Instructor Manual Marketing Concepts and Strategies, 9th Edition Sally Dibb Dr. Lyndon Simkin Willia

Instructor Manual Marketing Concepts and Strategies, 9th Edition Sally Dibb Dr. Lyndon Simkin William M. PrideO. C. Ferrell

Instructor Manual Marketing Concepts and Strategies, 9th Edition Sally Dibb Dr. Lyndon Simkin William M. PrideO. C. Ferrell

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INSTRUCTOR SOLUTION MANUAL FOR MARKETING CONCEPTS AND STRATEGIES, 9TH EDITION SALLY DIBBDR. LYNDON SIMKINWILLIAM M. PRIDEO.C. FERREL CHAPTER 1-24

CHAPTER 1

The marketing concepts OBJECTIVES •

To define marketing.

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To appreciate the context of marketing and marketing orientation.

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To explain the marketing process.

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To understand the importance of marketing.

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To gain insight into the basic elements of the marketing concept and its implementation.

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To understand how the marketing concept has evolved and some of the current ‗hot‘ themes.

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To appreciate the major components of a marketing strategy and the marketing mix.

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To gain a sense of general strategic marketing issues, such as marketing opportunity analysis, target market selection and marketing mix development.

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To grasp the ethos and structure of this book.

PURPOSE AND PERSPECTIVE The purpose of this chapter is to give students an overview of what marketing is and provide a general framework for studying the field of marketing. First, we explore several definitions of marketing and introduce some basic terminology. Next, we show why the study of marketing is important and relevant to students. Because we believe that an understanding of the marketing concept is fundamental, we devote several pages to this area. Then we discuss the basic components of the marketing concept, its evolution and its implementation. Then we provide an overview of strategic marketing management and describe in general what a marketing strategy is. We examine four generic marketing tasks: marketing opportunity analysis, target market selection, marketing mix development and marketing management. Finally, we discuss how the text is organized. We point out to students that they can use the general framework presented in Chapter 1 as an indicator of how the text is organized and as a reference for understanding how one topic fits into the total framework. Figure 1.5 depicts this framework, which is presented in the Postscript of each Part of the text. It shows (1) the central focus of that Part, (2) what has already been studied and (3) what will be studied in later Parts of the text.

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LECTURE OUTLINE I.

Marketing explained and defined A. Marketing orientation 1. A marketing-oriented organization devotes resources to understanding the needs and buying behaviours of customers, competitors‘ activities and strategies, and market trends and external forces – now and as they may shape up in the future; interfunctional coordination ensures that the organization‘s activities and capabilities are aligned to this marketing intelligence.

2. Not all organizations can claim to have a marketing orientation – some are sales-led – but a marketing orientation is of significant benefit to an organization, as it facilitates a better understanding of customers and helps a business to prepare for external market developments, threats and opportunities.

3. The use of some of marketing‘s concepts and an understanding of the role of marketing in attracting and satisfying customers, are not enough on their own to establish a marketing orientation. a) However, failure to comprehend the core concepts of marketing will make a marketing orientation impossible to achieve – the focus of this text is on explaining the core concepts of marketing.

4. It is possible for an organization lacking a full marketing orientation to nevertheless deploy aspects of the marketing toolkit as described in the following chapters. a) The definition of marketing per se is not, therefore, the same as the definition of marketing orientation.

B. Marketing defined 1. Various definitions are presented, including those from the Chartered Institute of Marketing, US management guru Peter Drucker and leading US marketer Philip Kotler. We define marketing as consisting of individual and organizational activities that facilitate and expedite satisfying exchange relationships in a dynamic environment through the creation, distribution, promotion and pricing of goods, services and ideas.

This is also the definition adopted by The American Marketing Association (the AMA). We also embrace the view that marketing is an analytical process that should add value to customers and to the organization serving these customers.

C. Understanding market trends and developments that may affect both customers‘ views and the activities of business operating in a particular market is a core theme of effective marketing.

1. These factors may include social trends, technological enhancements, economic patterns and changes in the legal and regulatory area, as well as political influences and are often termed as the marketing environment.

D. The A-S-P process (analysis, then strategy and finally programmes) focuses on providing customer satisfaction in a manner that leads to a business‘s successful performance.

E. Marketing is not a science and there is no single definition universally in use. Irrespective of the definition adopted, it is clear that key issues are important: • Satisfying customers •

Identifying/maximising marketing opportunities

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Targeting the ‗right‘ customers

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Facilitating exchange relationships

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Staying ahead in dynamic environments

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Endeavouring to beat or pre-empt competitors

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Utilising resources/assets effectively

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Increasing market share (in core target markets)

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Enhancing profitability

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Satisfying the organization‘s stakeholders

These issues are further discussed in the context of our adopted definition of marketing, which is broken down into its core components and explored in detail.

II.

III.

The marketing process A. Continual changes in the marketing environment, competitors and their activities, as well as customer needs, expectations, perceptions and buying behaviour, mean that marketers must undertake analyses of these market conditions to ensure that marketing strategies and their associated marketing programmes are truly effective.

1. As changes in the marketplace occur, marketers should revise their strategies accordingly.

B. The marketing process is the analysis of market conditions, the creation of a marketing strategy, the development of marketing programmes designed to action the agreed strategy and, finally, the implementation and control of the marketing strategy and its associated marketing programmes.

1. This is required not only for existing activities and markets but also whenever an organization contemplates entering new markets, launching new or replacement products, modifying the brand strategy, changing customer service practices, rethinking advertising and promotional plans, altering pricing or distribution policies and for unexpected sales patterns.

2. Without an awareness of changes in the marketing environment it is unlikely that the specified marketing programme will be sustainable in the longer term.

3. See figure 1.2 for details of the marketing process.

The importance of marketing A. The use of marketing techniques and the development of a marketing orientation should enable an organization to understand its customers and stakeholders better, address competitors‘ activities and market developments and effectively harness its capabilities.

B. Marketing activities are used in many (indeed, most) organizations.

1. Between 25 and 33 per cent of all civilian workers in Europe and the United States perform marketing activities.

2. Whether a person earns a living through marketing activities or performs them while voluntarily participating in non-business organizations, that person is likely to need marketing knowledge and skills.

3. Social marketing uses nudge theory to alter behaviours for the good of society and the individual, such as anti-smoking interventions, sustainable living solutions and healthier eating programmes, harnessing the marketing toolkit as explored later in this course/book.

C. Marketing activities are important to businesses and the economy.

1. A business organization must sell products to survive and remain healthy, and marketing activities directly or indirectly help sell the organization‘s products.

2. Marketing activities help produce the profits essential not only to the survival of the individual business, but to the health and ultimate survival of the entire economy.

D. Marketing knowledge enhances consumer awareness.

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Marketing activities affect many aspects of our everyday lives, and many of the improvements we wish to make in the quality of our lives can be achieved through an understanding of marketing activities.

2. Studying marketing activities helps us to weigh their costs, benefits and flaws more effectively.

E. Marketing costs consume a sizeable portion of buyers‘ income.

1. About half of what a buyer spends on goods and services goes to pay the costs of marketing.

2. Because the costs of marketing activities consume such a significant portion of a buyer‘s income, it is necessary to know how this money is used.

F. Marketing relates to business performance.

1. The aim of marketing is to satisfy the ‗right‘ customers, taking account of market trends and competitive activity.

2. A marketing-led business should have satisfied, loyal customers, with a strong financial benefit to the business.

IV. The marketing concept and its evolution A. The marketing concept is not a second definition of marketing; it is a way of thinking—a management philosophy about an organization‘s entire range of activities.

1. Basic elements of the marketing concept: a) According to the marketing concept, an organization should try to provide products and services that satisfy customers‘ needs through a coordinated set of activities that also allows the organization to achieve its goals. b) Providing customer satisfaction is the major thrust of the marketing concept. c) In attempting to satisfy customers, a business must consider not only short run, immediate needs but also broad, long-term desires. d) A business‘s production, finance, accounting, personnel and marketing departments must work together to meet consumers‘ short- and long-term desires and needs.

2. The marketing concept stresses that a business organization can best achieve its goals by providing customer satisfaction.

B. The evolution of the marketing concept 1. The philosophy of the marketing concept emerged in the third major era in the history of business, preceded by the production and the sales eras.

2. The production era a) During the second half of the nineteenth century, the Industrial Revolution came into its own. b) As a result of new technology and new ways of using labour, products streamed out of factories into the marketplace, where consumer demand for the new manufactured goods was strong.

3. The sales era a) From the mid-1920s to the early 1950s, businesses viewed sales as the major means of increasing profits. b) During this era, businesspeople believed that the major marketing activities were personal selling and advertising.

4. The marketing era a) By the early 1950s, businesses found that they first had to determine what customers wanted and then produce it, rather than simply making products and then trying to change customers‘ needs to fit what they produced. b) As more organizations realised the importance of identifying customers‘ needs, businesses entered the marketing era—the era of customer orientation.

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C.

The relationship marketing era a) It has been suggested that much of marketing traditionally focused on winning new business by attracting new customers. While many marketers believe longterm brand loyalty has always been an essential goal, the focus throughout the 1990s was on relationship marketing. b) Relationship marketing still emphasises the targeted customer, but in order to build long-term relationships the need is to convey ongoing commitment by ‗looking after‘ the customer once the initial business has been won. c) Relationship marketing refers to ‗long-term, mutually beneficial arrangements in which both the buyer and seller focus on value enhancement through the creation of more satisfying exchanges‘.

(1) Successful marketers respond to customers‘ needs and strive to increase value to buyers over time – eventually this interaction becomes a solid relationship that allows for cooperation and mutual dependency. d) Relationship marketing requires good relationships and the communication of effective marketing propositions to additional ‗markets‘: suppliers, agents, distributors, recruiters, referral bodies (such as independent financial advisers), influencers (such as the Bank of England or the EU‘s Commission) and the internal – in-company – market.

6. The digital era a) The web has brought a whole new set of behaviours, both for consumers and brands, to engage, communicate, learn and share opinions. b) Multi-channel marketing, mobile marketing, social media, big data and CRM processes are some of the biggest consequences. c) A game-changer for marketers has been the emergence of consumer-toconsumer communication about brands, products and experiences based on social media, taking much control over brand messaging away from marketers.

7. Other developments a) The uptake of the marketing process and toolkit for non-commercial purposes has also been a recent phenomenon, with social marketing encouraging positive behavioural and attitude changes around health, wellbeing and sustainability. b) There has also been the growth of what has come to be termed critical marketing. This questions whether the actions of marketers are truly acceptable, beneficial or for the greater good.

Implementing the marketing concept 1. Because the marketing concept affects all types of business activities, the top management of an organization must incorporate the marketing concept so completely that it becomes the basis for all the decisions and goals set for the company. a) The first step management must take to implement the marketing concept is to establish an information system that will enable the company to learn about customers‘ needs and use the information internally to create satisfying products. b) Management‘s second major task for implementing the marketing concept is to restructure the organization to coordinate all its activities.

2. Even after establishing an information system and reorganising the company, a business‘s new marketing approach may not work perfectly. a) There is a limit to a company‘s ability to satisfy customers‘ needs for a particular product. In a mass market economy, most business organizations cannot tailor products to fit the exact needs of each customer. b) The company must first determine customers‘ needs accurately, and even when it does it often has a difficult time developing a product that satisfies those needs.

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Sometimes, by satisfying one segment of society, a company creates dissatisfaction within other segments. d) In implementing the marketing concept, a company may have difficulty maintaining employee morale during any restructuring required to coordinate the activities of the various departments.

3.

Adoption of the marketing philosophy takes time, resources, endurance and commitment.

IV. The essentials of marketing A. Marketing analyses 1. It should be evident that marketing can enhance an organization‘s understanding of its customers, competitors, market trends, threats and opportunities.

2. It should, therefore, be able to direct an organization‘s target market strategy, product development and communication to its distribution channels and competitors.

3. To do this, marketing personnel must have marketing intelligence gleaned from marketing analysis of: a) Customers b) Competitors c) Marketing environment forces d) The organization‘s capabilities and marketing assets 4. These are the essential building blocks for the development of marketing strategies and the creation of marketing programmes.

B. Marketing strategy 1. A marketing strategy encompasses the selection of which marketing opportunities to pursue, analysis of target market(s), and the creation and maintenance of an appropriate marketing mix that will satisfy those people in the target markets.

2. Marketing mix is the tactical ‗toolkit‘ of the marketing programme; product, place/distribution, promotion, price and people variables that an organization can control in order to appeal to the target market and facilitate satisfying exchange.

3. An organization‘s marketing managers are responsible for developing and managing marketing strategies. a) Marketing managers must deal with three broad sets of variables when developing and managing marketing activities: those relating to the marketing mix, those inherent in the accompanying target market strategy and those that make up the marketing environment.

(1) Marketing mix decision variables and target market strategy variables are factors over which an organization has control.

(2) Marketing environment variables are subject to less control by an organization.

4. Marketing opportunity analysis a) A marketing opportunity exists when circumstances allow an organization to take action towards reaching a particular group of customers. b) Most new products or services reflect the identification by marketers of a marketing opportunity. c) To ensure growth and survival as products diminish, an organization must find new products and markets.

(1) Modifying existing products, introducing new ones or deleting undesirable ones are ways to ensure survival.

(2) Marketing the product to a greater number of individuals in the existing market, convincing current customers to use more of a product and expanding geographic market boundaries help improve organizational security and stability.

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Internal organizational factors a) Organizational objectives, financial resources, managerial skills, organizational strengths and weaknesses and cost structures are the primary internal factors to consider when analysing marketing opportunities and organizational objectives.

(1) An organization should pursue opportunities that are consistent with its organizational objectives.

(2) Financial resources constrain the type of marketing opportunities an organization can pursue.

(3) Management‘s skills and experience can limit the types of opportunities pursued – most organizations at some time are limited in their growth plans by a lack of sufficient managers with suitable skills and market insights.

(4) Specialized skills and technological expertise can be strengths in some situations but weaknesses in others.

(5) An organization‘s cost structure can be affected by geographic location, employee skills, access to raw materials, and type of equipment and facilities.

(6) The cost structure of an organization may provide a competitive advantage over rivals or may place a business at a competitive disadvantage.

Marketing environment forces a) A business that fails to monitor the forces of the marketing environment is likely to miss out on emerging opportunities at the expense of rivals with the foresight to examine these market drivers. b) There are six major forces in the marketing environment. (These forces are discussed extensively in the next two chapters.)

(1) Political forces (2) Legal forces (3) Regulatory forces (4) Societal/green forces (5) Technological forces (6) Economic and competitive forces c) Marketing environment forces affect a marketer‘s ability to facilitate and expedite exchanges in four general ways.

(1) These forces influence customers‘ lifestyles, living standards and product preferences and needs.

(2) These forces influence whether marketing managers can perform certain marketing activities and, if so, how.

(3) These forces may influence buyers‘ reactions to the company‘s marketing mix.

(4) These forces may provide an organization with a window of opportunity over rivals that fail to notice the market development or that take no action themselves. a) Equally, market drivers may provide competitors with such an opportunity ahead of a marketer‘s own organization. d) Rapid fluctuation of the various forces and their interrelatedness can present many challenges to marketing managers. e) Changes in the marketing environment can create uncertainty but can also result in new marketing opportunities.

Target market selection 1. A target market is a group of people (if a consumer market) or other businesses (if a business-to-business market) for whom a company creates and maintains a marketing mix that specifically fits that group‘s needs and preferences.

2. Marketing managers evaluate possible target markets to determine the following:

8 How entry into a market would affect the company‘s sales, costs and profits Whether the organization has the resources to produce a marketing mix that will meet the needs of a particular target market and whether satisfying those needs will be consistent with the company‘s overall objectives c) The size and number of competitors already marketing products in possible target markets 3. The target market can be defined narrowly or broadly.

4. A business may focus marketing efforts on one or several target markets.

5. The identification and analysis of a target market provide a foundation on which a marketing mix can be developed.

Marketing Programmes 1. In order to make the devised marketing strategy a reality, marketers must specify a set of marketing mix ingredients that, collectively, become the marketing programme designed to implement the agreed marketing strategy.

2. Marketing mix development a) The marketing mix consists of four components that can be varied by type and amount: product, place/distribution, promotion and price. Increasingly, a fifth component—people—is also being included. b) The product variable is the aspect of the marketing mix that deals with researching consumers‘ product wants and then designing a product with the desired characteristics.

(1) Creating and altering packages and brand names and thinking about guarantees and repair services are product variable decisions.

(2) Product variable decisions and related activities are important because they directly involve creating products and services that satisfy consumers‘ needs and wants. c) In dealing with the place/distribution variable, marketing managers seek to make products available in the desired quantities to as many customers as possible and to hold total inventory, transport and storage costs as low as possible.

(1) A marketing manager may become involved in selecting and motivating wholesalers, retailers and dealers, establishing and maintaining inventory control procedures, and developing and managing transport and storage systems.

(2) Marketers increasingly must manage multiple channels and digital with traditional channels. d) The promotion variable relates to communication activities used to inform one or more groups of people about an organization and its products.

(1) Promotion is used to increase public awareness of an organization, to make consumers aware of a new brand, to educate consumers about a product‘s features and to urge people to adopt a particular position regarding a political or social issue.

(2) Marketers increasingly refer to the promotion variable in the marketing mix as ‗marketing communications‘. e) The price variable relates to activities associated with establishing pricing policies and determining product prices.

(1) Consumers are interested in product prices because they are concerned about the value obtained in an exchange.

(2) Price is often used as a competitive tool.

(3) Price is also used to establish a product‘s image. a) b)

C.

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The people variable provides contact with customers and channel members, and reflects the level of customer service, advice, sales support and after-market back-up required.

(1) The right people must be recruited, trained, motivated and retained.

(2) For many products and services, personnel are perceived by consumers as part of the product offering. g) Developing and maintaining an effective marketing mix is a major requirement for a strong marketing strategy. h) It is the marketing mix that readers, as consumers, will most frequently have experienced for products and services purchased.

D. Marketing management a) Marketing management is a process of planning, organizing, implementing and controlling marketing activities to facilitate and expedite exchanges effectively and efficiently (1) Marketing planning is a systematic process of assessing opportunities and resources.

(2) Organizing marketing activities involves developing the internal structure of the marketing unit to direct marketing activities.

(3) Implementing the marketing plan involves the coordination of marketing activities, employee motivation and effective communication within the marketing unit.

(4) The marketing control process consists of establishing performance standards, evaluating actual performance by comparing it with these standards and reducing differences between desired and actual performance.

VI. The organization of this book A. The book‘s Parts

The first Part of Marketing: Concepts and Strategies provides an explanation of the marketing concept, presents the marketing process and overviews the principles of marketing strategy. Part One also examines the concept of the marketing environment and the nuances of marketing in international markets: • Part One: Marketing Defined and Marketing in Context The second Part explores the essential marketing analyses for developing an understanding of consumers and business customers, while producing a target market strategy: • Part Two: Understanding and Targeting Customers Having explored the core marketing analyses and requisites for developing a marketing strategy, Part Three provides an examination of the ingredients of the marketing mix, starting with product, branding and service issues; then exploring place and channels; promotion and marketing communications; digital marketing; pricing decisions; and concluding with modifying the marketing mix in international markets and for the marketing of services and business-to-business markets: • Part Three: Marketing Programmes – Products and Services, Brands, Place and Channels, Promotion and Marketing Communications, Digital and Pricing The focus switches in Part Four to the execution of marketing strategies and operationalization of marketing programmes: • Part Four: Marketing Management

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ANSWERS TO DISCUSSION AND REVIEW QUESTIONS 1.

What is meant by marketing orientation?

A marketing-oriented organization devotes resources to understanding the needs and buying behaviour of customers, competitors‘ activities and strategies, and market trends and external forces – now and as they shape up in the future; inter-functional coordination ensures that the organization‘s activities and capabilities are aligned to this marketing intelligence.

2.

What is marketing? How did you define marketing before you read this chapter?

Marketing consists of individual and organizational activities that facilitate and expedite satisfying exchange relationships in a dynamic environment through the creation, distribution, promotion and pricing of goods, services and ideas. Second, marketing does not begin after goods and services have been produced but before production activities. Third, marketing deals not only with goods and services but with ideas, issues, concepts and people. Therefore, our definition attempts to incorporate these ideas. The second part of this question can be used to stimulate class discussion about how the average person views marketing. Marketing is not ‗just advertising‘, ‗selling‘ or ‗conning people‘. It is a process of ensuring customer satisfaction and long-term loyalty while achieving a business‘s goals. Marketing is a guiding philosophy that puts the customer first and ensures that decision-makers in a business are fully aware of market forces.

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Why should someone study marketing?

The study of marketing is important because marketing costs consume a sizeable portion of buyers‘ income, and a knowledge of how such money is used helps consumers understand why products cost what they do. As a result, consumers may be able to stretch their income more effectively in the marketplace. Many organizations other than businesses use marketing activities, and approximately 25 to 33 per cent of all European and US civilian workers perform marketing activities. Whether or not a person is directly employed in marketing functions, the knowledge of such functions is beneficial.

Our industrial society depends on marketing activities to generate profits that are essential for the survival of the whole economy. Marketing activities also affect our own everyday lives. Many of the improvements we desire in the quality of our lives can be achieved through an understanding of marketing activities.

Studying marketing activities enables consumers to weigh the costs, benefits and flaws associated with marketing activities and to evaluate laws, regulations and industry guidelines intended to stop unfair, misleading and unethical marketing practices.

Marketing is an everyday part of most organizations and is every bit as important as understanding other core business functions such as finance, production, human resources or selling.

4.

What is the marketing process? Why should the process be so sequenced?

The marketing process is an analysis of market conditions, the creation of an appropriate marketing strategy, the development of marketing programmes designed to action the agreed strategy and finally, the implementation and control of the marketing strategy and its associated marketing programmes. This process is necessary because there are continual changes in the marketing environment, competitors and their activities, as well as in customers‘ needs, expectations, perceptions and buying behaviour. Without first having a sound understanding of these issues, marketing strategies and their associated marketing programmes cannot be truly

11 effective. Once analysis of the market conditions has been undertaken, more informed decisions on marketing strategy are possible. The marketing strategy then provides the foundations for the marketing programmes which are subsequently implemented.

5.

Discuss the basic elements of the marketing concept. Which organizations use this concept?

Have these organizations adopted the marketing concept? Explain your views.

The marketing concept is an organizational philosophy. It states that an organization should try to satisfy customers‘ needs through a coordinated set of activities that will also allow the organization to achieve its goals. The major thrust is customer satisfaction. If the company co-ordinates its activities to achieve customer satisfaction, it is practising the marketing concept.

The answers to the remaining parts of this question are based on local examples. The tutor should judge the degree to which such examples are more ‗product first, customer later‘ and whether such businesses appear to properly analyze their markets.

6.

Identify several business organizations that obviously have not adopted the marketing concept. What characteristics of these organizations indicate non-acceptance of the marketing concept?

The answers to this question centre on local examples. An emphasis on production or aggressive selling would be expected with products lacking a competitive edge or loyal customer base.

7.

What is digital marketing and why is it now so important to marketers?

How do you chat with your friends or find out about what‘s on? Probably as much via Facebook, Twitter or other web-based options as face-to-face chatting. When you are actively seeking product information or reviews about a particular brand, do you go in-store, read a brochure, talk to a salesperson or search online? The web and in particular social media provide us with immediate access to so much information, helping steer our purchasing and certainly giving us access to much positive or negative comment about a product or brand. Previously, marketers could largely control messages about their products, but now we can easily find the views of many other consumers, experts and pundits. Marketers have to recognize this change and seek to convey their messages via social media. They have access to more channels of distribution and online trading. With digital comes a wealth of new market insights and the world of ‗big data‘, providing greater opportunity to fine-tune offerings and to develop one-to-one relationships.

8.

Give an overview of what is meant by social marketing.

Programmes and targeting strategies behind healthier eating, giving up smoking, the Big Society, improving carbon footprints and enhancing sustainability, are just some of the more mainstream executions of marketing in non-profit markets.

9.

Briefly outline some issues of importance to critical marketers.

Some critical marketers seem to verge on being anti-consumerism and appear to be opposed to the very practice of marketing. Others merely question the likely outcomes of pursuing certain marketing strategies and programmes. For example, they might question whether it is ‗right‘ to encourage certain consumers to purchase more of a particular product or service. They are interested in better understanding the consequences of marketers‘ activities and ploys.

10. Describe the major components of a marketing strategy. How are these major components related?

A marketing strategy is the core of successful marketing efforts: it is the means for accomplishing the marketing objectives. Marketing strategy encompasses choosing a target market and

12 developing a marketing mix that will satisfy the people in that market. The needs of target market members provide the foundation on which a marketing mix is built.

11. Identify the tasks involved in developing a marketing strategy.

The tasks in developing a marketing strategy include marketing opportunity analysis and selection, target market selection, marketing mix development and overall management of marketing activities.

12. What are the primary issues that marketing managers consider when conducting a marketing opportunity analysis?

The marketing manager must consider various alternatives through which the organization can grow and sustain itself. This can be done through product modification, introduction of new products and deletion of products consumers no longer want. Managers may attempt to increase the number of customers for the company‘s products, to convince current customers to use more of a product or to expand the geographic boundaries of the company‘s marketing efforts.

Diversification into new product offerings may be a viable option. The success of any of these options depends on the organization‘s internal characteristics and the forces in the marketing environment.

13. What are the variables in the marketing environment? How much control does a marketing manager have over environmental variables?

The variables in the macro marketing environment include political, legal, regulatory, societal/green, economic/competitive and technological forces. All these variables affect marketing activities and decisions. These forces are sometimes called ‗uncontrollables‘, but they are not totally uncontrollable and some can be lobbied against. Even when such external forces are uncontrollable, to be forewarned is to be forearmed.

The marketing environment surrounds both consumers and the marketing mix. Marketers have little control over these environmental forces, but they must be aware of them, adapt to them and capitalise on the opportunities they provide. At times, marketers attempt to influence environmental forces, such as by supporting certain political candidates. Chapters 2 and 3 explore these forces in more detail, including the micro marketing environment forces popularised by Michael Porter.

14. Why is the selection of a target market such an important issue?

Target market selection is crucial to generating productive marketing efforts. If management does not identify the specific customer group to which it is directing its products and marketing efforts, the business may fail. The identification and analysis of a target market form a foundation for developing a marketing mix. Not all market segments are equally attractive or potentially viable: only some should become priority target markets.

15. Why are the elements of the marketing mix known as variables? What are these variables?

The marketing mix is the combination of marketing variables used to perform various activities to facilitate and expedite exchanges. These variables are product, price, place/distribution and promotion. They are called variables because marketing managers can vary the type and amounts of these components used in developing and maintaining a marketing mix. People are now widely held to constitute an additional marketing mix element.

16. What type of management activities are involved in marketing management?

Managing marketing activities involves planning, organizing, implementing and controlling.

Planning is a systematic process that focuses on assessing opportunities and resources,

13 determining marketing objectives, developing marketing strategy and developing plans for implementing and controlling. Organizing marketing activities involves developing the internal structure of marketing units. Implementing entails coordinating marketing activities, motivating marketing personnel and effectively communicating within the marketing unit. Controlling consists of establishing performance standards, evaluating actual performance by comparing it with these standards and reducing the difference between desired and actual performance.

17. Why is it important to adhere to the principle of analyses first, then marketing strategy development, followed ultimately by programmes for implementing the recommended marketing strategy?

Strategies cannot be determined without a sound understanding of the marketplace, notably customer needs and behaviour, marketing, opportunities, market trends and competitive forces.

Marketing programmes (the marketing mix and implementation controls) must be designed specifically to achieve the recommended marketing strategy, and the target market strategy must be decided before such tactical executions are determined.

COMMENTS ON THE WEB TASK AND CASES WEB TASK As this is an introductory chapter, the emphasis of this exercise is to focus on how an organization attempts to reflect customer needs. In this instance, leading Spanish car producer, Seat, part of the German VW group, has been selected because users of Marketing: Concepts and Strategies will have specific requirements from a car choice, based on brand image, functionality, style, performance, features, third-party endorsement and price.

While not perfect – what website is? – the selected site for Seat is easy to navigate, links with the motoring press plaudits for specific models and offers prospective buyers and current owners a wealth of attractively presented information. While students may suggest improvements, most will quickly appreciate how customer-orientated this web site is and thereby the effective manner in which Seat is communicating with its customer base.

Marketing research indicates that most private buyers (not fleet business customers) take around four months from deciding to switch vehicle to purchasing. This high involvement buying process generally necessitates an extensive searching for information, during which motoring magazines and TV programmes are consulted, more attention than normal is devoted to car advertisements, and peer comments are sought from family, friends and colleagues, particularly via social media… many car buyers now blog about their adventures and Facebook at each stage in their purchasing journey. The Seat website offers the required product information and pricing data, plus financing options, but it does so in a zappy fashion designed to reflect the sporty brand positioning adopted by this erstwhile valueled marque.

APPLIED MINI-CASE It is likely that Salty Dog is practising a ‗scatter-gun‘ approach to target marketing, reacting to emerging sales opportunities. This is quite common in smaller, quickly growing companies. A marketing manager should appraise the consumption patterns and trends for this type of product, carefully select the most relevant consumers to target, and assess competition also serving these consumers. As a result of these analyses, it would emerge that certain geographic areas were better targets than others, that some apparently attractive consumer targets in practice were not really worthwhile priorities, and that only specific retail brands would be applicable as stockists. Certain consumer types and behaviours will be more successful for Salty Dog to chase, so more work in

14 refining customer insight will be necessary. The owners of Salty Dog would need to see evidence from the analyses and clearly defined recommendations, both in a presentation and in a written report.

CASE STUDY: SWEDEN’S IKEA MARCHES ON The global success of furniture retailer IKEA is phenomenal, with a seemingly endless queue of potential customers eagerly awaiting the opening of each new store. The unique trading concept – a consumer-focused cash and carry store with a mix of self- and assisted selection – has proved successful in Europe, North America and Asia Pacific.

Question 1 explores the reasons behind this success: a differentiated concept; clear brand positioning and identity; quality merchandise attractively displayed at a keen price, with additional amenities (including creche, restaurant, café, toilets, ample parking, customer service and home-delivery subcontractors) making a trip to IKEA a ‗day out experience‘. The merchandise is innovative, stylish and constantly updated. The unique concept is not alone responsible for IKEA‘s success: the company maximises consumer awareness of its trading philosophy in a sector of retailing not known for innovation, style or customer service. IKEA has a clearly defined target market strategy, brand positioning and differentiation over rivals.

Question 2 examines why IKEA continually revisits its trading concept and launches new or modified formats. This is in response to continually changing consumer preferences and behaviours, along with responding to the moves of competitors. Coventry‘s vertical store, the boutique Outposts in Manhattan, IKEA Cook, IKEA business solutions and now a full-on digital presence are all examples.

Question 3 revisits the marketing concept and asks how IKEA deploys the principles of marketing.

There is an emphasis on differentiating the offer from competitors and striving to satisfy customers in an ever changing, dynamic marketplace. Products, services and ideas are part of the IKEA offer, which is conveyed through an ever evolving, tightly controlled marketing mix targeted at a very specific group of consumers. Ask consumers waiting in lengthy queues at in-store customer collection points whether they are satisfied and their answer will be in the negative! Nevertheless, they come back repeatedly for more. The ‗package‘ is not perfect, but in the target market‘s view, it clearly has much to offer over rival homeware and furniture retailers.

CHAPTER 2

Marketing strategy and understanding competitors

15

OBJECTIVES •

To define marketing strategy and explore the relationship with a company‘s organizational mission, goals and corporate strategy.

•

To assess organizational opportunities, capabilities and the SWOT analysis.

•

To consider strategic objectives.

•

To appreciate the role of target market strategy, customer value propositions and brand positioning in marketing strategy.

•

To examine competitive advantage, competitive positions and differential advantage.

•

To explore marketing objectives and understand the role of marketing mix programmes in executing a marketing strategy.

•

To understand the importance of implementation and performance monitoring in marketing strategy.

PURPOSE AND PERSPECTIVE This chapter focuses on marketing strategy. After discussing the need to comply with the organization‘s mission, goals and corporate strategy, the chapter examines the major considerations in assessing organizational opportunities and resources: marketing opportunities, environmental scanning, the company‘s capabilities and assets and SWOT analysis. The chapter then explores strategic objectives and focus, target market segmentation, brand positioning and competitive advantage. Competitive positions – market leaders, challengers, fast movers, followers, nichers – and competitive strategies, both offensive and defensive, are discussed, along with the importance of establishing a differential advantage. The link is then made with subsequent marketing objectives and marketing mix decisions and the controls required to implement the determined marketing strategy.

16

LECTURE OUTLINE V.

Marketing strategy defined A. Marketing strategy states which opportunities are to be pursued by an organization, indicates the specific markets towards which activities are to be targeted and the types of competitive advantages that are to be developed and exploited.

B. It articulates the best uses of a business‘s resources and tactics to achieve its marketing objectives.

1. The strategy requires clear objectives and a focus in line with an organization‘s corporate goals.

2. The ‗right‘ customers must be targeted more effectively than they are by competitors.

3. Associated marketing mixes must be developed into marketing programmes that successfully implement the marketing strategy.

