maybe even unknown—consumer needs. v. The aim of defensive strategy is to reduce the probability of attack, divert attacks to less-threatened areas, and lessen their intensity.

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• A leader would like to do anything it legally and ethically can to reduce competitors‘ ability to launch a new product, secure distribution, and gain consumer awareness, trial, and repeat.

• In any strategy, speed of response can make an important difference to profit. vi. Six defense strategies: • Position defense. Position defense means occupying the most desirable position in consumers‘ minds, making the brand almost impregnable.

• Flank defense. The market leader should erect outposts to protect a weak front or support a possible counterattack.

• Preemptive defense. A more aggressive maneuver is to attack first, perhaps with guerrilla action across the market—hitting one competitor here, another there— and keeping everyone off balance.

• Counteroffensive defense. In a counteroffensive, the market leader can meet the attacker frontally and hit its flank or launch a pincer movement so the attacker will have to pull back to defend itself.

• Mobile defense. In mobile defense, the leader stretches its domain over new territories through market broadening and market diversification.

• Contraction defense. Sometimes large companies can no longer defend all their territory. In planned contraction (also called strategic withdrawal), they give up weaker markets and reassign resources to stronger ones.

IV. Product Life-Cycle Marketing Strategies. See. Fig 17.1 A. Four key assumptions: • Products have a limited life.

• Product sales pass through distinct stages, each posing different challenges, opportunities, and problems to the seller.

• Profits rise and fall at different stages of the product life cycle.

• Products require different marketing, financial, manufacturing, purchasing, and human resource strategies in each life-cycle stage. See Fig. 17.2.

B. The Concept of a Product Life Cycle • Most product life cycles are portrayed as bell-shaped curves, typically divided into four stages: introduction, growth, maturity, and decline. (Table 17.1) • Introduction—A period of slow sales growth as the product is introduced in the market. Profits are nonexistent because of the heavy expenses of product introduction.

• Growth—A period of rapid market acceptance and substantial profit improvement.

• Maturity—A slowdown in sales growth because the product has achieved acceptance by most potential buyers. Profits stabilize or decline because of increased competition.

• Decline—Sales show a downward drift and profits erode.

• Growth-slump-maturity pattern characteristic of small kitchen appliances like bread makers and toaster ovens.

• Cycle-recycle pattern describes the sales of new drugs.

• Scalloped PLC is where sales pass through a succession of life cycles based on the discovery of new product characteristics, uses, or users.

C. Introduction Stage • Slow sales growth • Negative or low profits

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High promotional expenditures need to: o inform potential consumers o induce product trial o secure distribution in retail outlets • Higher prices D. Growth Stage i. Rapid climb in sales. Early adopters like the product, and additional consumers start buying it. New competitors enter, attracted by the opportunities. They introduce new product features and expand distribution. ii. Prices stabilize or fall slightly, depending on how fast demand increases. iii. Companies maintain marketing expenditures or raise them slightly to meet competition and continue to educate the market. Sales rise much faster than marketing expenditures, causing a welcome decline in the marketing-to-sales ratio. iv. Profits increase as marketing costs are spread over a larger volume, and unit manufacturing costs fall faster than price declines, owing to the producerlearning effect. v. Firms must watch for a change to a decelerating rate of growth in order to prepare new strategies. vi. To sustain rapid market share growth now, the firm: • Improves product quality and adds new features and improved styling • Adds new models and flanker products (of different sizes, flavors, and so forth) to protect the main product • Enters new market segments • Increases its distribution coverage and enters new distribution channels • Shifts from awareness and trial communications to preference and loyalty communications • Lowers prices to attract the next layer of price-sensitive buyers E. Maturity Stage i. Most products are in this stage of the life cycle, which normally lasts longer than the preceding ones. ii. The maturity stage divides into three phases: growth, stable, and decaying maturity.

• In the first, sales growth starts to slow. There are no new distribution channels to fill.

New competitive forces emerge.

• In the second phase, sales per capita flatten because of market saturation. Most potential consumers have tried the product, and future sales depend on population growth and replacement demand.

• In the third phase, decaying maturity, the absolute level of sales starts to decline, and customers begin switching to other products. iii. This third phase poses the most challenges. The sales slowdown creates overcapacity in the industry, which intensifies competition. Weaker competitors withdraw.

• A few giants dominate—perhaps a quality leader, a service leader, and a cost leader—and they profit mainly through high volume and lower costs.

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Surrounding them is a multitude of market nichers, including market specialists, product specialists, and customizing firms.

• The question is whether to struggle to become one of the big three and achieve profits through high volume and low cost or to pursue a niching strategy and profit through low volume and high margins. Sometimes the market will divide into low- and high-end segments, and market shares of firms in the middle will steadily erode. iv. Market Growth and Product Modifications. A company can expand the number of users through either or both of the following strategies: • Convert nonusers. This approach is also referred to as primary demand stimulation.

• Attract competitors’ customers. This approach is often referred to as stealshare strategy. v. A company can increase the usage rates among current users through the following strategies: • Increase the number of usage occasions. For example, Campbell‘s began promoting its soups for usage in the summer. Heinz might recommend using vinegar to clean windows.

• Increase consumption on each occasion. For example, Heinz designed larger, upside-down containers of ketchup to make it easier for users to squeeze out and use more ketchup.

• Create new usage occasions. For example, GlaxoSmithKline might promote Tums antacid as a calcium supplement. Arm & Hammer might promote the use of baking soda as an odor remover for refrigerators and kitchen sinks. vi. Managers also try to stimulate sales by improving quality, features, or style.

• Quality improvement increases functional performance by launching a ―new and improved‖ product.

• Feature improvement adds size, weight, materials, supplements, and accessories that expand the product‘s performance, versatility, safety, or convenience.

• Style improvement increases the product‘s esthetic appeal.

F. Decline Stage i. Sales decline for a number of reasons, including technological advances, shifts in consumer tastes, and increased domestic and foreign competition. ii. All can lead to overcapacity, increased price cutting, and profit erosion. iii. As sales and profits decline, some firms withdraw. iv. Harvesting and Divesting. Gradually reducing a product or business‘s costs while trying to maintain sales.

• The first step is to cut R&D costs and plant and equipment investment.

• The company might also reduce product quality, sales force size, marginal services, and advertising expenditures, ideally without letting customers, competitors, and employees know what is happening.

• Harvesting is difficult to execute, yet many mature products warrant this strategy. v. If the company can‘t find any buyers, it must decide whether to liquidate the

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brand quickly or slowly. It must also decide how much inventory and service to maintain for past customers. vi. Eliminating Weak Products • Besides being unprofitable, weak products consume a disproportionate amount of management‘s time, require frequent price and inventory adjustments, incur expensive setup for what are usually short production runs, draw advertising and sales force attention better used to make healthy products more profitable, and cast a negative shadow on company image.

• Maintaining them also delays the aggressive search for replacement products, creating a lopsided product mix long on yesterday‘s breadwinners and short on tomorrow‘s.

G. Alternative Product Life Cycle Patterns i. The product life cycle theory critics claim that patterns are too variable in shape and duration to be generalized and that marketers can seldom tell what stage their product is in. ii. A product may appear mature when it has actually reached a plateau prior to another upsurge. iii. Three alternative patterns are shown in Figure 17.3.

• Figure 17.3(a) shows a growth–slump–maturity pattern, which is characteristic of small kitchen appliances. Sales grow when the product is first introduced and then fall.

• The cycle–recycle pattern in Figure 17.3(b) often describes the sales of new drugs. The pharmaceutical company aggressively promotes its new drug, producing the first cycle. Later, sales start declining, and another promotion push produces a second cycle.

• In the scalloped pattern shown in Figure 17.3(c), sales pass through a succession of life cycles reflecting the discovery of new product characteristics, uses, or users. iv. Two categories of product life cycles: fads and trends.

• A fad is ―unpredictable, short-lived, and without social, economic, and political significance.‖ • A trend is a direction or sequence of events with momentum and durability. v. Firms need to visualize a market‘s evolutionary path as it is affected by new needs, competitors, technology, channels, and other developments, and change product and brand positioning to keep pace.

CHAPTER

18

DEVELOPING NEW MARKET OFFERINGS

LEARNING OBJECTIVES After studying this chapter, you should be able to: 18.1 Explain how companies develop new offerings.

18.2 Explain how companies generate new ideas.

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18.3 Describe how companies create and validate a prototype.

18.4 Summarize the key aspects of designing a business model for a new offering.

18.5 Explain how companies implement new offering strategies.

18.6 Discuss the key steps in commercially deploying a new offering.

CHAPTER SUMMARY 1. Innovation is the key to developing viable new offerings. Innovation can involve a new technology, a new approach to brand building, a new pricing mechanism, a new way of managing incentives, new channels of communication, or a novel distribution method.

Innovative offerings disrupt existing business models and make companies that fail to adapt to changing market conditions superfluous by devising new ways to create market value.

2. Successful new-product development requires the company to establish an effective organization for managing the development process, which can include product managers (of either the new product or existing products), committees, departments, or venture teams. Increasingly, companies are adopting cross-functional teams, connecting to individuals and organizations outside the company through crowdsourcing and other means, and developing multiple product concepts.

3. New-product development is an iterative process of discovering a novel idea and translating this idea into a viable, successful market offering. New-product development is represented as a sequence of actions (stages) separated by hurdles (gates) that the new offering must overcome. The stage-gate approach divides the innovation process into five key stages—idea generation, concept development, business-model design, offering development, and commercial deployment— separated by gates that serve to validate the actions taken in the previous step.

4. Innovation begins with generating an idea that pinpoints an unmet market need and suggests a novel way to address this need. There are two basic methods of idea generation: top-down idea generation, which begins with identifying a market opportunity, and bottom-up idea generation, which starts with an invention and then seeks to identify an unmet market need that it will satisfy. Top-down idea generation is the preferred approach for developing new offerings.

5. Concept development embodies a potentially viable idea by creating an initial version, or prototype, of the company‘s offering. Concept development aims to reduce market and implementation risk by designing the offering in an expeditious and resource-efficient way. Concept development typically evolves from a description of the product‘s core features to a scaled-down prototype that features the offering‘s core functionality.

6. Designing the business model involves three key components: identifying the target market, articulating the offering‘s value proposition in that market, and delineating the key attributes of the market offering. The target market delineates the market in which a company‘s offering aims to create value. The value proposition describes the value that the company plans to create for target customers, collaborators, and its stakeholders. The market offering defines the ways—product, service, brand, price, incentives, communication, and distribution—in which the company will create, communicate, and deliver market value.

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7. Offering implementation turns the conceptualized offering into an actual offering that is ready for market launch. Implementation involves gathering the necessary resources to put the business model into action and develop the market offering.

8. Commercialization informs target customers about the company‘s offering and makes the offering available to these customers. To minimize risk and resources, companies initially deploy the offering in selected (primary) markets and, upon its success, expand the availability of the offering to the entire target market. Market expansion ramps up the facilities involved in the offering‘s production, promotes the offering to all target customers, and ensures that the offering is available to the entire target market.

9. Two popular frameworks examine customers‘ reaction to new offerings. Rogers’ model depicts the number of new adoptions, rather than total adoptions, at a given point in time and divides customers into five categories—innovators, early adopters, early majority, late majority, and laggards—based on the timing of new-product adoption. Building on Rogers‘ model, Moore’s model argues that in the case of technology products, the adoption of innovations is a discontinuous process marked by distinct adoption gaps, the largest of which is the gap between the early adopters (enthusiasts and visionaries) and the mainstream market.

OPENING THOUGHT Students will be challenged in understanding the new-product process if they are new to the science of marketing. Students, like the general population, believe that new products are just ―thought-up‖ and created! Therefore, the first barrier to effective learning in this chapter is to outline and detail the new-product process. An instructor can use examples from his/her experience in the creation of new products or he/she can set up as an in-class or outside-of-class experiment, the ―creation‖ of a new product by the class or in groups.

Secondly, the consumer-adoption process may be new to some students who have not had any consumer buying behavior classes. This section of the chapter allows for the most discussion: Are you a heavy user? Or do you know someone who is an ―early adopter‖—someone who must have the latest gimmick? When involving the students in the examination(s) of their own lives or the lives of family/friends, the stages of the adoption process can begin to play a more meaningful role.

Finally, personal influence—the effect that another person has on our willingness to try products—should be a concept familiar to the students. The instructor‘s challenge here is to show the students (or make them aware if they have not been aware) that personal influence is a powerful determinant of behavior. The marketer must be cognizant of personal influence in designing a marketing campaign. At this point, class discussion can focus on the ethics of designing marketing campaigns to reach influential opinion-makers to promote products and/or services.

TEACHING STRATEGY AND CLASS ORGANIZATION PROJECTS

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27. At this point in the semester-long Marketing Plan project, there should be a brief write-up by the students as to the consumer-adoption process for their new product. How will the consumer learn about their new product and how quickly will they adopt it? Will the product be targeted to the heavy users and early adopters first, then early and late majorities? What is their estimated time for full adoption?

28. Identify three new products (introduced to the consumer and/or business markets within the last year) and classify them as either: a new-to-the-world product, a new product line, an addition to the existing product line, an improvement and/or revision of existing product(s), or a repositioning of an existing item. For each product selected, identify what challenges you think the developing company faced in marketing this product. What rate of diffusion and consumer adoption do you foresee for these new products?

ASSIGNMENTS Set up a project in which students (individually or in groups) observe consumers using products such as automobiles, use of the internet, use of the ―mall,‖ etc. to see if they can come up with some ideas from their observations.

New products fail at a disturbing rate. Recent studies put the rate at 95 percent in the United States and 90 percent in Europe. In small groups (five students suggested as the maximum), find three products that have ―failed‖ (been introduced then withdrawn from the market by the company) and suggest the cause or causes of these product failures. A listing of some of the reasons why new products fail can be found in the chapter.

In the opening vignette of the chapter, Dyson is noted for being one of the most innovative companies. Other innovative companies exist as well. In a small group, find at least three U.S. companies that have introduced numerous new products into the marketplace over the last two years. What characteristics do all of these companies share? What has been their success rate?

Apple‘s iPod® and iPhone® have been successful new product introductions for the company. It has been suggested that the introduction of iPhone and iPod was targeted at the ―innovators‖— technology enthusiasts and ―early adopters.‖ Question: Can the iPhone and iPod continue their rate of diffusion throughout the adoption curve and reach the early majorities and late majorities users? Or will they become stuck appealing to just those two first segments? In your answer, carefully review the sales, pricing, and products recently introduced by competitors of Apple.

The consumer-adoption process is similar to the product life cycle in its stages of introduction, growth, expansion, and decline. For example, by the time a product reaches the late majority, the product is also entering the latter stages of the product life cycle and price and promotion become increasingly important to maintaining sales. Overlaying these two graphs, comment on what their similarity means for marketers. Why do you think that the length of the adoption process and the product life cycle stages are similar? What does this similarity say about consumer buying practices? What lessons must marketers understand, in terms of new product launches, about these two?

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The chapter presents the stage-gate approach for new-product development. In small groups, and using the techniques described, develop at least three ―new ideas‖ for products and services.

Your group can use ―lateral marketing‖ techniques as well. Share these new ideas with others in the class and conduct an informal poll of which ideas have the most merit for future development.

Companies find good ideas by researching competitors‘ products and services. For this exercise, select a consumer product category (shampoos, soft drinks, snack foods, etc.), purchasing many of the available items in this category. Suggest some incremental innovations that you would like to see for the products/category chosen. For example, would you prefer a different form of bottling for shampoos? A different flavor for soft drinks—beer flavored cola, for example. Do any of the items in your research have glaring weaknesses as in its cleaning properties, smell, or taste that a company can improve upon? Why is competitive research so important for companies to undertake?

END-OF-CHAPTER SUPPORT Marketing Spotlight: Honest Tea 1. What role did marketing research and customer insights play in developing Honest Tea? Suggested answer: The Honest Tea Company identified four market trends in the beverage market. First, the demand for bottled tea had grown tremendously. Second, American consumers had begun to develop a ―tea culture.‖ Third, health consciousness and environmental awareness were increasing, which fueled a subsequent increase in the demand for natural food and beverage products. Fourth, a mindset had developed among consumers who valued the natural, ethical, and exotic aspects of drinking healthful tea. Guided by this market research, Honest Tea designed its bottled tea using only choice tea leaves from around the world, spring water for brewing, and natural sweeteners such as cane sugar or honey.

2. What are the key factors that contributed to the success of Honest Tea? Suggested answer: Honest Tea advertised its tea to three audiences: tea drinkers who found competitors‘ tea too sweet, bottled-water drinkers who desired fresh taste and variety, and diet soda drinkers who wanted no artificial sweeteners. Honest Tea found success in this market.

After Coca-Cola acquired a 40 percent stake in the company, the number of stores carrying Honest Tea increased dramatically. Then, Honest Tea began selling in grocery stores such as Walmart and Costco. Continuing with the health and wellness theme, Honest Tea introduced Honest Kids, a less sugary alternative that contains 45 fewer calories per serving than other children‘s juices. The organic beverage became so successful that it overtook tea as the company‘s best-selling product at retailers such as Amazon and in restaurants such as McDonald‘s and Subway. Coca-Cola also provided Honest Tea with the resources to expand and introduce new-product offerings consistent with the company‘s brand.

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3. How should Coca-Cola grow the Honest Tea brand? Should Honest Tea stay relatively independent, or should it be more closely incorporated into the Coca-Cola company and draw on Coca-Cola‘s corporate culture and business expertise?

Suggested answer: By staying ahead of health awareness trends, the Honest Tea Company has become firmly entrenched as one of Coca-Cola‘s most valuable brands. The acquisition allowed the company to offer healthful new products for different types of consumers, while still operating under the same company mission set in 1998: to create delicious, healthy, organic beverages with honesty, integrity, and an eye toward sustainability. Honest Tea should stay independent and not be incorporated into the Coca- Cola corporate culture because the key factor in Honest Tea‘s success was its clear identification of an untapped segment in the sweetenedbeverage market, providing healthy, low-sugar, lower-calorie beverages.

Marketing Spotlight: WeChat 1. What factors contributed to the phenomenal success of WeChat in China?

Suggested answer: First, Chinese smart-phone unit sales grew exponentially, which meant that a greater number of users could download and utilize the app. Second, WeChat grew by innovations that provided a better user experience. WeChat introduced unique features and Message in a Bottle, which allowed users to send messages to random recipients. WeChat‘s expanded platform allowed users to read and share blog posts and play games on the gaming platform, so WeChat overtook the messaging and social media market.

2. How important was WeChat‘s early-mover advantage in gaining and sustaining its dominant market position?

Suggested answer: WeChat‘s early-mover advantage was very important in gaining and sustaining its dominant market position. The wide variety of features that WeChat offers has helped the application become one of the largest mobile applications in the world. Although WeChat has been a widespread phenomenon mainly in China, Tencent has begun international expansion of WeChat, advertising the application‘s benefits to potential users in the United States, Malaysia, Singapore, and South Africa.

3. Can WeChat replicate its market success outside of China? Why or why not?

Suggested answer: Answers will vary. WeChat can replicate its market success outside of China.

Tencent has begun international expansion of WeChat, advertising the application‘s benefits to potential users in the United States, Malaysia, Singapore, and South Africa. Tesla features a WeChat mini program whereby users can locate charging stations, schedule test drives, and share their experiences about driving a Tesla. Other WeChat mini programs include popular games, shared bike locators, and a payment tool for gas.

DETAILED CHAPTER OUTLINE

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Opening vignette: The development of new offerings shapes a company‘s future.

Without investing in developing new offerings, a company is destined to rely on acquiring new products developed by other companies to ensure sustained growth. The development of new offerings is the engine that drives a company‘s success, enabling it to challenge industry norms and apply imaginative solutions that engage and delight customers. One company that definitely understands how to shape not only its own future, but also that of its customers, is Dyson Corporation. Dyson designed a vacuum cleaner that relied on centrifugal force to separate the dirt from the air. The vacuum cleaner was more effective at picking up dirt than traditional vacuum cleaners. Thus, the following discussion is relevant not only to new products and services but also to the development of the business models of an enterprise.

I. The Process of Developing New Product Offering i. Innovation is the key to developing viable new offerings. Innovation is not limited to the development of new products or services. ii. It can involve a new technology, a new approach to brand building, a new pricing mechanism, a new way of managing incentives, new channels of communication, or a novel distribution method. iii. Innovation is particularly important in industries that are characterized by high technological uncertainty, high market uncertainty, fierce competition, high investment costs, and short product life cycles. iv. Innovative offerings disrupt existing business models and make companies that fail to adapt to changing market conditions superfluous by devising new ways to create market value.

A. The Innovation Imperative i. In an economy characterized by rapid change, continuous innovation is a necessity. ii. Companies that fail to develop new products leave themselves vulnerable to: • changing customer needs and tastes • shortened product life cycles • increased domestic and foreign competition • lack of awareness of the potential market opportunities opened up by new technologies iii. Highly innovative firms are able to repeatedly identify and quickly seize new market opportunities. iv. Firms create a positive attitude toward innovation and risk taking, ―routinize‖ the innovation process, practice teamwork, and allow their people to experiment and even fail. v. Innovation ranges from minor improvements or revisions of existing products to new-to-the-world items that create an entirely new market. vi. Most established companies focus on incremental innovation, entering new markets by tweaking products for new customers, using variations on a core product to stay one step ahead of the market, and creating interim solutions for industry-wide problems.

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vii. Minor variations of existing products are the focus because it is difficult to predict which products will transform a market. viii. Many companies pursue new-to-the-world innovations although they are associated with great risk and cost. ix. New product success: • can improve the corporate image • create a greater sustainable competitive advantage for the company • produce significant financial rewards x. Successful new-product launches are exceptions rather than the rule. xi. New products fail at rates estimated to be as high as 95 percent because of: • Ignored or misinterpreted market research • Overestimates of market size • High development costs • Poor product performance • Inadequate pricing • Ineffective communication • Insufficient distribution support • Proactive competitive response • Lack of organizational support for the new offering • Inadequate return on the company‘s investment xii. The new offering fails to create superior value for its target customers in a way that sufficiently benefits the company and its collaborators.

B. Managing Innovation i. Creating an environment that fosters innovation and encourages the development of new products is paramount. Popular approaches include: • Departments in charge of current offerings. A common approach to foster and manage innovation is to assign responsibility for developing new products and services to managers in charge of a given product category, brand, or market.

• New-product departments. Large companies often establish a new-product department headed by a manager with substantial authority and access to top management.

• Innovation centers. Some firms open innovation centers in new geographic locations to better design new products for those regions.

• Venture teams. Another approach to driving innovation involves assigning newproduct development to venture teams. These intrapreneurs are relieved of other duties and given a separate budget and a longer time frame than is typical.

• Communities of practice. Another arrangement for new-product development involves creating forums in which employees from different departments are encouraged to share their knowledge and skills.

• Cross-functional teams. Creating project-specific teams combining different skill sets is another popular approach to fostering innovation.