C. A company‘s strategy is its direction and scope over the longer-term, meeting stakeholders‘ requirements. A marketing strategy is part of the execution plan for this corporate strategy.

Key components of strategy include providing direction; scoping markets and product areas in which to be active; creating competitive advantage; managing and aligning resources; reflecting the dynamics of the external trading environment; and managing stakeholders. In creating a strategy an organization‘s leadership must improve performance; prioritize opportunities to pursue; identify activities no longer deserving support/resourcing; create a target market strategy; understand how best to engage with these target customers; and mobilize or align those inside the organization to execute the strategy.

D. Strategic market planning 1. A strategic market plan is an outline of the methods and resources required to achieve organizational goals within a specific target market. a) The plan takes into account not only marketing but all other functional areas of a business unit that must be coordinated, such as production, finance and personnel, as well as environmental issues.

2. The concept of the strategic business unit is used to define areas for consideration in a specific strategic market plan. a) A strategic business unit (SBU) is a division, product line or other profit centre within a parent company.

(1) Each sells a distinct set of products to an identifiable group of customers, and each competes with a well-defined set of competitors.

(2) Each SBU‘s revenues, costs, investments and strategic plans can be separated from those of the parent company and evaluated.

(3) Strategic planners must recognise the different performance capabilities of each SBU and ensure that the SBUs complement each other for the greater good of the overall business.

3. The process of strategic market planning yields a marketing strategy that is the framework for a marketing plan. a) The planning process should be guided by a marketing-oriented culture and processes in the organization. b) A marketing plan is a written document that includes the framework and the entire set of activities for implementing and controlling an organization‘s marketing activities. c) A strategic market plan is not the same as a marketing plan – it is a plan of all aspects of an organization‘s strategy in the marketplace.

(1) A marketing plan, in contrast, deals primarily with implementing the marketing strategy as it relates to target markets and the marketing mix.

17 (2)

The marketing plan states which are priority target markets and details the marketing programmes, also specifying timeframes, budgets and responsibilities. d) Strategic market planning is based on an organization‘s overall goals, and it must stay within the bounds of the organization‘s opportunities and resources. e) In some organizations, marketers steer the development of the strategic marketing plan because they are the holders of market knowledge. f) In other organizations, the board of directors develops the strategic market plan and marketers focus on devising marketing strategies capable of achieving the aims of the top-line strategic marketing plan.

4. To achieve its marketing objectives, an organization must develop a marketing strategy, or set of marketing strategies (figure 2.2). a) To operationalize a marketing strategy, a marketing mix must be developed. b) A marketing programme is a marketer‘s marketing mix activities and implementation processes designed to operationalize the marketing strategy.

5. Most marketing programmes centre around a detailed marketing mix specification and include internal controls and procedures to ensure that they are implemented effectively.

6. Through strategic market planning, an organization can develop marketing strategies that, when properly implemented and controlled, will contribute to the achievement of its marketing objectives and its overall goals.

7. To formulate a marketing strategy, the marketer identifies and analyzes the target market and develops a marketing mix to satisfy individuals in that market.

8. Marketing strategy is best formulated when it reflects the overall direction of the organization and is coordinated with all the company‘s functional areas.

9. The strategic market planning process is based on an analysis of the broader marketing environment. a) Environmental forces can place constraints on a company and its overall goals, yet can provide favourable opportunities as well. b) Marketing environment forces influence the development of a marketing strategy more directly through their impact on consumers‘ needs and desires and their effect on competitors‘ plans.

VI. Organizational mission, goals and corporate strategy A. A company‘s organizational goals should be derived from its mission, the broad, long-term tasks that the organization wants to accomplish.

1. A mission statement gives the organization a clear purpose and direction, describes the unique aim of the organization, focuses on customer needs, directs top managers in pursuing opportunities and guides all employees and managers throughout the business, acting like glue to hold the organization together.

B. A company‘s goals should specify the ends, or results, that are sought.

1. Examples of organizational goals include profit, return on investment, an increase in market shares or an increase/decrease in the number of active markets.

2. Organizations can also have short-term and long-term goals. a) A successful company may want to sacrifice the current year‘s profits for the long run and at the same time pursue other goals, such as increasing market share.

C. Corporate strategy is a strategy that determines how resources are to be used to meet the organization‘s goals in the areas of production, logistics, finance, research and development, human resources, IT and marketing.

1. Corporate strategy is used by all organizations regardless of size.

18 2.

Corporate strategy planners are concerned with issues such as diversification, competition, differentiation, interrelationships among business units, and marketing environment forces.

VII. Organizational opportunities and resources A. Marketing opportunities 1. A marketing opportunity arises when circumstances and timing allow an organization to take action towards reaching a target market. a) An opportunity provides a favourable chance or opening for a business to generate sales from identifiable markets. b) A temporary period of optimum fit between the key requirements of a market and the particular capabilities of a company competing in that market is a strategic window.

2. The attractiveness of marketing opportunities is determined by: a) Market forces such as size and growth rate b) Political, legal, regulatory, societal/green, economic/competitive and technological marketing environment forces c) Internal capital, plant, and human and financial resources 3. Market requirements relate to customers‘ needs or desired benefits. a) Market requirements are satisfied by components of the marketing mix that provide buyers with these benefits. b) Marketers must devise strategies to out-perform competitors by finding out what product attributes buyers use to select products.

B. Environmental scanning 1. The process of collecting information about the marketing environment to help marketers identify opportunities and assist in planning is environmental scanning.

2. This approach engages management in the process of environmental forecasting and enhances the likelihood of successfully integrating forecasting efforts into strategic market planning.

3. Environmental scanning to detect changes in the environment is extremely important if a business is to avoid crisis management. a) Environmental scanning identifies new developments and determines the nature and rate of change.

C. Capabilities and assets 1. Capabilities relate to a company‘s distinctive competencies that it has developed to do something well and efficiently. a) A company is likely to enjoy a differential advantage over its rivals in an area where its competencies out-do those of its potential competitors.

2. Marketing assets highlight capabilities that managers and the marketplace view as beneficially strong. a) Customer based assets include brand image and reputation. b) Distribution based assets may involve density of dealers and geographic coverage. c) Internal marketing assets include skills, experience, economies of scale, technology and resources.

3. It is essential for a business to take time to assess its capabilities and assets and to map these alongside identified opportunities.

D. SWOT Analysis is the examination of an organization‘s strengths, weaknesses, opportunities and threats, usually depicted on a four-cell chart.

1. One of the most simplistic tools used by marketers, it is fundamentally little more than a set of checklists.

19 2.

The strengths relate to those internal operational, managerial, resource and marketing factors that managers believe provide a strong foundation for their organization‘s activities and for their ability to compete in the marketplace a) Many marketers treat the notion of marketing assets as a means for classifying strengths.

3. Weaknesses are those aspects of an organization, its products and activities in the marketplace, that place the organization at a disadvantage vis-à-vis competitors and in the view of targeted customers.

4. An organization must have an awareness of its capabilities and how these map out against competitors‘ strengths and weaknesses.

5. Opportunities and threats are external-facing issues of the trading environment and at the forefront of the marketing concept is marketing opportunity analysis. a) A sound appreciation of marketing environment forces and evolving market trends is essential for a marketing-oriented organization – without such appreciation, they will be unable to develop a truly meaningful marketing strategy.

6. Marketing environmental scanning identifies numerous issues that marketers must consider when developing marketing strategies. a) These market developments may offer opportunities for marketers to exploit or they may be the cause of threats to the fortunes of an organization.

7. SWOT analysis, in its simplistic way, has the benefit of placing an organization‘s strengths and weaknesses in the context of the identified opportunities and threats, so implying the extent to which an organization is capable of leveraging an opportunity or fending off an apparent threat.

8. SWOT can be an effective scene-setting tool, but only if the guidelines detailed in the Marketing Tools and Techniques box in this chapter are followed.

VIII. Strategic objectives and strategic focus A. Ansoff‟s matrix – a tool for determining competitive strategies: market penetration, market development, product development or diversification (figure 2.4) 1. A business may choose one or more competitive strategies as the basis for its strategic objectives, including intense growth, diversified growth and integrated growth.

B. Intense growth 1. Intense growth can take place when current products and current markets have the potential for increasing sales – there are three main strategies for intense growth: a) Market penetration is a strategy of increasing sales in current markets with current products. b) Market development is a strategy of increasing sales of current products in new markets. c) Product development is a strategy of increasing sales by improving present products or developing new products for current markets.

C. Diversified growth 1. Diversified growth occurs when new products are developed to be sold in new markets. a) Diversification allows companies to spread their risk across a number of markets. b) More importantly, it allows companies to make better and wider use of their management, technical and financial resources.

2. Horizontal diversification occurs when new products that are not technologically related to current products are introduced into current markets.

3. Concentric diversification occurs when new products that are related to current products are introduced into new markets.

20 4.

Conglomerate diversification occurs when new products that are unrelated to current technology, products or markets are introduced into new markets.

D. Integrated growth 1. Integrated growth can occur in the same industry that the company is in and in three possible directions: forwards, backwards or horizontally. a) Forward integration occurs when a company takes ownership or increased control of its distribution system. b) Backward integration occurs when a company takes ownership or increased control of its supply systems. c) Horizontal integration occurs when a company takes ownership or control of some of its competitors.

IX. Target Market Strategy and Brand Positioning A. Market segmentation is at the core of robust marketing strategy development.

1. As explained in Chapter 7 of Marketing: Concepts and Strategies, this involves identifying customer needs, expectations, perceptions and buying behaviour so as to group together homogeneous customers who will be satisfied and marketed to in a similar manner.

2. Shrewd targeting of certain segments and the development of a clear brand positioning are part and parcel of the market segmentation process.

B. Brand positioning is the creation of a desirable, distinctive and plausible image for a brand that will have strong appeal for the customers in a target market segment.

C. A target market strategy is the choice of which market segment(s) an organization decides to prioritize and for which to develop marketing programmes.

1. Organizations must identify priority target markets that are worthwhile targeting with bespoke marketing mix programmes: product, price, place (distribution), promotion and people.

D. Reaching targeted customers is achieved through all ingredients of the marketing mix, but specifically through developing a distinctive, plausible and memorable brand positioning.

1. This positioning imagery is communicated to targeted customers primarily through the promotional mix, packaging and design.

E. It is important to finalise the target market strategy of priority target market segmentation and required brand positioning before developing the marketing mix tactics of the marketing programmes destined to implement this strategy. There should be a well-honed customer value proposition, designed to excite and to satisfy targeted customers.

X. Competitive advantage A. In order to persuade customers to purchase an organization‘s products in preference to those products marketed by its competitors, leading strategists argue that it is necessary to develop a competitive advantage.

1. Competitors are organizations viewed as marketing products similar to, or substitutable for, a company‘s products, when targeted at the same customers.

2. Competitive advantage is the achievement of superior performance vis-à-vis rivals, through differentiation, to create distinct product appeal or brand identity; through providing customer value and achieving the lowest delivered cost; or by focusing on narrowly scoped product categories or market niches so as to be viewed as a leading specialist.

B. The creation of a competitive advantage is a core component of the development of a marketing strategy.

C. Marketing strategist Michael Porter identified the so-called generic routes to competitive advantage, claiming them to result in success for companies competing for position in any particular market (figure 2.5):

21 Cost leadership – developing a low-cost base, often through economies of scale associated with high market share and economies of experience – very tight cost controls are essential to the success of this strategy.

2. Differentiation – offering product and marketing programmes that have a distinct advantage or are different from those offered by competitors.

3. Focus – companies must maintain close links with the market so that product and marketing effort are designed with a particular target group in mind – typically of small size.

D. Failure to achieve any of these strategies can result in companies being ‗stuck in the middle‘, with no real competitive advantage.

1. It is not usually possible to simultaneously follow all three generic strategies for competitive advantage, but it is common for businesses to gain cost leadership while also differentiating their position and for organizations to seek both a focused and a differentiated approach.

2. It is sometimes more difficult to create a focused and cost leadership approach, as niche players rarely have the necessary scale economies, but it is not impossible.

XI. Competitive positions and differential advantage A. In order to ensure that their differential advantage will be effective, marketers must understand the nature of the competitive set and also identify those rivals with which to do battle.

1. Competitive set – all competing organizations and brands, irrespective of size and history, including substitutable solutions to customers‘ needs, as defined by the target market customers.

2. The customer‘s view of this competitive set is of paramount importance – management teams often name too narrow in scope a competitive set than is actually considered by customers.

B. The scoping of the competitive arena and the identification of the competitive set are important marketing analysis tasks – competitors are generally termed part of the ‗micro marketing environment‘.

1. For the identified competitive set, marketers should assess the objectives and strategies of these rivals, their strengths and weaknesses, and determine how competitors are likely to react to their own marketing strategy and programmes.

2. In effect, this leads to a decision about which competitors to ‗fight‘, which to avoid antagonising and which to treat as unimportant.

C. The power of suppliers and of consumers can also vary per company and act as a competitive force.

D. Michael Porter‘s view of defining the nature of the competitive arena (figure 2.7) is particularly useful for scoping the nature of a marketplace.

1. Five competitive forces are defined that together determine competition in an industry or marketplace: a) Rivalry among existing like-for-like players b) the threat of new entrants c) the threat of substitute products or services as a solution to customers‘ problems or needs d) the bargaining power of buyers e) the bargaining power of suppliers E. Competitive positions 1. Competitive positions are roles in the competitive marketplace that organizations assume, which influence their marketing strategies and programmes.

1.

22 a)

F.

G.

A market leader is the single player enjoying the largest individual share in a market.

(1) The market leader maintains its competitive position by expanding the total market or by expanding market share at the expense of its rivals, while protecting or defending current market share by retaining its customer base.

(2) The marketing programmes necessary for maintaining ongoing relationships with existing customers are quite different to the marketing programmes used to attract and entice potential customers. b) Market challengers aggressively try to capture market share from their rivals by attacking the market and the market leader to gain market share.

(1) Most markets have two or three challengers. c) Fast movers are smaller rival companies not yet destined to be major challengers but growing rapidly on a smaller scale. d) Market followers are low share competitors without the resources, market position, research and development, or commitment to challenge for extra sales and market share. e) Market nichers are companies that specialise by focusing on only a very narrow range of products or on a select band of consumers.

2. Warfare strategies a) Defensive warfare is a policy (which should be considered only by a market leader) of striking a balance between waiting for market developments or competitor activity and proactively parrying competitors‘ actions. b) Offensive warfare is a proactive and aggressive policy whereby challengers aggressively seek market share by identifying any weaknesses in the leader‘s marketing mix and developing a genuine corresponding strength.

3. Competitor scanning is the thorough monitoring of competitive positions and competitors‘ strategies. a) Competitor scanning helps to establish more realistic marketing goals, develop successful strategies and programmes, and pre-empt unfavourable situations caused by competitors‘ actions.

The competitive positions proforma has been developed by the authors of Marketing: Concepts and Strategies, in conjunction with many organizations, as a way of scoping the competitive set, helping a company in understanding the competitive positions in its target markets and diagnosing the effectiveness of a marketing strategy (see Marketing tools and techniques, page 60).

Differential advantage 1. A differential advantage is an attribute of a brand, product, service or marketing mix that is desired by the targeted customer and provided by only one supplier. a) It is a unique edge over rivals in satisfying this targeted customer. b) If successful, the differential advantage will be copied by rivals. c) Achieving a differential advantage requires an organization to make the most of its opportunities and resources while offering customers a satisfactory mix of tangible and intangible benefits. d) Low price should be avoided as a differential advantage unless the company has the scale economies to maintain a low-cost base and offer low price leadership. e) If there is no observable differential advantage, a business must look to its strengths over its rivals.

2. A basis for competing is a business‘s combined strengths as identified in a SWOT analysis and any differential advantage, which should form the leading edge of the business‘s marketing strategy.

23 While not unique, these strengths will still form the foundation for a company‘s ability to compete effectively.

H. Identifying differential advantage 1. Identify the market‘s segments.

2. Establish what product and service attributes are desired and demanded by customers in each segment.

3. Decide which attributes the company‘s competitor‘s offer.

4. Consider what the marketplace perceives the competitors‘ genuine strengths to be.

5. Identify whether any gaps exist between customer expectations of the product/service on offer and perceptions of the competitors‘ marketing programmes.

6. Consider whether any gaps identified in Step 5 are matched by the company and its own offerings. If the company is able to match one of more of these gaps, the potential exists for a differential advantage to be developed.

7. Question whether any of these potential advantages for the business can be emphasised through sales and marketing programmes.

8. Consider the sustainability of these advantages for the company. How easily and quickly can competitors catch up? Is it possible for the company to defend these advantages?

9. If there are no current advantages for the company, given the gaps identified between competitors‘ propositions and customer expectations, consider which areas offer potential for developing a future differential advantage.

10. In order to maximize any existing or potential advantages, detail the changes the company must make to its R&D, engineering, sales and marketing activities.

XII. Marketing objectives A. A marketing strategy must specify its core marketing objectives once the organization has agreed which marketing opportunities are worth pursuing.

1. These marketing objectives are typically defined in terms of which are the most desirable market segments to target and, for each of these priority market segments, what market share is being sought and thereby what sales volumes or levels are expected to be achieved.

2. Without specification of marketing objectives, it is difficult to ensure a fit with the determined overall corporate strategy, to monitor ongoing performance or to benchmark the effectiveness of the recommended marketing strategy against competitors‘ strategies.

XIII. Marketing mix decisions A. The marketing mix ingredients of product, place/distribution, promotion, price and people should be determined only after the marketing strategy has been produced.

B. The marketing strategy itself should be developed only after the core marketing analyses have been undertaken: trends, marketing environment forces, customer buying behaviour, competition, opportunities and capabilities.

C. The marketing process requires analysis, strategy formulation and then the specification of tactical marketing mix programmes to facilitate the implementation of the desired target market strategy.

XIV. Implementation and performance monitoring A. It is essential that the implementation of a marketing strategy be facilitated.

1. This involves specifying whom, when, how and at what cost the desired marketing mix programmes will be actioned.

2. There may be internal marketing issues to address, such as those connected with the sharing of marketing intelligence and strategies, communication channels within the business, hierarchical support and resources. a)

24 B.

The marketing programmes should be evaluated against predetermined performance measures to ensure their effective implementation and success in terms of the desired marketing objectives detailed within the marketing strategy.

ANSWERS TO DISCUSSION AND REVIEW QUESTIONS 1.

What is a marketing strategy?

Marketing strategy states which opportunities are to be pursued by an organization, indicates the specific markets towards which activities are to be targeted and the types of competitive advantages that are to be developed and exploited.

2.

Why should an organization develop a marketing strategy?

A marketing strategy helps an organization achieve its overall goals and is developed through the process of strategic market planning.

3.

Identify the major components of corporate strategy, strategic market planning and marketing strategy. Explain how they are interrelated.

Corporate strategy determines the organization‘s vision and goals, and how best to utilize resources and capabilities in the areas of production, logistics, finance, research and development, human resources, IT, sales, business development and marketing. The major components of strategic market planning include the establishment of organizational goals, organizational opportunities, organizational resources and marketing strategies (selection and analysis of target markets/development of marketing mixes). Once goals are determined, opportunities can be assessed and marketing objectives developed. Marketing objectives must help achieve the overall organizational goals. Marketing strategy makes these aspirations more specific and tangible by selecting certain opportunities to pursue, identifying appropriate target markets, seeking an edge over competitors and directing marketing programmes and activities designed to engage with current and potential customers.

4.

In what ways do marketing environment forces affect strategic market planning? Give some specific examples.

Strategic market planning must take into account political, legal, regulatory, societal/green, economic/competitive and technological forces. Strategic market planning considers not only marketing but all other functional areas of a business, including finance, production and personnel. Examples in the text include the computer market.

5.

What is a mission statement? Why must marketing strategists understand their organization‟s corporate strategy?

A mission statement sums up the organization‘s broad, long-term tasks that it hopes to accomplish. The corporate strategy determines how resources are to be used to meet the organization‘s goals. It would be counter-productive for marketers to develop marketing strategies and tactical marketing mix executions in isolation or in contradiction to either the stated mission or the corporate strategic vision.

6.

What are some of the issues that must be considered in analyzing an organization‟s opportunities and resources? How do these issues affect marketing objectives and marketing strategy?

In analyzing opportunities and resources, there are three major considerations: marketing opportunity must be assessed, environmental forces must be monitored and the company‘s

25 capabilities and assets must be understood. Marketing strategy and objectives must be viewed in light of these constraints.

7.

Why is marketing opportunity analysis necessary? What are the determinants of marketing opportunity?

Managers must undertake marketing opportunity analysis to determine when the right combination of circumstances will allow them to take action towards a target market. The opportunity could provide a favourable chance (strategic window) for the company to generate sales from markets. Marketing opportunity determinants are market size, market growth rate, market requirements and the actions of other companies.

8.

What are the components of a SWOT analysis?

The components are Strengths, Weaknesses, Opportunities and Threats.

9.

In relation to resource constraints, how can environmental scanning affect a company‟s long-term strategic market planning? Consider product costs and benefits affected by the environment.

Monitoring the outside environment helps the company avoid crisis management. An environmental change can suddenly alter the company‘s opportunities or resources, and effective new strategies may be needed to guide the total marketing effort.

10. What is the difference between market penetration, market development and product development?

Market penetration is a strategy of increasing sales in current markets with current products.

Market development involves increasing sales of current products in new marketing. Product development is a strategy of increasing sales by improving current products or developing new products for current markets.

11. Why do you think more companies are diversifying? Give some examples of diversified businesses.

Diversification allows companies to provide new products for new markets, such as construction equipment producer JCB launching clothing ranges in Debenhams. Companies can spread their risks across more markets, seek a wider set of marketing opportunities and maximise utilisation of their resources and capabilities.

12. The market segmentation process is at the heart of a marketing strategy. Why must this be so?

Few businesses have the resources to target all markets. Not all markets are equally attractive to a particular company. Target marketing focuses effort on key markets and marketing opportunities.

See Chapters 7 and 8 of Marketing: Concepts and Strategies.

13. What is competitive advantage?

Competitive advantage is the achievement of superior performance against rivals through differentiation to create distinctive product appeal or brand identity; through providing customer value and achieving the lowest delivered cost; or by focusing on narrowly scoped product categories or market niches so as to be viewed as a leading specialist.

14. Why should companies attempt to understand the strategies of their competitors? Explain your views.

26 Customers have a choice: a particular business or its competitors! A company‘s marketing mix will be compared with that of its rivals. Competitors will react to a company‘s marketing mix.

Understanding competitive forces is essential in marketing. To this end, competitor scanning helps companies to establish more realistic marketing goals, develop successful strategies and programmes, and pre-empt unfavourable situations caused by competitors‘ actions.

15. How can a market leader best defend its competitive position?

As the market leader, a company must be on the offensive and the defensive. If it sits back, aggressive challengers will inevitably erode market share, so the leader must look to expand the total market size, expand its own market share and/or enter new markets. Defensively, the leader must respond to attacks and parry competitors‘ moves while keeping its customers satisfied.

16. What are the strengths of a market nicher? In what way is a nicher vulnerable?

A nicher is a specialist by either product category or customer segment, and as such can more genuinely tailor its offering to match target customer needs. The nicher is vulnerable to new entrants – particularly larger companies that cater for several segments – and to sudden or dramatic downturns in its target segment‘s fortunes.

17. What is meant by the term differential advantage? How does this relate to the concept of competitive advantage?

A differential advantage is an attribute of a brand, product, service or marketing mix that is desired by the targeted customers and provided by only one supplier. Competitive advantages is broader and encompasses differential advantage as one of its three foundations. Competitive advantage is the achievement of superior performance against rivals through differentiation to create distinctive product appeal or brand identity; through providing customer value and achieving the lowest delivered cost; or by focusing on narrowly scoped product categories or market niches so as to be viewed as a leading specialist.

18. Why must a marketing strategy include detailed marketing objectives?

The marketing mix must be designed to deliver to specific requirements. Marketers must know their priorities. Performance must be measured and benchmarked against key criteria. Without detailed marketing objectives, it is unlikely that marketing activity will dovetail with corporate strategy.

19. In what ways should implementation of a marketing strategy be managed and facilitated?

Budgets, responsibilities, schedules and internal communication must be built into the specification of tactical marketing mix programmes. The marketing strategy must be made to happen! This also includes internal marketing (see Chapter 23 of Marketing: Concepts and Strategies).

27

COMMENTS ON THE WEB TASK AND CASES WEB TASK A customer-oriented business should have identified specific segments or groups of customers to target.

The information given out to this prioritised segment (or these segments) throughout all media including the web should be tailored to reflect the specific characteristics of these customers, their purchasing behaviour and the influencing factors on this decision-making, plus of course their product or service needs.

Have the students decided which groups of customers/segments their selected company is targeting? Is it clear who are the targets and for what product/service propositions? To what extent do they believe the proffered material is relevant to these customers?

An effective marketing strategy requires a clear target market strategy focusing on well defined marketing opportunities. However, a good marketing strategy must also be able to set one company apart from its rivals and to project superior attributes in order to communicate a competitive edge.

Samsung uses its products to organize the website with a clean, white and block colour theme. The simple but informative images show the products off to their best advantage and reflects the Samsung branding. Vodafone projects "Putting you at the heart of it ", with a raft of services and products aimed at business and private users. Pampers offers a host of information, focusing on its rewards and savings loyalty scheme for consumers. It focuses the website organization around the separate stages of growth from 'newborn baby' to 'toddler'. Innocent's website has a similar use of block colours on white with colour matching products, it focuses on its business history and recycling strategies. Innocent has also introduced a blog for news, such as its recent commitment to becoming a B-corp, a company committed to being a force of good.

APPLIED MINI-CASE A brand audit based on qualitative consumer marketing research, monitoring social media views and interviews with trade experts would identify the relative strengths of Kia. Consumer-led marketing research would identify the acceptability of the innovative range, product development, very targeted market selection and brand positioning to current customer targets and those in other segments. The emerging implications would need to be benchmarked against competitors‘ strategies and their brand positionings. Kia has started at the lower end of the market. Research is needed to determine whether the brand can be stretched upwards and whether there is space there against established rivals such as Audi, BMW, Jaguar, Mercedes and Lexus. Existing customers must not be neglected during this journey and their needs must continue to be met.

CASE STUDY: TESCO’S NEW STRATEGY FOR ZERO WASTE PACKAGING IN STORES The UN SDGs (see Chapter 24) are driving the ESG strategies of companies such as Tesco. Along with all large retailers, Tesco is striving hard to reduce its carbon footprint, of stores, in distribution, in terms of energy, packaging and waste. The case highlights only one aspect of Tesco‘s plans.

Question 1 asks why Tesco has embarked on a plan which involves so much disruption in-store to its operations and which involves having to change the consumption and shopping behaviours of its

28 consumers. It is because time is running out for our planet and rightly Tesco‘s leadership team feels it must make a contribution to the solutions that are needed throughout the supply and distribution chain.

Question 2 looks at the biggest challenges. These fall into three categories. First, schemes such as this require the cooperation of many different players. This requires bandwidth and resources to manage.

Different parties inevitably have different objectives. And not all will be willing to contribute to the costs. Second, this scheme presents health and safety challenges as well as logistical hurdles. Staff must be trained and overseen. Consumers, too! Third, consumers are not used to re-using/returning packaging to the point-of-purchase. Altering behaviour will take a concerted effort, patience and resources on the part of Tesco and its partners.

Question 3 considers the underlying trends. Any PESTLE analysis will today point to sustainability as a big driving force. It is a societal pressure, but also has regulatory and political dimensions, as well as technological aspects. The UN SDGs are talked about by politicians, company leadership teams, the media, pressure groups, consumers and even school children.

CHAPTER 3

The marketing environment

OBJECTIVES •

To understand the concept of the marketing environment and the importance of environmental scanning and analysis.

•

To explore the broad forces of the macro marketing environment: political forces relevant to marketers, the influence of laws on marketing practices, the impact of government regulations and regulatory agencies, societal issues important to marketers, the effects of new technology on society and marketing activities, economic and competitive factors and their impact on organizations and customers‘ willingness and ability to buy.

•

To examine the company-specific micro marketing environment forces: the competitive pressures facing an organization in terms of the supply chain, marketing intermediaries, buyers, competitors and from other publics.

•

To understand the role of the marketing environment in marketing opportunity analysis and the importance of strategic windows in marketing strategy.

PURPOSE AND PERSPECTIVE This chapter examines the six broad forces in the macro marketing environment – political, legal, regulatory, societal/green, technological and economic/competitive forces – as well as the companyspecific forces of the micro marketing environment.

First, environmental scanning, environmental analysis and two general approaches companies use to respond to environmental forces – a passive approach and an aggressive approach – are discussed. The next section focuses on what political forces are, how they influence business decisions and how businesses may react to them. The presentation of legal forces covers two broad categories of legislation: procompetitive laws and consumer protection laws. The chapter then explores the problems marketers experience in interpreting laws and considers the variations in court interpretations of the

29 laws. In dealing with regulatory forces, the potential effects of national and local government and nongovernmental regulatory units on marketing decisions are described, and specific ways in which legal and regulatory forces affect marketers‘ decisions are discussed. The next section examines societal/green forces and discusses living standards, quality of life and consumer movements. Next, technology is described and the effects of technology on society, which in turn affect marketing decisions, are considered, along with the direct effects of technology on marketing decision-making and several other factors that influence marketers‘ adoption and use of technology. The discussion of economic and competitive forces initially focuses on the major factors that affect demand, such as general economic conditions, buying power and consumer spending behaviour. The discussion then moves to the broad competitive forces including (1) the types of competitive structure, (2) competitive tools and (3) competitor monitoring.

The next major section examines the more narrowly focused, company-specific forces of the micro marketing environment. Based on Michael Porter‘s work, this section addresses suppliers, marketing intermediaries, buyers, competitors and publics as forces of the marketing environment that have an impact on an individual business in a more tightly constrained manner than the macro forces already discussed.

Finally, the chapter describes how changes in the marketing environment can create strategic windows that enable rivals to steal an edge. The importance of thoroughly and regularly monitoring the marketing environment is stressed.

LECTURE OUTLINE I.

II.

Introduction A. Marketing environment forces fall into two categories: the macro and the micro forces.

1. The macro environment includes the political, legal, regulatory, societal, technological, and economic/competitive forces impacting on all organizations operating in a market and on their ability to carry out their affairs.

2. Authors increasingly distinguish between these broad forces and an additional set of more company-specific forces, termed the micro marketing environment. a) Micro marketing environment forces are mostly aspects of the competitive arena.

3. It is necessary for marketers to scan and analyze environment forces.

4. Awareness is needed that issues and trends arising from these forces may create strategic windows of opportunity.

Examining and responding to the marketing environment A. The marketing environment consists of various external forces that directly or indirectly influence an organization‘s acquisition of inputs and generation of outputs.

1. These forces are typically divided into two categories: the macro forces and the micro forces of the marketing environment.

2. These influences can create uncertainty, threats and opportunities.

3. How marketing management monitors and reacts to the external forces is crucial to organizational survival.

B. Environmental scanning and analysis 1. Marketers must use environmental scanning and analysis to monitor changes in the marketing environment.

2. Environmental scanning is the process of collecting information about the forces in the marketing environment.

3. Environmental analysis involves assessing and interpreting the information gathered through environmental scanning.

30 a)

This process of evaluation monitors changes that present opportunities or potential problems for an organization.

C. Responding to environmental forces 1. Two possible responses to environmental forces are to accept them as uncontrollable or to confront and mould them. a) The reactive approach views environmental forces as uncontrollable and hard to predict and the organization as passive and reactive. b) The proactive approach attempts to shape environmental forces to the needs of the organization.

2. Neither approach is better than the other. a) Selection of one or the other depends on management philosophies and objectives, financial resources, markets, human skills and the composition of environmental forces.

III. Political forces A. Political, legal and regulatory forces are closely interrelated because political forces influence the following: 1. Enactment of legislation 2. Interpretations of legal decisions by the courts 3. Creation and effectiveness of regulatory agencies B. How government and political officials view companies and industries is important.

1. If political officials view a company or industry favourably, they are less likely to create or enforce laws and regulations unfavourable to the company or industry; they may also influence government purchases from this company.

2. Political officials can play a key role in helping organizations secure foreign markets.

3. Some companies attempt to influence political elements by helping to elect certain individuals to office through campaign contributions. a) Usually there is an implicit understanding that the elected official will perform political favours for the contributing company. b) There are strict laws governing donations and lobbying in most countries.

IV. Legal forces A. A number of laws influence marketing decisions and activities.

B. Procompetitive legislation is enacted to preserve competition and end various practices deemed unacceptable by society.

1. Monopolies and mergers a) The Competition and Markets Authority can investigate unfair business practices and anti-competitive behaviours. b) Legislation defines a monopoly as a situation in which at least a quarter of a particular good or service is supplied by a single person or a group of connected companies in a way that prevents, restricts or distorts competition. c) Ministers can act to remedy or prevent any harm that the Authority considers may exist. d) The EU has a commissioner responsible for competition.