C. The Stage-Gate Approach to Developing New Offerings i. Many top companies use the stage-gate system to divide the innovation process into stages, with a gate or checkpoint at the end of each stage. ii. The ultimate goal of using a stage-gate approach to new-product development is to

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ensure market success in a way that minimizes risk and optimizes allocation of the company‘s resources. iii. The stage-gate framework is a streamlined version that comprises five stages (See Fig. 18.1): • Idea generation: uncovering an unmet customer need and coming up with an idea about how to fulfill this need better than the available alternatives.

• Concept development: the development of an initial version (prototype) of the offering that has the core functionality of the proposed offering.

• Business-model design: the validated concept then becomes the core of a business model.

• Offering development: to fulfill the needs of its target customers and create value, the company develops the resources to create the offering and develop a marketready version.

• Commercial deployment: the offering is commercially deployed, making it available to customers. iv. The stage-gate approach has three aims. To develop: • a desirable offering that target customers will find attractive • a technologically feasible offering that the company will find doable • a viable offering that will create value for the company and its collaborators.

D. The Stage-Gate Approach to Developing New Offerings: An Illustration i. Consider a food-processing company introducing a new product that will increase its market presence and revenue.

• Idea Generation and Validation. After exploring a number of alternative ideas, the company decides to focus on creating a powder to add to milk to increase its nutritional value and taste.

• Concept Development and Validation. The company has to articulate the specific attributes: product formulation, brand name, incentives, communicating, and delivery.

• Business-Model Design and Validation. The company must make the case for why customers will buy the company‘s offering and its benefits.

• Offering Implementation and Market Testing. The company creates the product and conducts a market test.

• Commercial Deployment. To minimize risk and the initial outlay of resources, the company chooses to deploy its product in selected markets.

II. Idea Generation A. Generating Viable Ideas i. Top-down idea generation begins with identifying a market opportunity followed by developing an offering specifically designed to address this opportunity. ii. Bottom-up idea generation starts with an invention and then seeks to identify an unmet market need. The invention is driven by technological innovation rather than by an identified market need. iii. Top-down innovation is the preferable method of idea generation, identifying value-creation opportunities.

B. Idea Validation i. Idea validation examines the key assumptions of an idea to determine its soundness. ii. This process involves assessing the offering‘s: CS-201 Copyright © 2022 Pearson Education, Inc. Browsegrades.net

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Desirability: whether the offering successfully addresses an important unmet customer need • Viability: whether the offering will simultaneously benefit the company iii. Companies are prone to two types of errors when they evaluate proposed ideas.

See Fig. 18.2.

• The first error involves the failure to reject an idea that has little or no merit.

• The second error is based on an opposite miscalculation—the rejection of a good idea.

C. Market Research Tools for Ideas Generation and Validation i. Exploratory research is a mainstay of idea generation and validation. ii. Common market research tools for idea generation and validation: • Observing customers. Examining people‘s behavior in their natural environment can be an effective way to gain insights into customer needs.

• Interviewing customers. Questioning customers to uncover their unmet needs and gather insights about novel ways in which these needs can be met.

• Interviewing employees. Employees can be a source of ideas for developing new products and services.

• Interviewing experts. Firms tap external sources of new ideas, including scientists, engineers, patent attorneys, university and commercial laboratories, industrial consultants and publications.

• Analyzing the competition. Companies find good ideas by researching the products and services of other companies.

• Crowdsourcing lets companies engage outsiders in the new-product development process and receive either unique expertise or a different perspective on a problem.

III. Concept Development A. Prototyping i. The prototype is a working model of the offering that aims to flesh out the original idea and weed out problems before the offering is created. ii. Concept development typically evolves from a description of the product‘s core features into the scaled-down prototype that introduces the offering‘s core concepts to target consumers. iii. There are two types of prototype tests: alpha testing, which involves an evaluation of the product within the firm, and beta testing, which tests the product with customers.

B. Concept Validation i. Concept validation assesses the soundness of the core concept by addressing the technological feasibility of the offering and the way target customers view its desirability. ii. Concept development and validation are guided by experimental studies designed to test the prototypes. iii. Another approach is conjoint analysis, asking respondents to evaluate different attributes to determine the value that consumers place on specific attributes of an offering.

IV. Business-Model Design

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A. Designing the Business Model i. Business-model design also takes the offering‘s viability—its value-creating capacity—into consideration, in addition to concept development‘s focus on the technological feasibility and the desirability of the offering. ii. Designing the business model involves three key components. See Fig. 18.3.

• The target market is the market in which the company has chosen to create value with its offering.

• The value proposition details the type of value that the company plans to create for its target customers and collaborators.

• The market offering describes how the company will create, communicate, and deliver value to its target customers, collaborators, and the company stakeholders.

B. Business-Model Validation i. Business-model validation aims to assess the offering‘s ability to create market value on three key dimensions: • Desirability indicates the extent to which target customers perceive the offering to be attractive.

• Feasibility indicates the extent to which the company can create an offering that delivers the functionality desired by customers.

• Viability indicates the extent to which an offering can create value for the company. ii. Demand forecasts are built on one of three information bases: what people say, what people do, or what people have done.

V. Offering Implementation A. Developing the Core Resources i. To succeed, a company must have the necessary resources to implement its business model. ii. To gain the resources, a company might adopt one of two different strategies.

• First, the company might create resources by developing assets and capabilities or by acquiring resources from a third party.

• Alternatively, rather than building its own resources, a company might choose to collaborate with other entities.

B. Developing the Market Offering i. Turning the prototype into a market-ready commodity involves creating the final product and service but also: • Building the brand • Setting both retail and wholesale prices • Determining the type of sales promotions to be used • Developing a plan to effectively communicate the benefits of the offering • Making it available to target customers ii. The development of an offering often involves advanced prototyping and market testing to ensure that the offering will succeed in creating market value. iii. Many companies skip test marketing despite its benefits and rely on faster and more economical testing methods. iv. The development of a streamlined version of the offering—referred to as a minimum viable offering—enables the company to test the offering‘s market performance before proceeding to develop the full-scale offering.

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VI. Commercial Deployment A. Selective Market Deployment i. Commercialization informs target customers about the company‘s offering and makes the offering available to these customers. ii . The selective market deployment approach allows for testing in a natural environment to observe how target customers, competitors, and company collaborators react to the offering. iii. The subset of target customers to which the offering will initially be made available is referred to as the primary target. iv. Some products catch on immediately (e.g., roller blades), whereas others take a long time to gain acceptance (e.g., diesel engine autos).

B. Market Expansion i. Expanding the market to include all customers for whom the company‘s offering aims to create value is the next logical step after the company‘s offering has been successfully launched in its primary target market. ii. Market expansion involves three activities: • Ramping up the facilities involved in the offering‘s production • Promoting the offering to all target customers • Ensuring that the offering is available to the entire target market iii. Broader markets usually involve a wider range of customers, which necessitates introducing variants to accommodate the different needs and preferences of target customers.

CHAPTER

19

BUILDING CUSTOMER LOYALTY

LEARNING OBJECTIVES After studying this chapter, you should be able to: 19.1 Explain how a company should balance its acquisition and retention efforts.

19.2 Discuss how a company can manage customer satisfaction and loyalty.

19.3 Describe how companies manage customer relationships.

19.4 Discuss how a company should manage customer lifetime value.

CHAPTER SUMMARY 1. Customer loyalty reflects a deeply held commitment to patronize a particular product, service, or brand for future purchase and consumption occasions. Loyalty is a continuum, with different levels of loyalty varying in terms of their strength and ranging from satisfaction with the company‘s offering to advocacy and evangelism.

2. Customer satisfaction is the key to building customer loyalty. Satisfaction is a person‘s feelings of pleasure or disappointment that result from comparing the actual performance of a

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product or service to expectations. Recognizing that high satisfaction leads to high customer loyalty, companies must ensure that they meet or exceed customer expectations.

3. Customer satisfaction, product and service quality, and company profitability are intimately connected. Higher levels of quality result in higher levels of customer satisfaction, which support higher prices and (often) lower costs.

4. To ensure sustainable growth, a company must not only attract new customers; it must also keep them and increase their business. Losing profitable customers can dramatically affect a firm‘s profits. Three of the most effective strategies for building customer loyalty are interacting closely with customers, developing loyalty programs, and building brand communities.

5. Customer relationship management (CRM) is the process of carefully managing detailed information about individual customers and all customer touch points to maximize loyalty.

The ultimate goal of CRM is to develop programs to attract and retain the right customers and to meet the individual needs of valued customers. Popular strategies for enhancing customer relationship management include customization, customer empowerment, customer word of mouth, and customer complaints.

6. Customer lifetime value (CLV) reflects the monetary equivalent of the value that customers will create for the company during their tenure with the company. CLV can refer to the value created by an individual customer, or it can refer to the cumulative value created by all of the company‘s customers—the sum of lifetime values of all customers. The aim of customer relationship management is to produce high customer lifetime value.

7. A company should aim to build customer value across all occasions on which a customer encounters its products, services, or brands—from actual experience to personal or mass communication to casual observation. Companies that fail to consistently deliver superior customer value are likely to see their customer base eroding over time.

8. Marketing managers must calculate the customer lifetime value of their customer base to understand the profit implications. Customer profitability analysis helps marketers identify their most valued customers and develop strategies to create value for these customers in a way that fosters long-term customer loyalty. When measuring customer lifetime value, it is important to take into account not only the monetary value each customer is likely to directly generate for the company but also the strategic value this customer will create by endorsing the company and its offerings to others.

OPENING THOUGHT Although most students understand the concept of ―buying,‖ some will have difficulty in understanding the differences between total customer value and total customer cost. It will be beneficial for long-term understanding and retention to cover what the definition is and what it is not. Secondly, the distinction between satisfaction and total customer satisfaction for the consumer might be challenging for some students. Some students may have a hard time understanding the distinction between perception and expectation. Finally, it might be necessary to reemphasize the concepts of Customer Relationship Management (CRM), customer databases, and database mining often in the lecture. However, most of the students today are proficient in

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Case-Oriented Syllabus

internet usage and can cite examples of relationship marketing from their own favorite sites such as Amazon.com.

TEACHING STRATEGY AND CLASS ORGANIZATION PROJECTS C) At this point in the semester-long marketing plan project, students should have completed their value proposition for the fictional product, defined how they will deliver satisfaction and maintain customer loyalty.

D) Have students (in groups or individually) select a local firm in their community, or a local division of a national firm, and seek permission to interview their corporate executives on their corporation‘s definition of customer satisfaction, loyalty, and what their particular firm does to foster such customer relations. This project can be combined with the project on marketing research and as such, students can create questionnaires suitable for mailing to these executives. The students can then present these findings to the class in a group or by individual presentations. This could be a full-semester project or limited to a few weeks of the semester.

ASSIGNMENTS Key manufacturers and others must be concerned with how customers view products (customer satisfaction perceptions) being disseminated throughout the ―electronic world‖ via the internet.

No longer can one discount the ―power of the mouse‖ for affecting potential customers. In small groups, students are to select a particular firm or product and are to research what is being said on the internet regarding this company/product. What effects does this type of dissemination of consumer opinions via the internet have on the company‘s marketing strategies? What can the company do to stem the tide of such comments? How does a company defend itself against blatantly untrue consumer opinions?

Have each of the students read Michael Tsiros, Vikas Mittal, William T. Ross Jr., ―The Role of Attributions in Customer Satisfaction: A Reexamination,‖ Journal of Consumer Research, 31 (September), 2004, pp. 476-483, and comment on their findings.

Customer relationship management is a current business ―buzz word.‖ Customer Relationship management: https://www.investopedia.com/terms/c/customer_relation_management.asp Retrieved on March 18, 2021.

Students can be directed to do an internet research project from named marketing/business journals on the subject of customer relations management (the chapter‘s endnotes can provide a good source of leads for the students). Each student can be directed to research, read, and compile a report on their findings from a minimum of five articles from five different marketing and business magazines, such as Fortune. The student‘s report is to comment on how these articles compare, complement, or contrast the material contained in this chapter.

The research firm J.D. Powers and Associates (jdpower.com) lists eight categories of products for consumers to research before purchasing the product or service. Breaking up the class into

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eight groups, have the students research the top performers for each category and be able to share their findings as to what characteristics, policies, procedures, and vision these top rated companies have in common. Is there a ―common‖ link among all of the winners? Are there differences? In terms of the material contained in this chapter, how would you explain these similarities and differences?

END-OF-CHAPTER SUPPORT Marketing Spotlight: Stitch Fix 1. How does Stitch Fix benefit from using market data to gather customer insights?

Suggested answer: The algorithms developed by Stitch Fix improved the success of personalized styling dramatically, which helped to manage inventory and ensure customer satisfaction. As customers shared more information with the company, Stitch Fix clothing recommendations became more and more precise, and the company‘s many prediction techniques kept customers subscribed for long periods of time. Sales data showed that a quarter of Stitch Fix customers kept their subscription for at least nine months. Furthermore, Stitch Fix‘s analytics became so sophisticated that they could predict what stage of the buying cycle the customer was in. The data showed that most customers began their Stitch Fix subscription when their closets were in need of an overhaul, so they would order multiple boxes in a short period of time; as their closets filled, customers would become more and more specific in their preferences. The combination of these two factors helped Stitch Fix adjust different levels of inventory to different types of apparel needs, ensuring that less inventory would be returned to the warehouse.

2. What role does customization play in the Stitch Fix business model? Can this business model be easily replicated by competitors?

Suggested answer: Customization is key to the business model. Stitch Fix‘s machine learningbacked algorithms were combined with information that required a human stylist‘s judgment, such as fashion trends and personal requests made by the customer.

The algorithms developed by Stitch Fix improved the success of personalized styling dramatically, which helped to manage inventory and ensure customer satisfaction.

As customers shared more information with the company, Stitch Fix clothing recommendations became more and more precise, and the company‘s many prediction techniques kept customers subscribed for long periods of time. This business model would be difficult to replicate because of the use of data analytics, artificial intelligence, and machine learning.

3. What are the pros and cons of Stitch Fix using artificial intelligence and machine learning in designing market offerings?

Suggested answer: Pros: The company was founded on the idea that people don‘t want to go to stores to buy clothes or choose between many assortments. Stitch Fix is a response to that shopping preference and a response to the wish for convenience. The clothes are delivered to a customer who can select some items and return the rest. The clothes are customized based on the buyer‘s preferences. Cons: Fashion trends change quickly, and items that are perceived as outof-style cause the build-up of costly inventories.

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Case-Oriented Syllabus

Marketing Spotlight: Caesars Entertainment 1. What is the role of customer relationship management in the entertainment industry?

What is the relationship among customer satisfaction, customer loyalty, and company profitability?

Suggested answer: Customer relationship management plays a critical role in the highly competitive entertainment industry. By increasing customer satisfaction and customer loyalty, a company increase profitability. Looking into the data Harrah‘s had collected over the years, the CEO noticed that many patrons visited different casino companies. He believed that by reducing customer ―disloyalty,‖ Harrah‘s could massively increase sales without the need to open new locations. He noticed that 26 percent of the gamblers who visited Harrah‘s locations generated 82 percent of the company‘s revenue. The CEO concluded that by rewarding customers differently based on the frequency of their visits and playing behavior, Harrah‘s could improve customer loyalty and increase its sales.

2. What are the key aspects of Harrah‘s customer loyalty program? What are the key drivers of its success?

Suggested answer: The loyalty program rewarded customers based on the tier in which they were categorized: Gold, Platinum, or Diamond. These categories reflected the customer‘s expected lifetime value to the company, calculated by the estimated frequency of visits and amount spent per visit. Each tier provides customers with different perks, such as skipping the lines at restaurants and reception desks for Platinum and Diamond cardholders.

Diamond cardholders also receive benefits that include personal visits from chefs at Harrah‘s restaurants and personalized treatment from staff at hotel locations. In addition to redesigning its loyalty program, the company also overhauled its customer service to improve the overall customer experience. Exceptional service was crucial to winning the loyalty of customers.

Harrah‘s began providing management with more tools and information to effectively hire and train new employees. This resulted in a lower turnover rate and a superior customer service team.

3. How should Harrah‘s use the recent developments in data analytics, machine learning, and artificial intelligence to enhance customer loyalty and create shareholder value?

Suggested answer: Students can offer their ideas on how Harrah‘s can best use data analytics, machine learning, and artificial intelligence to enhance customer loyalty and create shareholder value. The more data collected about a customer the better Harrah‘s can customize the visit. If Harrah‘s offers babysitting to families because the demographic data has been collected and stored, then Harrah‘s fills a need for a family and encourages loyalty to Harrah‘s. On the other hand, if a customer is alone, babysitting is not needed or wanted. In that case, meals might be valued. Tailoring the benefit to the customer is key. The use of data analytics and artificial intelligence increase shareholder value, the value given to stockholders in a company based on the ability to sustain and grow profits over time. The only caveat is that collecting data must not violate a customer‘s privacy and personal information must be protected.

DETAILED CHAPTER OUTLINE

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Opening Vignette: Generating a sale is the beginning of building and managing customer relationships for the purpose of creating a loyal customer base. Cultivating loyal customers is a priority for market-driven companies that seek to gain and defend their market position. Without building customer loyalty, a company will have to constantly invest in acquiring new customers to replace disloyal customers. From its humble beginnings, SoulCycle was able to scale up its business model by relentlessly focusing on creating a unique workout routine that builds an emotional bond with its customers.

Customer-centered companies are using technology to connect with customers and build customer relationships.

I.

Managing Customer Acquisition and Retention i. The ability to effectively acquire new customers and retain existing ones has a direct impact on the company‘s bottom line. ii. A company must have a clear understanding of the customer acquisition funnel and effectively balance its customer acquisition and retention efforts.

A. The Customer Acquisition Funnel i. There are five phases of the customer acquisition funnel. See Fig. 19.1.

• Awareness: the gateway to customers‘ interaction with the company‘s offering • Appeal: a process of selective elimination • Ask: customers seek additional information about the offerings • Act: a transition from information gathering and evaluation to an action • Advocate: customers‘ reactions following their consumption experience B. Balancing Customer Acquisition and Customer Retention i. Effective management of customer acquisition and retention involves clear understanding of customer conversion and retention rates.

• By calculating conversion rates—the percentages of customers at the different stages who move to the next stage—managers identify any barrier to building a loyal customer base.

• The customer acquisition funnel emphasizes the importance of attracting new customers and retaining existing ones. ii. Satisfied customers are the company‘s customer relationship capital. The customer base is the number and value of customers who will do business with the new firm if the company were sold.

• To reduce the defection rate, the company must define and measure its retention rate.

II. Managing Customer Satisfaction and Loyalty i. Loyalty is a deeply held commitment to rebuy or repatronize a preferred product or service in the future despite situational influences and marketing efforts having the potential to cause switching behavior.

• Customer loyalty can be thought of as a continuum, with different levels of loyalty varying in strength.

• Loyalty can range from satisfaction with the company‘s offering to advocacy and evangelism from customers who think of the offering as a part of their own identity and feel responsible for its success. ii. Customer satisfaction is the key to building customer loyalty.

A. Understanding Customer Satisfaction CS-209 Copyright © 2022 Pearson Education, Inc. Browsegrades.net

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i. Satisfaction is a person‘s feeling of pleasure or disappointment that results from comparing a product or service‘s perceived performance (or outcome) to expectations.

• If the performance or experience falls short of expectations, the customer is dissatisfied.

• If it matches expectations, the customer is satisfied.

• If it exceeds expectations, the customer is highly satisfied or delighted.

• Customer assessments of product or service performance depend on many factors, including the type of loyalty relationship the customer has with the brand.

• Although the customer-centered firm seeks to create high customer satisfaction, increasing customer satisfaction by lowering price or increasing services may result in lower profits.

• Expectations result from past buying experience, friends‘ and associates‘ advice, public information and discourse, and marketers‘ and competitors‘ information and promises. ii. If a company raises expectations too high, the buyer will be disappointed.

If it sets expectations too low, it won‘t attract enough buyers. iii. For customer-centric companies, customer satisfaction is both a goal and a marketing tool.

B. Product and Service Quality as a Driver of Customer Satisfaction i. Satisfaction depends on product and service quality.

• Quality is the totality of features and characteristics of a product or service that bear on its ability to satisfy stated or implied needs. ii. This is clearly a customer-centered definition. The seller has delivered quality whenever its product or service meets or exceeds customers‘ expectations. iii. A company that satisfies most of its customers‘ needs most of the time is a high-quality company, but performance and consistency differ: • Performance reflects the overall functionality of a company‘s products and services.

• Consistency reflects the degree to which a company‘s performance remains at the same level over time. iv. Higher levels of quality result in higher levels of customer satisfaction, which support higher prices and (often) lower costs. v. Marketing plays an especially important role in helping companies identify and deliver high-quality goods and services to target customers. Marketing tasks: • Correctly identify customers‘ needs and requirements.

• Communicate customer expectations properly to product designers.

• Make sure customers‘ orders are filled correctly and on time.

• Check that customers have received proper instructions, training, and technical assistance in the use of the product.

• Stay in touch with customers after the sale to ensure they are, and remain, satisfied.

• Gather customer ideas for product and service improvements and convey them to the appropriate departments.

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C. Measuring Customer Satisfaction i. Firms measure customer satisfaction regularly for customer retention.

A highly satisfied customer: • stays loyal longer • buys more as the company introduces new and upgraded products • talks favorably to others about the company and its products • pays less attention to competing brands • is less sensitive to price • offers product or service ideas to the company • costs less to serve than new customers because transactions can become routine. ii. Customers define good performance differently. iii. Periodic surveys can track customers‘ overall satisfaction directly and ask additional questions to measure: • repurchase intention • likelihood or willingness to recommend the company and brand • specific attributes or benefits related to customer satisfaction. iv. Companies need to monitor their competitors. They can monitor their customer loss rate and contact those who have stopped buying or hire mystery shoppers to pose as buyers and report on strong and weak points.

D. Building Customer Loyalty i. Too many companies suffer from high customer defection. ii. Prioritizing customer retention by building customer loyalty is more effective than trying to acquire customers who leave when they find a better deal. iii. Companies that want to build loyalty should: • Interact closely with customers • Develop loyalty programs/frequency programs/club membership programs • Build brand communities—specialized communities of consumers and employees whose identification and activities focus around the brand, characterized by: o A connection to the brand, company, product or other community members o Shared rituals, stories, and traditions that help convey the meaning of the community o A shared moral responsibility or duty to both the community as a whole and individual community members o Brand communities can rise organically from brand users or can be company-sponsored/facilitated. iv. Recommendations for making online brand communities more effective: • Enhance the timeliness of information exchanged.

• Enhance the relevance of information posted.

• Extend the conversation.

• Increase the frequency of information exchanged.