C. Consumer protection legislation 1. The mid-1960s and early 1970s saw tremendous growth in consumer protection legislation. Trading Standards, the Financial Conduct Authority and many other organizations work to protect consumers. GDPR governance is the latest example.

2. Private organizations such as the Consumers‟ Association work to further laws governing product safety and information disclosure.

3. Consumer protection laws include the following: a) The Fair Trading Act (1973)

31

V.

b) The Food Act (1984) c) The Medicines Act (1968) d) The Misrepresentations Act (1967) e) The Trade Descriptions Act (1968) f) The Prices Act (1974) g) The Unfair Contract Terms Act (1977) h) The Sale of Goods Act (1979) i) The Supply of Goods and Services Act (1982) j) The Weights and Measures Act (1985) k) The Consumer Credit Act (1974) l) The Consumer Protection Act (1987) m) The Financial Services Act (1986) D. Interpreting laws 1. Laws and regulations affecting marketing are stated in vague terms. a) Some companies may operate in a legally questionable way to see how much they can get away with. b) Other organizations may interpret a law very conservatively to ensure that they are not violating that law.

2. Recent court decisions are analyzed by marketers to understand the law better and to gain a clearer sense of how the courts will interpret an issue in the future.

Regulatory forces A. Some regulatory agencies are created and administered by governmental units and others by non-governmental sources.

B. Government (similar administrative bodies exist in most countries.)

1. In the UK, the Department for Environment, Food and Rural Affairs (DEFRA) develops and controls policies for agriculture, horticulture, fisheries and food; it also has responsibilities for environmental and rural issues and food policies.

2. The Department of Employment and Learning controls the Employment Service, employment policy and legislation; training policy and legislation; health and safety at work; industrial relations; wage councils; equal opportunities; small companies and tourism; statistics on labour and industrial matters for the UK; the Careers Service; and international representation on employment matters and educational policy.

3. DEFRA also controls policies for planning and regional development, local government, new towns, housing, construction, inner city matters, environmental protection, water, the countryside, sports and recreation, conservation, historic buildings and ancient monuments.

4. The Export Credit Guarantee Department is responsible for the provision of insurance for exporters against the risk of non-payment for goods and services, access to bank finance for exports and insurance cover for new investment overseas.

5. The Central Statistical Office prepares and interprets statistics needed for central economic and social policies and management; it coordinates the statistical work of other departments.

6. The Department for Business, Energy and Industrial Strategy controls industrial and commercial policy, promotion of enterprise and competition in the UK and abroad, and investor and consumer protection.

7. The Department of Transport is responsible for land, sea and air transport; rail network regulation; domestic and international civil aviation; international transport agreements; shipping and ports industries; navigation issues, HM Coastguard and marine pollution; motorways and trunk roads; road safety; and overseeing local authority transport.

32 C.

Local authorities (similar administrative bodies exist in most countries.)

1. UK local authorities have far-reaching functions, some primary and others discretionary.

2. County councils are responsible for matters requiring planning and administration over wide areas needing substantial resources, including transport planning, highways, traffic regulation, local education, consumer protection, refuse disposal, police, the fire service, libraries and personal social services.

3. District councils administer functions of local significance, including environmental health, housing decisions, most planning applications and refuse collection. a) They may also provide some museums, art galleries and parks.

4. Most countries in Europe have a similar structure.

5. The European Union aims to establish commonly accepted parameters for planning, service provision and regulation, and a framework to assist in inter- and intra-country disputes.

D. Non-governmental regulatory forces 1. Self-regulatory programmes operate in the absence of government regulations and in an attempt to prevent government interference.

2. The Ofcom Code of Advertising Standards and Practice aims to keep broadcast advertising ―legal, decent, honest and truthful‖.

3. Self-regulatory programmes have several advantages over governmental laws and regulatory agencies. a) Such programmes are less expensive to establish and implement. b) Their guidelines are more realistic and operational. c) Self-regulatory programmes reduce the need to expand government bureaucracy.

4. These programmes also have several limitations. a) Non-member organizations do not have to abide by the industry guidelines that a trade association might set. b) Many self-regulatory programmes lack the tools or the authority to enforce guidelines. c) Guidelines in self-regulatory programmes are often less strict than those established by government agencies.

E. Deregulation 1. Governments can drastically alter the environment for companies.

2. Privatisation of the public utilities in the UK created new terms and conditions for their suppliers and sub-contractors.

VI. Societal forces A. Societal forces comprise the structure and dynamics of individuals and groups and the issues that engage them.

B. Living standards and quality of life 1. Society expects marketers to provide a high standard of living with many goods and services. a) People want comfortable homes; safe and readily available foods; a variety of clothing that can project an image; and efficient transportation, communications, medical and educational services.

2. People also desire a high degree of quality in their lives. a) Quality of life is enhanced by leisure time, clean air and water, unlittered beaches, conservation of wildlife and natural resources, and security from radiation and poisonous substances.

3. Because of these desires, consumers have become increasingly concerned about environmental issues such as pollution, waste disposal and the greenhouse effect.

33 a) The green movement is concerned about these environmental issues.

Marketers have a responsibility to help provide what societal members want and to minimise what they do not want.

C. Consumer movement forces 1. The consumer movement is a diverse collection of independent individuals, groups and organizations who seek to protect the rights of consumers.

2. Major consumer movement issues are environmental protection, product performance and safety and information disclosure.

3. Major forces of the consumer movement are individual consumer advocates, consumer organizations and other interest groups, consumer education and consumer laws.

VII. Technological forces A. Technology is the knowledge of how to accomplish tasks and goals.

1. The effects of technology are broad in scope and today exert a tremendous influence on everyone‘s lives.

2. Technology results from scientific research performed by businesses, universities and not-for-profit organizations.

3. The rapid technological growth of recent decades is expected to continue.

B. The impact of technology 1. Effects of technology on society a) Technology determines how consumers satisfy their physiological needs. b) Technological developments have improved standards of living. c) Some technological side effects have been undesirable, for example, polluted air and water, health hazards and unemployment.

2. Effects of technology on marketing a) Technology affects the types of products that marketers can offer. b) Laptop computers, hand-held video cameras and cellular telephones have changed consumer behaviour. c) Technological changes in communications affect how marketers reach customers (e.g. facsimile machines and the Internet). d) Technological advances in transport have enabled consumers to travel further and more often to shop at a larger number of stores. e) Producers are able to get their products to retailers and wholesalers faster.

C. Adoption and use of technology 1. Through technology assessment, managers try to foresee the effects of new products and processes on a company‘s operations, other business organizations and society in general.

2. Companies whose products and product changes grow out of recent technology strive to gather and use technological information.

3. The use of technology is sometimes affected by whether companies in an industry use it as a competitive tool. a) A marketer may decide not to apply a new technology as long as competitors are not attempting to use it.

4. The use of technology can also depend on the extent to which a company can protect inventions resulting from technological information. a) Patents can offer such protection for a certain time period.

D. CRM 1. Customer relationship management (CRM) captures data from customers about these customers‘ characteristics and their purchasing, building profiles and tailoring marketing propositions.

4.

34 2.

Database management, data mining, modelling and analytics are at the heart of CRM systems and processes. Web-based communication is often a result. Technology underpins all CRM. E. The internet and digital marketing 1. eCommerce is so important to most marketers as a key channel to reaching targeted customers, either as a standalone route to market or as part of a multi-channel strategy.

2. The web helps consumers and business customers source products and services, research options and compare suppliers.

3. Social media are now part of everyday life, often used to seek endorsements for purchases and to share opinions about consumer experiences.

F. Digital marketing 1. Digital is the buzz word of marketing, because of the rapid customization available in targeting and communicating with individual consumers and owing to the challenges posed by greater consumer-to-consumer communication using social media.

2. Significant investment is evident in technology-enabled digital marketing by most brands.

G. Mobile marketing 1. Thanks to smartphones and tablets consumers can research options, make purchases and often consume ‗on the move‘. Business customers, too. Mobile marketing is an important development.

2. Mobile technology has revolutionized our behaviours and modified our lifestyles.

H. Social media 1. How often each day do you go online to chat, find out or communicate opinions and decisions? Lots! Social media networks have transformed your lifestyles.

2. Marketers must keep up with such a step-change in consumer behaviour, ensuring their brands and products are visible and deemed desirable.

3. Consumers have never before been so empowered to ‗make or break‘ a brand‘s reputation, which poses huge challenges for marketers.

VIII. Economic and competitive forces A. Economic and competitive forces are factors in the marketing environment – such as the effects of general economic conditions; buying power; willingness to spend; spending patterns; types of competitive structure, competitive tools and some methods for monitoring competitive behaviour.

B. General economic conditions 1. These conditions change because of fluctuations in the economy that follow a general pattern referred to as the business cycle, which consists of four stages. a) Prosperity (1) Unemployment is low and total income is relatively high; thus buying power is high (assuming a low inflation rate).

(2) Marketers expand their marketing mixes to take advantage of the increased buying power.

(3) Marketers intensify distribution and promotion efforts. b) Recession (1) Unemployment rises and total buying power declines.

(2) Consumers become more conscious of price and value.

(3) Some companies make the mistake of drastically reducing marketing efforts.

(4) Marketers should revise their marketing activities by focusing on product functions and promotional efforts that emphasise value and utility. c) Depression

35 (1)

A.

Unemployment is extremely high, wages are very low, total disposable income is at a minimum and consumers lack confidence in the economy.

(2) Government fiscal and monetary policies can help off-set the effects of recession and depression. d) Recovery (1) The economy moves from depression or recession to prosperity.

(2) High unemployment declines, total disposable income rises and consumers regain confidence.

(3) Marketers face the problem of determining how quickly prosperity will return and of forecasting what level of prosperity will be reached.

(4) Marketers should maintain flexibility in their strategies.

Consumer demand and spending behaviour 1. Buying power refers to the resources such as goods and services and financial holdings that can be traded in an exchange situation. a) The major financial sources of buying power are income, credit and wealth.

(1) Income is the amount of money an individual receives through wages, rents, investments, pensions and subsidy payments for a given time period; total income is used for three purposes: paying taxes, spending for goods and services and saving.

(2) Disposable income is after-tax income; it is the ready source of buying power used for spending and/or saving.

(3) Discretionary income is the disposable income available for spending and saving after an individual has purchased the basic necessities of food, clothing and shelter; discretionary income is used to purchase entertainment, holidays, cars, education, pets, furniture, appliances and so forth.

(4) Credit affects buying power by allowing individuals to spend future income now or in the near future; three factors affecting consumers‘ use of credit are: (1) availability of credit, (2) interest rates, and (3) credit terms, such as the size of down payments and amount and number of monthly payments.

(5) Wealth is an individual‘s accumulation of past income, natural resources and financial resources such as cash, securities, jewellery, land and so forth.

(6) Buying power information is available from government sources, trade associations and research agencies.

2. Consumers‘ willingness to spend is affected by several factors: a) The product‘s absolute price and its price relative to the prices of substitute products. b) The amount of satisfaction that an individual currently receives or expects in the future from a product already owned. c) An individual‘s expectations about future employment, income level, prices, family size and general economic conditions.

3. Consumer spending patterns indicate the relative proportion of annual family expenditures or the actual amount of money spent on certain kinds of goods and services. a) Comprehensive spending patterns show the percentage of family income allotted to the annual expenditures for general classes of goods and services. b) Product-specific spending patterns indicate the annual monetary amounts families spend for specific products within a general product class. c) Information needed to construct product-specific spending patterns is available in government publications, trade publications and consumer surveys.

36 d)

Marketers use spending patterns to analyze general trends in how families spend their incomes for various kinds of products.

B. Assessment of competitive forces 1. For a business, competition is any company that markets products that are similar to, or can be substituted for, its products in the same geographic area.

2. Types of competitive structure include monopoly, oligopoly, monopolistic competition and perfect competition. a) A monopoly exists when a company produces a product that has no close substitutes. b) An oligopoly exists when a few sellers control the supply of a large proportion of a product. c) Monopolistic competition exists when a company with many potential competitors attempts to develop a differential marketing strategy to establish its own market share. d) Perfect competition, if it existed at all, would entail a large number of sellers, not one of which could significantly influence price or supply.

(1) Products would be homogeneous, and there would be full knowledge of the market and easy entry into it.

3. Competitive tools influence the level of competition and are used to deal with competitive economic forces. a) Examples of competitive tools are price, specific market segmentation, product features, promotional methods, distribution channels, store locations and service.

4. Monitoring competition is essential because marketers in an organization need to be aware of the actions of major competitors. a) Competitive monitoring allows businesses to determine what specific strategies competitors are following and how those strategies affect their own. b) Data about market shares, product movement, sales volume and expenditure levels can help marketing managers assess the performance of their own marketing efforts. c) To be successful, competing organizations need to identify unique marketing mixes. d) The search for a competitive edge, achieved through a differential advantage, is central to effective marketing strategy.

IX. The micro marketing environment A. The forces of the macro marketing environment are the very broad forces of the trading environment that have an impact on all businesses (and often consumers) operating in a particular marketplace.

B. The micro marketing environment forces are more company-specific forces reflecting the nature of the business, its suppliers, marketing intermediaries (channel members), buyers, all types of competitors and publics.

1. The organization a) When actioning marketing strategies, it is necessary to consider the internal environment: top management, finance, research and development, purchasing, manufacturing, sales and marketing, logistics. b) Senior management, corporate goals and colleagues‘ views, inputs, concerns and abilities to implement the desired marketing plan must all be taken into account.

2. Suppliers a) Raw materials, components or supplies come from third parties. b) Without the understanding and cooperation of these other organizations, a business would fail to deliver a quality product or service.

37 c)

X.

Marketers need to be aware of aspects of supply that could affect the way their business functions, including supplier innovations, deals with rivals, supply shortages, strikes, legal disputes, and so forth.

3. Marketing intermediaries a) Most businesses do not sell directly to their targeted customers but rather use intermediaries or channel members. b) Channel members include resellers – such as retailers, wholesalers, agents, brokers, dealers – plus physical distribution companies. c) Without the cooperation of such intermediaries, products would not smoothly reach the intended target market. d) Awareness of factors affecting intermediaries reduces the likelihood of impediments to a business‘s own activities.

4. Buyers a) Customers are fickle (see chapters 5 and 6) and their needs and perceptions must be continually surveyed. b) As customers‘ needs evolve, different businesses will be placed differently in terms of resources, skills, marketing mix programmes and products to satisfy such changing customer requirements.

5. Competitors a) Marketers must strive to satisfy target customers in a manner that differentiates their product, brand and overall proposition from competing companies‘ marketing mixes. b) It is essential that marketers understand their competitive arena (see Chapter 2). c) Competition stems not only from like-for-like or direct rivals (e.g. Sainsbury‘s versus Tesco), but also from substitute products (e.g. tunnelling ‗moles‘ removing the need for JCB backhoe loader diggers) or new entrants.

6. Publics a) The micro marketing environment also includes any group – public – that does or could impact on a business‘s ability to satisfy its targeted customers and achieve its corporate objectives. b) These could include financial bodies, communications and media outlets, government bodies, consumer and pressure groups, neighbourhood publics, the general public and internal publics such as the workforce.

The marketing environment and strategic opportunities A. Changes in the marketing environment can trigger major developments that, if large enough, are called strategic windows or paradigm shifts.

1. If market leaders fail to monitor the marketing environment and do not spot or react quickly enough to an underlying opportunity or evolutionary change, competitors may gain an advantage.

B. Strategic windows open because of many issues in the marketing environment, including six broad causes: 1. New technology 2. New markets 3. New distribution channels 4. Market redefinition 5. New legislation and regulation 6. Financial and political shocks C. The marketing environment – macro and micro forces – must be continually monitored in order to maximize marketing opportunities and fend off competitors‘ actions.

38 1.

2.

3.

A business must determine which aspects of the marketing environment to monitor and how to do this.

Companies opt for different solutions: some require line managers to undertake environmental scanning, a strategic planner may carry out such monitoring, or in a few large companies a bespoke marketing environment unit is responsible for researching, analysing, disseminating and recommending.

More frequently marketing planning identifies core trend and evolving forces to monitor. a) Marketing planning is practised in most companies. b) Part of the remit is to report annually on marketing environment forces likely to have implications for the business (see Chapter 21). c) No matter how implemented, it is essential that the marketing environment is monitored thoroughly and regularly. d) PEST analysis is a popular name for an evaluation of the marketing environment, looking at political – including legal and regulatory issues – economic, social and technological developments, and assessing the implications of such issues.

ANSWERS TO DISCUSSION AND REVIEW QUESTIONS 1.

Why are environmental scanning and analysis so important?

Understanding the current state of the marketing environment and recognising the threats and opportunities arising from changes within it help marketing managers assess the performance of current marketing efforts and develop marketing strategies for the future.

2.

How are political forces related to legal and regulatory forces?

Marketers are concerned with political and legal forces because of their potential control of business practices. People in government positions create regulatory agencies, enact legislation and interpret laws through the courts. The effects of these forces can be favourable or unfavourable to marketers, depending on political attitudes or public feelings towards the business sector. When political officials have favourable attitudes towards a specific industry, they are less likely to create or enforce laws and regulations that will negatively affect organizations in that industry. Personal bias may play a strong part here.

3.

Describe marketers‟ attempts to influence political forces.

Companies attempt to influence the political structure by helping to elect officials who are or will be favourable towards business interests. The help sometimes takes the form of campaign contributions. This may be simply to protect against unfavourable legislation rather than to prompt favourable legislation. Elected officials are expected to return the favour by supporting the business during their terms of office. In summary, businesspeople recognise the effects of political and legal forces and seek to influence them when possible. Ethical considerations should be strongly considered. Sadly, this is not always the case.

4.

What types of procompetitive legislation directly affect marketing practices?

Procompetitive legislation aims to preserve competition. All of the following laws have a broad impact on marketing activity and are of considerable concern to marketers.

Monopolies and mergers (competition) legislation aims to limit monopoly. Monopoly is defined as a situation where at least a quarter of a good is supplied by a single person or group of connected companies.

39 The Financial Services Act (1986) aims to limit threats to competition through rules, regulations and guidance from various bodies. The Secretary of State may take action against organizations that are seen to be acting improperly.

Anti-competitive practices legislation means that the Director General of Office of Fair Trading can investigate business practices that may restrict competition.

The Restrictive Trade Practices Act (1976) controls agreements that may restrict freedom on matters such as price setting and conditions of sale.

In addition, the European Union seeks to dismantle government trade barriers between member states supported by the Treaty of Rome.

5.

What is the major objective of most procompetitive laws? Do the laws generally accomplish this objective? Why or why not?

The primary objective in creating procompetitive laws was to preserve a competitive environment.

These laws have helped achieve this objective, in some respects, by diminishing the use of monopolistic practices. However, to some degree, procompetitive laws have also stifled competition by restricting the use of competitive tools such as pricing, advertising and sales promotion.

6.

What types of problems do marketers experience as they interpret legislation?

Many laws and regulations that affect marketers are written in vague terms, and marketers must resort to legal counsel rather than rely on their own interpretations. This vagueness, as shown in our examples, affects businesses in several ways. First, because the laws are sometimes ambiguous, a marketer may choose to operate in a legally questionable way to determine the extent to which they can function before being prosecuted under the law. Second, to ensure compliance with a law that is vaguely worded, a marketer may take a very conservative stand.

Third, a business may violate a law and have no knowledge of the violation because the provisions in the statute are ambiguous.

Courts, too, must interpret the laws and their meanings, and although the provisions of the laws remain unchanged, court interpretations may vary over the years. The courts may start with a very strict interpretation and change to a looser one in later cases. The marketer can only try to determine the ‗feelings‘ of the court to acquire a better understanding of what a law is intended to do and how business is expected to function within that law.

7.

What are the goals of the Competition and Markets Authority? How does the Authority affect marketing activities?

The Competition and Markets Authority (formerly the Monopolies and Mergers Commission and then the Competition Commission) is an independent body that investigates monopolies that are referred to it to see if they are operating against the public interest. The Secretary of State can take remedial action if appropriate. The Authority also investigates some take-overs and mergers. If the Authority believes it is against the public interest for a take-over or merger to proceed, then it will prohibit any agreement between the companies involved. The actions of the Authority can therefore potentially influence the relationships forged between organizations.

8.

Name several non-governmental regulatory forces. Do you believe that self-regulation is more or less effective than governmental regulatory agencies? Why? Although governmental regulatory forces are of primary concern to marketers, marketers must also deal with various non-governmental agencies that influence marketing decisions. Some businesses attempt self-regulation, which often is developed through trade associations. Many of

40 these programmes are designed to stop or stall the development of laws and governmental regulatory groups that would regulate marketing practices. Some programmes deal with ethical or social issues. Businesspeople generally view self-regulation as an alternative to further governmental intervention.

9.

How is the so-called „green movement‟ altering the shape of business?

The green movement is concerned with environmental issues and with safeguarding the natural environment. Concerns include clean air and water, the conservation of natural resources and security from radiation and poisonous substances. For some companies, these consumer concerns have created problems, but other companies have seen such environmental issues as potential opportunities. For example, supermarket shelves are rapidly filling with packaging that can be recycled or reused and products that are manufactured in a more environmentally ‗friendly‘ manner.

10. Describe the consumer movement. Analyze some active consumer forces in your area.

The consumer movement is a social movement that offers consumers a way of expressing dissatisfaction and of correcting some of the conditions that have caused it. Examples of forces in the students‘ areas might include government agencies, independent consumer groups or individual consumer activists.

11. What does the term „technology‟ mean to you?

As the chapter states, spacecraft, computers, cars, buildings, synthetic fibres, laser beams and heart transplants are applications or outgrowths of technology, but none of them is technology. As defined in this chapter, technology is the knowledge of how to accomplish tasks and goals.

Students should be aware of this distinction.

12. How does technology affect you as a member of society? Do the benefits of technology outweigh its costs and dangers?

Technology determines whether we are born, how we live and how we die. Students should discuss aspects of their lives affected by technology, such as working, playing, learning, eating, drinking, sleeping and other areas. In discussing the favourable and unfavourable aspects of technology, they should weigh factors such as improved productivity, improved goods and services, increased leisure time and improvements in education, communication, transport and entertainment against the unfavourable technological effects of polluted air and water, health hazards, unemployment and any other factors that students view as unwanted effects of technological applications.

13. Discuss the impact of technology on marketing activities.

Because technology affects people‘s desires for goods and services, it affects marketing activities.

Technology influences the types of products that marketers can offer for sale; the production process, which affects the quality and price of products; the ways marketers reach consumers to communicate about products; and the way products are transported and stored. Technology affects how consumers behave and live. It impacts on how marketers do their job (e.g. reflecting customer behaviour, utilising the Internet, communicating their proposition, surveying target customer views, etc.). Some of the biggest developments in marketing today hinge on technology: CRM systems, web-based commerce, mobile marketing, social media networking and the whole growth of digital marketing.

14. What factors determine whether an organization adopts and uses technology?

41 An organization‘s use of technology is determined by the company‘s ability to use it, consumers‘ ability and willingness to buy technologically improved products, the perceived long run effects of applying technology, the extent to which the company is technologically based, the degree to which technology is used as a competitive tool and the extent to which the business can protect resulting technological applications through patents or other means.

15. In what ways can each of the business cycle stages affect consumers‟ reactions to marketing strategies?

Prosperity. Assuming a low level of inflation, total buying power is high because unemployment is low and aggregate income is high. Thus, customers have the ability to purchase.

Recession. Total buying power declines because unemployment rises. The lack of buying power, coupled with the general pessimism that often accompanies recessions, causes consumer spending to decline. Buyers become more conscious of price and value, and thus desire products that are basic and fundamental.

Depression. Total disposable income is at a minimum because wages are very low and unemployment is extremely high. Because of low disposable income and a total lack of confidence in the economy, consumers cut their spending to a minimum.

Recovery. Disposable income increases as the high unemployment rate declines. Customers become more optimistic about the state of the economy. Consumer spending levels increase.

16. What is the current business cycle stage? How is this stage affecting businesses in your area?

The question is designed to have students analyze the current state of the economy and evaluate the effects of these economic conditions on local businesses. One major issue to consider is the degree to which the state of the national economy affects local businesses. In the current global economic turmoil, Euro crisis and recession, migration pressures and demographic changes there are plenty of examples to choose!

17. Define income, disposable income and discretionary income. How does each type of income affect consumer buying power?

Income is the amount of money an individual receives through wages, rents, investments, pensions and subsidy payments for a given time period. Disposable income is income that remains after taxes are paid; it is used for spending and/or saving. Discretionary income is disposable income that is available for spending and/or saving after an individual has purchased the basic necessities of food, clothing and shelter. Each income measure relates to consumers‘ buying power, because the size of each may affect the degree of buying power.

18. How is consumer buying power affected by wealth and consumer credit?

As current credit use increases, so does current buying power. By allowing people to spend future income now, credit increases current buying power but reduces future buying power. Wealth also increases buying power. Wealthy people can use their wealth not only for current purchases but also to generate additional income and to acquire large amounts of credit.

19. How is buying power measured? Why should it be evaluated?

The buying power for a geographic unit is usually measured on the basis of one or more of the following factors: population, effective buying income and retail sales. When using a buying power index, a marketer is concerned not only with the current index for a geographic unit but with how this changes from one time period to another.

42 A marketer measures buying power because buying power determines customers‘ ability to make purchases. Such measurements are used in assessing marketing opportunities, forecasting sales, establishing sales quotas and budgeting marketing expenditures.

20. What factors influence a consumer‟s willingness to spend?

Factors that influence a consumer‘s willingness to spend are the product‘s price, the individual‘s level of satisfaction obtained or expected in the future from currently used products, family size and the consumer‘s expectations about future employment, income, prices and general economic conditions.

21. What are the principal types of competition?

There are four principal types: monopoly, oligopoly, monopolistic and perfect.

22. What differentiates the forces of the micro marketing environment from those of the macro marketing environment?

The macro forces are the very broad forces that generally affect all players in a marketplace: political, legal, regulatory, societal/green, technological and economic/competitive. The micro forces (after Michael Porter) are also external trading forces, but they have a more narrowly defined impact on individual companies: internal workforce; suppliers; marketing intermediaries; buyers; competitors, including direct, substitute and new entrants; and the company‘s numerous publics.

23. Why must marketers monitor changes in supplier and marketing intermediary practices?

Most companies source supplies from third parties whose cooperation is essential. Good relations with such suppliers may give an edge over rivals if the suppliers are facing problems. Most companies utilise intermediaries in the marketing channel, including resellers – retailers, wholesalers, agents, brokers, dealers – and physical distribution companies, to distribute their products. Such players have needs, too, and mutually beneficial relationships are desirable. These intermediaries must be understood and changes to their environments addressed.

24. Why should marketers not only track direct, like-for-like competitors? What other types of competitors are there?

Substitutes, such as tunnelling ‗moles‘ replacing JCB backhoe loader diggers for laying pipes, or new entrants, such as Daewoo in the European small and medium car market a few years ago, can have significant impact. Companies tracking only like-for-like rivals can get caught out.

25. Why should marketers be aware of their company‟s publics?

Publics can include financial bodies, journalists and the media, government bodies, consumer and pressure groups, neighbourhood groups, the general public and the internal workforce. Clearly, under certain circumstances, each public can impact on a business‘s ability to function, for better or for worse.

26. How does an assessment of marketing environment forces assist in marketing opportunity analysis?

As explained in Chapter 1, marketers must understand evolving customer needs and their own organizational capabilities when assessing opportunities in the marketplace. Without consideration of the macro and micro marketing environment forces, they simply do not know enough about their evolving marketplace to be able safely and soundly to assess any opportunities!

27. What are the main causes for the opening of strategic windows?

43 The forces of the marketing environment can create windows of opportunity or, if not monitored, competitive threats. Strategic windows are often created by new technology, new markets, new distribution channels, market redefinition, new legislation and regulation, or financial and political shocks.

28. How can a business instigate environmental scanning?

Some businesses require line managers to undertake environmental scanning in addition to daily responsibilities. A strategic planner occasionally takes on the task. A few large companies have bespoke teams examining marketing environment forces. More often than not, the annual marketing planning activity includes environmental scanning. Processes may hinge on a cardboard box into which managers drop press cuttings or tit-bits, or they may involve intranet newsletters and discussions.

COMMENTS ON THE WEB TASK AND CASES WEB TASK The marketing environment is easy to illustrate in terms of economic crises, acts of terrorism affecting the tourism industry, legislation impacting on a particular market sector, the green consumer and so forth. For students not working in a particular industry (i.e. most undergraduates), it is not so easy to illustrate the impact of the regulators and public bodies that impact on marketers‘ activities and on consumer options.

Students can select any state-run regulatory body in most countries in order to identify the extent of these organizations‘ powers and controls. The two suggested, the Competition and Markets Authority and the Financial Conduct Authority, both sum up well on their web sites the nature of their work and the scope of their influence.

APPLIED MINI-CASE The Marketing tools and techniques box on page 74 indicates likely approaches to scanning the marketing environment. While external consultants are occasionally commissioned, generally managers either brainstorm the ‗PEST‘ analysis in a seminar or individual managers routinely monitor an element of the marketing environment, surfing the web, reviewing the trade press, networking with industry observers and so on. Had the major food companies been analyzing the marketing environment, they would not have been caught out by the obesity issue and the associated mounting consumer and regulatory pressure to produce more healthy food. An analysis of the marketing environment would have steered Coca-Cola towards these well-crafted initiatives.

CASE STUDY: THE WORLD OF RICE: EXTERNAL CHALLENGES FOR TILDA’S MARKETERS As a miller and importer of rice, Tilda must look to climate issues impacting on harvests, import/export regulations restricting rice movements, and the appearance of new crop varieties. Operating principally at the premium end of the market, Tilda‘s consumers must be able and willing to pay a price premium, so economic recession is a force to observe for Tilda. As a dominant player, any new entrant competitor is likely to pose a threat. The world of rice is far from dull!

Question 1 considers which issues would cause Tilda concern. The glib answer is all of them. A few years ago, poor harvests put up raw material costs so that many consumers previously loyal to the Tilda brand could no longer pay the premium for such a staple foodstuff, with significant decline in market

44 share resulting. Recession has forced the introduction of value lines, in common with so many other brands. Competition forever forces Tilda to innovate and be a thought leader in this challenging market.

Question 2 asks how might Tilda monitor these trends and forces of the marketing environment. The company is a member of many trade bodies and as a major global food brand is well-networked into many international trade organizations, government agencies and opinion groups. In addition, the company undertakes annual marketing planning, fully evaluating the marketing environment in its PEST analyses. Ad hoc workshops, mixing internal personnel with well-informed external experts and pundits, are also part of Tilda‘s approach to assessing the marketing environment.

Question 3 asks a general question about why marketers might struggle to gain adequate insights about their marketing environments. Sometimes ignorance of the need to explore these forces is to blame. Or the scale of the challenge is poorly understood, with one person being expected to be an expert in everything from consumer trends, legal developments, technology, politics and regulation, macro economics and competition. Inability to network with appropriate external experts and to attain topical data is a major failing in many businesses. In general, however, the cause often lies in a failure to develop appropriate working practices and routinised processes. Tilda captures its external challenges in its marketing planning, through well-managed networking and with dedicated workshops, but not all organizations are so smart.

CHAPTER 4

Marketing in international markets and globalization

OBJECTIVES •

To understand marketing beyond just a national market.

•

To define international marketing and understand the nature of international involvement.

•

To understand the importance of marketing intelligence when assessing international markets.

•

To recognize the impact of environmental forces on international marketing efforts.

•

To become aware of regional trade alliances and markets.

•

To look at alternative market entry strategies for becoming involved in international marketing activities.

•

To appreciate that international marketing strategies fit along a continuum from customization to globalization.

•

To understand the growing importance of international cooperation.

PURPOSE AND PERSPECTIVE This chapter applies the concepts of marketing to exchange across national boundaries. International economics and international trade at the macro level are not covered, but the tutor can supplement these topics. The goals are to show the levels of involvement in international marketing, to explore international marketing intelligence, to look at how target market selection in foreign countries is

45 structured by the marketing environment (the basic environmental variables are covered) and to examine regional trade alliances and markets, as well as alternative market entry options. This chapter is viewed as an application and/or adaptation of basic marketing concepts and decisions to the international environment. It therefore uses many real world companies and product examples to show how international marketing activities are performed. An important feature of this chapter is a review of the latest developments in the European Union and how they impact on international marketing. It concludes with a discussion of customisation versus the globalization of international marketing strategies.

46

LECTURE OUTLINE I.

Involvement in international marketing A. Marketers engaged in international marketing must decide on the degree to which it is possible to standardize their marketing strategies for different markets.

B. Levels of international involvement 1. Domestic marketing involves marketing activities directed exclusively in a business‘s home market 2. Export marketing takes place when a business takes advantage of opportunities outside its home market but continues production in the home country a) Sometimes exporting activities begin almost by accident as new markets become available. b) At this stage, production in the home country will be used to supply these new markets.

3. International marketing goes beyond simple exporting and involves reducing reliance on intermediaries and establishing direct links in the countries in which trade takes place. a) At this point, a foreign subsidiary may be set up, and products may be sourced away from the domestic market.

4. Multinational marketing goes one step further by adapting some of the company‘s marketing activities to appeal to local culture and differences in tastes.

5. Multinational companies are those that behave in foreign markets as if they were local companies.

6. Full scale global marketing requires total commitment to international marketing and involves applying the organization‘s assets, experience and products to develop and maintain marketing strategies on a global scale.

7. Globalized marketing occurs when marketing strategies are developed for major regions or the entire world to enable organizations to compete globally.

C. Understanding global marketing 1. Global marketing is the most extreme case of international involvement, representing the full integration of international marketing into strategic planning.

2. The underlying principle is to identify products or services for which similarities across many markets allow a single global strategy to be pursued. a) The fact that one marketing strategy can be used across a number of markets makes this approach attractive to managers.

3. Recently, marketers have realized that while it may be feasible to standardize a company‘s offerings in different markets, a degree of adaptation to local differences is also required.

4. In many business markets, interaction between customer personnel and an organization‘s own staff is integral to the marketing and sales processes: cultural differences vary significantly between countries, and a standardized marketing approach is unlikely to succeed.

5. Some companies have moved from customising or standardizing products for a particular region of the world to offering globally standardized products.

6. Debate about the feasibility of globalized marketing strategies continues, but it should be remembered that there are degrees of both customization and globalization.

47 7.

II.

III.

Some marketers now believe that some of the best global opportunities are presented by ‗global market segments‘, so long as similar product needs, buying behaviour and brand perceptions are evident across national borders.

8. Even if such global market segments are identified – and there is no doubt they exist for many consumer goods, services and business products – the marketing programmes may require modification to reflect local market conditions and customer purchasing.

International Marketing Intelligence A. The first step in analyzing a foreign market is gathering secondary data from government publications, financial services companies, international organizations such as the United Nations, foreign governments and international trade organizations.

B. Primary data may be needed to understand consumers‘ buying behaviour in specific countries.

1. Primary data collection techniques may need adjustment for foreign markets. a) Attitudes towards privacy, unwillingness to be interviewed, language differences and low literacy rates can be serious research obstacles.

2. Primary research should uncover significant cultural characteristics before a product is launched so that the marketing strategy is appropriate for the target market.

C. After analyzing secondary and primary data, marketers should plan a marketing strategy that also enables decisions about whether to withdraw from the foreign market, to continue to expand operations or to consider additional foreign markets.

1. Marketers must ensure they acquire the necessary marketing intelligence in order to provide a full understanding of trading conditions in all of the non-domestic markets.

Environmental forces in international markets Note: A conceptual overview of the marketing environment is given in Chapter 3.

A.

B.

C.

Cultural forces 1. Concepts, values and tangible items make up culture; culture is the blueprint for acceptable behaviour in a given society and is passed from one generation to another.

2. When products are introduced into one nation from another, acceptance is far more likely if there are similarities between the two cultures.

3. Connotations associated with body motions, greetings, colours, numbers, shapes, sizes and symbols vary considerably across cultures.

4. International marketers should also be aware of a country‘s attitudes towards the body and towards male-female social interaction.

5. Marketers need to tune into changes in culture that provide marketing opportunities.

6. How consumers perceive a country itself can affect their adoption and use of products from that country.

7. Marketing negotiations and decision-making behaviour can also be influenced by cultural perceptions of the role or status of the seller.

Social forces 1. Marketing activities are primarily social in purpose; therefore, they are structured by the institutions of family, religion, education, health and recreation.

2. By finding major deviations in institutions among countries, marketers can gain insights into the adaptation of marketing strategy.

Economic forces 1. Economic factors to be considered when making necessary adjustments in marketing abroad include standards of living, availability of credit, discretionary buying power, income distribution, natural resources and conditions that affect transport. a) Exchange rate fluctuations and differences in interest rates can also have a major impact.

48 2.

Gross domestic product (GDP) is the total value of all goods and services produced by a country. a) Dividing a country‘s GDP by the size of its population indicates the standard of living and thus the level of discretionary income or buying power of individual consumers in that country.

D. Political, regulatory and legal forces 1. A country‘s political system, national laws, regulatory bodies, national pressure groups and courts all have great impact on global marketing.

2. A government‘s policies towards public and private enterprise, consumers and foreign companies influence marketing across national boundaries.

3. The types of measures a government can take to govern cross-border trade include the use of tariffs, quotas and non-tariff barriers. a) Tariffs are taxes that affect the movement of imports, exports or goods in transit across economic or political boundaries. b) Quotas involve physical restrictions on the amount of goods that can be imported, thereby limiting choices for consumers. c) Non-tariff barriers include a wide range of rules, regulations and taxes that can impact upon trade.

4. Differences in political and governmental ethical standards also affect marketing activities. a) The use of pay-offs and bribes is entrenched in many governments. b) A company‘s code of ethics ultimately must determine whether to give small tips or gifts in countries where such practice is customary. c) It is a difficult challenge in many markets for international marketers striving to compete effectively in a country exhibiting markedly different – ‗worse‘ – ethics than in the domestic market, while adhering to the laws governing the company‘s head office, and the codes stipulated by the company‘s domestic stakeholders.

E. Technological forces 1. Much of the technology used in industrialized regions of the world may be inappropriate for developing countries. a) Promoting products via the Internet will be difficult in countries where computer ownership is low.

2. Many countries engage in international trade to gain valuable industrial and agricultural technology; however, the export of technology of strategic importance is controlled by governments.

3. Distribution channels, logistics, the tracking of goods in transit, automatic reordering using IT, CRM systems, customer interaction and internal company communications may be severely impeded in certain companies owing to their infancy in terms of the life cycles of technology used routinely in North America, the EU or Asia Pacific to manage such marketing activities.

IV. Regional trade alliances and markets A. The North American Free Trade Agreement (NAFTA) 1. The North American Free Trade Agreement (NAFTA), implemented in 1994, was designed to eliminate all tariffs on goods produced and traded between Canada, Mexico and the United States.

2. The agreement provided for a totally free trade area by 2009. a) NAFTA made it easier to invest in the participating countries. b) Duties on certain products were phased out over a 10 or 15 year period, and special rules allowed for re-instatement of certain tariffs or measures due to sudden surges of imports.

49 c)

B.

C.

D.

NAFTA also linked the US with other South American countries, providing greater opportunities to trade.

3. NAFTA became a positive factor for US companies wishing to engage in international marketing – because licensing requirements were relaxed under the pact, smaller businesses that previously could not afford to invest in Mexico and Canada were able to do business in those markets without having to locate there.

4. NAFTA was the first trade agreement in history to contain specific provisions for protecting the environment.

5. The United States-Mexico-Canada Agreement (USMCA) updated and replaced NAFTA in 2020.

European Union 1. The European Union (EU) is one of three major market groups in Western Europe. a) The EU has its origins in the European Common Market, which later became known as the European Community (EC). b) Following the signing of the Maastricht Treaty in 1992 and the creation of the single European market in 1993, the group became known as the European Union. c) Today the EU has 28 members, with the United Kingdom exiting soon. d) On 1 January 1999 the European Union moved closer to economic and monetary union with the launch of the euro, the unit of European currency.

2. Although consumers in the EU are likely to become more homogeneous in their needs and wants, marketers know that cultural and social differences between the member states will require modifications in the marketing mix for consumers in many countries.

Pacific Rim nations 1. The Pacific Rim nations include Japan, China, South Korea, Taiwan, Singapore, Hong Kong, the Philippines, Malaysia, Indonesia, Australia, Indochina, Thailand and Brunei. a) Sixty per cent of the world‘s population lives in this region.

2. Companies in the Pacific Rim nations have become increasingly competitive and sophisticated in their marketing efforts over the last three decades. a) In the early to mid-1990s, the performances of Japan and the four so-called ‗Tiger‘ economies of the region – South Korea, Singapore, Taiwan and Hong Kong – were particularly impressive.

3. Much attention is now being given to the four Pacific Rim nations that have reached the point of massive industrial growth: Thailand, Malaysia, Indonesia and China.

4. In general, attempts to promote trade and other links between Pacific Rim countries have not been particularly successful. a) The Association of South East Asian Nations (ASEAN), which aims to build trade and other links between its six members, is the best known. b) More recently, the Asia Pacific Economic Co-operative (APEC) has been set up to include the six ASEAN members (Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand), the United States, Australia, Canada, New Zealand, Japan, China, South Korea, Hong Kong and Taiwan.

In 2020, 15 countries including Japan, South Korea, China, Australia and New Zealand, as well as ten Southeast Asian countries, signed a trade pact known as the Regional Comprehensive Economic Partnership (RCEP).

Central and Eastern Europe (CEE) 1. Central and Eastern Europe (CEE) encompasses the Commonwealth of Independent States (formerly the Soviet Union), the Balkan states (Lithuania, Latvia and Estonia), the Czech and Slovak Republics, Hungary and Poland.

50 2.

V.

The decline of communism in central and eastern Europe, the fall of the Berlin Wall and the break-up of the former Soviet Union have resulted in a host of new marketing opportunities. a) Following a policy of perestroika, involving much political and economic change, the CEE countries are replacing centrally planned economies with marketing oriented democratic institutions. b) The challenge now is to move forward from the inefficiencies of state-owned industry by developing the marketing expertise, business culture, infrastructures and legal frameworks needed to trade with capitalist countries.

3. The Commonwealth of Independent States (CIS) emerged in 1996 as a loosely connected group of former Soviet Union states.

4. Reviewing economic data in comparison with EU countries provides a stark reminder of the difficult position in which many eastern European nations find themselves. a) Lack of cooperation between member states and the continuing economic and political problems in Russia are restricting opportunities.

5. The reformers of the CEE economies want to reduce trade restrictions on imports and offer incentives to encourage exports to and investment in their countries.

6. There is speculation that some of the eastern European nations will ultimately join the European Union.

7. Companies wishing to market their products in eastern Europe and the former Soviet Union must carefully monitor events and proceed cautiously.

E. General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO) 1. GATT is an agreement between countries to reduce worldwide tariffs and increase international trade.

2. Originally signed in 1947 by 23 countries, GATT provides a forum for tariff negotiations, and a place where international trade problems can be discussed and resolved.

3. There are currently 124 GATT countries and it has far-reaching ramifications for the international marketing strategies of many companies.

4. GATT sponsors rounds of negotiations aimed at reducing trade restrictions. a) The Uruguay round further reduced trade barriers for most products and provided new rules to prevent dumping – the selling of products at unfairly low prices. b) The most significant outcome of the Uruguay round was the establishment of the WTO – an entity that promotes and facilitates free trade between member states.

Alternative market entry strategies A. Exporting entails the use of an intermediary that performs most marketing functions associated with selling to other countries.

1. Exporting represents the lowest level of commitment to international marketing.

2. Requiring minimum effort and cost, it is the most flexible approach.

3. Risk is limited because there is no direct investment in the foreign country.

B. Licensing is a system in which a licensee pays commissions or royalties on sales or supplies used in manufacturing.

1. Licensing is an alternative to direct investment when production, technical assistance or marketing know-how is required. a) The exchange of management techniques or technical assistance is a primary reason for licensing agreements.

2. Licensing is also attractive when the political stability of a foreign country is in doubt or when resources are unavailable for direct investment.

51 3.

C.

D.

E.

F.

Licensing is especially advantageous for small manufacturers wanting to launch a wellknown brand internationally.

Franchising 1. Franchising, a form of licensing, is another alternative to direct investment in nondomestic markets.

2. Franchising, which is gaining popularity in Europe, grants the right to use certain intellectual property rights, such as trade names, brand names, designs, patents and copyrights.

3. The franchiser grants a licence to the franchisee, who pays to be allowed to carry out business under the name of the franchiser. a) The franchiser retains control over the manner in which business is conducted and assists the franchisee in running the business.

4. The franchisee retains ownership of the business, which remains separate from that of the franchiser.

Contract manufacturing is the practice of hiring a foreign company to produce a designated volume of product to a set specification.

1. Marketing activity may be handled by the contract manufacturer or by the contracting company.

Joint ventures and strategic alliances 1. In international marketing, a joint venture is a partnership between a domestic company and a foreign company or government.

2. Joint ventures are especially popular in industries that call for large investments, such as natural resources extraction or car manufacturing.

3. Joint ventures are often a political necessity because of nationalism or governmental restrictions on foreign ownership.

4. Sometimes joint ventures are criticized as being inherently unstable, or because they might result in take-over attempts; there is also the danger that the relationship might stifle flexibility.

5. Strategic alliances are partnerships formed to create a competitive advantage on a worldwide basis. a) Similar to joint ventures, the partners share common goals yet often retain their distinct identities. b) What distinguishes strategic alliances from other business structures is that member companies may have been traditional rivals competing for market share in the same product class. c) Global strategic partnerships and alliances between two or more corporations from several regions are increasingly prevalent. Virtual corporations are a further adaptation.

Trading companies 1. A trading company provides a link between buyers and sellers in different countries. a) Trading companies are not involved in manufacturing or owning assets related to manufacturing.

2. Such companies buy in one country at the lowest price consistent with quality and sell to buyers in another country.

3. Trading companies take title to products and undertake all the activities necessary to move the products from the domestic country to a foreign country.

4. Trading companies reduce risk for businesses interested in getting involved in international marketing by assisting producers with information about products that meet expectations in domestic or international markets.

52 a)

Other services provided by trading companies include consulting, marketing research, advertising, insurance, research and development, legal assistance, warehousing and foreign exchange services.

G. Foreign direct investment 1. Foreign direct investment (FDI) involves making a long-term commitment to marketing in a foreign nation through direct ownership of a foreign subsidiary or division.

2. The term multinational enterprise refers to a company that has operations or subsidiaries located in many countries. a) Often the parent company is based in one country and cultivates production, management and marketing activities in other countries.

3. A wholly owned foreign subsidiary may be allowed to operate independently of the parent company to have more freedom to adjust to the local environment. a) Subsidiaries can offer tax, tariff and cross-cultural operating advantages.

4. The greatest advantages of direct foreign investment are greater strategy control and enhanced market capacity. a) To maximize these, a subsidiary may operate under foreign management, so that a genuinely local identity can be developed.

VI. Customization versus the globalization of international marketing strategies A. Traditionally, international marketing strategies have customized marketing mixes according to cultural, regional and national differences in order to reflect localized marketing conditions.

B. In the 1980s and 1990s, however, the trend was towards globalization – the development of marketing strategies to treat the entire world, or its major regions, as a single entity.

1. Globalization was also attempted of the remaining ingredients of marketing programmes, notably marketing communications, pricing and distribution channels.

C. Over time, the champions of globalized marketing recognized that a ‗think globally, act locally‘ compromise was sensible.

1. Economies of effort and scale in a single product and brand identity were worthwhile, but the route to market, the way in which the brand and product were communicated to the intended target audiences, the pricing and service required, often had to be manipulated at a local level to reflect the pertinent localized market conditions.

D. International marketing requires strategic planning, if a company is to incorporate nondomestic sales into its overall marketing strategy.

E. Globalization requires a total commitment to the world, regions or multinational areas as an integral part of the company‘s markets and extensive analysis of the marketing environment is required to understand the needs of the target markets and to implement the selected strategy successfully.

F. While a global presence does not guarantee a global competitive advantage, a global presence does generate five opportunities for creating value: 1. to adapt to local market differences 2. to exploit economies of scale 3. to exploit economies of global scope 4. to mine optimal locations for activities and resources 5. to maximize the transfer of knowledge across locations

ANSWERS TO DISCUSSION AND REVIEW QUESTIONS 29. How does international marketing differ from domestic marketing?

53 International marketing differs from domestic marketing in that exchange occurs across national boundaries. When marketing occurs across national boundaries, decisions should address changes in the marketing environment.

30. What must marketers consider before deciding whether to become involved in international marketing?

International marketing involvement relates to the company‘s goals and the perceived opportunity from serving foreign markets. Sometimes, to develop desired profits and growth, marketers view it as necessary to cross national boundaries.

31. Are the largest industrial companies in Europe committed to international marketing? Why or why not?

The largest industrial companies in Europe are generally committed to international marketing because their resources and marketing opportunities can be optimized in serving foreign markets.

Companies such as Esso and Coca-Cola have increased their profit bases tremendously by increasing the size of the world markets they serve. The same is true for major EU businesses such as Ericsson, ABN AMRO or JCB. 32. Why do you think so much of this chapter is devoted to an analysis of the international marketing environment?

The environment is a major consideration in analysing international marketing. If a marketing strategy is to be effective across national boundaries, the complexities of all environments must be understood. The cultural, social, economic, political/legal and technological environments of many countries differ considerably.

33. A manufacturer exported peanut butter with a green label to a nation in the Far East. The product failed because it was associated with jungle sickness. How could this mistake have been avoided?

By using a marketing intelligence system or by conducting marketing research, the selling company could have learned the cultural taboos and attitudes of the nation in the Far East. The green label should have been market tested in the foreign country; the results would have indicated that the colour of the label was considered taboo.

34. How do religious systems influence marketing activities in foreign countries?

Religious systems influence international marketing processes by helping form a society‘s ethics and value structure. All societies have some philosophy for explaining the unknown and supernatural.

35. Recent recession has affected trade opportunities for many European businesses. How could businesses minimize the impact of such problems?

Awareness of marketing environment forces and market trends would have given forewarning of such problems. Utilisation of alliances with local partners reduces the financial risk of trading in non-domestic markets. A balanced portfolio of markets is essential, with riskier ventures compensated for by well-established and lucrative territories of activity.

36. If you were asked to provide a small tip or bribe to have a document approved in a foreign nation where this practice was customary, what would you do?

This question relates to the values and the ethical standards of the individual involved. There is no right or wrong answer in this situation, but such tips should be avoided if possible. In much of Europe, this type of payment is considered a bribe and therefore unethical.

54 37. What should marketers consider as they decide whether to licence or to enter into a joint venture in a foreign nation?

A decision to license or to enter into a joint venture in a foreign country depends on the nature of the product and the political and economic stability of the nation being served. Licensing is not as risky as a joint venture because the licensee pays commissions or royalties on the sales of supplies used in manufacturing in a foreign country. This technique is an alternative to direct investment.

The joint venture is a partnership between a domestic and a foreign company and/or government.

In a joint venture, there is always the possibility that the domestic and foreign companies may disagree, and the foreign company can be at a disadvantage. There is always the possibility of expropriation—the foreign country may take over all control of a joint venture. On the other hand, a joint venture often guarantees that a company will gain a foreign market, and it may help develop local support for the company‘s products.

38. Discuss the impact of strategic alliances on marketing strategies.

Strategic alliances—partnerships formed to create a competitive advantage on a worldwide basis—are the newest form of international business structure. The number of strategic alliances is growing at an estimated rate of about 20 per cent per year, and in some areas they are becoming the predominant means of competing. For example, Cathay Pacific Airways and Japan Airlines operate a direct service between Hong Kong and Japan. It was the first joint venture between Cathay Pacific and Japan‘s national flag carrier. Cathay will operate a Lockheed TriStar, which can carry 281 passengers, with one JAL crew member. The impact of strategic alliances such as this on marketing strategies is that the companies can offer high quality products and services at the lowest competitive price available and focus on their unique approaches to promotion and distribution.

11. What is meant by globalization?

Globalization is the development of marketing strategies that treat the entire world, or its major regions, as a single entity.

12. What are the differences between customization and globalization?

Globalization requires total commitment to the world, regions or multinational areas as an integral part of the company‘s markets. Global marketing involves applying the organization‘s assets, experience and products to develop and maintain marketing strategies on a global scale. Global marketing is the most extreme case of international involvement, representing the full integration of international marketing into strategic planning. Businesses which are not fully engaged in global marketing, but which are involved either in international and multinational marketing may engage in activities to customize either their products or aspects of their marketing programmes to suit local markets.

COMMENTS ON THE WEB TASK AND CASES WEB TASK The selected companies have been chosen deliberately because all strive to trade globally, utilizing a common product range or retailing concept across national boundaries, supported by a similar brand proposition and customer support.

JCB is the UK equivalent of US construction giant Caterpillar but is a major player around the world.

Its core range of products and enviable customer service are offered in each country in which the company has operations. Samsung is well known for consumer electronics, but it also offers a range of

55 products for business users. Throughout the world, Samsung offers the same products, specification, customer service and branding. French hypermarket retailer Carrefour was one of the first retailers with global ambitions. Despite a few setbacks, the company trades in many continents, taking its successful hypermarket and supermarket concepts to numerous countries, with only minor alterations in format to reflect local trading needs. Ford has a global brand and product strategy but seeks to reflect the behaviours and aspirations of its target consumers in each territory, mapping competition and studying the forces of the marketing environment in each region. IKEA does the same, flexing its trading concept, merchandising mix and communications to reflect local market conditions.

However, all these companies recognize the importance of understanding localized customer needs and buying behaviour, competition, the marketing environment and perceptions of them. If students take the time to look at several different countries‘ home pages on each of these global businesses‘ websites, they will quickly appreciate the subtle but important changes made to the information offered to each country‘s consumers or business customers.

APPLIED MINI-CASE Consumer tastes (pardon the pun) would be assessed, as this type of confectionery is not universally consumed around the world. The marketing environment forces, notably around healthy eating moves, would be assessed. A crucial analysis would be that of competition, as certain mature markets with strong domestic and international brands already offering such products might prove unattractive.

Related to this analysis, there would need to be an analysis of distribution channels to ensure easy access to the intended target market and to check that existing manufacturers have not restrictively tied up retail distribution.

CASE STUDY: CARREFOUR’S ‘G4’ AND INTERNATIONAL GROWTH STRATEGY France‘s Carrefour has been managing hypermarkets for close to 40 years but has expanded far from its French base. Along with The Netherlands‘ Ahold, the UK‘s Tesco, Sweden‘s IKEA and America‘s Wal-Mart (all discussed in other chapters), Carrefour is one of the few retailers with genuinely global ambitions. However, expansion overseas has not been without difficulties. More recent expansion has been through acquisition of domestic businesses timed to coincide with growth opportunities for grocery hypermarket retailing in each country.

Question 1 examines how Carrefour has grown internationally, initially through organic expansion and creating store networks from scratch in Benelux, Italy, Switzerland and the UK. While not too successful, further organic growth was successful in France, Spain, Brazil, Argentina and Taiwan.

Since the 1990s, growth has been via acquisition, and also into other retailing sectors and store formats, such as frozen food, office supplies, eyewear, cash and carries, and discounters. Other retailers have been very successful in launching various formats aimed at town centres, C-stores in local neighbourhoods and e-channels.

Question 2 asks about additional international opportunities likely to open up to Carrefour, which include further grocery sector growth, expansion into other retailing categories and store styles, plus more countries of operation. As Carrefour increases its expertise in logistics and supply chain management, there are also diversification opportunities to utilize its growing business skills and managerial prowess, particularly into multiple store formats and online.

Question 3 asks about Carrefour‘s globalization and modification of its retailing concept to fit local needs. In Spain, a local brand name, Pryca, was adopted. The acquisition of non-hypermarket businesses has, at times, reflected local dislike of the hypermarket concept. Logistics have also had to reflect local distribution and operational practices. Increasingly, Carrefour strives to adopt a uniform

56 approach and positioning globally, whereas other retailers with global ambitions have begun to vary their operations and store formats to reflect localized markets and consumer expectations.

CHAPTER 5

Consumer buying behaviour

OBJECTIVES •

To understand the different types of consumer buying behaviour.

•

To recognize the stages of the consumer buying decision process and understand how this process relates to different types of buying decisions.

•

To explore how personal factors may affect the consumer buying decision process.

•

To learn about the psychological factors that may affect the consumer buying decision process.

•

To examine the social factors that influence the consumer buying decision process.

•

To understand why it is important for marketers to attempt to understand consumer buying behaviour and the role of this behaviour in marketing strategy.

•

To appreciate the growing role of consumer-to-consumer (C2C) communication, social media and the digital environment regarding buying behaviour.

•

To understand the growing impact of C2C communication on the buying choices that consumers make.

PURPOSE AND PERSPECTIVE Marketing hinges on exchanges with targeted customers and on their satisfaction. Without a sound understanding of how and why customers buy, effective marketing is impossible. Chapter 5 examines business-to-business (industrial or organizational) buying behaviour, in which a business‘s customers are other businesses. This chapter introduces the major decision processes involved in consumer purchasing, in which the customer is the individual consumer/householder (the general public). First, the various types of consumer buying behaviour, such as routine response behaviour, limited decisionmaking, extensive decision-making and impulse buying, are described. Next, the major stages of the consumer buying decision process – problem recognition, information search, evaluation of alternatives, purchase and post-purchase evaluation – are considered. Then the major influences on the buying decision process are discussed. In the personal influences section, the manner in which demographic, situational and involvement factors affect purchase decisions are outlined. The psychological and social influences on consumer buying decisions are also considered. The chapter examines how the digital environment has impacted on buying behaviour, particularly with the growth of social media-enabled increasing real-time consumer-to-consumer communication. Finally, the chapter analyzes why marketers should understand consumer buying behaviour.

57

LECTURE OUTLINE I.

II.

III.

Introduction A. Buying behaviour is the term used to describe the decision processes and actions of people involved in buying and using products.

B. Consumer buying behaviour is the buying behaviour of ultimate customers – people who purchase products for personal or household use; it is not concerned with the purchase of items for business use.

C. The success of a company‘s marketing strategy will depend on how buyers react to it. To find out what satisfies customers, marketers must examine the main influences on what, where, when and how consumers buy.

1. By understanding these factors better, marketers are better able to predict how consumers will respond to marketing strategies.

2. Ultimately this information helps companies compete more effectively in the marketplace.

D. Although marketers try to understand and influence consumer buying behaviour, they cannot control it.

1. Even if marketers wanted to manipulate buyers, they have neither the power nor the knowledge to do so.

2. The growth of social media has exaggerated this lack of control.

Types of consumer buying behaviour A. Routine response behaviour generally occurs when buying frequently purchased, low cost, low risk items.

1. It involves very little search and decision effort.

B. Buyers engage in limited decision-making when buying products that are unfamiliar, expensive, high-risk or which are purchased infrequently.

1. This type of decision-making involves a moderate amount of time for information gathering and deliberation.

C. Buyers engage in extensive decision-making when a purchase involves unfamiliar, expensive, high risk or infrequently bought products, such as cars, homes, holidays or personal pensions.

1. Buyers in such cases use many criteria to evaluate alternative brands or choices and spend much more time seeking information and comparing alternative brands before deciding on the purchase.

D. By contrast, impulse buying involves no conscious planning but a powerful, persistent urge to buy something immediately.

1. Marketers often capitalize on the tendency towards impulse buying by placing magazines and confectionery next to checkout counters.

E. The purchase of a product does not always elicit the same type of decision-making behaviour.

1. Buyers may engage in extensive decision-making the first time they purchase a certain kind of product but use limited decision-making on subsequent occasions.

The consumer buying decision process A. There are five stages in the consumer buying decision process: problem recognition, information search, evaluation of alternatives, purchase and post-purchase evaluation.

1. The actual act of purchasing is only one stage in the process and is a later stage.

2. Not all decision processes, once initiated, lead to an ultimate purchase; the consumer may stop the process at any stage.

58

B.

C.

D.

E.

3. Not all consumer decisions include all five stages.

Problem recognition 1. This first stage occurs when a buyer becomes aware of a difference between a desired state and an actual condition.

2. The individual may be unaware of the problem or need.

3. Marketers may use sales personnel, advertising, sales promotion and packaging to help trigger recognition of such needs or problems.

4. Consumer problem recognition speed can be slow or rapid, depending on the individual and the way in which need recognition was triggered.

Information search 1. This stage begins after the consumer becomes aware of the problem or need.

2. The search for information about products will help resolve the problem or satisfy the need.

3. There are two aspects to information search: internal search and external search. a) In an internal search, buyers first search their memory for information about products that might solve the problem. b) An external search is made if consumers cannot retrieve enough information from their memory for a decision and need to seek additional information from friends, colleagues, relatives or public sources, such as government reports, news stories and the Internet.

4. Consumer groups are increasingly demanding access to greater quantities of relevant product information.

5. How consumers use and process the information obtained during a search depends on features of the information itself, namely availability, quantity, quality, repetition and format.

6. Repetition increases consumer learning of information. a) Repetition helps consumers grasp details as the message is repeated. b) Initially effective commercials can result in ‗wear-out‘ as consumers begin to pay less attention to repetitious commercials and respond less favourably.

7. Much depends on the level of involvement – the level of interest, emotion and activity that the consumer is prepared to expend on a particular purchase (see below).

8. The format in which information is transmitted to the buyer – whether verbally, numerically or visually – may also determine its effectiveness.

9. When successful, an information search yields an evoked set of products or a group of brands that the buyer views as possible alternatives.

Evaluation of alternatives 1. In this stage, the consumer establishes criteria against which to compare the characteristics of the products in the evoked set. a) These criteria are the characteristics or features that the buyer wants (or does not want).

2. The consumer rates and eventually ranks the brands in the evoked set, using the criteria and their relative importance, or salience.

3. The salience is the level of importance a buyer assigns to each criterion for comparing products.

4. Marketers can influence consumers‘ evaluation by framing the alternatives, that is, by the manner in which an alternative and its attributes are described.

Purchase 1. The purchase stage, in which the consumer selects the product or brand to be purchased, is mainly the outcome of the consumer‘s evaluation of alternatives.

59 2.

During this stage, the buyer picks the seller from whom the product will be purchased and finalizes the terms of sale. a) Price, delivery, guarantees, service agreements, installation and credit arrangements are discussed and settled.

3. The actual purchase is made, unless the process has been terminated earlier.

F. Post-purchase evaluation 1. The buyer begins to evaluate the product after purchase, based on many of the criteria used in the evaluation of alternatives stage.

2. This stage will determine whether the consumer is satisfied or dissatisfied. a) Consumers‘ satisfaction or dissatisfaction determines whether they make a complaint, communicate with other possible buyers or purchase the product again.

3. Cognitive dissonance are doubts that occur when the buyer questions whether the best purchase decision was made.

IV. Personal factors influencing the buying decision process A. Personal factors are unique to a particular person.

1. In this section, three types are considered: demographic factors, situational factors and level of involvement.

B. Demographic factors 1. Demographic factors are individual characteristics such as age, sex, race, ethnic origin, income, family life cycle and occupation. (These characteristics are discussed further in Chapter 7.)

2. Demographic factors can influence who is involved in family decision-making.

3. They can also partially govern behaviour during a specific stage of the decision process.

4. They can affect the extent and way in which products in a specific product category are used.

5. They can lead to variations in buying behaviour.

C. Situational factors 1. Situational factors are the external circumstances or conditions that exist when a consumer is making a purchase decision.

2. They can influence the buyer at any stage of the consumer buying decision process and may cause the individual to shorten, lengthen or terminate the process.

3. Examples include uncertainty about employment, product scarcity and time pressures.

D. Level of involvement 1. Level of involvement refers to the level of interest, emotional commitment and time spent searching for a product in a particular situation. a) It determines why a buyer is motivated to seek information about certain products and brands but virtually ignores others. b) The extensiveness of the buying decision process varies greatly according to the consumer‘s level of involvement.

2. Low involvement buyers form an attitude towards a product and evaluate its features after purchasing it rather than before.

3. Conversely, high involvement buyers spend much time and effort researching their purchase beforehand.

4. Enduring involvement is an ongoing interest in a product class because of personal relevance.

5. Situational involvement results from the particular circumstance or environment in which buyers find themselves.

60 a)

V.

This type of involvement is usually temporary because the conditions that triggered the high degree of involvement may change.

6. Low consumer involvement describes a situation when purchase decisions do not generate much consumer involvement, such as for routine response purchases.

Psychological factors influencing the buying decision process A. Psychological factors operating within individuals partly determine people‘s general behaviour and thus influence their behaviour as consumers.

1. The primary psychological influences on consumer behaviour – perception, motives, learning, attitudes and personality – are highly affected by social forces external to the individual (see below).

B. Perception 1. Perception is the three-step process of selecting, organizing and interpreting information inputs to produce meaning. a) Information inputs are the sensations received through sight, taste, hearing, smell and touch.

2. The first step of the perceptual process is the selection of information. a) Only a small number of information inputs are selected to reach one‘s awareness; certain inputs are selected and others are ignored. b) This selective exposure occurs because one cannot be conscious of all inputs at the same time c) An input is more likely to reach the person‘s awareness if it relates to an anticipated event. d) A person is more likely to let an input reach consciousness if the information helps satisfy current needs. e) If the intensity of an input changes significantly, it is more likely to reach awareness.

3. The selective nature of perception leads to two other conditions: selective distortion and selective retention. a) Selective distortion is the changing or twisting of currently received information to make it more consistent with personally held views. b) Selective retention occurs when people remember information inputs that support their feelings and beliefs and forget inputs that do not.

4. In the second step of the perceptual process, information inputs are organized and integrated with information already stored in memory. a) Although this step is usually carried out quickly, it may take longer when the individual is considering an unfamiliar product area.