III. Managing Customer Relationships CS-211 Copyright © 2022 Pearson Education, Inc. Browsegrades.net

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i. Companies are using information about customers to build long-term relationships. ii. Customer relationship management is the process of carefully managing detailed information about individual customers and all customer ―touch points‖ to maximize loyalty. iii. Customer value management focuses on the analysis of individual data on prospects and customers to develop marketing strategies to acquire and retain customers and drive customer behavior. iv. Based on what they know about each valued customer, they can customize market offerings, services, programs, messages, and media. v. Strategies for enhancing customer relationship management: • Customization • Customer empowerment • Managing customer word of mouth • Dealing with customer complaints.

A. Customization i. Customization makes the company‘s offering as personally relevant as possible to as many customers as possible. ii. To customize the consumer experience, companies use call centers, online, digital, and mobile tools plus artificial intelligence and data analytics to foster contact between company and customer. iii. To develop an effective customer relationship management program, marketers must know their customers. iv. Permission marketing is the practice of marketing to consumers only after gaining their expressed permission.

• Permission marketing implies that marketers can develop consumer relationships by sending messages only when the consumers wish to be engaged with the brand.

• Permission marketing presumes that consumers know what they want, even though they often have undefined, ambiguous, or conflicting preferences.

B. Customer Empowerment i. Customer empowerment, means that companies must strengthen their relationship with customers and engage with them in new ways. ii. Customers are empowered to become evangelists and demonstrate their passion. iii. Although new technologies help customers assist or become involved in a brand‘s marketing, they can also help them avoid marketing (e.g., web browsers feature ad-blocking). iv. To successfully exploit the potential of social media, companies need to design experiences that deliver tangible value in return for customers‘ time, attention, endorsement, and data. v. Many businesses overlook social media‘s capabilities for: • delivering customer value while capturing customer insights • monitoring the brand • conducting research

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• soliciting new-product ideas.

C. Managing Customer Word of Mouth i. Recommendations from other consumers are becoming an increasingly important decision factor. ii. In an atmosphere of heightening mistrust of some companies and their advertising, online customer ratings and reviews play a growing role in the customer buying process.

• Companies recognize the power of consumer reviews and have begun to display them in their stores (e.g., Best Buy).

• Marketers may benefit from tracking social media traffic to identify popular blogs.

• Online word of mouth is especially critical for small brands. iii. When consumers can better learn the advantages and disadvantages of products through negative reviews, fewer product returns may result, saving retailers and producers money.

D. Dealing with Customer Complaints i. Customers whose complaints are satisfactorily resolved tell five people about the good treatment they received. ii. The average dissatisfied customer gripes to 11 people! iii. Each person told about a negative experience will tell other people, so the number exposed to bad word of mouth may grow exponentially. iv. The following practices help recover customer goodwill: • Set up a seven-day, 24-hour, toll-free hotline (by phone, fax, or e-mail).

• Contact the complaining customer as quickly as possible.

• Accept responsibility for the customer‘s disappointment.

• Resolve the complaint swiftly to the customer‘s satisfaction. v. Firms worry about the negative effects of cranky customers communicating online; however, marketers contend that the positives of social media outweigh the negatives. vi. One strategy is to shape the public image during quiet times and leverage that goodwill in paid or other media during difficult times.

IV. Managing Customer Lifetime Value i. The 80-20 rule states that 80 percent or more of the company‘s profits come from the top 20 percent of its customers. ii. Companies need to concern themselves with and how efficiently they create value from the customers and prospects available.

• It‘s not always the largest customers who demand considerable service and deep discounts or who yield the most profit.

• The smallest customers pay full price and receive minimal service, but the costs of transacting with them can reduce their profitability.

• Midsize customers who receive good service and pay nearly full price are often the most profitable.

A. The Concept of Customer Lifetime Value (CLV) i. CLV reflects the monetary equivalent of the value that customers create for the company during their tenure. ii. CLV can refer to the value created by a customer, or it can refer to the CS-213 Copyright © 2022 Pearson Education, Inc. Browsegrades.net

Case-Oriented Syllabus

value created by all of the customers—―the sum of lifetime values of all customers.‖ • Customer lifetime value is also called customer equity. iii. Customer profitability analysis is conducted with activity-based costing, which identifies the real costs for serving each customer—the costs of products and services based on the resources they consume.

• Companies that fail to measure their costs correctly fail to measure their profit correctly and can misallocate their marketing effort.

B. Customer Lifetime Value and Brand Equity i. The customer equity perspective focuses on bottom-line financial value and yields quantifiable measures of financial performance. ii. The brand equity perspective emphasizes strategic issues in managing brands and creating and leveraging brand awareness and image with customers.

• Researchers argue that a focus on either brand equity or customer equity depends on the way a company creates market value. iii. The distinction between focusing on brand or customer equity is attributed to the following factors: • Firms that utilize subscription models—such as health clubs—are more likely to find value in customer equity; firms without contractual services focus on brand equity.

• Companies that identify their customers and assess their profitability focus on customer equity; companies without a link between a customer‘s behavior and performance outcomes focus on brand equity.

• Companies that produce self-expressive products such as cars focus on brand equity.

• Companies that cannot obtain customer-level data or have direct contact with their customers focus on brand equity.

• Service-oriented companies are more likely to focus on customer equity than are product-oriented firms.

C. Building Customer Lifetime Value i. Winning companies improve that value by excelling at strategies like the following: • Improving customer service.

• Engaging customers.

• Enhancing the growth potential of each customer.

• Managing unprofitable customers.

• Rewarding the most profitable customers. ii. A company should build customer value across all of its touch points—any occasion when a customer encounters the brand and product.

D. Creating Customer Loyalty by Building Trust i. Trust is established and maintained via three important building blocks: • One building block is competence. Companies and brands build competence trust when the job is completed effectively.

• Another building block is honesty. Firms build honesty trust by telling the truth and keeping promises.

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•

A third building block is benevolence. Companies and brands build benevolence trust when they demonstrate concern about the interests of customers and employees. ii. Research has shown that each of the three building blocks is differentially affected by positive and negative information. iii. Trust is more important early in the relationship and becomes less important once a relationship is established.

• Once trust is established, companies and brands benefit from the trust that employees and customers have. iv. The life-time value of long-term customers is high, and perceptions of trust violations in long-term relationships have more negative effects than violations in shorter-term relationships.

E. Measuring Customer Lifetime Value i. Customer lifetime value is calculated as the net present value of the stream of future profits expected over the customer‘s lifetime purchases. ii. Can add up to thousands of dollars or even run to six figures iii. Customer lifetime value calculations provide a formal quantitative framework for planning customer investment, and they help marketers adopt a long-term perspective. iv. Common factors in CLV models include: • the revenues generated from a given customer • the cost of acquiring and servicing this customer • the probability of customer repeat buying in the future • the customer‘s likely tenure with the company • the discount rate (cost of capital for the firm). v. Marketers who use customer lifetime value concepts take into account the shortterm, brand-building marketing activities that help increase customer loyalty. vi. A customer‘s value to a company depends on the likelihood of making referrals and engaging in positive word of mouth.

CHAPTER

20

TAPPING INTO GLOBAL MARKETS

LEARNING OBJECTIVES After studying this chapter, you should be able to: 20.1 Explain how companies decide whether to go abroad.

20.2 Discuss the factors that companies consider in deciding which global markets to CS-215 Copyright © 2022 Pearson Education, Inc. Browsegrades.net

Case-Oriented Syllabus

enter.

20.3 Summarize the strategies companies use to enter global markets.

20.4 Explain how companies can adapt their marketing strategies for global markets.

CHAPTER SUMMARY 1. Going abroad involves two major types of risks: general risks associated with entering a new market and specific risks associated with doing business in a different country.

When deciding to go abroad, a company must carefully assess the risk–reward ratio for each global market it considers entering.

2. Deciding whether to go abroad is the first of several decisions a company must make when developing its global strategy. If the company has concluded that going abroad is indeed the best course of action, it must then make a set of more specific decisions, including which markets to enter, how best to enter these markets, the specific marketing program for each market, and the most effective way to structure the marketing organization in each country.

3. Once a company decides to target a particular country, it must choose the best mode of entry with its brands. Its broad choices are indirect exporting, direct exporting, licensing, joint ventures, and direct investment, ordered in terms of ascending commitment, risk, control, and profit potential.

4. An important decision for a company entering a new global market is to what extent it will adapt its marketing strategy to local conditions. A standardized marketing program worldwide promises the greatest consistency across individual countries. In contrast, an adapted marketing program tailors a company‘s offering to the specifics of each country.

5. Developing global product strategies requires knowing what types of products or services are easily standardized and what adaptation strategies are appropriate. In deciding how extensively to adapt their marketing programs at the product level, firms can pursue a strategy of straight extension, product adaptation, or product invention.

6. When entering global markets, a company must also decide how to position its brand and whether or how much to adapt the brand to the specifics of each particular market. It also must consider the country-of-origin effects that are likely to influence the way the brand is perceived in the particular market.

7. A company can benefit from adapting its price and communication strategies to the local market. The level of adaptation can vary from minor variations in the marketing program to entirely different pricing and communication policies for each target country.

8. At the distribution level, firms need to take a whole-channel view of distributing products to the final users. Firms must always consider the cultural, social, political, technological, environmental, and legal limitations they face in other countries.

OPENING THOUGHT In today‘s multicultural world, students will have been exposed to products marketed across geographic or national boundaries, so the student‘s ability to grasp this concept should be

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straightforward. What could present a challenge is the extent of marketing planning and detail needed by the firm in making their marketing decisions nationally and internationally.

The instructor is encouraged to open up the class discussions to students from other nations present in the class, and to ask these students to describe the shopping experiences in their homeland. Students with international business or international marketing experiences should be especially encouraged to present to the class descriptions of what marketing is like outside of the United States.

TEACHING STRATEGY AND CLASS ORGANIZATION PROJECTS 1. If the project is to be exported to another country, then student‘s submissions regarding how the product is to be distributed should be included here, otherwise this begins the presentation phase of the project, and student groups should begin their presentations to the class.

2. The instructor is encouraged to challenge the students by assigning students to find their favorite product‘s corporate office. Examples may include Nestlé, Nike, Suzuki, Nokia, Ben & Jerry‘s, and others. Beyond just discovering examples of global or international firms, students should uncover via financial information, the origin of sales by country. Such an exercise will provoke interesting classroom discussions as the students begin to realize the global nature of business in today‘s international marketplace.

ASSIGNMENTS Have students read the March 8, 2014 Economist article titled ―Business in emerging markets: Submerging hopes,‖ at http://www.economist.com/news/leaders/21598640-boom-emergingmarket-investment-rich-world-firms-has-led-plenty. Ask students how marketers should balance current risks, and lower than expected returns, with future potential. Share student comments in class.

Major marketers are using the power of the internet to engage in global e-commerce. Visit a foreign website for an American company and evaluate the similarities and differences between the U.S. website and its foreign website. What differences/similarities strike you as significant?

Could the differences be readily adapted to other foreign countries?

Finding free information about trade and exporting has never been easier. Websites such as www.cia.gov, www.ita.doc.gov, www.exim.gov, and www.sba.gov provide valuable information for marketers. Visit each site and compile a list of information that you, as a marketer, might find valuable in deciding how to market internationally.

Table 20.3 shows some famous ―blunders‖ in international marketing. Students should research these examples (and find others) and provide insight into why they think such ―blunders‖ were

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allowed to occur. This can lead to a classroom discussion into the complexity facing many firms in international and multi-cultural marketing.

Have the students prepare an international campaign and marketing plan for one consumer product. Ask them to refer to Global Marketing Pros and Cons (Table 20.1) and, being cognizant of these international companies, decide on how much to adapt their marketing strategy to local conditions. Students should pick an international corporation and in researching the products sold by the firm overseas, see if there are some significant differences in brand characteristics for each country. For example, Pringles, Always, and Toyota have made some changes in product features, packaging, channels, and pricing in different global markets. The assignment is for the students to provide additional examples of products changed to suit the country‘s consumers while at the same time, maintaining the international brand name.