5. Interpretation – the third step of the perceptual process – is the assigning of meaning to what has been organized.

6. It is difficult for marketers to control people‘s perceptions. a) A consumer‘s perceptual process may prevent the information from being received. b) A buyer may receive the information but perceive it differently from the way that was intended. c) Buyers who perceive information inputs to be inconsistent with their personally held beliefs are likely to forget the information quickly.

7. A person‘s self-perception, or self-concept, may affect purchase decisions and consumption behaviour.

C. Motives 1. A motive is an internal, energy giving force that directs a person‘s activities towards satisfying a need or achieving a goal.

61 a) Motivation is the set of mechanisms for controlling movement towards goals.

A buyer‘s actions at any time are affected by a set of motives rather than by just one. a) Each buyer‘s motives are unique. b) At a single point in time, some motives in the set have priority, but the priorities of motives vary from one occasion to another.

3. Motivation affects the direction and intensity of behaviour as individuals must choose which goals to pursue at a particular time.

4. Patronage motives influence where a person purchases products on a regular basis.

5. Motivation research can be used to analyse the major motives that influence consumers to buy or not buy products. a) Motives that are subconscious are especially hard to judge and cannot be elicited by marketers through direct questioning.

6. Most motivation research relies on interviews or projective techniques. a) In an in-depth interview, the researcher tries to get the subject to talk freely about anything at all to create an informal atmosphere.

(1) Usually the researcher asks general, non-directed questions and then probes the subject‘s answers for clarification.

(2) An in-depth interview may last several hours. b) In a focus group, the moderator – through leadership that is not highly structured – tries to generate discussion about one or several topics among a group of six to twelve people.

(1) Researchers cannot probe as far in a focus group as in an in-depth interview, and some products may not be suitable for such group discussion. c) To determine the subconscious motives reflected in the interviews, motivation researchers must exhibit a range of qualities.

(1) They must be perceived as non-threatening by members of the group.

(2) They must be able to adopt a demeanour appropriate for the characteristics of the individuals in the group.

(3) They must be extremely well trained in clinical psychology. d) Projective techniques are tests in which subjects are asked to perform specific tasks for particular reasons, while actually being evaluated for other purposes.

(1) Such tests are based on the assumption that subjects will unconsciously ‗project‘ their motives as they perform the required tasks.

(2) Examples are word association tests, sentence completion tests and bubble drawings.

Learning 1. Learning refers to changes in a person‘s behaviour caused by information and experience. a) The learning process is strongly influenced by the consequences of behaviour.

(1) Behaviour that results in satisfying consequences tends to be repeated. b) Consumers learn about products directly by experiencing them or indirectly through information from advertisements or from a sales representative of a particular brand.

2. Knowledge has two components: familiarity with the product and expertise – the ability to apply the product. a) The duration and intensity of the buying decision process depends on the buyer‘s familiarity with or prior experience in purchasing and using the product. b) Consumers who lack expertise are more likely to seek the advice of others.

2.

D.

62 3.

Marketers sometimes help customers to learn about their products and to gain experience with them by means of free samples, in-store demonstrations and detailed advertisements.

4. Influencing what consumers learn is difficult to achieve – marketers encounter problems in attracting and holding consumers‘ attention, providing the kinds of information that are important for making purchase decisions, and convincing consumers to try the product.

E. Attitudes 1. An attitude refers to an individual‘s enduring evaluation, feelings and behavioural tendencies towards an object or activity.

2. Attitudes are learned through experience and interaction with others.

3. Attitudes can be changed, but generally they remain stable and do not change from moment to moment.

4. An attitude consists of three major components: cognitive, affective and behavioural. a) The cognitive (or thinking) component is a person‘s knowledge and information about the object or idea. b) The affective (or feeling) component comprises feelings and emotions towards the object or idea. c) The behavioural (or action) component is composed of the action tendencies one exhibits towards the object or idea.

5. Consumers‘ attitudes towards a company and its products greatly influence the success or failure of the company‘s marketing strategy.

6. Marketers use several methods to measure consumer attitudes towards prices, package designs, company logos and brand names, advertisements, warranties, store design and location, features of existing or proposed products and social responsibility issues. a) Direct questioning of consumers is the simplest method. b) Marketers sometimes evaluate consumer attitudes using attitude scales.

(1) Subjects are asked to indicate the intensity of their feelings towards an object by reacting to a series of adjectives, phrases or sentences about the object.

7. Changing people‘s negative attitudes generally is a long, expensive and difficult task and may require extensive promotional efforts.

F. Personality 1. Personality includes all the internal traits and behaviours that make a person unique.

2. Each person‘s unique personality is both inherited and the result of personal experiences.

3. Personalities are typically described as having one or more characteristics such as compulsiveness, ambitiousness, gregariousness, dogmatism, authoritarianism, introversion, extroversion, aggressiveness and competitiveness.

4. Though marketing researchers have for many years attempted to find relationships among such characteristics and buying behaviour, the results of many studies have been inconclusive.

5. When marketers aim advertising campaigns at general types of personalities, they use positively valued personality characteristics.

VI. Social factors influencing the buying decision process A. Social factors, the forces that other people exert on buying behaviour, can be grouped into four major areas: roles and family, reference groups, social classes, and culture and subcultures.

B. Roles and family

63 1.

C.

D.

E.

A role is a set of actions and activities that a person in a particular position is supposed to perform, based on the expectations of both the individual and surrounding people.

2. Because people occupy numerous positions, they also have many roles.

3. An individual‘s roles influence both general behaviour and buying behaviour.

4. Marketers need to be aware of how roles affect buyer behaviour.

Reference groups 1. A reference group is a group with which an individual identifies so much that he or she takes on many of the group members‘ values, attitudes or behaviours. a) Families, friends, work colleagues, and social, religious and professional organizations are examples of reference groups.

2. A group can be a negative reference group for an individual, perhaps because they previously were part of it but later rejected its values and members.

3. A reference group may serve as a point of comparison and a source of information for an individual.

4. The degree to which a reference group will affect a purchase decision depends on an individual‘s susceptibility to the group‘s influence and the strength of his or her involvement with the group. a) The more conspicuous a product, the more likely the brand decision will be influenced by reference groups.

5. A marketer sometimes tries to use reference group influence in advertisements by suggesting that people in a specific group buy a product and are highly satisfied with it. a) Whether this kind of advertising succeeds will depend on how effectively the message is communicated, the type of product, and the individual‘s susceptibility to a reference group influence.

6. In most reference groups, one or more members stand out as opinion leaders. a) An opinion leader provides information about a specific sphere of interest to reference group participants who seek such information. b) Opinion leaders are viewed by group members as being well informed on a particular area, and easily accessible.

Social classes 1. A social class is an open group of individuals who have similar social rank. a) A class is referred to as ‗open‘ because people can move into and out of it.

2. The criteria for grouping people into classes vary from one society to another. a) Many factors are taken into account, including occupation, education, income, wealth, race, ethnic group and possessions.

3. To some degree, people within social classes develop and assume common patterns of behaviour.

4. Because social class affects so many aspects of a person‘s life, it also affects buying decisions, including the type, quality and quantity of products that a person buys and uses.

5. Different countries often collate data about their populations based on social or socioeconomic factors. a) For many years, the UK, like some other countries, used a relatively simple classification based on social status and occupation. b) In 2001, the UK‘s Office for National Statistics introduced a modified system known as NS SEC (National Statistics Socio-Economic Status), based on occupation and aims to more closely reflect consumers‘ purchasing power.

Culture and sub-cultures 1. Culture consists of everything in our surroundings that is made by human beings.

64 a)

Culture includes tangible items, such as food, furniture, buildings, clothing and tools. b) Culture is also made up of intangible concepts, including education, the legal system, healthcare and religion. c) Culture also includes the values and a wide range of behaviours that are acceptable within a specific society.

2. The concepts, values and behaviours that make up a culture are learned and passed from one generation to the next.

3. Because cultural influences widely affect the ways in which people buy and use products, culture affects the development, promotion, distribution and pricing of products.

4. An increase in ethnic diversity in many societies has implications for the way in which new products and services are develop and marketed.

5. International marketers must take into account that people in other regions of the world have different attitudes, values and needs, which in turn call for different methods of doing business. (See Chapter 4 for a more detailed treatment of this topic.)

6. Cultures can be divided into sub-cultures according to geographic regions or human characteristics, such as age or ethnic background. a) Within sub-cultures there are even greater similarities in people‘s attitudes, values and actions than within the broader culture. b) To deal effectively with sub-cultural differences, marketers may have to alter their product, promotion, distribution systems, price or people to satisfy members of particular sub-cultures.

VII. The impact of new thinking and new technologies A. Marketers now recognize that in addition to the rational model of consumer decision making depicted in this chapter, there is a sub-conscious element to consumer choice.

Neuromarketing, which is the study of consumers‘ brain patterns to reveal responses to marketing stimuli, uses brain scanning approaches from neuroscience to shed light on these sub-conscious elements.

B. Consumer-to-consumer communication (C2C) refers to communication taking place between consumers through face-to-face, online or other electronic media. Today, blogs, wikis, podcasts and rating sites and the like have the capability to publicize, praise or challenge the company.

C. The arrival of social networking sites and increasing use of digital media allow consumers to connect with each other and influence each other like never before, removing some of the power from brand managers who previously largely controlled the information available about their brands and companies.

D. More control about purchasing information and more persuasion are in the hands of consumers.

E. The buy-in to social media and networking varies between consumers. Some are creators, others are critics, while many are only collectors or joiners. Some are spectators and many are still inactive.

VIII. Understanding consumer behaviour A. Marketers try to understand consumer buying behaviour so that they can offer consumers greater satisfaction.

B. An appreciation of how and why individuals buy products and services helps marketers design more appealing marketing programmes.

C. Consumer expectations are now rising, making it more important than ever for marketers to focus on the marketing concept and to be consumer oriented.

65 D.

The fact that it may be difficult to analyse consumer behaviour precisely, does not detract from the importance of doing so.

1. Considerable progress has been made recently as advances in technology and changing shopping habits are increasing the opportunities for capturing and managing information about consumers.

2. When analyzed, this information provides vital insights into the needs and wants of different customer types.

ANSWERS TO DISCUSSION AND REVIEW QUESTIONS 1.

Name the types of buying behaviour consumers use. List some products that you have bought using each type of behaviour.

The different types of consumer buying behaviour include routine response behaviour, limited decision-making, extensive decision-making and impulse buying.

Routine response behaviour occurs when people buy frequently purchased, low-cost items that need very little search and decision effort. Examples of routinely purchased products include toothpaste, bread, packaged food products and laundry services.

Limited decision-making occurs when consumers buy products only occasionally and when they need to obtain information about an unfamiliar brand in a familiar product category. This type of decision-making requires a moderate amount of time for information gathering and deliberation.

Purchase decisions might include a new pest control company or a new ‗healthy‘ cereal.

The most complex decision-making behaviour, extensive decision-making, comes into play when a purchase involves unfamiliar, expensive or infrequently bought products, such as cars, homes or stereo systems.

2.

In what circumstances have you bought a product on impulse?

Most students probably will indicate that they have bought a product on impulse. Typical impulse purchases include low risk, cheap, frequently consumed items, such as confectionery or soft drinks. However, retailers are smart with their positioning of online deals and in-store promotions, so often many items in a customer‘s shopping basket are ones not initially considered for purchase on a particular shopping trip.

3.

What are the five stages in the consumer buying decision process? Are all these stages used in all consumer purchase decisions?

The major stages in the consumer buying decision process are problem recognition, information search, evaluation of alternatives, purchase and post-purchase evaluation.

Not all consumer decisions include all five stages. The individual may terminate the process at any stage, and not all decisions lead to a purchase.

4.

What are the personal factors that affect the consumer buying decision process? How do they affect the process?

A personal factor is one that is unique to a particular person. Personal factors include demographic factors, situational factors, and level of involvement. Because of characteristics such as age, sex and unique external circumstances, personal factors directly affect the purchase.

5.

How does a consumer‟s level of involvement affect their purchase behaviour?

The level of involvement determines the importance and intensity of interest in a product in a particular situation. A buyer‘s level of involvement determines why they are motivated to seek

66 information about certain products and brands but virtually ignores others. The extensiveness of the buying decision process varies greatly with the consumer‘s level of involvement. Online communities often engender increasing involvement, even when one consumer is passive but is engaged in a discussion aiding another consumer‘s purchasing.

6.

What is the function of time in a consumer‟s buying decision process?

The time available to make a decision is a situational factor that strongly influences consumer buying decisions. If there is little time for selecting and purchasing a product, the person may make a quick choice and purchase a readily available brand. The amount of available time also affects the way consumers process information contained in promotional material.

7.

What is selective exposure and what effect does it have on consumer buying?

Selective exposure relates to receiving information and then screening it internally with only partial awareness of all of the cues received. We select some inputs and ignore many others because we cannot be conscious of all inputs at one time. An input is more likely to reach awareness if it relates to an anticipated event or to an unmet need. Thus, you are more likely to notice an advertisement on television for McDonald‘s when you are hungry and thinking about where to go for lunch.

8.

How do marketers attempt to shape consumers‟ learning?

Marketers attempt to influence consumers‘ learning by having them experience products – for instance, using free samples. Indirect experiences of products through product information from salespeople and advertisements are other avenues by which marketers attempt to influence purchases through the learning process.

9.

Why are marketers concerned about consumer attitudes?

Consumer attitudes towards a company and its products strongly influence the success or failure of the organization‘s marketing programme. Negative attitudes among consumers may result in loss of sales, while strong positive attitudes may increase sales. Because attitudes play such an important role in determining consumer behaviour, marketers seek to measure consumer attitudes towards prices, packaging, branding, advertising, salespeople, services, images and features of new products. If a significant number of consumers hold negative attitudes towards a company or its products, the marketing programme should be changed to make attitudes more favourable.

10. Describe reference groups. How do they influence buying behaviour? Name some of your own reference groups.

A reference group is a group with which an individual identifies so strongly that he or she takes on many of the values, attitudes or behaviours of group members. The group can be large or small, and usually an individual will have several reference groups. The effect of reference groups on purchasing behaviour depends on the type of product, the person‘s susceptibility to the group‘s influence and the strength of the person‘s involvement with the group.

11. In what ways does social class affect a person‟s buying behaviour?

Individuals within social classes often exhibit common consumer behaviour patterns; they share similar attitudes, values and possessions. Social class influences a person‘s attitudes, perceptions, motives, personality and learning process, all of which affect purchasing decisions. Marketers thus need to be aware of the impact of social class on consumer behaviour. It will be interesting to see how greater social networking breaks down some traditional divides.

12. What is culture? How does it affect a person‟s buying behaviour?

67 Culture is everything in our surroundings that is made by human beings, including tangible and intangible items. Culture influences what we wear and eat, where we live and how we live. It affects the ways we buy and use products and influences the satisfaction we receive from them.

Because culture determines the ways in which products are purchased and used, it affects the entire marketing mix.

13. Describe the sub-cultures to which you belong. Identify buying behaviour that is unique to your sub-culture.

This question lets students probe the unique sub-cultures to which they belong. Students should be encouraged to relate the unique features of their sub-cultures to their purchasing behaviour.

14. If consumers are dissatisfied with a particular purchase, what actions are open to them?

What can marketers do to respond to these actions?

After purchase takes place, consumers will begin evaluating whether the product‘s performance meets expectations. A range of criteria may be used to assess the performance. This stage will determine how satisfied or dissatisfied the consumer is with the purchase and whether a similar purchase will be made in the future.

Dissatisfaction may cause the consumer to complain. Sometimes cognitive dissonance occurs.

These are doubts about whether the right purchase decision was made, which may cause the consumer to return the product or seek positive information about it to justify the choice.

Increasingly, dissatisfaction is shared with fellow consumers, often via social media. Marketers should strive to provide satisfactory service and good experience, minimizing dissatisfaction.

When complaints are made, they must be handled promptly and professionally, bearing in mind possible risks to brand reputation.

15. How is consumer-to-consumer communication (C2C) changing the way consumers buy products?

Consumers have always sourced information from reputable/trusted sources to aid their purchasing, and friends and family are always top of the list. Now social media enable instant sourcing of information and either a positive or negative endorsement from personal contacts.

Companies are utilising the digital arena to help with price comparisons and to enable shoppers to share their in-store selections with friends and partners via Facebook or email. The world of available information has become instantly available and the ability to access a friend‘s opinion or partner‘s agreement to a purchase has become instantaneous. Digital marketing, as explored elsewhere in this book, has altered the nature of the relationship between brands and their customers, while social media has given a much bigger role in purchasing to friends and third parties for information search and trialling opinions.

COMMENTS ON THE WEB TASK AND CASES WEB TASK By cleverly monitoring an individual customer‘s purchasing behaviour, Amazon is effective at assessing a reader‘s tastes and selecting similar titles that may be of interest. For time pressured, curious or easily led customers, such suggestions are popular and often generate incremental sales.

The level of consumer involvement will vary subject to the purchase occasion: the routine purchase of a favourite author‘s new title or another one in a series already being read; the more involved and time consumer task of selecting a title as a gift for someone else, versus the higher involvement trawling for

68 unspecified titles concerning a very specific topic. There are other examples, too, but these alone illustrate the variations.

The information offered by Amazon‘s website acknowledges these variations: quick search for a known title, prolonged surfing by theme or responding to Amazon‘s suggestions for purchases.

A book shop manager once described her main types of customers as thus: •

Time pressured, run in, know what they want, find it, pay, go.

•

Need a gift, don‘t know what or where, come in, browse, often tempted by the table displays of current leading titles or offers, find a title as quickly as possible, pay and leave.

•

The confirmed browser, knows his/her mind, has favourite classifications/authors, but spends time browsing at that part of the shop, lingers, selects eventually, pays and leaves.

Amazon‘s online store caters for all of these types of purchasing.

APPLIED MINI-CASE If a private consumer, cost, desired luxury and hotel amenities, service levels, convenience in terms of location and parking, brand image, third party endorsement, proximity to attractions or place of business might all be factors. For business users, corporate contracts and discounts, block bookings and conference/meeting facilities might also be important. In other words, a mix of personal, psychological and social influences. InterContinental has a range of hotel brands targeting different consumer behaviours and corporate user requirements. If you are selecting a hotel for a break with your mates, a romantic weekend away, a family holiday or a business trip, your needs will vary and so will the whole purchasing process.

CASE STUDY: CRAYOLA COLOURING IN THE TWENTY-FIRST CENTURY The toy market has undergone considerable change. Crayola LLC (part of Hallmark Cards), which produces Crayola Crayons, must increasingly compete with a host of high technology toys. The company also has to respond to children becoming more involved in the buying process than ever before. This case considers the company‘s response to changing market conditions and diverse consumer behaviours to address.

Question 1 examines the reasons for the company‘s need to update its marketing of Crayola and alter its strategy. The company faced increasing competition from a host of more modern, high technology products such as computer games and music downloads. Within this environment, the crayon was in danger of seeming dull and old fashioned. Buying patterns were also changing, with increased power in the hands of children, who found the traditional crayon concept rather dull. The company was in need of an urgent product and marketing strategy update to change perceptions of the product and encourage kids to see the product as an exciting way to express themselves.

Question 2 focuses on Crayola‘s target audiences and why the company needed to approach them differently. There are two main target audiences, the parents and their children. The company realized that its traditional approach of targeting parents was not satisfactory. Children are now playing an important role in the purchase of toys, having a greater deal of power and influence over the process.

They also have an increasing amount of disposable income. This meant that the business had to offer products and develop marketing programmes that had more appeal for this audience. Research showed that children wanted brighter, more exciting colours than were being offered, so the company brought out a range of new colours. In addition, a host of new product lines was introduced, all backed up by an updated advertising campaign featuring fashionable youngsters. The company continued to recognize

69 the importance of the parents and their income. The company continued to target parents with advertisements in women‘s and parents‘ magazines. In addition, the company must appeal to educationalists and also media pundits who now can make or break a toy brand with a ‗must buy‘ or ‗avoid‘ blog or tweet.

Question 3 asks why the company has embraced the Internet. This has been necessary because the three target audiences at which the business is targeting its products: parents, educators and ‗Crayola kids‘ are familiar with and regularly use this medium, both for shopping and for leisure activities.

Parents are turning to the Internet to take the pain out of shopping for their kids. Educators use the medium to keep up-to-date with educational trends. Kids are becoming genuine experts, using the Internet for everything from computer games, chat and information to shopping and picking up on the latest trends.

CHAPTER 6

Business markets and business buying behaviour

OBJECTIVES •

To become familiar with the various types of a business market.

•

To identify the major characteristics of business buyers and transactions.

•

To understand several attributes of business demand.

•

To become familiar with the major components of a buying centre or decision-making unit.

•

To understand relationship marketing and exchanges between business buyers and sellers.

•

To understand the stages of the business buying decision process and the factors that affect this process.

•

To learn how to select and analyze target markets in business-to-business.

•

To appreciate some of the nuances of marketing business-to-business products.

PURPOSE AND PERSPECTIVE In this chapter, the major types of business markets, including producer, reseller, government and institutional, are discussed. Next, several dimensions of business buying, such as the characteristics of transactions, the attributes of buyers, the primary concerns in making purchase decisions, the methods of buying and the major types of business purchases, are considered. Then the characteristics of demand for business products are discussed. Next, the major participants in business-to-business buying decision processes, who are referred to as the buying centre, are examined, and the relationship between buyers and sellers is considered. The chapter then examines the stages of the business buying decision process and the factors that influence that process. Finally, the chapter considers the selection and analysis of business markets.

70

LECTURE OUTLINE I.

II.

Introduction A. Many marketers do not address consumers, instead targeting businesses or organizations.

B. A business market is one in which the customer is not a consumer, but other businesses or organizations that purchase a specific type of product or service for resale, for use in other products or for use in their daily operations.

C. In older books this used to be known as industrial or organizational marketing – more recently the term business-to-business marketing became popular.

Types of business market A. Producer markets 1. Producer markets consist of individuals and organizations that purchase products for the purpose of making a profit by using them to produce other products or by using them in their operations. a) Producer markets include buyers of raw materials and semi-finished and finished items used to produce other products.

2. A wide range of industries make up the producer markets, including agriculture, forestry, fisheries, mining, construction, transport, communications and public utilities.

B. Reseller markets 1. Reseller markets consist of intermediaries that buy finished goods and resell them to make a profit. a) Resellers do not change the physical characteristics of the products they handle, except for occasional minor alterations.

2. Wholesalers purchase products for resale to retailers, other wholesalers and producers, governments and institutions. a) Some wholesalers carry as many as 250,000 items, making it easier for resellers to buy from a single source.

3. Retailers purchase products and resell them to final consumers.

4. When making purchase decisions, resellers consider several factors: a) Level of demand to determine quantity and price levels b) Amount of space required to handle the product relative to its potential profit c) Supplier‘s ability to provide adequate quantities of product when and where needed d) Ease of placing orders e) Availability of technical assistance and training programmes f) Whether the product complements or competes with products the company currently handles C. Government markets 1. Government markets include national and local governments and contribute to public sector markets.

2. The government spends billions of pounds on a wide range of goods and services to support internal operations and to provide the public with education, utilities, national defence, road systems and healthcare.

3. The types and quantities of products that government markets purchase reflect social demands on government agencies.

4. Many companies do not try to sell to the government because of the complex buying procedures necessitated by the government‘s public accountability.

5. Government purchases are usually made through bids or negotiated contracts.

71 6. Government markets, although complex, can be very lucrative.

Institutional markets 1. Organizations with charitable, educational, community or other non-business goals constitute institutional markets. Third sector marketing covers charities, the voluntary sector, not-for-profit and NGOs. 2. Members of institutional markets include libraries, museums, universities, charitable organizations, and some churches and hospitals.

3. Because such institutions have different goals and fewer resources than other types of organizations, marketers may use special marketing activities to serve these markets.

4. Public-sector marketing is a significant growth area within the marketing discipline.

Dimensions of business buying A. Characteristics of business transactions 1. Business buyers tend to order in much larger quantities than do individual consumers. a) Suppliers must often sell their products in large quantities to make profits; consequently, they prefer not to sell to customers who place small orders.

2. Business purchases generally are negotiated less frequently than consumer sales. a) Some purchases involve expensive items, such as machinery or office equipment, that are used for a number of years. b) Other products, such as raw materials and component parts, are used continuously in production and may have to be supplied frequently; however, the sale of these items is likely to be a long-term agreement requiring periodic negotiations.

3. Negotiations in business sales may take much longer than those for consumer sales. a) Purchasing decisions are often made by committee. b) Orders are frequently large, expensive and complex. c) Products may be custom built. d) Several people or departments in the purchasing organization may be involved.

4. One practice unique to business sales is reciprocity, an arrangement in which two organizations agree to buy from each other. a) In some countries, reciprocal agreements that threaten competition are illegal. b) A certain amount of reciprocal dealing occurs among small businesses and, to a lesser extent, among larger companies. c) Developing long-term relationships of this kind can be an effective competitive tool, though problems can result if coercive measures are used to enforce reciprocity or if purchasing agents are influenced to deal only with certain suppliers.

B. Attributes of business buyers 1. The buying behaviour of business buyers differs from that of consumers because business buyers are better informed about the products they purchase. a) To make purchasing decisions, business buyers demand detailed information about a product‘s functional features and technical specifications.

2. Business buyers seek the psychological satisfaction that accompanies promotion and financial rewards. a) Agents are most likely to achieve these goals when they consistently exhibit rational buying behaviour and perform their jobs in ways that help their companies achieve organizational objectives.

C. Primary concerns of business buyers 1. Business buyers take into account a variety of factors including quality, delivery, service, price, product range, innovation, reliability and logistical support.

D.

III.

72 2.

D.

Increasingly business buyers are concerned with support levels and ongoing commitment from their selected suppliers.

3. Business customers are also interested in achieving and maintaining a specific level of quality in the products they offer to target markets.

4. A product must meet specifications so that its use will not result in malfunction for the ultimate consumer. a) Obtaining a product that meets but does not exceed specifications is important to avoid unnecessary costs.

5. When tangible goods are the same or similar, the mix of services a business marketer provides represents its greatest opportunity to gain a competitive advantage.

6. Among the most commonly expected services are market information, inventory maintenance, on-time delivery, flexible ordering and logistical support, technical assistance, warranty back-up, repair services and credit facilities. a) Market information generally includes technical product information, data regarding demand, information about general economic conditions, and supply and delivery information. b) Suppliers must maintain an adequate inventory to keep products accessible when needed by a business buyer. c) Reliable, on-time delivery by suppliers enables business customers to carry less inventory. d) Warranty back-up, including repair services and replacement parts are important because equipment that cannot be used is costly. e) Credit offered by suppliers to business customers helps to improve cash flow, reduces the peaks and troughs of capital requirements and thus lowers the company‘s cost of capital. f) Service quality has become a critical issue because customer expectations of service have broadened.

(1) Marketers also need to strive for uniformity of service, simplicity, truthfulness and accuracy; to develop customer service objectives; and to monitor or audit their customer service programmes.

(2) Marketers with a strong customer service programme can keep their customers coming back long after the first sale.

7. Price matters greatly to a business customer because it influences operating costs and costs of goods sold and thus affects the selling price and profit margin. a) A buyer of major equipment views the price as the amount of investment necessary to obtain a certain level of return or savings.

8. In many markets, regulatory compliance is a major driver.

Methods of business buying 1. Description is a purchase method used when the products being purchased are commonly standardized according to certain characteristics and are normally graded using such standards. a) Characteristics include size, shape, weight and colour. b) The buyer purchases by simply describing the product and specifying quantity, grade and other attributes.

2. Inspection is necessary when products have unique characteristics and vary in condition. a) Examples include large industrial machinery, used vehicles and buildings.

3. Sampling occurs when a sample of the product is taken from the lot, evaluated and assumed to represent the characteristics of the entire lot.

73 a)

This purchase method is appropriate when the product, such as grain, is homogeneous and examination of the entire lot is not physically or economically feasible.

4. Negotiation is used when a business-to-business buyer describes what is needed and asks suppliers to submit bids. a) Sellers may submit bids; the buyer then negotiates contract terms with those holding the most attractive bids. b) This purchase method is most likely to be used for one-off projects, such as buildings and capital equipment.

E. Types of business purchases 1. In a new task purchase, an organization makes an initial purchase of an item to be used to perform a new job or to solve a new problem.

2. In a modified re-buy purchase, a new task purchase is changed the second or third time it is purchased, or the requirements associated with a straight re-buy purchase are modified.

3. A straight re-buy purchase occurs when a buyer re-purchases the same products routinely under approximately the same terms of sale.

F. Demand for business products 1. Derived demand a) Derived demand is demand for business products which arises from the demand for consumer products. b) When consumer demand for a product changes, a wave is set in motion that affects demand for all the items involved in the production of that product.

2. Inelastic demand a) The demand for many business products at the industry level is inelastic demand, that is, a price increase or decrease will not significantly alter demand for the item. b) When a sizeable price increase for a component represents a large proportion of the total product‘s cost, demand may become more elastic, because the component price increase will cause the price at the consumer level to rise sharply. c) The characteristic of inelasticity applies only to industry demand for the business product, not to the demand curve faced by an individual company.

3. Joint demand a) Joint demand occurs when two or more items are used in combination to produce a product. b) With joint demand, shortages of one item may jeopardize sales of all the jointly demanded products.

4. Fluctuating demand a) The demand for business products fluctuates according to consumer demand, causing producers to buy large quantities of raw materials and components when consumer demand is high, and conversely causing producers to cut purchases when consumer demand is low. b) When a business marketer‘s customers change their inventory policies, the company may notice changes in demand. c) Significant price increases or decreases can lead to unexpected temporary changes in demand: when prices are raised, customers buy more of an item because they expect the price to rise further, and when prices are lowered, they postpone purchases while waiting for further price reductions.

IV. Business buying decisions

74 A. B.

C.

D.

Business (or business-to-business) buying behaviour refers to the purchase behaviour of producers, resellers, government units and institutions.

The buying centre 1. The buying centre or decision-making unit consists of the group of people within an organization who are involved in making business purchase decisions, including users, influencers, buyers, deciders and gatekeepers. a) Users are those in the business who actually use the product being acquired. b) Influencers are often technical personnel who help develop the specifications and evaluate alternative products. c) Buyers select the suppliers and negotiate the terms of purchase. d) Deciders choose the products and suppliers. e) Gatekeepers control the flow of information to and among others in the buying centre.

2. The size and characteristics of an organization‘s buying centre are affected by the number of its employees and its market position, the volume and types of products being purchased, and the company‘s overall managerial philosophy regarding who should be involved in purchase decisions.

Relationship marketing and managing exchange relationships 1. The term relationship marketing has been used to express the increasing interest that marketing experts are placing on the relationships between supplying and buying companies.

2. Instead of being concerned with individual transactions, relationship marketing emphasises the whole relationship between the parties. a) Relationship marketing can be regarded as all of the activities an organization uses to build, maintain and develop customer relations. b) Relationship marketing is concerned with getting and keeping customers by ensuring that an appropriate combination of marketing, customer service and quality is provided. c) Underlying this marketing concept is the idea that the relationship between a supplying organization and its buyers is similar to the relationship between two individuals.

3. When a company buys a product or service from another company, both organizations become involved in an exchange process in which items of value are exchanged. a) A range of factors can be exchanged during the purchase process, including information, products, finance and social factors.

4. It is often in the interests of both parties to develop long term relationships. a) The buying and selling companies are more likely to adapt to each other‘s needs and to reach agreement quickly. b) Such relationships reduce the level of risk (financial and practical) associated with the purchase.

5. Relationship management describes the process of encouraging a match between the seller‘s competitive advantage and the buyer‘s requirements over the life cycle of the item being purchased. a) Key account management (KAM) is where very large business customers are granted preferential status and are managed with a dedicated and tailored resource.

Stages of the business buying decision process 1. First stage: One or more individuals in the organization recognize that a problem or need exists.

75 2.

V.

Second stage: The development of product specifications requires those involved to assess the problem or need and to determine what is necessary to resolve or satisfy it.

3. Third stage: This stage involves searching for possible products to solve the problem and locating suitable suppliers. a) Some businesses engage in value analysis, which is the evaluation of each component of a potential purchase. Supplier analysis is an appraisal of current and potential suppliers.

4. Fourth stage: The list of several alternative products and suppliers generated in the search stage are evaluated to determine which options (if any) meet the product specifications developed in the second stage.

5. Fifth stage: The product to be purchased and the supplier are chosen, and the product is actually ordered, while specific details such as terms, credit arrangements, delivery dates and methods, and technical assistance are worked out. a) A business may decide on one or several suppliers. b) Sole sourcing is when only one supplier is selected, whereas multiple sourcing involves the use of more than one supplier.

6. Sixth stage: The product‘s and supplier‘s performances are evaluated.

E. Influences on business buying 1. Environmental factors are uncontrollable forces such as politics, laws, regulations and regulatory agencies, activities of interest groups, changes in the economy, competitors‘ actions and technological changes.