END-OF-CHAPTER SUPPORT Marketing Spotlight: IKEA 1. What are some of the things IKEA is doing well to reach consumers in different markets? What else could it be doing?

Suggested answer: By understanding each country‘s different consumers and cultural nuances, IKEA is able to create one-size-fits-all solutions instead of tweaking its products for different markets. Many customers spend time in IKEA‘s full-size sample rooms. Because the aesthetic of each room greatly influences whether a customer will make a purchase, IKEA shows how the same products can appeal to different regional customers. IKEA‘s success can largely be attributed to the adaptation of its business model to different markets. IKEA‘s market research in different regions has helped the company accelerate its expansion across the world and become a relevant competitor in each market. What will determine IKEA‘s future success is continuing to understand each market segment and fine-tuning its stores appropriately.

2.IKEA has essentially changed the way people shop for furniture. Discuss the pros and cons of IKEA‘s strategy, especially as the company continues its global expansion.

Suggested answer: Answers will vary. Pros: IKEA‘s business model is based on mass production of the same types of products, which allows it to benefit from large economies of scale. By securing low costs from suppliers, IKEA charges low prices to consumers. Products are designed to be sleek, functional, and minimalistic to appeal to the greatest number of budgetminded shoppers. IKEA keeps its prices low by having customers assemble the furniture themselves. IKEA furniture is packed into cardboard boxes. IKEA removes as much air as possible from this ―flat packing‖ to allow furniture to fit inside shipping containers without wasting any space, thus reducing the costs of shipping.

Cons: Despite its success in Europe, IKEA has faced problems replicating the business model globally. IKEA identified strategic challenges in each market and had to adjust accordingly. For example, one of IKEA‘s main value propositions in Europe and North America is its low-cost furniture. In China, however, IKEA‘s furniture is priced slightly higher. IKEA realized that the same value proposition was not in place, so it targeted young middle-class customers, who were more aware of Western style. IKEA had to locally source materials and manufacturing because it was not competitive in price.

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3. How much should IKEA customize its products and retail environment to fit local tastes? Could excessive customization hurt its brand identity?

Suggested answer: Answers will vary. As stated above, IKEA‘s success can largely be attributed to the adaptation of its business model to different markets with different local tastes. Excessive customization will not hurt IKEA‘s brand identity because IKEA‘s future success relies on using market research to understand each market segment and fine-tuning its stores appropriately.

Marketing Spotlight: Mandarin Oriental 1. What are the key drivers of Mandarin Oriental‘s global success?

Suggested answer: One of Mandarin Oriental‘s key success factors is the regionalization of its hotels in areas such as guest engagement, social media, and overall oriental charm. Mandarin Oriental tries to ensure that each location has its own regional expertise and local flavor. The group hires architects from across the globe to design each hotel to be authentic in style and embraced by the local community. Mandarin Oriental trains its employees so that they are deeply knowledgeable about the environments surrounding their hotels. Mandarin Oriental‘s use of international celebrity endorsements has greatly contributed to the success of its global advertising campaign.

2. What are the pros and cons of Mandarin Oriental‘s positioning as a global luxury brand? Can it have universal appeal for travelers around the world?

Suggested answer: Answers will vary. Pros: Mandarin Oriental‘s use of international celebrity endorsements has contributed to the success of its global advertising campaign. Famous figures have all endorsed the brand. Mandarin Oriental selects celebrity brand endorsers from across the globe, making potential customers likely to remember the advertisements. Celebrities must be compatible with the brand in terms of identity, personality, and lifestyle. Mandarin Oriental has enjoyed international acclaim because of its authentic oriental charm and dedication to serving its guests, employees, and the local community. The group leads the luxury hotel industry in culinary excellence, demonstrating its commitment to providing guests with top-quality experiences. The group is the only luxury hotel group to have 10 Forbes ―Five Star‖ spas. With its outstanding brand delivery, Mandarin Oriental is committed to providing the best in global luxury hospitality. Cons: Mandarin Oriental‘s luxury hotel pricing is high. One challenge Oriental faces is ensuring that each location has its own regional expertise and local flavor.

Employees have to be familiar with local cultures and hotspot locations in their cities. When guests visit social media pages or hotel front desks, Mandarin Oriental has to tailor the experience to the regional market.

3. How should Mandarin Oriental build its global digital media strategy in a way that increases its popularity without hurting its brand image?

Suggested answer: The challenge is to build a digital media strategy that increases the popularity of Mandarin Oriental without hurting its brand image. When guests visit social media pages or CS-219 Copyright © 2022 Pearson Education, Inc. Browsegrades.net

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hotel front desks, Mandarin Oriental has to provide an experience tailored to the regional market.

Digital media has to be authentic and embraced by the local community. Digital media strategists have to be deeply knowledgeable about the environments surrounding their hotels. Digital media has to reflect local cultures.

DETAILED CHAPTER OUTLINE Opening vignette: Although opportunities to compete in international markets are significant, the risks can be high. Companies selling in global industries have no choice, however, but to internationalize their operations. Some marketers, like Hyundai, are finding international success in an increasingly smaller and more multicultural world. Hyundai vehicles are sold in over 200 countries. The company employs more than 110,000 people around the globe and has manufacturing and research facilities worldwide. In this chapter, we review the major decisions involved in expanding into global markets.

I. Deciding Whether to Go Abroad i. Several factors draw companies into the international arena.

• Better profit opportunities • Larger customer base to achieve economies of scale • Reduced dependence on one market • Counterattack global competitors in home markets • Customers abroad require international service • Ideas, products, and services can be transferred from one market into another market ii. If the domestic market were large enough, many companies would remain domestic because of the following factors: • need to learn other languages and laws • need to deal with volatile currencies • need to face political and legal uncertainties • need to resign products to suit different customer needs and expectations • need to address variations in shopping habits • need to gain social acceptance • no communication and distribution infrastructure iii. Going abroad involves two major types of risks.

• General risks associated with entering a new market: o Risk of not understanding foreign preferences o Failure to offer a competitively attractive product o Failure to build effective supply and distribution networks o Failure to promote the offering in an effective and cost-efficient manner • Specific risks associated with doing business in a different country: o Lack of business culture understanding o Underestimating foreign regulations; incurring unexpected costs o Lack of managers with international experience o Commercial laws can change, currency can be devalued, an expropriation of foreign property could occur iv. Deciding whether to go abroad is the first of several decisions a company

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must make when developing its global strategy. See Fig. 20.1.

II. Deciding Which Markets to Enter A. Determining How Many Markets to Enter i. Waterfall approach: gradually entering countries in sequence ii. Sprinkler approach: entering many countries simultaneously iii. The company must choose what countries to enter based on the product and on geography, income, population, and political climate. iv. It may make sense to go into markets where competitors have already entered to force them to defend their market share, as well as to learn how they are marketing in that environment.

B. Evaluating Potential Markets • Physical proximity: neighboring countries are popular because entry costs are lower, and control and understanding are higher.

• Cultural proximity: more familiar language, laws, and culture can determine choices but may cause companies to overlook better markets and fail to realize real differences.

• High market attractiveness, low market risk, and a competitive advantage are important. i. Successfully entering developing markets requires a special set of skills and plans, along with the ability to do a number of things differently and well. ii. Many firms from developed markets are using lessons from developing markets to better compete in their home markets.

III. Deciding How to Enter the Market i. A company must choose the best mode of entry for its brands: indirect exporting, direct exporting, licensing, joint ventures, and direct investment. See Fig. 20.2.

A. Indirect and Direct Export i. Indirect exporters work through independent intermediaries.

• Domestic-based export merchants buy the manufacturer‘s products and then sell them abroad.

• Domestic-based export agents, including trading companies, seek and negotiate foreign purchases for a commission.

• Cooperative organizations conduct exporting activities for several producers— often of primary products such as fruits or nuts—and are partly under their administrative control.

• Export-management companies agree to manage a company‘s export activities for a fee. ii. Indirect export has two advantages: • Less investment • Less risk iii. Direct exporting has relatively higher risk and return, and happens in several ways: • Domestic-based export department or division, where a service function may evolve into an export department.

• Overseas sales branch or subsidiary might handle sales, distribution, warehousing, promotion, displays and customer service.

• Traveling export sales representatives travel to find businesses.

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• •

Foreign-based distributors or agents can hold limited or exclusive rights to represent the company.

Successful companies adapt their websites to provide country-specific content and services to their highest-potential international markets in the local language.

B. Licensing i. Licensing is a simple way to engage in international marketing.

• Foreign company gets a license to use a manufacturing process, trademark, patent, trade secret, or other item of value for a fee or royalty • Licensor gets market entry at little risk; licensee gets production expertise or well-known product or brand name • Licensor has less control than if it had its own production and sales facilities, gives up profits, and may create a competitor when the contract ends • Best strategy is to lead in innovation so licensee will continue to depend on the licensor • Licensing arrangements include management contracts, contract manufacturing, and franchising.

C. Joint ventures i. Joint ventures involve foreign investors and local investors.

• May be necessary or desirable for economic or political reasons • Foreign firm might lack the financial, physical, or managerial resources to undertake the venture alone, or the foreign government might require joint ownership as a condition for entry • Partners might disagree over investment, marketing, investments • Good partners share ―brand values‖ that help maintain brand consistency across markets.

D. Direct Investment i. Direct investment is direct ownership and has advantages.

• Cost economies through cheaper labor or raw materials, government incentives, and freight savings • Stronger image in the host country because it creates jobs • Deeper relationship with the government, customers, local suppliers, and distributors, enabling it to better adapt its products to the local environment • Full control over investment and can develop manufacturing and marketing policies that serve its long-term international objectives • Access to the market in case the host country insists that locally purchased goods must have domestic content • A disadvantage is the firm exposes a large investment to risks like blocked or devalued currencies, worsening markets, or expropriation. ii. Acquisition of local brands is another way of entering an international market.

• Acquisition can couple the benefits of having a local presence with access to advanced technologies, proprietary know-how, and state-of-the-art manufacturing processes.

• Rather than forming a partnership, a firm may choose to acquire another firm.

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•

Acquisition represents a longer-term commitment by the company to maintain a presence in the country in which the acquired company operates.

IV. Deciding on the Global Marketing Program i. Standardized Marketing Program (lowest costs) • Advantages: economies of scale in production and distribution, lower marketing costs, power and scope, consistency in brand image, ability to leverage good ideas quickly and efficiently, uniformity of marketing practices • Disadvantages: ignores differences in consumer needs, wants, usage patterns, response to marketing programs and activities, brand and product development, competitive environment, legal environment, marketing institutions, administrative procedures ii. At the other extreme is a localized marketing program in which the company, consistent with the marketing concept, believes consumer needs vary and tailors its marketing to each target group.

A. Global Product Strategies i. There are three basic global product strategies: straight extension, product adaptation, and product innovation. ii. Straight Extension • Straight extension introduces the product in the foreign market without any change.

• This strategy requires no additional research and development expense, manufacturing retooling, or promotional modification.

• Straight extension has been successful for cameras, consumer electronics, and many machine tools.

• High-end products benefit from standardization because quality and prestige often can be marketed similarly across countries.

• Culture and wealth factors influence how quickly a new product takes off in a country, though adoption and diffusion rates are becoming more alike across countries over time.

• Food and beverage marketers find it more challenging to standardize. iii. Product Adaptation • Product adaptation alters the product to meet local conditions or preferences.

• Regional, country, city, and retailer versions can also be used.

• Product invention can be backward or forward.

• Brand element adaptation can include brand names. iv. Product Invention. Rather than using or adapting its current products, a company might choose to develop new products for its global markets. v. Dealing with Counterfeit Products. As companies develop global supply chain networks and move production farther from home, the possible occasions for corruption, fraud, and quality control problems increase.

• Counterfeiting is estimated to cost more than a trillion dollars a year.

• Manufacturers are fighting back with software that detects fraud and automatically warns apparent violators.

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i. A company must decide how to position its brand, as well as whether and how much to adapt the brand to the specifics of each particular market. ii. It must consider the country-of-origin effects that influence brand perception around the world. iii. Brand Adaptation. To launch products and services globally, marketers change brand elements.

• A brand name may require a choice between phonetic and semantic translations.

• Numbers and colors can take on special meaning in certain countries.

• Brand slogans or ad taglines sometimes need to be changed too. iv. Country-of-Origin Effects • Mental associations and beliefs triggered by a country • Brands weave themselves into the cultural fabric of their foreign markets.

• Foreign business can boost the local economy, and provide jobs.

• Country image can also help sell products.

• Global marketers know that buyers hold distinct attitudes and beliefs about brands or products from different countries.

C. Global Pricing Strategies i. Price escalation adds transportation costs, tariffs, importer margins, wholesaler margins, and retailer margins. ii. Choices for setting prices: set uniform price everywhere, or set market-based price in each country.

• A high transfer price could result in higher tariff duties but lower income taxes, but a low one could be charged with dumping to enter or win a market.

• Countries with overcapacity, cheap currencies, and the need to export aggressively have pushed their prices down and devalued their currencies.

• Sluggish demand and reluctance to pay higher prices make selling in these markets difficult.

D. Global Communication Strategies i. Companies vary in the extent to which they adapt their marketing communication for each local market. ii. A company can use one message everywhere, varying only the language and name.

• Communication adaptation can be at the product and communication level.

• A company can develop a global pool of ads from which each country selects the most appropriate.

• Some companies allow their country managers to create country-specific ads.

• Adapted communications must be culturally acceptable, appropriate, and recognize laws.

• Companies also must be prepared to vary the appeal of their messages.

• Personal selling tactics might need to change.

E. Global Distribution Strategies i. The multinational complains that the local distributor doesn‘t invest in business growth, doesn‘t follow company policy, and doesn‘t share enough information. ii. The local distributor complains of insufficient corporate support, impossible goals, and confusing policies. iii. The multinational must choose the right distributors, invest in them, and set

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performance goals to which both parties can agree.

• Distribution channels vary considerably across countries.

• Much foreign retailing is in the hands of small, independent retailers.

• Markups are high, but the real price comes down through haggling.

• Breaking bulk, a function of intermediaries, perpetuates long channels of distribution, a major obstacle to large-scale retailing in developing countries.

• Nevertheless, retailers are moving into global markets, offering the opportunity to sell across more countries and challenging local distributors and retailers. iv. Many multinationals are plagued by the gray market, which diverts branded products from authorized distribution channels either in-country or across international borders.

• Often a company finds some enterprising distributors buying more than they can sell in their own country and reshipping the goods to another country to take advantage of price differences. o Gray markets create a free-rider problem, making legitimate distributors‘ investments in supporting a manufacturer‘s product less productive and selective distribution systems more intensive to reduce the number of gray market possibilities.

• They harm distributor relationships, tarnish the manufacturer‘s brand equity, and undermine the integrity of the distribution channel.

CHAPTER

21

SOCIALLY RESPONSIBLE MARKETING

LEARNING OBJECTIVES After studying this chapter, you should be able to: 21.1 Discuss the role that corporate social responsibility plays in marketing management.

21.2 Explain how companies manage corporate social responsibility in the workplace.

21.3 Identify the strategies that companies use to promote sustainability.

21.4 Describe how companies balance social responsibility and corporate profitability.

CHAPTER SUMMARY 1. The most admired companies in the world abide by high standards of business and marketing guidelines that dictate serving people‘s interests, not only their own.

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Raising the level of socially responsible marketing calls for pursuing a triple bottom line that focuses on the community and the environment, in addition to corporate profits.

2. Achieving socially responsible growth calls for marketers to invest resources to create value for the community in which a company operates. There are several domains in which community-based corporate social responsibility typically occurs: improving the workplace, engaging in corporate philanthropy, supporting low-income communities, fostering cause marketing, and engaging in social marketing.

3. A growing number of companies focus on the largest but poorest group of the world's population—commonly referred to as the bottom of the pyramid—in the belief that they can profitably serve these customers, while at the same time promoting social change.

4. Many aspects of ―green‖ culture, from organic products or ingredients to recyclability, have gone mainstream, as consumers increasingly turn to digital devices to learn about the environment and share their green experiences. Sustainability—the ability to meet humanity‘s needs without harming future generations—now tops many corporate agendas. Major corporations outline in great detail how they improve the long-term impact of their actions on communities and the environment.

5. Pursuing a triple bottom line routinely poses challenges for profit-driven companies, because some of their stakeholders may not endorse corporate social responsibility that comes at the expense of corporate profits. To ensure a meaningful commitment to corporate social responsibility, a company must find the right balance between profitability and societal benefits and ensure that the chosen efforts to promote social responsibility are reflected in the company‘s culture and value system and have the buy-in of the company stakeholders.

OPENING THOUGHT This chapter sums up the concept of marketing in today’s environment.

Marketing must be involved in all elements of the company’s operations and work closely with its suppliers, channel partners, with the understanding that each element or function provides an opportunity to market the product to the ultimate consumer. In many ways, this chapter focuses on the “management” of marketing in terms of the ability of the marketing personnel to work with cooperation and to encourage customer focus by each discipline. Marketers today must also be concerned for the welfare of society as a whole. Finally, marketers must focus their attention to the implementation process of solving marketing opportunities.

Students engaged in disciplines outside of marketing may present differing opinions of the value of their discipline to the overall health of the organization.

The instructor’s challenge is to demonstrate how a holistic approach is preferable or even necessary in today’s (and more so for the future) competitive environment. Companies that do not/will not adopt such a view are likely to find that they are not competitive in the future.

TEACHING STRATEGY AND CLASS ORGANIZATION

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PROJECTS 3. At this point in the semester-long marketing plan project, this chapter is the second of two parts of oral presentations of the student’s projects. Students should emphasize here how, specifically, their marketing plans contain a holistic view of the marketing process.

4. The concept of “internal marketing” is prevalent now in popular books and magazines. Students should read and review at least four sources from the internet and comment on what additional information, techniques, and formulas for success they have discovered. How does this information compare, contrast, or add to the information contained in the chapter? What is the future of “internal marketing” and why are companies so intent on succeeding?

ASSIGNMENTS Successful holistic marketers have integrated relationship marketing, internal marketing, and social marketing into their organizations. Students should choose three companies that they believe practice holistic marketing and then defend their choices by outlining the marketing programs of the selected companies.

Some companies, like the Newman‘s Own Brand, have built a business model on social responsibility. Students should find three other examples of such socially responsible firms and comment on whether or not they see ―social responsibility‖ as a need component for marketing in the future. Specifically, knowing what we now know about consumer-buying behavior, is ―socially responsible‖ a determinant for future success—is it a mega-trend? Or just a trend?

Have students read Lily Zheng, “We’re Entering the Age of Corporate Social Justice,” Harvard Business Review, November 2020. Retrieved on March 23, 2021 from: https://hbr.org/2020/06/were-entering-the-age-of-corporate-social-justice Have the students read Michael F. Porter and Mark R. Kramer, ―Strategy & Society,‖ Harvard Business Review, December 2006, pp. 78-82; Clayton M. Christense, Heiner Baumann, Rudy Ruggles, and Thomas M. Stadtler, ―Disruption Innovation for Social Change,‖ Harvard Business Review, December 2006, pp. 94-101, and report on their findings. In particular, ask the students to comment on the sustainability of these concepts into the 21st Century.

Students should research and find two examples of a successful cause-marketing program currently available in their area and evaluate whether or not they believe that this causemarketing program is (a) building the firm‘s brand awareness; (b) enhancing brand image; (c) establishing brand credibility; (d) evoking brand feelings; (e) creating a sense of brand community; and (f) eliciting brand engagement. Students should be able to defend their opinions citing financial, market share, stock price growth, and other definitive measures.

Drawing a clear line between normal marketing practices and unethical behavior is not easy. Ask students to identify two firms in the area that they feel are or have demonstrated unethical behavior (although not illegal, per se). Do they believe that such practices will not be successful for the firm in the future, and if so, why? Do all of the students in the class agree with this CS-227 Copyright © 2022 Pearson Education, Inc. Browsegrades.net

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assertion? Or on the other hand, do they believe that the examples offered are just ―creative‖ marketing?

END-OF-CHAPTER SUPPORT Marketing Spotlight: Starbucks 1. What are the key aspects of Starbucks‘s strategy and tactics?

Suggested answer: Starbucks‘s success is often attributed to its high-quality products and services, and its relentless commitment to providing consumers with the richest possible sensory experience. Starbucks constantly innovates the concept of the coffeehouse store.

A critical component of the success of Starbucks is its commitment to social responsibility. From the very beginning, Starbucks set out to be a different kind of company—one that not only celebrated coffee and its rich tradition but also conveyed a feeling of connection and a sense of community.

2. Where does a company like Starbucks draw the line in supporting socially responsible programs? How much of its annual budget should go toward these programs?

How much time should employees focus on these programs? Which programs should Starbucks support?

Suggested answer: Answers will vary. Students can debate how much Starbucks should spend on its various socially responsible programs. Starbucks was one of the first companies to offer full health benefits to eligible full- and part-time employees, including coverage for domestic partnerships. Health insurance now costs the company more each year than coffee. It was also the first privately owned U.S. company to offer a stock option program (called Bean Stock) that includes part-time employees, enabling them to participate in the company‘s financial success.

Starbucks has also committed to hiring 10,000 veterans and military spouses over the next five years. More recently, Starbucks began offering full tuition coverage for a first-time bachelor‘s degree through online programs such as the one offered by Arizona State University. The Starbucks Foundation supports literacy programs for children and families in the United States as well as various charities and communities worldwide. Starbucks must retain a passion for coffee and a sense of humanity and continue to prove that the company ―stands for something more than just profitability.‖ On the other hand, Starbucks has to be profitable in order to carry out its programs. A balanced approach is in Starbuck‘s best interest.

3. Starbucks has worked hard to make business decisions that are both ethical and responsible.

How are the results of Starbucks‘s socially responsible programs measured?

Suggested answer: Starbucks can measure its socially responsible green initiatives. From building new LEED-certified green buildings to reducing waste and improving water conservation, small changes can make a big difference in the environment. It took Starbucks 10 years to develop the world‘s first recycled beverage cup made of 10 percent postconsumer fiber.

The company followed that with a new hot-cup paper sleeve that required fewer materials to make. These innovations conserve approximately 100,000 trees a year. Starbucks‘s goal is to

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ensure that all of its cups are recycled or reused. Other programs such as the literacy initiatives can be measured by totaling the number of participants and the progress made in reading skills.

Marketing Spotlight: Ben & Jerry’s 1. What role does corporate social responsibility play in the Ben & Jerry‘s business model?

Suggested answer: Ben & Jerry‘s achieved its mission of making the world a better place by designing its products to be environmentally friendly. The company sold its ice cream in ―Ecopints,‖ an environmentally friendly packaging that did not use paper bleached by chlorine. Ben & Jerry‘s sourced its milk from regional dairy farms and used milk that was certified hormone free.