2. Organizational factors include the buyer‘s objectives, purchasing policies and resources, as well as the size and composition of its buying centre.

3. Interpersonal factors refer to the relationships among the people in the buying centre, where the use of power and the level of conflict influence organizational buying decisions.

4. Individual factors are the personal characteristics of individuals in the buying centre, such as age, education, personality, position in the organization and income level.

Selection and analysis of business-to-business markets A. Marketing research are market analysis are widely used in business markets, with most business marketers having easy access to a considerable amount of information about potential customers.

B. Most business marketers follow a similar pattern when analysing target markets.

1. Determining who potential customers are and how many there are.

2. Locating where they are.

3. Estimating their purchase potential.

C. Identifying potential customers.

1. Much information about business customers is based on the Standard Industrial Classification (SIC) system, administered in the UK by the Central Statistical Office.

2. There are ten broad divisions in the most recent SIC manual, ranging from agriculture, forestry and fishing to banking, finance, insurance, business services and leasing.

3. Each broad division is sub-divided into classes, groups and activity headings. a) There are 10 divisions, 60 classes, 222 groups and 334 activity headings.

4. Data are available for each SIC category through various government publications.

5. The SIC system is a ready-made tool for dividing business organizations into market segments based mainly on the type of product manufactured or handled.

6. The SIC system must be used in conjunction with other types of data to enable a business marketer to determine which customers it can reach and how many of them can be targeted.

76 a)

Input-output analysis, which works well in conjunction with the SIC system, is based on the assumption that the output or sales of one industry are the input or purchases of other industries. b) Input-output data tell what types of industries purchase the products of a particular industry.

D. Locating potential customers 1. Once marketers know what industries purchase their kind of products and the number of establishments in these industries, they must find out the names and addresses of potential customers.

2. The Internet or business-to-business directories, which contain the potential customer‘s name, SIC number, address, phone number and annual sales, can be used.

3. Another approach, which is more expedient but more expensive, is to use a marketing research agency.

4. Marketers must weigh up the attractiveness and purchase potential of customers and determine which to pursue.

5. In business marketing, situation-specific variables may be more relevant in segmenting markets than general customer characteristics. a) Business customers concentrate on benefits sought, so understanding the end use of the product is more important than the psychology of decisions or socioeconomic characteristics. b) Segmenting by benefits rather than by customer characteristics can provide insight into the structure of the market and opportunities for new customers.

E. Estimating purchase potential 1. To estimate the purchase potential of business customers or groups of customers, marketers must find a relationship between the size of potential customers‘ purchases and a variable available in SIC data, such as the number of employees.

2. If the marketer has no previous experience in this market segment, a random sample of potential customers may be needed to establish whether any such relationship exists.

3. Once this relationship has been established, it can be applied to potential customer segments to estimate their purchases.

4. After deriving these estimates, the marketer selects the customers to be included in the target market.

F. More and more businesses are adopting segmentation schemes that are based on needs, buying behaviour and characteristics of their customers, rather than on simple trade categories or SIC codes.

VI. Marketing‘s variations in business markets A. Business marketers often have to address the needs of business customers within a marketing channel and the needs of their intended business customers, but they may also have to serve the needs of consumers.

B. Many business marketers handle a relatively small number of clients and the need to tailor marketing propositions to the customers‘ wishes may be more important than in consumer markets.

1. Sales staff are central in building the understanding with customers – their relationships with customers can be leveraged to gain an in-depth appreciation of customers‘ needs.

2. Not surprisingly, the sales and marketing personnel in many business companies work together very closely.

C. While business marketers strive to create strong brands, branding in this area lacks the emotion of consumer branding and often suffers from poor investment.

77 1.

D. E.

F. G. H.

Business branding tends to be more simplistic, focusing on identification and product differentiation.

In many business situations, companies pool expertise and resources to win contracts.

1. Understanding competitive forces is often complex and intriguing.

Business marketers may fall back on simple criteria, such as SIC codes or trade sectors, when determining market segments.

1. Market segmentation of business customers relies on an understanding of those customers‘ buying behaviour.

2. The research methods used to glean this information are often different in business markets and consumer markets.

Business marketers must make certain adjustments to their marketing mix programmes compared with consumer marketers.

Business marketers must modify their use of the entire marketing toolkit to reflect the nature of their markets and the characteristics of their business customers.

It is often necessary to address the needs of customers within a marketing channel as well as the needs of intended customers.

ANSWERS TO DISCUSSION AND REVIEW QUESTIONS 1.

Identify, describe and give examples of four major types of business markets.

The four major types of organizational markets are producer markets, reseller markets, government markets and institutional markets. The producer market consists of individuals and business organizations that purchase products to make a profit by using them to produce other products or by using them in their operations. Farmers are a producer market because they purchase farm machinery, fertiliser, seed and livestock to carry out their tasks. The reseller market consists of intermediaries, such as wholesalers and retailers, that buy finished goods and resell them to make a profit. Marks & Spencer is such a reseller.

Government markets consist of national and local governments that, taken together, spend billions of pounds annually for goods and services to support their internal operations. Institutional markets are organizations that seek to achieve goals other than normal business goals such as profit, market share or return on investment.

2.

Why are business buyers generally considered more rational in regard to their purchasing behaviour than consumers?

Prior to purchasing, business buyers usually seek out and obtain more information about products than ultimate consumers do. They may give special attention to information about the products‘ functional features, specifications and technical attributes. Most business purchasers seek promotion within the organization and greater financial and psychological rewards. By performing the purchasing function in a way that helps their companies achieve business-tobusiness objectives, business buyers can further the attainment of their personal goals.

3.

What are the primary concerns of business customers?

Many of the primary considerations of business buyers when making purchasing decisions fall into the category of quality level, service or price. Quality level is maintained by purchasing a product that meets a set of delineated characteristics, called specifications. Products that exceed specifications may cost more without providing off-setting benefits.

78 Suppliers‘ service to business customers influences these customers‘ costs, sales and profits.

Some of the most commonly desired services include market information, maintaining an inventory, on-time delivery, repair services and replacement parts, and credit.

Price influences operating costs and costs of goods sold and thus affects the selling price and profit margin.

4.

List several characteristics that differentiate business transactions from consumer ones.

Industrial transactions differ from consumer ones in several ways. Orders tend to be larger, there are long negotiation periods, reciprocity sometimes plays a role in the process and industrial buyers tend to be more informed about the products they purchase.

5.

What are the commonly used methods of business buying?

Most business buyers use one or more of the following methods: description, inspection, sampling or negotiation. Products that are commonly standardized and normally graded using such standards may be purchased by simply describing their desired characteristics. Certain products, especially those that are large and expensive and have unique characteristics, will probably have to be inspected by the purchasers before a decision is reached. When buying decisions are based on sampling, the purchaser assumes that the sample product taken from the lot is representative of the entire lot. Negotiated contracts occur when sellers submit bids and the buyer discusses terms with those who submit the most attractive bids.

6.

Why do buyers involved in a straight re-buy purchase require less information than those making a new task purchase?

The straight re-buy purchase is a routine procedure. The specifications have been worked out, and all the major problems should have been resolved. Conversely, in a new task purchase, an organization makes an initial purchase of an item that requires the development of product specifications, vendor specifications and procedures for future purchases.

7.

How does business demand differ from consumer demand?

Industrial/business demand differs from consumer demand in that industrial demand is (a) derived, (b) inelastic, (c) joint and (d) more fluctuating.

8.

What are the major components of a buying centre or decision-making unit?

The major components or roles of a buying centre are users, influencers, buyers, deciders and gatekeepers. One person may perform several of these roles.

9.

What elements may be exchanged by a buyer and seller when a purchase transaction takes place?

Information, products and services, finance and social exchanges can all be exchanged by buyers and sellers when a purchase transaction occurs.

10. Why has relationship management attracted so much interest in business markets?

It is often in the interests of business buyers and sellers to develop long-term relationships. These relationships allow the parties to adapt to each other‘s needs, ensure that agreement can be reached more quickly and reduce the risk associated with the purchase. Relationship management describes the process of encouraging a match between the seller‘s competitive advantage and the buyer‘s requirements over the life cycle of the item being purchased.

11. Identify the stages of the business buying decision process. How is this decision process used when making straight re-buys?

79 The stages of the business buying decision process are: (1) recognising the problem, (2) establishing product specifications to solve the problem, (3) searching for products and suppliers, (4) evaluating products with respect to specifications, (5) selecting the most appropriate product and supplier and ordering the product, and (6) evaluating product and supplier performance. This decision process is used in its entirety primarily for new task purchases.

Several of the stages, but not necessarily all, are used for straight re-buy purchases.

12. What impact does the evaluation of a particular purchase have on future buying decisions?

After purchase, the product will be evaluated. If its performance does not adequately solve the problem or satisfy the need, this may result in a modification to the product specification for future purchases. If the supplier fails to satisfy the buying company, corrective action may be sought and another supplier may be chosen. In both cases, the outcomes will affect future buying decisions.

13. How do environmental, organizational, interpersonal and individual factors affect business purchases?

The level of influence of these factors varies with the buying situation, the type of product being purchased and whether the purchase is new task, modified re-buy or straight re-buy.

14. What function does the SIC system help business marketers perform?

The Standard Industrial Classification (SIC) system was developed to classify selected economic characteristics of industrial, commercial, financial and service organizations. As such, the system is a useful way for businesses to group and segment industrial customers, especially if a relationship can be found between SIC characteristics and purchase potential. It is often necessary for businesses to combine SIC data with other information for a full picture to be developed.

15. List some sources that a business marketer can use to determine the names and addresses of potential customers.

There are three types of sources that can be used. First, the Internet is a valuable source for information of all kinds about businesses. Most companies have their own websites, which can be useful collecting points for information. A second source of information is found in business directories that contain the name, SIC number, address, phone number and annual sales of potential customers. A third approach, which is more expedient but more expensive, is to use a marketing research agency.

16. In what ways do business marketers have to reflect the nuances of business markets when deploying the marketing toolkit?

Business marketers may sometimes cater for thousands of individual customers, but unlike the marketers of consumer goods, it is more likely that business marketers cater for the needs of only a small number of customers. This means that often the marketing proposition and marketing mix are tailored for individual customers in a way rarely found in consumer markets. Following from this, the managing of ongoing relationships with key customers is a core activity of business marketers. Other differences include less emotive use of branding than in consumer marketing, the prevalence of negotiated and bid pricing, often shorter marketing channels and the creation of bespoke products and services.

COMMENTS ON THE WEB TASK AND CASES

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WEB TASK Dell has identified different categories of customers, tailoring sections of its website accordingly, with different propositions and marketing messages.

In all buying situations, marketers must be able to profile their customers, understand their customers‘ needs and decision-making, while appreciating the influencing factors impacting on this decisionmaking. These information requirements are true for B2C and B2B marketing. In the case of Dell‘s B2B marketing, additionally the marketing team should aim to comprehend the composition of the relevant buying centre to tailor appropriate messages. Plus, there is the need to identify what these managers perceive to constitute risk in order to avoid the Dell option seeming to be a risky purchase.

APPLIED MINI-CASE How often do you post a blog, tweet someone or Facebook your circle of close friends? How many online brand communities are you signed up to? How many companies have profiled you based on your online behaviour, online purchasing and online searches? Increasingly, as consumers, we are part of such activities daily… they are becoming routinized behaviour. The same is now true for businesses, such as American Express. LinkedIn offers forums and discussion groups tailored to different interests and commercial sectors, but there are many more social media options for ‗networked‘ and ‗wellconnected‘ corporate personnel. More and more businesses dealing with business customers are creating their own online communities and discussion groups designed to improve their brand profiles and client engagement. Professional bodies and trade associations are likewise building their online networks.

CASE STUDY: IN THE BLACK AND LEADING Nynas is a leading bitumen business in many sectors in the UK, Scandinavia and much of western Europe. The company is renowned for its innovative product development with polymer formulations.

The key product is bitumen, a core ingredient in macadams and asphalts in roads and pavements. This case examines the products that Nynas produces and considers how the company must manage the diverse range of customers with which it deals. In order to maintain its position as market leader in key segments, Nynas has to give careful consideration to its competitive edge, which is built upon close customer dialogue, high quality, innovative products and strong logistical support.

Question 1 asks about Nynas‘s customer base. As indicated in the case, the nature of the customer base is broad. It includes any business involved in putting down surfaces for pavements, roads, driveways, car parks and school playgrounds. This encompasses the Highways Agency and local authorities, builders and developers, and all kinds of roofing/drive contractors. In addition, Nynas provides product for various specialist applications, including carpet backing, roofing felt and various waterproofing substances.

Question 2 asks what types of business markets might purchase Nynas‘s products. The company has a particularly diverse product base. Many of these customers are either from producer markets, such as builders and carpet manufacturers, or from government markets, such as the Highways Agency buying bitumen for roads or local government seeking to re-surface school playgrounds.

Question 3 asks students what types of purchases are most associated with Nynas‘s products. In general, many buyers will tend routinely to re-order a large proportion of the products they buy. For this reason, most purchases of Nynas‘s products will be straight or modified re-buy decisions. However, from time to time the company may also sell to customers in a new task situation. For example, Nynas may be asked to develop a new kind of waterproof backing for carpets or a flexible and safe surface for children‘s playgrounds.

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CHAPTER 7

Segmenting markets

OBJECTIVES •

To understand the definition of a market.

•

To recognize different types of market.

•

To appreciate what is meant by market segmentation.

•

To grasp why so many marketers place segmentation at the heart of their marketing strategies.

•

To know the most commonly adopted bases for segmenting markets.

•

To learn how companies go about segmentation.

•

To understand the importance and role of customer relationship management.

PURPOSE AND PERSPECTIVE This chapter covers what a market is, how to recognize different types of markets, how organizations segment markets and the role of customer relationship management. First, the concept of a market is defined, and the major types of markets are described. Next, the advantages of a market segmentation approach are examined. The process of choosing segmentation variables, the types of variables that marketers use, and the differences in business market segmentation are all examined. The chapter then addresses segmentation effectiveness and the profiling of market segments. CRM (customer relationship management) is an important strategic tool for many marketers and is harnessed closely within a company‘s segmentation strategy and target marketing, as explained at the end of this chapter.

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LECTURE OUTLINE I.

II.

What are markets?

A. A market is an aggregate of people who, as individuals or as organizations, have a need for certain products and the ability, willingness and authority to purchase such products.

B. Requirements for a market 1. For a group of people to be a market, the members of the group must meet the following four requirements: a) They must need or want a particular product or service. b) They must have the ability to purchase the product or service. c) They must be willing to use their buying power. d) They must have the authority to buy the specific products or services.

C. Types of markets 1. A consumer market consists of purchasers and/or individuals in their households who personally consume or benefit from the purchased products and do not buy products primarily to make a profit.

2. A business market (also referred to as an organizational or business-to-business market) consists of individuals or groups that purchase a specific kind of product to resell, use directly in producing other products or use in general daily operations. a) The four categories of organizational (or industrial) markets are producers, resellers, governments and institutions (discussed in Chapter 6 of Marketing: Concepts and Strategies).

What is Market Segmentation?

A. Businesses sometimes decide to target the total market, using an undifferentiated (or total market) approach, which assumes that all customers have similar needs and wants, and can be served with a single marketing mix.

1. However, it is much more usual for a differentiated approach using market segmentation to be followed.

2. For both consumer and business-to-business markets, the trend is away from this approach due to the varying characteristics, needs, wants and interests of customers.

B. Markets in which all customers have different requirements are termed heterogeneous markets.

1. In completely heterogeneous markets the only way to satisfy everyone is by offering tailor-made or bespoke products.

2. However, while it is not always feasible to do this, it is often possible to aggregate customers into groups with similar product needs and wants.

C. Market segmentation is the process by which customers in markets with some heterogeneity can be grouped into smaller, more similar or homogeneous segments.

1. A market segment is therefore a group of individuals, groups or organizations sharing one or more similar characteristics that cause them to have relatively similar product needs and buying characteristics.

2. Market segementation involves identifying such groups so that marketers can better develop product or service benefits that are appropriate for them, supported by an appropriate marketing mix.

3. Once market segments have been identified, marketers decide which, if any, they intend to enter. a) A marketing programme covering all the elements of the marketing mix can then be designed to suit the particular requirements of the segments targeted.

83 D.

III.

Reasons for using market segmentation 1. Success can follow the effective implementation of market segmentation strategies.

2. Careful segmentation, and the customer understanding underlying it, can make it easier for companies to identify and exploit different market opportunities. a) Segmentation can help minor players in the market gain a foothold in a particular niche, perhaps by identifying an opportunity not directly exploited by market leaders.

E. Customer analysis 1. Market segmentation allows a better understanding of customers‘ needs, wants and characteristics to be achieved.

2. Marketers who are closely in touch with segments can respond quickly to even slight changes in what target customers want.

F. Competitor analysis 1. Most markets are characterized by intense competition.

2. Marketers need to understand the nature of this competition and to discover which market segments the competition is targeting.

3. Understanding these factors allows marketers to make decisions about the most appropriate segments to target and the kind of competitive advantage to seek.

4. Companies that do not understand their competitive environment risk encountering competition they had not envisaged or putting resources into unattractive areas of the market.

G. Effective resource allocation 1. All companies have limited resources.

2. To target the whole of a market is usually unrealistic.

3. The effectiveness of personnel and material resources can be improved when they are more narrowly focused on a particular segment of customers.

H. Strategic marketing planning 1. Dividing markets up allows marketers to develop plans to suit the particular needs and requirements of customers in different segments.

2. Time scales covered by strategic plans can also be structured accordingly, because some segments change more rapidly than others.

Segmenting, targeting and positioning A. There are three stages to carrying out market segmentation: segmenting, targeting and positioning.

B. Segmenting the market 1. The key is to understand which variables in particular markets are the most suitable for distinguishing between different product requirements.

2. Understanding as much as possible about the customers in the segments is important.

C. Targeting strategy (see the next chapter of Marketing: Concepts and Strategies) 1. Once segments have been identified, decisions about which and how many customer groups to target can be made, including the following options: a) Adopt an undifferentiated approach, focusing on the total market. b) Concentrate on a single segment with one product and marketing programme. c) Offer one product and marketing programme to a number of segments. d) Target a different product and marketing programme at each of a number of segments.

D. Positioning the product (see the next chapter of Marketing: Concepts and Strategies) 1. Decide how and where within the targeted segments to aim the product or products, brand or brands.

2. Translate customers‘ needs and wants into a tangible marketing mix.

84 3.

Understand consumer perceptions.

IV. Segmentation variables A. Segmentation variables or bases are the dimensions or characteristics of individuals, groups or businesses that are used for dividing a total market into segments.

1. Customers must make choices about the most appropriate variables to use but they must consider the needs and buying behaviour of their intended customers.

2. The choice of segmentation variables is based on several factors. a) Creativity is a factor; sometimes businesses benefit from moving away from a traditionally popular segmentation approach. b) Availability of big data and improved analytics to now really probe consumer and business customer behaviours.

B. Selecting appropriate variables 1. Selecting appropriate variables for market segmentation is an important marketing management decision because the variable is the primary factor in defining the target market.

2. Decisions about the number of segmentation variables used are partly based on a company‘s resources and capabilities. a) The emergence of big data, new analytical tools and increased computing power make sophisticated multi-level segmentation analysis quicker, cheaper and easier than ever before.

The type of product and degree of variation in customers‘ needs also dictate the number and size of segments targeted.

3. Developments in IT technology have made it easier to capture and manage customer information and so there is an increasing tendency to use multivariable segmentation rather than single variable segmentation.

4. It is now even possible to deal with individual customers, although this involves a substantial injection of resources that may not create justified returns.

5. One-to-one marketing involves developing long-term relationships with individual customers in order to understand and satisfy their needs.

6. Single variable segmentation is achieved by using only one variable, the simplest type of segmentation to perform. a) A single characteristic gives marketers only moderate precision in designing a marketing mix to satisfy individuals in a specific segment.

7. Multivariable segmentation uses more than one characteristic to divide a total market. a) Multivariable segmentation provides more information about the individuals in each segment, which may enable a company to develop a marketing mix that will satisfy customers in a given segment more precisely. b) Its major disadvantage is that the number of segments created increases, reducing the sales potential of many of the segments and increasing the complexity of resourcing and managing the segments that result.

Variables for segmenting consumer markets 1. Demographic variables a) These variables are closely related to consumers‘ product needs and purchasing behaviour and can be readily measured. b) The emphasis is on tailoring the service package to suit particular needs. c) Commonly used segmentation variables include age (marketers must cater for an increasingly aging population), gender (success depends on the product type – b)

C.

85

2.

3.

4.

5.

chocolate was unsuccessful, skincare more so), ethnicity (marketers are now looking for new ways to connect with the needs of these particular groups), marital status and the ‗family life cycle‘ (table 7.1).

Socio-economic variables a) This group of variables includes income, occupation, education and social class. b) Sometimes these variables are included under the demographics label.

Geographic variables a) Geographic variables include climate, terrain, natural resources and population density. b) Market density refers to the number of potential customers within a unit of land area, such as a square kilometre. c) Geodemographic segmentation refers to clustering people according to postcode areas and census data. d) ACORN (A Classification of Residential Neighbourhoods) develops geographic location further (table 7.2).

Psychographic variables a) Marketers sometimes use psychographic variables such as personality characteristics, motives and lifestyles to segment markets – these can be used alone or combined with other types of segmentation variable.

(1) Personality is a useful variable when products are similar to competing products and when consumers‘ needs are not significantly affected by other segmentation variables.

(2) Some market research shows weak relationships between consumer choice and personality traits.

(3) Personality traits are difficult to measure accurately. b) One of the more popular programmes studying lifestyles is conducted by the Stanford Research Institute‘s Value and Lifestyle Programme (VALS).

(1) This programme surveys consumer to select groups with indentifiable values and lifestyles.

(2) Initially three broad consumer groups were identified: Outer-directed, Innerdirected and Need-driven consumers.

(3) The current VALS classification categorizes consumers into eight basic lifestyle groups: Innovators, Thinkers, Achievers, Experiencers, Believers, Strivers, Makers and Survivors.

Behaviouristic variables a) Consumers‘ behaviour towards the product might relate to the way the particular product is used or purchased, or to the benefits consumers require from it. b) Purchase behaviour may depend on brand loyalty or price. c) The occasion for purchasing the product may impact upon product choice because in different sets of circumstances different product selection criteria may be applied. d) Benefit segmentation is the division of a market according to the benefits consumers want from the product. e) Product usage is a method sometimes used by marketers to segment consumers.

(1) Individuals can be divided into users and non-users of a particular product, and users can be classified further as heavy, moderate or light. f) How customers apply the product may also determine segmentation.

(1) To satisfy customers who use a product in a certain way, some features may have to be designed with special care to make the product easier to use, more convenient or more environmentally friendly.

86 g)

The varying attitude of customers towards products constitutes another set of variables that can be used to segment markets.

6. Having it all a) In the digital era of big data, improved heuristics, huge computing power, better analytics and immediacy, most segmentation studies no longer select some of the above factors or variables, but invariably now use all of these dimensions. b) This is a huge change in recent years, making segmentation more popular than ever before. Often segmentation is done within other projects, such as multi-channel strategizing, CRM development or brand strategy.

D.

V.

Variables for segmenting business markets 1. Marketers may segment business markets according to company demographics, operating variables, purchasing approach, situational factors and the personal characteristics of buyers. a) Just as in consumer markets, some segment bases are easier to measure and apply than others.

2. Company demographics or firmographics relating to the type of business or industry, geographic location, company age and size are probably the most widely used segmentation variables in business markets.

3. Customer requirements can be affected by different operating variables, such as the technology applied by the buying organization or the product types used.

4. Although sometimes difficult to measure, the characteristics of the purchasing approach, such as the nature of the buying centre or buying policies, can sometimes be an appropriate way for organizational markets to be segmented.

5. Situational factors, such as the urgency or the size of the order, may be appropriate base variables in some cases.

6. Although individuals may not have much control over organizational buying, personal characteristics still play a role in the preferences that are demonstrated for organizational goods and services.

E. Profiling market segments 1. Whether consumer or business markets, profiling must be undertaken in order to ‗bring to life‘ the segments for the development of sales and marketing programmes.

2. Descriptor variables are assigned to each segment, along with catchy segment labels which help clarify the key customer issues to be addressed in each segment.

Segmentation effectiveness A. Haphazard implementation of base variables can lead to ineffective market segmentation, missed opportunities and inappropriate investment.

B. There must be real differences in the needs of consumers for the product or service.

C. Dissimilar consumers, in terms of their needs and purchasing behaviour, must not be grouped together in the same market segment.

D. The segments revealed must be measurable, substantial, accessible, stable and useful.

1. Segments must be measurable and easy to identify so that some basis can be found for effectively separating individuals into groups or segments with relatively homogeneous product or service needs.

2. Segments must be substantial enough to be sufficiently profitable to justify developing and maintaining a specific marketing mix.

3. Segments must be accessible so that companies can reach them with a particular marketing mix.

87 4.

Segments must be reasonably stable over time so that action taken has a chance to work.

5. Segments must be deemed useful and meaningful to the manager tasked with operationalising them.

E. Applying market segmentation also requires a good deal of common sense.

VI. Customer relationship management (CRM) and retention A. Customer relationship management (CRM) is the identification of the most worthwhile and valuable customers within target market segments, along with the development of ongoing relationships to foster their loyalty and repeat purchasing.

B. Learning relationships are where a business over time takes the time and trouble to better understand their customers‘ characteristics and buying behaviours, modifying their approaches to engaging with these customers.

C. Technology is a key enabler of CRM, but to be effective, the captured data and their implications must be shrewdly interpreted and efforts made to customize subsequent marketing activities. Technology alone does not foster optimized customer relationships or maximize value from individual customers.

D. CRM is not a substitute for segmentation: the two work in harmony, with CRM providing the means for enhancing value creation from the ‗best‘ customers or business accounts within a target market segment.

ANSWERS TO DISCUSSION AND REVIEW QUESTIONS 1.

What is a market? What are the requirements for a market?

A market is an aggregate of people who, as individuals and/or organizations, have needs for products in a product class and have the ability, willingness and authority to purchase such products.

2.

In the area where you live, is there a group of people with unsatisfied product needs who represent a market? Could this market be reached by a business organization? Why or why not?

In answering this question, students should demonstrate that their suggested markets meet the requirements of a market as discussed in Question 1.

3.

Identify and describe the two major types of market. Give examples of each.

The major types of markets are (1) consumer and (2) industrial or business-to-business markets.

Consumer markets include those in which the purchaser intends to consume or benefit from the product and does not purchase products for the main purpose of making a profit. Industrial markets are composed of people who purchase the products to resell, to use for producing other products or to use in the company‘s daily operations.

4.

What is the total market approach? Under what conditions is it most useful? Describe a current situation in which a company is using a total market approach. Is the business successful? Why or why not?

In the total market approach, a company designs a single marketing mix and directs it at the entire market for a particular product. For this approach to be effective, customers‘ needs for the product must be similar and a single marketing mix must be able to satisfy the majority of the customers.

The remaining parts of this question should focus on examples suggested by students.

88 5.

What is the market segmentation approach? Describe the basic conditions required for effective segmentation. Identify several companies that use the segmentation approach.

In the market segmentation approach, (a) the total market is divided into groups consisting of people with relatively similar product needs and (b) one or more marketing mixes are designed to fit precisely the needs of the people in a segment (or segments).

For this process to be effective, consumers‘ needs must be heterogeneous; the segments must be measurable and easy to identify; and the segments must be substantial in terms of sales potential to justify the development and maintenance of a marketing mix for one segment. In addition, the segment must be accessible, so it can be reached with a particular marketing mix, and stable over time.

6.

Why might social marketers find market segmentation particularly helpful?

Social marketing involves bring about behavioural changes for the good of society and the individual, such as quitting smoking, managing personal debt differently, healthier eating, sustainable living and so on. Inevitably, many people do not want to buy-in… they like smoking or gambling. Rather than waste resources trying to alter mindsets and attitudes amongst those unlikely to alter their consumption patterns, the smart way forward is to identify those smokers open to persuasion or those households likely to alter energy consumption. This is segmentation.

7.

Describe the basic conditions required for effective segmentation.

Customers in a particular market must demonstrate variation in their behaviours and purchasing so that sub-groups are evident. Putting like-minded and similarly behaving customers together creates a market segment. So, there must be this variation across the population in question. They must be reachable and the benefits of so doing must justify the costs of treating each segment differently in terms of marketing to them.

8.

List the differences between concentration and differentiation strategies. Describe the advantages and disadvantages of each strategy.

The main difference between the concentration strategy and the differentiation strategy of market segmentation is that the concentration strategy directs marketing efforts towards a single market segment using one marketing mix, while the differentiation strategy directs marketing efforts at two or more market segments using a different marketing mix for each segment.

The concentration strategy enables a company to specialize in one market segment and penetrate it effectively, thereby creating larger sales volume. Also, it allows a company with limited resources to compete with larger companies. The concentration strategy can be risky, however, because the company relies solely on one segment; if the strategy fails, the company has nothing to off-set the decline. Also, if the company becomes well entrenched in one segment, it may have difficulty expanding into other segments because of its image.

The differentiation strategy enables a company to increase total sales by focusing on more than one segment. This is especially useful if a company has excess production capacity, because it allows the company to use this capacity. However, the cost of production usually increases with increased production runs; the company typically must increase its marketing activities to implement several distinct distribution and promotion plans for different segments.

9.

Identify and describe four major categories of base variables that can be used to segment consumer markets. Give examples of product markets that are segmented by variables in each category.

Any four categories from the following may be discussed.

89 Demographic variables include items such as sex, age, marital status and the like. These types of variables are used frequently because they are measurable and closely related to customers‘ product needs.

Socio-economic variables include income, occupation, education and social class; they are popular because different groups have different aspirations in certain product areas.

Geographic variables include climate, terrain, natural resources, population density and subcultural values. ACORN takes geographic segmentation one stage further, incorporating socioeconomic variables.

Other variables include personality, motives and lifestyle. Psychographics is the main technique used to measure lifestyle. These variables can be used alone to segment markets or combined with other segmentation variables. However, they are difficult to measure accurately.

The preceding categories relate to basic customer characteristics. Product related behavioural characteristics include purchase behaviour, purchase occasion, benefits sought, consumption behaviour, user status and attitude to product.

When discussing examples, students should be encouraged to use local and regional as well as national examples.

10. Explain how geodemographic approaches such as ACORN or MOSAIC support marketers.

The variables used to visualize each customer or household enables similar ones to be grouped together to for market segments. Those in each segment can be located and targeted using these systems.

11. What dimensions are used to segment business markets?

Business-to-business markets are segmented according to geographic location, type of organization, customer age and size, and product type and product use. Increasingly, the behavioural characteristics of these organizations and their personnel, their attitudes and perceptions of risk, their cultures and management practices are used, too.

12. How do marketers decide whether to use single variable or multivariable segmentation?

The single variable method uses only one variable. The multivariable segmentation strategy gives the marketer additional information about the consumer so that the marketer can develop a marketing mix that will satisfy customers in a given segment more precisely. When deciding whether to use a single or multivariable segmentation strategy, the marketer must consider whether a more precise marketing mix can be developed if additional information is obtained and whether the cost of this additional information can be justified. Toys and nappies are two examples of product markets divided through multivariable segmentation.

13. Give examples of product markets which are divided using multivariable segmentation.

Any of the examples which have featured to date, from JCB construction equipment to Dell‘s offerings.

14. What is customer relationship management?

Customer relationship management (CRM) is the identification of the most worthwhile and valuable customers within target market segments, along with the development of ongoing relationships to foster their loyalty and repeat purchasing. Through what are termed learning relationships, a business, over time, takes the time and trouble to better understand their customers‘ characteristics and buying behaviours, modifying their approaches accordingly to better engage with these customers.

90 15. In what ways does customer relationship management benefit an organization?

CRM provides the means for enhancing value creation from the ‗best‘ customers or business accounts within a target market segment. By exploring how better to serve these most desirable (high spending, profitable, loyal, regular) customers, they become more satisfied and spend more.

The ability to serve them better stems from capturing customer insight and analyzing how better to engage with these ‗wanted‘ customers. The goal is to increase the ‗share of wallet‘ secured out of these consumers‘ or business customers‘ total spending.

16. How does customer relationship management benefit from market segmentation?

Different customers respond to different approaches and service levels. One-to-one bespoke service is generally in most markets unaffordable. Segmentation groups like-minded and similarly behaving customers together. CRM then can treat those customers within a segment as one, gaining economies of effort, but still reflecting the most important behavioural differences requiring bespoke handling segment to segment.

COMMENTS ON THE WEB TASK AND CASES WEB TASK Adventure Travel Abroad, part of the Natural Travel Collection, is an internet company targeting the more independent and adventurous customer. Whether diving, travelling naturalist, those wanting walks or wildlife, or schools creating expeditions, Adventure Travel caters for those wishing to discover fascinating places and cultures from around the world. The company focuses on event planning for groups and corporates but will serve individuals seeking a once in a lifetime journey, unusual honeymoon or unexpected thrill. Spending power is an important targeting criteria, but the segmentation deployed by Adventure Travel is based more around the motivations, lifestyles and aspirations of its targeted audiences, whether they are corporate clients or individual consumers.

APPLIED MINI-CASE As individuals, many of us have Facebook accounts. In many ways, LinkedIn is a businessperson‘s Facebook, providing online networking opportunities for 350 million members, discussion forums and commercial opportunities. Users may sign in to sector-specific groups or network with peers working in similar jobs or companies. Many busy professionals find LinkedIn ideal for keeping up to date with the latest business practices or identifying experts from whom to seek guidance or insights. “Manage your professional identity. Build and engage with your professional network. Access knowledge, insights and opportunities.‖ The positioning is around empowerment, career aspirations, networking, insight and personal ambition.

CASE STUDY: MARRIOTT GETTING DOWN TO BUSINESS WITH BUSINESS TRAVELLERS Marriott is one of the world‘s leading operators of hotels, with over 3,000 properties operating under sixteen brands in nearly 70 countries. The Ritz-Carlton, JW Marriott, Autograph Collection of independent hotels, more budget-led Courtyard by Marriott, Springfield Suites, Fairfield Inn, Renaissance Hotels and Marriott Resorts, are just some of the company‘s well-known businesses.

Between them, these hotels cater for leisure travellers seeking a good deal, those wanting luxury and to be pampered, or those requiring escape and downtime. They also serve individual business travellers, corporate accounts and businesses staging meetings, conferences, exhibitions and major trade shows.

91 Question 1 looks at how Marriott is segmenting the market for hotel services. Marriott the brand is a full-service chain, while the JW Marriott brand is more up-market still and the Ritz-Carlton brand is known for its top quality service. There are also tour-focused leisure brands, suites-hotels and full-scale resort complexes. A look at www.marriott.co.uk/hotel-brands will demonstrate the full range of the Marriott portfolio and separate target market strategies of each brand.

Question 2 considers the targeting strategies being deployed. Marriott does not adopt an undifferentiated approach, with only a single proposition addressing the entire market. Neither does the company concentrate on only a single segment. Instead, Marriott pursues many segments with a portfolio of propositions and brands. Some compete with each other in targeting the same segment(s).

Each brand has been well researched and focuses on a tightly defined target market. Multivariable segmentation is deployed.

Question 3 asks about the data Marriott should have for segmentation purposes. Marriott has a sophisticated approach to its segmentation, capturing many variables in its database and ongoing programme of customer insight work. Demographic, geographic, psychographic, behaviouristic variables are utilized in its segmentation of consumer markets, while all of the options detailed on pages 231-232 are applied to its business market segmentation. The case offers many examples of these variables, revealing the awe-inspiring depth of its research into its customers‘ characteristics, buying behaviours and consumption patterns. Nevertheless, most students will suggest additional variables or factors to consider alongside Marriott‘s existing insights into its customers.

CHAPTER 8

Targeting and positioning

OBJECTIVES •

To understand targeting decisions for the emerging opportunities worth pursuing now.

•

To consider various segmentation targeting strategies.

•

To discover how marketers prioritize target markets and select between market segments.

•

To appreciate the importance of assessing sales potential, market share and value share in creating target market strategy.

•

To learn about strategies for positioning.

•

To complete coverage of the market segmentation process of segmenting a market, selecting which segments to target, and positioning a proposition in those chosen target market segments.

•

To explore customer value propositions and their linkages with effective positioning strategy.

PURPOSE AND PERSPECTIVE This chapter builds on the previous chapter‘s examination of identifying and creating market segments.

The chapter first explores segmentation targeting strategies, including undifferentiated, concentrated and differentiated, and considers the factors impacting on this choice. The strategic role of understanding market attractiveness and opportunity selection is then explored. Related to this aspect of strategy development, the evaluation of markets and forecasting their potential worth is considered.

92 Having addressed the targeting aspect of marketing strategy and the market segmentation process, the chapter switches to develop an understanding of positioning strategy, which is the engagement of and appeal to the consumers or business customers identified as the target priorities.

93

LECTURE OUTLINE I.

Segmentation targeting strategies A. Undifferentiated strategy 1. Undifferentiated is a strategy in which an organization defines an entire market for a particular product as its target market, designs a single marketing mix and directs it at that market.

2. The strategy assumes that all customers in the target market for a specific kind of product have similar needs and is often used for staple foods such as sugar and salt.

3. The undifferentiated strategy is effective under two conditions: a) A large proportion of customers in a total market must have similar needs for the product b) The organization must be able to develop and maintain a single marketing mix that satisfies customers‘ needs.

B. Concentration strategy 1. In a concentration strategy, the organization directs its marketing efforts towards a single market segment by creating and maintaining one marketing mix.

2. The chief advantage of the concentration strategy is specialization—the company has an opportunity to analyze carefully the characteristics and needs of a distinct customer group and then focus all its energies on satisfying that group‘s needs. a) In this way, a company with rather restricted resources can compete with much larger organizations.

3. The major disadvantage is that if the company‘s sales depend on a single segment and that segment‘s demand for the product declines, the company‘s financial strength also declines. a) Moreover, when a company penetrates one segment and becomes well entrenched, its popularity may keep it from moving into other segments.

C. Differentiated strategy 1. With a differentiated strategy, an organization directs its marketing efforts at two or more market segments by developing a marketing mix for each selected segment. a) After a company uses a concentration strategy in one market segment, it can expand into additional segments. b) Increased sales can result because the company‘s mixes are being aimed at more people. c) A company with excess production capacity can use this approach to absorb some of the excess.

2. A disadvantage of the differentiated strategy is that a greater number of production processes, materials and people are required.

D. One-to-one marketing 1. The growth of customer insight, big data and customer relationship management systems enables brands to build one-to-one relationships either within the segments of a differentiated strategy or across a market in an undifferentiated strategy.

2. More commonly, one-to-one is a way of focusing on the most important customers within the segments deemed as priorities within a differentiated strategy.

E. Factors affecting choice of targeting strategy: 1. A number of core factors influence the choice of target market segments: a) Needs/wants of end users b) The size, structure and future potential of the segment

94 c) The availability of company resources d) The intensity of the competition e) The size of the company‘s existing market share f) The possibility of any production/marketing scale economics 2. A company may recognize that a fit between its products or capabilities and target customer needs is stronger and more ‗marketable‘ in one market segment than another.

3. Marketing planning experts suggest a variety of issues to consider when determining which and how many target market segments to prioritize. a) Market factors – size, growth per annum, diversity of the market etc. b) Competition – types of competition, degree of concentration etc. c) Financial and economic – contribution margins, capacity utilization etc. d) Technology – maturity and volatility, complexity, differentiation etc. e) Socio-political and regulatory – social attitudes and trends etc.

II. Target market attractiveness and opportunity selection A. Identifying and selecting opportunities and markets 1. Every organization has its own reasons for selecting markets to target related to its own goals and circumstances. The selection of which opportunities to pursue and the choice of which target segments to address are some of the most important decisions made by any organization. These choices are not just part of marketing strategy but are in fact pivotal to the creation of the company‘s overall strategy.

2. A survey of marketing practices in the largest UK companies revealed an interesting set of variables utilized in determining target market attractiveness (table 8.1). a) UK businesses are overly restricted by the City‘s short-termism and the emphasis placed on performance only in terms of profitability in the most recent few months. b) Outside the UK, however, businesses worry about market share and profitability, not just for today and tomorrow, but for a few years to come. c) Businesses really need to adopt a balanced list of criteria, mixing short-term and longer-term issues and internal and external factors – market characteristics, financial considerations and trends.

B. Strategic options 1. The Ansoff matrix, under various guises, is popularly deployed by managers when exploring their strategic options. Often this technique is used intuitively and might not be referred to as the Ansoff analysis. It provides four options. a) Current products to current target markets, but in greater numbers: market penetration. b) Current products to new markets: market development. c) New products to current target markets: product development. d) New products to new target markets: diversification.

2. PEST marketing environment analysis (see chapters 2 and 3) and SWOT analysis of an organization‘s strengths, weaknesses, opportunities and threats also reveal potential opportunities and new business streams.

3. The Directional Policy Matrix (DPM) is a very well-regarded strategic planning tool used also to help select between opportunities to pursue, markets to target or customers to prioritize. The DPM adopts a mix of criteria to both examine relative attractiveness and map these opportunities or markets against a company‘s capabilities or business strengths. This concept is explained further in Chapter 12 of Marketing: Concepts and Strategies.

III. Evaluating markets and forecasting sales A Worthwhile pursuits

95 1.

The costs of developing marketing programmes and supporting these against competitors are considerable. It is imperative that there is an assessment of the potential of the markets or market segments being evaluated as possible target markets to pursue. a) Sales potential is the amount of a product or service likely to be sold in a given period of time. b) Market share is the company‘s proportion of the total market‘s sales vis-à-vis competitors‘ sales. Market share is a key performance metric for marketers and achieving strong market share is important for long-term success. c) Value share is the proportion of total market spend (income share between all the players active in a market).

IV. Marketing programmes A. Marketing mix 1. Each market segment identified as a pursuit requires a marketing programme created from a bespoke marketing mix, which necessitates considerable investment and commitment of resources.

2. These product, price, place, promotion and people considerations which form marketing programmes are discussed in the following Parts of Marketing: Concepts and Strategies.

V. Positioning A. Positioning is the process of creating an image for a product in the minds of target customers.

1. The product must be perceived by the selected target customers to have a distinct image and position vis-à-vis its competitors.

2. Product differentiation is widely viewed as the key to successful marketing.

A. Determining a positioning 1. Positionings are described by variables and within parameters that are important to the customers and are essentially selected by them.

2. In-depth market research is required to fully understand customer motivations and expectations.

3. Consumers generally assign a positioning to a company or product relative to that of the market leader.

4. A product‘s positioning is affected by the reputation and image of the company and its other products, and by the activities of its competitors.

5. Perceptual mapping is a tool commonly adopted by marketers and marketing researchers to depict consumer perceptions and prioritising of brands and their perceived attributes visually.

B. Steps in determining a positioning plan 1. Define the segments in a particular market.

2. Decide which segment (or segments) to target.

3. Understand what the target consumers expect and believe to be the important considerations when deciding on the purchase.

4. Develop a product that caters specifically for these needs and expectations.

5. Evaluate the positioning and images, as perceived by target customers, of competing products in the selected market segment.

6. Select an image that sets the product apart from the competing products.

7. Inform target customers about the product, which is made readily available at the right price, through the development of the full marketing mix.

D. Positioning statement 1. The final stage in the process is the development of a positioning statement. This is more than an advertising strapline: it is a guiding philosophy.

96 2.

VI.

The positioning statement should be memorable, distinctive, plausible and imageenhancing. It should appeal to the consumers or business customers targeted and compete effectively with rivals‘ positionings.

Customer perceived value A. Before marketers determine a desired brand positioning within a target market, they should have identified their brand‘s over-arching brand architecture and messaging, as explained in Chapter 12. The identified positioning strategy in a segment must resonate with the brand‘s overall standing and meaning.

B. In order to maximize their brand‘s impact and positioning, marketers should understand what consumers or business customers value, aiming to align their messaging and proposition to these values. The customer value proposition should be analysed and considered when developing a brand‘s positioning. To be successful, a brand should have benefits to offer which are functional, economic and psychological. At the very least, a brand must have a compelling story around one of these dimensions. Market leadership invariably requires all three. There are examples on page 253.

ANSWERS TO DISCUSSION AND REVIEW QUESTIONS 1.

What are the general segmentation targeting options?

Targeting is the task of prioritizing which markets and market segment(s) to address. When a company designs a single marketing mix and directs it at the entire market for a particular product, it is using an undifferentiated (or total market) approach as its targeting strategy.

Although customers may have similar needs for a few products, for most products their needs are very different. In such instances, a company should use a concentrated or a differentiated strategy.

In the concentration strategy, an organization directs its marketing efforts towards a single market segment through one marketing mix. In the differentiated strategy, an organization develops different marketing mixes for two or more market segments.

2.

What are the essential ingredients for ensuring a balanced discussion about worthwhile opportunities and segments to target?

Market insights are paramount: topical views about customers‘ drivers, competitors‘ moves, performance successes/failures, market trends and the forces of the marketing environment.

Without data and market analytics, there is no foundation. A cross-functional team of managers with reasonably open-minds and a hunger to strive for growth helps! Analytical frameworks to steer the debate, such as the directional policy matrix, also provide clarity. An understanding of corporate goals and what ‗good‘ will look like in performance is also necessary.

3.

What criteria should be considered when selecting between opportunities or market segments to prioritize?

These should include financial criteria, but also market-facing criteria such as the ability to satisfy the customers in question, the likelihood of achieving differentiation versus competitors, the longevity and growth prospects, and so forth. There should be short-term measures and longer-term dimensions such as market growth rate. There must be some measures of the ability to compete/differentiate and satisfy intended customers. Financials matter, but short-term profitability should not be the only consideration!

97 4.

Outline an approach to assessing the relative merits of emerging opportunities or market segments.

First, there should be consideration of all the options available to pursue, involving an exploration of which opportunities exist. The Ansoff matrix may help, and other marketing analyses will reveal possible options: customer research, competitor analysis, a SWOT assessment and the PEST analysis of marketing environment forces undoubtedly will reveal opportunities. There needs to be a financial analysis of these options alongside a financial review of the performance of current activities and pursuits in the company. Management discussions will then debate the emerging picture, but a more robust under-pinning to such debate will result from undertaking a directional policy matrix-styled assessment of the relative attractiveness of each of these available opportunities. Trade-offs will be required, dropping some current target markets/pursuits in favour of supporting newly identified hot prospects.

5.

Summarize the stages for producing a directional policy matrix (DPM)-led assessment of the relative attractiveness of possible target market segments.

As explored in Chapter 12, when using the directional policy matrix to select between opportunities or market segments, there are 8 steps: 1. Select a ‗balanced‘ set of attractiveness variables, not only expected profitability (see Q3 above).

2. Select a set of business strength or capability variables, pertinent to the industry in question, with which it is possible to compare strengths against the strongest competitor.

Each industry tends to have certain unique capabilities, appropriate for comparisons between competitors in terms of their strengths and weaknesses for achieving success with consumers or business customers in opposition to their strongest rivals.

3. For both sets of variables – market attractiveness and business strengths – the selected variables should be weighted, because some matter more than others. Typically, this involves allocating 100 points across the market attractiveness variables (there are examples in this chapter and in Chapter 12) and 100 points across the business strength variables.

4. These two sets of variables and their respective weightings should be held constant over time, so that progress quarter by quarter or year by year of the opportunities or market segments being assessed may be observed.

5. Each opportunity or individual market segment, depending on the unit of analysis for the study, should then be judged variable by variable. If the specific opportunity or segment performs well against a selected variable, it should be scored ‗1‘; if it performs only ‗soso‘ it should be scored ‗0.5‘, while if it performs poorly, it should be scored ‗0‘.

6. For each variable, the weighting (out of 100) multiplied by the score (‗1‘, ‗0.5‘ or ‗0‘) will result in a value for the variable.

7. In both lists separately – market attractiveness and business strengths – the summation of these values will provide total values between 0 and 100: one total for the market attractiveness dimension and one total for business strengths.

8. These total values enable the relative position of each opportunity being assessed or each market segment under examination to be plotted on the Directional Policy Matrix. Those opportunities or market segments plotted upper left on the DPM are more desirable than anything plotted towards the lower right.

6.

Why must marketers evaluate the sales potential of possible priority target market segments?

98 Pursuing any opportunity and engaging with a target market segment is costly: product development, debates about pricing and deals to establish presence, channel engagement, creating and execution marketing communications, supporting appropriate customer services, establishing management teams and operations, strategizing and marketing planning, all require people, time, money and more juggling of these activities alongside a company‘s other pursuits. A company must be certain of appropriate pay-back and have a view of the expected rewards.

7.

Why is it important to decide on the desired positioning for a product, service or brand?

Targeted customers must be made aware of the company‘s product or service, but in a manner which appeals to them and sets the company‘s proposition apart from competitors‘ offerings.

BMW‘s The Ultimate Driving Machine is very different to the positionings of Mercedes or Lexus, is highly memorable, distinctive and plausible. There is little point developing a segmentation scheme or pursuing an opportunity if the targeted consumer or business customer is not made to desire the product or service or be persuaded to aspire to engage with the brand.

8.

Choose a product and discuss how it could best be positioned in the market. Determine a suitable positioning statement.

Answers should pay heed to the steps listed in Q9 below. Remember that a positioning statement goes beyond a simple advertising strapline: it is a long-term guiding philosophy or ethos for the brand in its various markets and for its many pursuits.

9.

What are the essential stages in developing a positioning?

This process commences with the identification of target market priorities: 1 Define the segments in a particular market.

2 Decide which segment(s) to target.

3 Understand what the target segment‘s consumers or business customers expect and believe to be the most important considerations when deciding on the purchase.

4 Develop a product or products catering specifically for these needs and expectations.

5 Evaluate the positioning and images, as perceived by the target customers, of competing products in the selected market segment or segments.

6 Select an image that sets the product or products apart from the competing products, thus ensuring that the chosen image matches the aspirations of the target customers. The selected positioning and imagery must be credible.

7 Inform target consumers about the product. Although this is primarily a task for marketing communications, it is also vital that the product is made readily available at the right price, through the development of the full marketing mix.

10.

What is a customer value proposition?

Customer value reflects the tangible and intangible benefits and costs to the customer and is a combination of trade-offs between perceived quality, service, price and reputation. Marketers seek functional, economic and psychological benefits to offer to customers in order to validate their customer value proposition.

11.

How do the concepts of customer value propositions and positioning relate?

The process of exploring what consumers or business customers value forces managers to appreciate what they have to offer which will reassure and excite their targeted customers. Their positioning strategizing for each target market segment should be informed by knowing what these customers value, as their positioning proposition is more likely to resonate and appeal if it is aligned to customers‘ values. The positioning strategy must never be at odds with customers‘ values.

99 12. For a new hotel chain just launching, explain how the three stages – segmentation, targeting and positioning – of the market segmentation process are important.

All three stages will be important. Single-minded ruthlessness is required in determining which consumers/business customers to pursue and for what mix of business (bargain breaks, full vacations, business stop-overs, conferences and business meetings, weddings and other events, etc). There will be segments deemed less important than others. The positioning strategy must play to the prioritized segments and opportunities. These decisions should be informed by an appreciation of market trends, market performance data, the forces of the marketing environment, the competitive arena, and realism regarding the hotels‘ and their management‘s capabilities.

13. For a product of your choice, explain which stage of the market segmentation process matters the most.

If new-on-the-scene, shrewd selection of target segments and lots of thought about positioning vis-à-vis competitors will be important. More mature products will struggle to radically change positionings, but often find redefining segments and updating their targeting strategy accordingly offers a shot-in-the-arm. Tutors should respond with common sense to students‘ choices and views.

14. When might it not be necessary to segment a market?

As chapters 7 and 8 of Marketing: Concepts and Strategies have explained, rarely is it not appropriate to segment. New products, brand launches, innovative business models, long-term market leaders, financially successful and also struggling products and brands all require clarity in target market strategy. Segments exist in all markets for all products and services. No company has the resources to address all segments in a particular market. Importantly, a brand or proposition should not be stretched across too many segments, as it will not be sufficiently focused on the needs and expectations of customers in any single segment, leaving the way clear for competitors to better cater for these customers‘ requirements.

COMMENTS ON THE WEB TASK AND CASES WEB TASK AS THE WEB SITE EXPLAINS: LUXURY DELIVERED CHOCOLATE GIFTS Whatever you’re up to this season, our luxury chocolate will help you do it in style – delivered as gifts by post or handed over in person. As a cocoa grower & chocolatier, you can be sure our gourmet chocolates will thrill & excite. So for chocolate gift delivery look no further than our online chocolate store!

The company targets upper-scale and discerning consumers and corporate clients via its website and chain of stores located in major shopping malls.

Products are classified by Occasion (anniversaries, gifts, Easter, thank-you gifts), Product Type (Easter eggs, gifts, boxes, hampers), Person (him, her, children, vegetarians, vegans, diabetics), Genre (dark, white, milk chocolate, alcohol-free, gluten-free).

The positioning is for lovers of chocolate, indulgence and those wanting to spoil a loved one or colleague.

100

APPLIED MINI-CASE Most retailers today include a digital channel to market. Few, however, are digital-only, particularly in the grocery sector. Ocado is different. It was created in the dot.com boom and is online only, with only so-called dark stores used for picking customers‘ orders.

The Ocado proposition is clearly stated in the text and on its website. Here, the focus is on the current strategic partnership with M&S, which has made its food lines available via Ocado‘s website instead of running its own online operation.

The technology – the platform and logistics processes – underpinning Ocado and M&S in the UK are marketed by the Ocado parent company to a host of operators and client companies in other countries, so that they, too, are able to trade online.

CASE STUDY: IAMS UNDERSTANDS PEOPLE WHO LOVE PETS IAMS launched into a crowded and highly competitive market. The brand has become very successful.

It identified that there were different attitudes towards pets exhibited amongst pet owners, with a significant number not simply focused on pampering, but wishing ‗to do the right thing‘ for their pets nutritionally. The company offers products which mirror those now consumed by caring and informed humans, focusing on prebiotics and good bacteria, natural ingredients, and healthier eating options.

Question 1 considers the influences on their consumers‘ buying behaviour, particularly the psychological drivers. Nutrition was the original positioning platform for IAMS, but just as the views about healthy eating have expanded and diversified for human diets, they have for pets‘ nutritional and lifestyle needs. Hence the move into fortified foods, prebiotics, natural ingredients and lifestyle marketing. IAMS enables pet owners to pamper their animals, but in ways deemed good for them.

Question 2 IAMS targets pet owners who treat their dogs and cats as family members, but those owners who worry about their pets‘ health and fitness are those consumers targeted by IAMS. Caring owners, who want to manage weight gain or who recognize the different eating requirements for older animals.

Question 3 ―Give your pet high quality food‖… the positioning is one of an intelligent, ‗grown-up‘ range of healthy products that will assist pet owners in looking after their animals and do the right thing for their animals as they pass through their life stages. ―Like you, we adore dogs and cats, and have a very particular passion for their nutrition. We know that good nutrition can help make a difference to your pets‘ health and happiness.‖

CHAPTER 9

Marketing research

OBJECTIVES •

To understand the importance of marketing research in marketing decision-making.

•

To distinguish between research and intuition in solving marketing problems.

101 •

To learn the five basic steps of the marketing research process.

•

To understand the fundamental methods of gathering data for marketing research.

•

To gain a sense of the relative advantages and disadvantages of marketing research tools.

•

To understand how tools such as databases, decision support systems and the internet facilitate marketing research.

•

To identify key ethical considerations in marketing research.

PURPOSE AND PERSPECTIVE This chapter focuses on the ways of gathering information needed to make marketing decisions. It distinguishes between managing information within an organization (a marketing information system) and conducting marketing research. The importance of marketing research and its role in marketing decision-making and problem solving is discussed. The five steps of the marketing research process – (1) locating and defining problems of research issues, (2) designing the research, (3) collecting data, (4) analyzing and interpreting research findings and (5) reporting research findings – are examined. In focusing on data collection, exploratory, descriptive and causal studies are reviewed, and the methods of gathering marketing research data are then considered. First, secondary data collection methods are discussed, with the focus on using available reports and other information from both internal and external sources. Then the more complex process of primary data collection is analysed, with a look at sampling, survey methods, questionnaire construction, observation methods and experimentation. The use of technology to improve marketing information gathering and analysis, including the need for companies to develop their own marketing information systems, is then considered. Finally, the importance of ethical standards for marketing research is explored.

102

LECTURE OUTLINE I.

II.

Introduction A. Effective marketing is contingent on marketers having a clear understanding of customers, competitors, market trends and aspects of the marketing environment.

B. Marketing research is the systematic process of gathering, interpreting and reporting information to help marketers solve specific marketing problems or take advantage of marketing opportunities.

1. The thrust of a marketing research effort is to gather information that is not currently available to decision-makers.

2. The purpose of marketing research is to inform a business about customers‘ needs and desires, marketing opportunities for particular goods and services, and changing attitudes and purchase patterns.

3. Marketing research is conducted on a special project basis.

4. Detecting shifts in buyers‘ behaviour and attitudes helps companies stay in touch with the ever-changing marketplace.

The importance of marketing research A. Building an understanding of customers, competitors, market trends and the marketing environment requires that markets have access to information and marketing intelligence.

1. Sometimes marketing research is needed to supplement existing information.

B. The Marketing Research Society defines marketing research as ―The collection and analysis of data from a sample of individuals or organizations relating to their characteristics, behaviour, attitudes, opinions or possessions. It includes all forms of marketing and social research such as consumer and industrial surveys, psychological investigations, observational and panel studies‖.

C. All organizations have some marketing intelligence.

1. Marketing intelligence is the composite of all data and ideas available within an organization.

D. There are broadly two types of marketing research: quantitative and qualitative.

1. In quantitative research, data that can be statistically analyzed and whose results can be expressed numerically are collected. a) These data tend to come from large surveys, sales data or market forecasts.

2. Qualitative research deals with information too difficult or expensive to quantify, such as subjective opinions and value judgements. a) These data are typically unearthed during depth interviews or discussion groups.

E. Some companies handle their own information needs while others buy in help from outside agencies that specialize in marketing research.

1. The global marketing and opinion research industry is huge.

2. Recent growth in the industry highlights marketing research‘s status as a management tool.

F. All kinds of businesses use marketing research to help them develop marketing programmes that match the needs of customers.

1. The categories in which companies seek quantitative research include customer satisfaction surveys, advertising tracking analyses, new or modified product evaluations, brand awareness studies and customer attitude surveys.

103 2.

For qualitative research the categories include customer attitude and satisfaction studies, concept testing, advertisement testing, packaging concepts and promotional offers.

G. As managers recognize the benefits of marketing research they assign it a much greater role in decision-making.

H. The increase in marketing research activities represents a transition from intuitive to scientific problem solving.

1. In relying on intuition, marketing managers base decisions on personal knowledge and past experience.

2. In scientific decision-making, managers take an orderly and logical approach to gathering information.

3. Successful decisions blend both research and intuition.

III. The marketing research process A. To maintain the control needed for obtaining accurate information, marketers approach marketing research in logical steps.

B. The five steps of the marketing research process are: (1) locating and defining issues or problems, (2) designing the research, (3) collecting data, (4) analyzing and interpreting research findings, and (5) reporting research findings.

IV. Step 1: locating and defining problems or research issues A. Problem definition, the first step towards finding a solution or launching a research study, focuses on uncovering the nature and boundaries of a situation or question related to marketing strategy or implementation.

B. The first sign of a problem is usually a departure from some normal function, such as conflicts between or failures in attaining objectives.

C. To determine the specific causes of the problem, marketers must define the problem and its scope beyond the superficial symptoms.

1. The interaction between the marketing manager and the marketing researcher should yield a clear definition of the problem.

2. The problem definition stage should continue until the researchers and decision-makers are clear about what they want from the research and how they will use it.

V. Step 2: designing the research A. Research design is an overall plan for obtaining the information needed to address it.

1. This step requires detailed research objectives or hypotheses to be formulated.

2. The most appropriate type of research must be designed to ensure the results are reliable and valid.

B. A research objective is the desired outcome from the marketing research project being undertaken.

C. A hypothesis is an informed guess or assumption about a certain problem or set of circumstances.

1. It is based on all the insight and knowledge available about the problem from previous research studies and other sources.

D. As information is gathered, a marketing researcher can test a hypothesis.

E. The hypotheses that are accepted or rejected become the study‘s chief conclusions.

F. The research objectives and any hypotheses being tested determine which approach will be used for gathering general data.

1. Exploratory research is deliberately flexible data gathering used to discover the general nature of a problem and the factors that relate to it. a) Exploratory studies are used when more information about the problem is needed and the tentative hypothesis must be made more specific.

104 An examination of the organization‘s records, a review of publicly available data, and the questioning of knowledgeable people inside and outside the business may be helpful.

2. Descriptive research is data collection that focuses on providing an accurate description of the variables in a situation. a) Descriptive studies are undertaken when marketers need to understand the characteristics of certain phenomena to solve a particular problem. b) Such studies may range from general surveys of consumer characteristics, such as education, occupation or age, to more specific details about consumer purchases. c) Descriptive studies generally require much prior knowledge and assume that the problem is clearly defined.

3. Hypotheses about causal relationships require a more complex approach than descriptive studies. a) In causal research, it is assumed that a particular variable X causes a variable Y. b) Marketers must plan the research so that the data collected will prove or disprove that X causes Y. c) Marketers must try to hold constant all variables except X and Y. G. In designing research, care is needed to ensure that research techniques are both reliable and valid.

1. A research technique has reliability if it produces almost identical results in successive repeated trials.

2. To have validity the method must measure what it is supposed to measure.

VI. Step 3: collecting data A. Marketing researchers have two types of data at their disposal: primary and secondary.

1. Primary data are observed and recorded or collected directly from respondents.

2. Secondary data are compiled inside or outside the organization for some purpose other than the current investigation.

B. Secondary data collection 1. Secondary data collection involves using available reports and other information from both internal and external sources to study a marketing problem.

2. Information about past marketing activities, such as sales records and research reports, can be used to test hypotheses and pinpoint problems.

3. Secondary data are also found in periodicals, census reports, government publications, the Internet and unpublished sources.

4. Syndicated data services are organizations that periodically collect general information and sell it to clients.

5. Another type of secondary data, which is available for a fee, is demographic analysis. a) Such information may be valuable in tracking demographic changes that have implications for consumer behaviour and the targeting of products.

C. Primary data collection 1. The collection of primary data is a more lengthy, costly and complex process than the collection of secondary data.

2. By systematically choosing a limited number of units, or sample, to represent the characteristics of a total population, marketers can project the reactions of a total market or market segment. a) The objective of sampling in marketing research is to select representative units from a total population. b) With probability sampling every element in the population being studied has a known chance of being selected for study. b)

105 c)

3.

In simple random sampling, all the units in a population have an equal chance of appearing in the sample.

(1) Random sampling is basic probability sampling. d) In stratified sampling, the population of interest is divided into groups according to a common characteristic or attribute, and a probability sampling is then conducted within each group.

(1) Usually, samples are stratified when researchers believe that there may be variations among different types of respondents, depending on factors such as sex, race and age. e) Area sampling involves two stages: first, selecting a probability sample of geographic areas and, second, selecting units or individuals within the selected geographic areas for the sample.

(1) This approach is a variation of stratified sampling, with the geographic areas serving as the segments, or primary units, used in sampling.

(2) Area sampling may be used when a complete list of the population is not available. f) Quota sampling differs from other forms of sampling in that it is judgemental; the final choice of respondents is left to the interviewers.

(1) Quota samples are used most often in exploratory studies, in which hypotheses are being developed.

(2) This kind of sampling is useful when questioning people with some unusual characteristics, and when focusing on a specific core target market segment.

Survey methods often collect data by mail, telephone, online or personal interviews. a) Mail surveys are used most often when respondents are spread over a wide geographic area and when funds for the survey are limited.

(1) Mail surveys, in which questionnaires are sent by mail or email, are the least expensive method as long as the response rate is high enough to produce reliable results.

(2) The main disadvantage of mail surveys is the possibility of a low response rate or of misleading results, if the respondents are significantly different from the population being sampled.

(3) Premiums or incentives have been effective in encouraging respondents interviewed by mail on a regular basis.

(4) Mail panels of consumers selected to represent a market or market segment are useful for evaluating new products, providing general information about consumers and providing consumer purchase records.

(5) Many companies use consumer mail panels, others use consumer purchase diaries, which keep track of purchases only. b) In telephone surveys, interviewers record respondents‘ answers to a questionnaire.

(1) The response rate is higher than that for a mail survey, and telephone interviews can be conducted quickly.

(2) However, many households are excluded from telephone directories by choice or because the residents moved after the directory was published.

(3) Computer assisted telephone interviewing integrates questionnaire, data collection and tabulations, and provides data to aid decision-makers in the shortest time possible.

(4) Online surveys have evolved as an alternative to telephone surveys.

Tapping into social media has proved highly useful for researchers. c) The personal interview survey offers interviewers a great deal of flexibility.

106 (1)

4.

5.

Rapport gained through direct interaction usually permits more in-depth interviewing, including probes, follow-up questions or psychological tests.

(2) In addition, because face-to-face interviews can be longer, they can yield more information and respondents can be selected more carefully.

(3) The focus group interview allows researchers to observe group interaction when members are exposed to an idea or concept; consumer attitudes, behaviours, lifestyles, needs and desires can be explored in a flexible and creative manner.

(4) Quali-depth interviews are 25 to 30 minute intercept interviews that incorporate some of the in-depth advantages of focus group interviews with the speed and flexibility of shopping mall/pavement intercept interviews.

(5) Another research technique is the in-home interview, a 45 to 90 minute interview in which the research visits the respondent in his or her home.