For the other ingredients, priority was placed on sources that were fair trade and organic. Ben & Jerry‘s found many ways to reduce its garbage output, including feeding community farm animals with its own ice cream waste.

2. Should Ben and Jerry have continued to operate Ben and Jerry‘s as an independent company, rather than selling it to Unilever? What were the pros and cons of going forward with the sale?

Suggested answer: Ben and Jerry‘s was presented with an offer it couldn‘t refuse. The company was purchased for over $300 million, with the stipulation that an executive board be created to carry out its social and environmental missions. Despite early setbacks, the executive board negotiated for autonomy. Ben & Jerry‘s has since doubled down on its social mission, committing further profits to support local farmers, reducing its environmental impact, and advocating for social and political justice. Pros: Ben and Jerry‘s was presented with a very lucrative offer. Cons: They initially lost autonomy and control over their social and environmental programs.

3. How can Ben & Jerry‘s justify the concept of a triple bottom line—profits, people, and planet—to company shareholders?

Suggested answer: Answers will vary. Ben & Jerry‘s has remained steadfast in carrying out its social and environmental projects. At the same time, the company has remained profitable. Ben & Jerry‘s began using only cage-free eggs, set the minimum wage higher than the national average, at $18/hour in 2020, and received B Corporation certification for holding high economic and social standards. Ben & Jerry‘s continues to advance its social mission, one flavor at a time.

Marketing Spotlight: Tiffany & Co. 1. Should a luxury company actively engage in corporate social responsibility? What are the pros and cons of this decision?

Suggested answer: Yes, a luxury company should engage in social responsibility. Tiffany & Co. traces its diamonds and metals to the source and ensures that mining locations practice responsible operations. The company employs a zero-tolerance policy toward purchasing conflict diamonds and helped establish the Institute for Responsible Mining Assurance (IRMA), the first CS-229 Copyright © 2022 Pearson Education, Inc. Browsegrades.net

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certification for responsible mining sites. The company has been vocal in its opposition to mines that threaten local ecosystems, and lobbied against development of a mine that might damage local fisheries. Pros: The company has contributed to IRMA‘s mission by investing in the environmental and economic development of its mining sites. For example, Tiffany & Co. trained its workers in Botswana—where 98 percent of Tiffany‘s polishers are now based—to cut and polish diamonds, providing locals with job opportunities and enriching Botswana‘s economy by $50 million. The company has also made extensive efforts to provide its workers with an ethical standard of living. Cons: Even with vertical integration, it is difficult to monitor the mining sites, and abuses occur.

2. Should Tiffany advertise the fact that it is supporting various social and environmental initiatives? Why or why not?

Suggested answer: Tiffany should advertise that it is supporting various social and environmental initiatives. Tiffany & Co.‘s social and environmental missions have become a valuable aspect of its brand image, and its strict usage of diamonds and precious metals that are ethically sourced is an integral part of the brand‘s promise.

3. How important is it for Tiffany to have a chief sustainability officer (CSO)? What are the advantages and disadvantages of having a single person ultimately responsible for designing and implementing corporate social responsibility programs?

Suggested answer: It is important for Tiffany to have a chief sustainability officer. The CSO oversees Tiffany‘s social and environmental initiatives. The company has pledged zero gas emissions by 2050, tacking on climate change as part of sustainability. Other initiatives include conservation of coral reefs and development of urban parks. By having the CSO in charge of implementing these programs, there is a clear chain of authority and responsibility. However, the downside is the lack of input and creativity from others in the organization who have no control over policies.

DETAILED CHAPTER OUTLINE Opening vignette: Healthy long-term growth for a brand requires marketers to engage in a host of marketing activities and satisfy a broad set of constituents and objectives. In doing so, marketers must consider the societal impact of their actions. Corporate social responsibility has become a priority for many organizations and is ingrained in their business models. Some organizations, such as United Way, embrace this vision of social responsibility. By partnering with software giant Salesforce.com, United Way has been able to attract new donors and strengthen its relationships with existing donors, while reducing its marketing costs. Moreover, working together, both companies created a platform based on Salesforce‘s artificial intelligence functionality that can be used across different nonprofit organizations. Successful marketing requires effective relationship marketing, integrated marketing, internal marketing, and performance marketing.

I. The Role of Social Responsibility in Marketing Management i. Effective marketing must be matched by ethics, values, and social responsibility. ii. Companies engage in prosocial activities and invest in corporate social

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responsibility for the following reasons: • Creating societal benefits is an element of the corporate culture and the company‘s value system.

• Differentiating themselves appeals to consumers and collaborators who favor companies that exhibit civic virtues and care about creating value for society.

• Building a bank of public goodwill offsets criticisms and deals with crises.

• Increasing employee loyalty creates investor goodwill. iii. Many companies focus on the so-called triple bottom line—people (social component), planet (sustainability component), and profit (monetary component).

II. Community-Based Corporate Social Responsibility i. Domains in which community-based corporate social responsibility occur: • improving the workplace • engaging in corporate philanthropy • supporting low-income communities • fostering cause marketing • engaging in social marketing.

A. Corporate Social Responsibility in the Workplace i. To implement corporate social responsibility in the workplace, companies focus on: • Fair compensation that offers wages consistent with the industry norms and is sufficient to meet basic living requirements.

• Work–life balance that ensures employees can allocate time to other aspects of their lives—family, personal interests, socializing, and leisure activities.

• Diversity that is promoted by avoiding artificial barriers or distinctions based on factors such as race, ethnicity, religion, and culture.

• A safe and healthful working environment that protects employees against workplace violence and work-related illnesses.

• Employee development that is fostered by investing resources in training and advancing employees. ii. Treating employees fairly and ethically is important for global businesses with different labor laws. iii. Applying the same principles to global subsidiaries as to domestic operations is the mark of a socially responsible organization.

B. Corporate Philanthropy i. Corporate philanthropy is rising, as firms believe that corporate social responsibility in the form of cause marketing and volunteerism programs are the ―smart thing to do.‖ ii. Corporate giving can have a positive impact in at least three domains: • enhancing company image • enhancing customer loyalty • enhancing perceived product performance. iii. Consumers view companies engaged in corporate philanthropy as warmer, more compassionate, more ethical, more likable and trustworthy, and less blameworthy in corporate crises. iv. A company‘s reputation for social responsibility tends to: CS-231 Copyright © 2022 Pearson Education, Inc. Browsegrades.net

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• enhance consumer loyalty • increase customer satisfaction • decrease consumer price sensitivity • increase their brand commitment. v. Doing good can indeed help companies do well. vi. Cause marketing or ―consumption philanthropy‖ may: • replace virtuous actions with less thoughtful consumer buying • reduce emphasis on real solutions • deflect attention from the fact that markets create many social problems.

C. Service Low-Income Communities i. The bottom of the pyramid (BOP) is a socioeconomic concept used in reference to the largest but poorest group of the world's population, who live on less than $2.50 a day. ii. A ―low-price, low-margin, high-volume‖ business model is the key to successfully appealing to lower-income consumers in developing markets. iii. The transfer of innovations from developing to developed markets is reverse innovation. iv. Reverse innovation adopts solutions from a developing market to achieve cheaper alternatives in a developed market. v. Reverse innovation can involve public policy benefits, which can transform industries through: • ultra-low-cost transportation • renewable energy • clean water • micro-finance • affordable health care • low-cost housing. vi. Getting the marketing equation right in developing markets can pay big dividends.

D. Cause Marketing i. Cause-related marketing links the firm‘s contributions toward a designated cause to customers engaging directly or indirectly in revenue-producing transactions with the firm. ii. A successful cause-marketing program can: • improve social welfare • create differentiated brand positioning • build strong consumer bonds • enhance the company‘s public image • create a reservoir of goodwill • boost internal morale • galvanize employees • drive sales • increase the firm‘s market value. iii. Associating a company‘s brands with a relevant cause can benefit the company in several ways: • builds brand awareness

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• enhances brand image • establishes brand credibility • evokes brand feelings • creates a sense of brand community • elicits brand engagement iv. Cause-related marketing backfires if consumers question the link between the product and the cause or see the firm as self-serving and exploitive or if consumers do not think a company is consistent and sufficiently responsible in all its behavior. v. To avoid backlash, some firms take a soft-sell approach to their cause marketing. vi. Many companies focus on one or a few causes to maximize impact, but limiting support may not result in a transfer of positive feelings to the firm.

E. Social Marketing i. Social marketing is similar to cause marketing in that both aim to benefit the community in which the company operates. ii. Social marketing aims to further a cause, such as ―say no to drugs‖ or ―exercise more and eat better.‖ iii. Social marketing influences behavioral change for social good by using a marketing planning process that involves a well-defined audience segment.

• Choosing the right goal or objective for a social marketing program is critical.

• The planning process follows many of the same steps as for traditional products and services.

• They should have a clearly defined goal, a well-articulated strategy, and meaningful tactics. iv. Social marketing is related to brand activism, in which a company takes a stand on an important social, economic, environmental, or political issue (e.g., Nike‘s support of NFL players kneeling during the national anthem).

III. Sustainability-Focused Corporate Social Responsibility i. Sustainability: the ability to meet humanity‘s needs without harming future generations. ii. Many aspects of ―green‖ culture—from organic purchases to recyclability—are now mainstream as consumers learn about the environment and share green experiences. iii. Environmental issues are also playing an increasingly important role in product design and manufacturing.

• Greenwashing gives products the appearance of being environmentally friendly without living up to that promise.

• Because insincere firms have jumped on the green bandwagon, consumers bring a healthy skepticism to environmental claims.

• They are also unwilling to sacrifice product performance and quality, nor are they necessarily willing to pay a price premium for green products. iv. Companies that innovate solutions and values in a socially responsible way are most likely to succeed.

IV. Balancing Socially Responsibility and Corporate Profitability i. In some cases it is not easy to draw a clear line between normal marketing practices and unethical behavior.

A. Developing Ethical Marketing Communications CS-233 Copyright © 2022 Pearson Education, Inc. Browsegrades.net

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i. To break through the clutter of messaging faced by consumers, some advertisers push the boundaries of what is ethical and legal. ii. Advertisers must not make false claims, use false demonstrations, or create ads with the capacity to deceive, even if no one is actually deceived.

• Sellers in the United States are legally obligated to avoid bait-and-switch advertising that attracts buyers under false pretenses.

• It‘s illegal for salespeople to misinform consumers or mislead them about the advantages of buying a product.

• Marketing communication can generate public controversy when marketers take unfair advantage of vulnerable groups (such as children) or disadvantaged groups (such as low-income, ethnic minority residents), or promote potentially harmful products.

B. Managing Customer Privacy i. Consumers are aware of cookies, profiles, and other online tools that let e-commerce businesses know their identity and shopping habits. ii. Consumers are concerned by the extent to which companies gather information about them.

• One concern is that a company‘s ability to pinpoint a person‘s location enables marketers to track consumers‘ daily routines, frequently visited establishments, and movements within a retail store.

• The exploding amount of digital data online can be collected, bought, and sold by advertisers, marketers, ad networks, data brokers, website publishers, social networks, and online tracking and targeting companies.

• Research shows that more people, especially older consumers, are refusing to reveal private information online.

• Consumers accept more privacy intrusions because they don‘t realize what information they are giving out. iii. Consumers increasingly want to know where, when, how, and why they are being watched online. iv. To give consumers control over their personal data, the European Union introduced the General Data Protection Regulation that requires data processors to clearly disclose any data collection, reveal the purpose of data collection, state how long data are being retained, and disclose whether the data are being shared with any third parties or outside of the European Union.

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