(6) Shopping mall/pavement intercept interviews involve personal interviewing of a percentage of individuals who pass by certain ‗intercept‘ points in a shopping centre or on a pavement.

(7) In on-site computer interviewing, respondents complete a selfadministered questionnaire displayed on a computer monitor.

A carefully constructed questionnaire is essential to the success of any survey. a) A questionnaire is a base document for research purposes that provides the questions and the structure for an interview or self-completion and has provision for respondents‘ answers. b) Questions must be designed to elicit information that meets the study‘s data requirements. c) Questions must be clear, easy to understand and directed towards a specific objective. d) Questions are usually of four kinds: open-ended, dichotomous, multiple choice and Likert scale; most questionnaires include a mix of question styles. e) The design of a questionnaire affects the validity and usefulness of the results.

(1) Testing a questionnaire on a few respondents before conducting a full survey helps to eliminate such difficulties.

(2) Certain guidelines must be followed when undertaking questionnaire design. f) Researchers must be careful about questions that might be considered too personal or might result in a respondent‘s admitting to activities that other people are likely to condemn.

When using observation methods, researchers record respondents‘ overt behaviour, noting physical conditions and events. a) Researchers avoid direct contact with respondents; instead, they examine and note respondents‘ actions systematically. b) Observation may include the use of ethnographic techniques, such as watching customers interact with a product in a real-world environment.

(1) Ethnography is increasingly being used by many marketing research agencies to gain greater insights into consumer lifestyles. c) Observation may also be combined with interviews. d) If the presence of a human observer is likely to bias the outcome, or if human sensory abilities are inadequate, mechanical means may be used to record behaviour.

107 (1)

Mechanical observation devices include cameras, recorders, counting machines and other equipment that records physiological changes in individuals. e) Observation is straightforward and avoids a central problem of survey methods: motivating respondents to state their true feelings or opinions.

6. Experimentation involves keeping certain variables constant so that the effects of the experimental variables can be measured. a) In experimentation an independent variable (a variable not influenced by or dependent on other variables) is manipulated. b) The resulting changes are measured in a dependent variable (a variable that is contingent on, or restricted to, one value or a set of values assumed by the independent variable).

(1) In a laboratory setting, it is possible to control independent variables that might influence the outcome of an experiment, though such isolation from the real world does not permit duplicating all the conditions that affect choices in the marketplace.

(2) A field setting allows experimentation to take place in a real-world environment; however, field experiments can be influenced or biased by unexpected events.

(3) Examples of field settings are home placements, when a product is used in the home in a real setting; and diary tests, experiments in which households log their weekly purchases and consumption patterns.

VII. Step 4: analyzing and interpreting research findings A. The first step in drawing conclusions from most research is displaying the data in table format.

B. After the data are tabulated, they must be analyzed.

1. Statistical interpretation focuses on what is typical or what deviates from the average.

C. Marketing managers must understand the research results and relate the results to a context that permits effective decision-making.

VIII. Step 5: reporting research findings A. The final step in the marketing research process is reporting the research findings.

1. The marketer must look objectively at the findings to see how well the gathered facts answer the research question or support or negate the hypotheses posed in the beginning.

2. Since it is doubtful that the study can provide everything needed, the researcher should point out the deficiencies of the research in the report, perhaps suggesting areas that require further investigation.

B. Because the report is a means of communicating with the decision-makers who will use the research findings, researchers need to determine beforehand how much detail and supporting data to include.

1. Researchers must recognize the needs and expectations of the report user and adapt to them.

C. Providing adequate explanations in understandable language makes it easier for decisionmakers to apply the findings and diminishes the likelihood that a report will be misused or ignored.

D. Communicating with potential research users prior to writing the report can help the researcher supply information that will improve decision-making.

IX. Using technology to improve marketing information gathering and analysis

108 A.

B.

C.

X.

A marketing information system (MIS) is a framework for the day-to-day management and structuring of information gathered from sources both inside and outside the organization.

1. An MIS provides a continuous flow of information about prices, advertising expenditure, sales, competition and distribution expenses.

2. The main focus of the MIS is on data storage and retrieval.

3. In the MIS the means of gathering data receive less attention than do the procedures for expediting the flow of information.

4. An effective MIS starts by determining the objective of the information.

5. Evolving telecommunications and computer technology is allowing marketing information systems to cultivate one-to-one relationships with customers.

Most marketing information systems include an internal database, which is a collection of information arranged for easy access and retrieval.

1. Databases allow marketers to tap into an abundance of information useful in making marketing decisions.

2. Marketing researchers can use commercial databases developed by information research businesses to obtain useful information for marketing decisions. a) Many commercial databases are accessible online for free. b) Single-source data is information provided by a single marketing research company.

The internet has evolved as a powerful communication medium, linking customers and companies around the world via computer networks with email, forums, web pages and more.

1. Companies can mine their own databases, records and websites for useful information.

2. Marketing researchers can subscribe to online services. Specialist tools such as those available from SurveyMonkey are proving very popular.

3. Marketers can subscribe to ‗mailing lists‘ that periodically deliver electronic newsletters to their computer screens and they can participate in on-screen discussions.

4. The enhanced communication provided by the internet provides a high-speed link between a company‘s customers, suppliers and employees.

5. While most web pages are open to anyone with internet access, big companies also maintain internal webpages, called ‗intranets‘.

Chapter 19 explores the changes brought about by digital marketing, ‗big data‘, the use of social media and the web to acquire market insights into customers and markets.

The importance of ethical marketing research A. Marketing research and information systems are vital to marketing decision-making.

B. Because of this, it is essential that ethical standards be established and followed to stamp out unacceptable practices. Recently introduced EU-wide GDPR legislation strives to regulate data collection, storage, use and sharing.

1. Marketing research ethical issues relate to honesty, manipulation of research techniques and data, invasion of privacy and failure to disclose the purpose or sponsorship of a study.

2. ‗Sugging‘ (―selling under the guise of marketing research‖) is a major ethical issue.

C. Organizations like ESOMAR and the Market Research Society have developed codes of conduct and guidelines to promote ethical marketing research.

1. To be effective, such guidelines must instruct those who participate in marketing research on how to avoid misconduct.

D. Without clear understanding and agreement, including mutual adoption of standards, ethical conflict will lead to mistrust and questionable research results.

109

ANSWERS TO DISCUSSION AND REVIEW QUESTIONS 1.

What is the marketing information system (MIS) of a small organization likely to include?

Usually the MIS of a small organization is a file of information about operations. Most organizations have some type of marketing databank, including data on inventories, shipments, purchasing and sales.

2.

What are the differences between quantitative and qualitative marketing research?

In quantitative research, techniques and sample size result in data that can be statistically analyzed and numerically expressed. Examples include large surveys, sales data and market forecasts.

With qualitative research, information that is too difficult or expensive to quantify is collected.

Examples include subjective opinions and value judgements not amenable to statistical analysis and quantification.

3.

How do the benefits of decisions guided by marketing research compare with those of intuitive decision-making? How do marketing decision-makers know when it will be worthwhile to conduct research?

Marketing research is used to decrease uncertainty. Also, it is an important tool when a manager lacks personal knowledge about or experience with the situation. Marketing research is not important when the decision is relatively insignificant or when there are no alternative courses of action.

4.

Give specific examples of situations in which intuitive decision-making would probably be more appropriate than marketing research.

Intuitive decision-making is important when problems are minor or there is a time constraint that does not allow for a formal analysis. Such minor problems usually occur on an individual basis and do not accumulate over time. Examples of minor individual problems are customer complaints and personnel decisions.

5.

What are the differences between exploratory, descriptive and causal research?

Exploratory studies are used when more information about the problem is needed and the tentative hypothesis must be made more specific. Descriptive studies are undertaken to gain understanding of the characteristics of some phenomenon to solve a problem. Causal studies look at the relationship between variables, where a particular variable X is the cause of the variable Y.

6.

What are the major limitations of using secondary data to solve marketing problems?

Major limitations in using secondary data concern accuracy and availability.

7.

List some of the problems of conducting a laboratory experiment on respondents‟ reactions to the taste of different brands of beer. How would these problems differ from those of a field study of beer taste preferences?

A laboratory experiment is an artificial situation in that some of the marketing variables, such as label and advertising, are not important in the selection of beer. In field experiments, uncontrollable factors have an influence. It may be hard to isolate factors that influence sales. In comparing a laboratory experiment with a field experiment, one is likely to find that the advantages of one are the disadvantages of the other.

8.

In what situation would it be best to use random sampling? Quota sampling? Stratified or area sampling?

110 Random sampling works best when it is easy to number or identify all units in a population and give each unit a known or equal opportunity of appearing in the sample.

Quota sampling differs from other sampling techniques because it is judgemental. It is usually limited to two or three demographic variables and to some personal or behavioural characteristics such as wearing eyeglasses or owning a cat or dog. Quota sampling is often used in exploratory studies that are not projected to the total population.

Stratified or area sampling is a form of probability sampling that is useful when units such as individuals are not available on a list but geographic areas such as blocks or census tracts can be used. Researchers then use a random selection process to pick out units or individuals to be sampled.

9.

Suggest some ways to encourage respondents to cooperate in mail surveys.

An incentive such as a premium can be offered to those who participate. A well written letter stating the importance of the survey can be helpful. Sampling from a frame or population that is interested in the topic under investigation will increase response. Using a questionnaire that is short and easy to fill out is also helpful.

10. What are the benefits of the focus group technique?

An important benefit of using a focus group approach is that detailed information can be collected quickly at a relatively low cost. Issues that can be explored include new product concepts, buying processes and advertising concepts. An effective moderator can quickly encourage discussion among a group of six to twelve individuals. The group format allows for interaction of opinion. A range of issues on the research brief can be explored as the two or three hour discussion unfolds.

11. How has the growth of the internet and mobile communications increased the opportunities for collecting information?

As the examination of CRM in chapters 3 and 7 explained, companies routinely capture data about their customers, now facilitated online with cookies. Many agencies provide search engine optimization tools, including the ability to probe the online behaviours of consumers searching for your brand or viewing your company‘s web pages.

Online marketing research has also grown, both for qualitative and quantitative research. This can be in the form of formal questionnaires similar to those used in mail surveys but delivered online, or in the guise of ‗routine‘ customer satisfaction tracking. How often do you find a pop-up asking for a few minutes of your time when you visit a particular company‘s website? This is a big growth opportunity for capturing customer insight. Syndicated online research is also growing.

12. Give some examples of marketing problems that could be solved through information gained from observation.

Personal observation can be used to solve problems such as shoplifting, spoilage and breakage.

Also, demographic characteristics can be observed and classified. One could observe and plot licence plates on a map to obtain a geographic market profile. Other examples in which observation is important are television ratings and traffic flow.

13. Why is questionnaire design important? Why should questionnaires be tested?

Good questionnaire design is essential for successful surveys. Questions must yield appropriate information, be clear and easy to understand and help satisfy objectives. The way in which a questionnaire is designed will significantly affect the validity and usefulness of its results.

111 Testing questionnaires helps check the appropriateness of questions, wording and layout. It is better to identify potential difficulties early on so that corrective action can be taken and resources saved.

14. What is „sugging‟? Why is it damaging to the marketing research industry? ‗Sugging‘ is ―selling under the guise of marketing research.‖ Such unethical conduct is damaging because it hurts the image of marketing research and may result in respondents being unfairly manipulated. In the long term, ‗sugging‘ could lead to mistrust, poor respondent cooperation and questionable research results.

15. Why are ethics so important in conducting marketing research?

Ethics should matter in all aspects of marketing. Here, data will be attained and their collection, storing and use concern many consumers, members of the public, regulators and trade bodies.

Privacy laws must be obeyed. Consumers resent invasions of privacy, unauthorized use of their data, research being used for cold-call selling, and unapproved sharing of their data with third parties. Poorly managed marketing research and perceived unethical behaviour can cause huge mistrust and damage brand reputation.

COMMENTS ON THE WEB TASK AND CASES WEB TASK Ethical behaviour amongst marketing research practitioners is at the core of ESOMAR‘s goals. Much of the web site is devoted to ESOMAR‘s code and to the communication of best practice. The code considers sample selection, privacy rights, respondent bias, the misleading of respondents, respondent reward, misrepresentation, inadequate analysis and poor reporting of the facts, amongst other issues.

ESOMAR offers advice for conducting ‗good‘ marketing research and hosts numerous events designed to bring together the marketing research community in order to share best practice.

APPLIED MINICASE Marketing strategy requires the identification of worthwhile opportunities to pursue, the specification of an associated target market strategy, and the creation of a basis for competing. In order to manage these requirements, marketers need information about market size, share, sales and profitability; customers and their buying behaviour; competitors; the forces and trends of the marketing environment; organizational capabilities; plus sales force information such as the customer contact database indicating staff liaison with customers. Examples provided by students should be customized for the retail environment and may well select a specific retailer in order to provide an illustration.

CASE STUDY: FOCUS GROUP INTERVIEWING: IN-DEPTH VIEWS FROM GROUP DISCUSSIONS Focus group interviews are informal group discussions about products or marketing ideas, usually carried out by marketing research companies. The technique‘s increased popularity during the 1980s led to a number of developments in how focus groups are used. This case looks at the developments and demonstrates a range of usage situations for the approach.

Question 1 is concerned with the strengths and benefits of focus group marketing research. Compared with other interviewing approaches, focus groups enable the most thorough exploration of marketing issues (for example, new product concepts, advertising concepts and so on) at relatively good value for

112 money. A good moderator can put a group of six to twelve individuals (typically eight) quickly at their ease, encourage interaction of opinion and focus the two or three hour discussion on specific issues in the research brief as the session unfolds.

Question 2 asks students to consider other research tools that might have been used by the retailer in this case study. Any programme of research needs to be carefully designed to ensure that an appropriate mix of data types and collection techniques are used. This is the logic behind the step-by-step view of the marketing research process: defining and locating problems, developing hypotheses, collecting data, analyzing and interpreting research findings and reporting findings. When planning research, it is necessary to be aware of each of these elements so that at the end of the data collection, the identified information needs have been satisfied. All too often, companies begin collecting data before they have addressed the fundamental questions of why they require the information and what they want to do with it. The service retailer described in the case could have used focus groups in conjunction with secondary published data or other primary data collection approaches, such as personal interviews or mail or telephone surveys. The focus group research either could have been used to obtain qualitative insights prior to more quantitative data collection, or could have been applied after survey data had been collected to generate insights into the results obtained.

CHAPTER 10

Product decisions

OBJECTIVES •

To learn how marketers define products.

•

To define the levels of a product.

•

To understand how to classify products.

•

To become familiar with the concepts of product item, product line and product mix.

•

To understand the concept of product life cycle.

•

To understand the types of organizational structure used to manage products.

•

To grasp the importance of the levels of a product in determining a competitive edge.

PURPOSE AND PERSPECTIVE This chapter covers fundamental concepts relating to (1) the definition of a product, (2) consumer and industrial product classification schemes, (3) the three different levels of product, (4) product line and product mix concepts, (5) the product life cycle, (6) why some products fail and others succeed, and (7) other product related characteristics. It provides definitions and examines the basic relationships necessary for understanding the role of products in the marketing mix. Students often believe that products are related more to production than to marketing. The chapter shows that products can be goods, services, ideas or all three and that there are different levels of product. Many real-world examples are presented to illustrate product concepts.

113

LECTURE OUTLINE I.

II.

III.

Introduction A. A product is everything, both favourable and unfavourable, tangible and intangible, received in an exchange of an idea, service or good.

B. A product is a network of tangible and intangible attributes, including functional, social and psychological utilities or benefits.

C. A product can be an idea, a service, a good or any combination of the three, including supporting services such as installation, guarantees, product information and promises of repair or maintenance.

D. A product is a key element in the marketing mix and is central to the company‘s marketing proposition.

E. Without the ‗right‘ product it is unlikely that marketers will be able to satisfy their customers.

F. There is more to the product component of the marketing mix than the actual tangible product or the service supplied to a customer.

G. A successful product will not remain so indefinitely.

H. Developing a successful product requires knowledge of fundamental marketing and product concept.

What is a product?

A. A good is a tangible physical entity.

B. A service is intangible; it is the result of the application of human and mechanical efforts to people or objects.

C. Ideas are concepts, philosophies, images or issues that provide the psychological stimulus to solve problems or adjust to the environment.

D. When buyers purchase a product, they actually buy the benefits and satisfactions that they think the product will provide.

1. Services in particular are bought on the basis of promises of satisfaction.

Classifying products A. Consumer products are those purchased to satisfy personal and family needs; they can be classified according to how buyers generally behave when purchasing a specific item.

1. Convenience products are relatively inexpensive, frequently purchased and rapidly consumed items on which buyers exert only minimal purchasing effort. a) The buyer spends little time planning the purchase of a convenience item or comparing available brands or sellers. b) A convenience product is normally marketed through many retail outlets. c) Because sellers experience high inventory turnover, per unit gross margins can be relatively low. d) Producers of convenience products can expect little promotional effort at the retail level and thus must provide it themselves in the form of advertising, sales promotion and packaging.

2. Shopping products are items for which buyers are willing to put forth considerable effort in planning and making the purchase. a) Buyers allocate considerable time to comparing stores and brands with respect to prices, credit, product features, qualities, services and perhaps guarantees. b) Although shopping products are purchased less frequently and are more expensive than convenience products, buyers of shopping products are not particularly brand loyal.

114 c) d)

B.

Shopping products require fewer retail outlets than convenience products.

Because shopping products are purchased less frequently, causing lower inventory turnover, middlemen expect to receive higher gross margins. e) In many cases, the producer and the middlemen expect some cooperation from each other in providing parts and repair services and performing promotional activities.

3. Speciality products possess one or more unique characteristics for which a significant group of buyers is willing to expend considerable effort. a) Buyers carefully plan the purchase of a speciality product; they know exactly what they want and will not accept a substitute. b) Speciality items are often distributed through a limited number of retail outlets. c) Like shopping goods, speciality products are purchased infrequently, causing lower inventory turnover and thus requiring relatively high gross margins.

4. Unsought products are purchased when a sudden problem arises or when aggressive selling is used to obtain a sale that otherwise would not take place. a) The consumer generally does not think of buying these products regularly. b) Unsought products include emergency plumbing services and headstones. c) Life insurance is an example of an unsought product that requires aggressive personal selling.

Business products are items bought for use in a company‘s operations or to make other products; they can be classified according to their characteristics and intended uses.

1. Raw materials are basic materials that actually become part of a physical product. a) They are usually bought and sold in relatively large quantities according to grades and specifications.

2. Major equipment includes large tools and machines used for production purposes. a) This equipment is usually expensive, may be used in a production process for a considerable period of time and is often custom made to perform specific functions. b) Because major equipment is so expensive, purchase decisions are often long and complicated and may be made by high level management. c) Marketers of major equipment must frequently provide a variety of services, including installation, training, repair and maintenance assistance, and even help in financing the purchase.

3. Accessory equipment does not become a part of the final physical product but is used in production or office activities. a) Compared with major equipment, accessory items are usually much cheaper, are purchased routinely with less negotiation and are treated as expenditure items rather than capital items because they are not expected to last as long. b) More outlets are required for distributing accessory equipment than for major equipment, but sellers do not have to provide the multitude of services expected of major equipment marketers.

4. Component parts become a part of the physical product and are either finished items ready for assembly or products that need little processing before assembly. a) Buyers purchase component parts according to their own specifications or industry standards. b) Buyers of component parts expect specified quality and delivery on time.

5. Process materials are used directly in the production of other products. a) Unlike component parts, process materials are not readily identifiable.

6. Consumable supplies facilitate production and operations but do not become part of the finished product.

115 a)

Consumable supplies are standardized items used in a variety of situations and are purchased by many different types of organizations. b) They are commonly sold through numerous outlets and are purchased routinely, often from more than one seller. c) Because supplies can be divided into three sub-categories – maintenance, repair and operating (or overhaul) supplies – they sometimes are called MRO items.

7. Industrial/business services are the intangible products that many businesses use in their operations, such as financial and legal services, marketing research, computer programming and operation, and caretaking and printing services. a) Companies must decide whether to provide their own services internally or to obtain them outside the organization. b) This decision depends largely on the costs associated with each alternative and how frequently the services are needed.

IV. The three levels of product A. The core product is the level of a product that provides the perceived or real core benefit or service.

B. The actual product is a composite of several factors: the features and capabilities offered, quality and durability, design and product styling, packaging and the brand name.

C. The augmented product is formed by support aspects of a product, including customer service, warranty, delivery and credit, personnel, installation and after sales support.

D. For most consumer or industrial products and services, the consumer is influenced by the three levels of the product.

V. Product line and product mix A. A product item is a specific version of a product that can be designated as a distinct offering among a business‘s products.

B. A product line is a group of closely related product items that are considered a unit because of marketing, technical or end use considerations.

1. Marketers must understand buyers‘ goals if they hope to come up with the optimum product line.

2. Specific items in a product line reflect the desires of different target markets or the different needs of consumers.

C. A product mix is the composite, or total, group of products that a company makes available to customers.

1. The depth of a product mix is measured by the number of different products offered in each product line.

2. The width of a product mix is measured by the number of product lines a company offers.

VI. Product life cycles A. Product life cycles refers to the four major stages for products: introduction, growth, maturity and decline.

1. As a product moves through its life cycle, marketing strategies must be periodically evaluated and possibly changed.

2. By understanding the typical life cycle pattern, marketers are better able to maintain profitable products and drop unprofitable ones.

B. Introduction 1. The introduction stage of the life cycle begins with the product‘s first appearance in the marketplace, when sales are zero and profits are negative.

2. The failure rate for new products is high, ranging from 60 to 90 per cent.

3. There may be only a few sellers with enough resources, technological knowledge and marketing know-how to launch the product successfully.

116 4.

Initially, a higher product price may be required to recoup expensive marketing research or development costs.

C. Growth 1. During the growth stage, sales rise rapidly and profits reach a peak and then start to decline.

2. This stage is critical to a product‘s survival because competitive reactions to the product‘s success during this period will affect its life expectancy.

3. Profits decline late in this stage because increased competition drives down prices and creates the need for heavy promotional expenses.

4. At this point, a typical marketing strategy encourages strong brand loyalty and competes with aggressive emulators of the product.

5. A company tries to strengthen its market share and develop a competitive position by identifying and emphasizing the product‘s benefits.

6. Aggressive promotional pricing, including price cuts, is typical during the growth stage.

D. Maturity 1. During the maturity stage, the sales curve peaks and starts to decline, and profits continue to decline.

2. This stage is characterized by severe competition, with many brands in the market.

3. Weaker competitors are squeezed out or switch their attention to other products.

4. Fresh promotional and distribution efforts, such as mass media advertising and dealer oriented promotion, are typical in this phase.

5. Buyers‘ knowledge of the product reaches a high level.

E. Decline 1. During the decline stage, the last stage of the product life cycle, sales fall rapidly.

2. New technology or a new social trend may cause product sales to take a sharp turn downwards.

3. The marketer considers pruning items from the product line to eliminate those not returning a profit.

4. The marketer may cut promotion efforts, eliminate marginal distributors and, ultimately, plan to phase out the product.

5. Because most businesses have a product mix consisting of multiple products, marketers must deal with the dual problems of prolonging the life of existing products and introducing new products to meet organizational sales goals.

VII. Why some products fail and others succeed A. Many new products fail each year.

1. Failure and success rates vary in different industries.

2. Consumer products are more likely to fail than business products.

B. Products fail for many reasons.

1. Failure to match product offerings to customer needs a) When products do not offer value and lack the features customers want, they may fail.

2. Other reasons for failure include technical or design problems, poor timing, overestimation of market size, ineffective promotion and inefficient distribution.

C. It is important to distinguish between degrees of product failure.

1. Absolute failure is when a company loses money on a new product because it is unable to recover development.

2. Relative product failure is when a product returns a profit but does not meet profit or market share objectives.

117 a)

If repositioned, a relative product failure may become a successful member of the product line. b) Some products experience relative product failure after years of success.

VIII. The ingredients for success A. Some new products are very successful.

B. The most important ingredient for success is the product‘s ability to provide a significant and perceivable benefit to a sizeable number of customers.

IX. Tangible and intangible product characteristics A. Physical characteristics and product quality 1. Determining the specific quality level to build into a product is crucial for marketers. a) Higher quality often demands better materials and more expensive processing, which increases production costs, and ultimately the product‘s price.

2. How much the target market is prepared to pay will affect the level of quality specified. a) The concepts of quality and value are related. b) In general, consistent levels should be set for all products with a similar brand. c) The quality of competing brands is also an important consideration.

B. Supportive product related services 1. A guarantee is an agreement specifying what the producer or supplier will do if the product malfunctions. a) An effective guarantee should be unconditional, easy to understand and communicate, meaningful, easy to invoke, and quick and easy to act on. b) Guarantees that service marketers provide set clear performance standards, generate feedback from customers on the quality of the service and help build customer loyalty and sales.

2. A marketer must establish a system to provide replacement parts and repair services, especially for expensive, complex industrial products that buyers expect to last a long time.

3. A company must sometimes provide customers with credit services. a) Providing credit services can help a company acquire and maintain a stable market share. b) The availability of credit services enables more people to buy the product, thus enlarging the market for the item. c) By offering credit services, companies can earn interest income from customers.

ANSWERS TO DISCUSSION AND REVIEW QUESTIONS 1.

List the tangible and intangible attributes of a tablet such as an iPad. Compare the benefits of the tablet with those of an intangible product such as life insurance.

This question is intended to get students to recognize that product benefits are more than the visible, tangible attributes. Tangible attributes of a tablet include battery life, size and weight, functionality, access times, apps, and so forth. Intangible attributes include usefulness, the role of the tablet in the user‘s life and self-image, and product image (Apple versus a cheaper eastern European import).

A tablet is a more visible and tangible product than life insurance. Life insurance marketers must deal almost exclusively with the intangible attributes of security and protection. A tablet is also sold on the basis of intangibles, including usefulness and image, but tangible attributes can be used in communicating these features such as shape, colour, weight, battery life, apps, etc.

118 2.

A product has been referred to as a “psychological bundle of satisfaction”. Is this a good definition of a product?

Products do provide psychological benefits as well as satisfaction, but they are more than this simple definition implies. The tangible and intangible attributes include functional, social and psychological utilities of all parts of the product. Stating that a product is a ―psychological bundle of satisfaction‖ does not explicitly convey that some products provide mechanical and functional features that help accomplish a task but do not necessarily provide a great deal of psychological stimulation. For example, a car‘s fan belt is desired for the functional benefits it provides; these benefits are probably more important than psychological aspects.

3.

Is a roll of carpet in a shop a consumer product or a business product? Defend your answer.

The classification of products into the industrial or consumer class depends on the buyer‘s purpose and intent. If a carpet is purchased for a consumer‘s living room, it is a consumer product.

If it is purchased for an office in which business is conducted, it is an industrial product.

4.

How do convenience products and shopping products differ? What are the distinguishing characteristics of each type of product?

Convenience products (milk and petrol) are purchased at the closest retail facility. Shopping products (clothing and furniture) are purchased after comparisons and alternatives have been evaluated. Distinguishing characteristics include price, frequency of purchase, time of consumption, searching time, margins and product adjustment. Convenience products rank lower than shopping products in terms of searching time, margins, adjustment and time of consumption.

Convenience products also are replaced more often than shopping products.

5.

Would a music system that sells for £750 be a convenience, shopping or speciality product?

For most people, this kind of purchase would be a shopping product. Most consumers spend some time making comparisons and shopping in several places when buying a music system. However, if the purchaser knows exactly what he or she wants and is not willing to make comparisons, the system would be considered a speciality product.

6.

In the category of business products, how do component parts differ from process materials?

Component parts become a part of the physical product and are either finished items ready for assembly or products that need little processing before assembly. Although they become part of a larger product, component parts can often be identified and distinguished easily.

Process materials are used directly in the production of products; unlike component parts, they are not readily identifiable.

7.

How does a company‟s product mix relate to its development of a product line?

A product mix is the composite of all products that a company sells. The product line includes a group of products closely related in terms of marketing, technical or end use considerations. For example, toothpaste is a product Procter & Gamble sells. Crest is just one brand in the product line.

8. When should a company add depth to its product lines rather than width to its product mix?

A company should add depth to the product line when there is greater opportunity to profit by building on current marketing expertise and consumers‘ acceptance in a particular market.

Launching new products to add to the marketing mix may require new marketing channels, promotion, pricing techniques and production facilities. Many companies have expanded by increasing the width of their product mixes and the depth of their product lines.

119 9.

How do industry profits change as a product moves through the four stages of its life cycle?

During the introduction stage, profits are negative. The company should break even as the growth stage is reached, and profits should increase rapidly and show the highest profit to sales ratio during late growth. Profits decline during maturity and usually drop further during the decline stage.

10. What is the relationship between the concepts of product mix and product life cycle?

Most companies are not tied to a single product. They often have a number of products in the product mix, and different products are usually at different stages of the product life cycle. This means that new products must be introduced and the life of existing products prolonged to meet organizational sales goals.

11. What factors must marketers consider when deciding what quality level to build into a product? What support services can be offered to back up product quality?

The quality level of a product will depend on the price the target market will pay, the price and quality of the company‘s other products, and the price and quality of competing brands. A range of support services can be offered including delivery and credit services, guarantees, technical advice, installation assistance, repairs and replacement services.

12. What are aspects of the augmented product for a new car?

Aspects of the augmented product for a new car are: the warranty; the level of customer service that is offered to potential customers (for example, test drives and facilities for children in showrooms); the level of after sales support that is offered (for example, a first free service); the degree to which sales and service personnel are helpful, knowledgeable and friendly; the types of payment and credit facilities that are offered and the nature of the delivery arrangements.

13. Why is the augmented product increasingly important when determining a differential advantage?

A differential advantage is an attribute of a product or service highly desired by targeted customers and not currently offered by rival companies or products. It is a unique differentiator and is difficult to identify and sustain. In increasingly competitive marketplaces, as businesses strive to derive a differential advantage over rivals, they are having to look beyond the actual product to aspects of product quality and the augmented product features.

COMMENTS ON THE WEB TASK AND CASES WEB TASK Goodyear, based in the USA, is a leader in tyre production, but also manufactures belts and hoses, claiming to be a leader in synthetic polymers and resins. The main website focuses on tyres. The message is straight forward: car, 4x4, van, truck, farm, earthmover or plane, Goodyear has the latest product solution. Put simply, Goodyear produces innovative tyres. There is even a Tyre Finder interactive product finder, enabling the customer to specify their driving requirement and season in order to ensure the most appropriate tyre is fitted.

The website offers a wealth of product detail. For example, under 4x4, a variety of products is offered, with supporting technical explanation but also a large amount of usage guidance in terms of suitability for gradients, terrain, weather conditions, loads and so forth. The web also suggests Goodyear is the global leader in what is termed ‗run flat‘ technology. There are supporting endorsements from leading

120 motoring magazines, such as Auto Express in the UK. In order to cement Goodyear‘s standing for safety and quality, there are sections linking to events such as the Land Rover Experience.

APPLIED MINI-CASE A brand manager would conduct a consumer and trade audit of the perceptions of the Golf brand versus competing brands. This analysis would focus on the consumers in the intended target market segment(s). As a result, it would become obvious whether the Golf‘s reputation and brand positioning remained desirable, strong and suitably differentiated from competitors. The marketing research might include the testing of alternative brand names, positionings and suggested brand strategies in order to determine whether better options – in the eyes of targeted consumers – exist. The research would probe what is viewed about competing brands and how well VW and Golf fair against these.

CASE STUDY: HEINEKEN’S PORTFOLIO OF BRANDS Heineken is Europe‘s largest brewer and worldwide is second only to America‘s Anheuser-Busch. With a presence in 178 countries and more than 90 per cent of sales originating outside the domestic Dutch market, Heineken has been described as the most international beer brand. There is more to Heineken than simply its namesake lager brand. In general, the company operates a multi-branding strategy: (a) a local brand (such as Dreher in Italy or ‗33‘ in France), (b) an upper price brand such as Aguila Master in Spain or Amstel, and (c) the Heineken brand itself, known throughout the world.

Question 1 asks why Heineken has a mix of local and international brands. In the same way as Electrolux (with Zanussi and AEG) and Procter & Gamble (with international and local brands), the mix of brands allows local tastes to be catered for, international brands to attain scale economies and uniform positionings, and several market segments to be catered for. There may be some cannibalization, but in general, the benefits are a greater number of satisfied drinkers in several different market segments.

Question 2 highlights how the continual product, packaging, distribution and promotion changes keep the brands fresh, customers satisfied and competitors on edge! Certainly, the launch of Heineken Export in the UK caught archrivals off-guard. In mature and highly competitive markets, brand and product introductions might be expensive and tie up resources, but they often are the only ways to achieve overall growth in volumes and share of a market.

Question 3 focuses on the downside of trading with so many brands. Coca-Cola or Pepsi have various non-cola brands, but in the core market, colas, everything is linked to their overall brand identity. This provides economies of scale in achieving distribution and brand awareness. However, some retailers are loath to give these players more shelf-space and in some markets, regulators worry about their dominance. By trading with many brands, Heineken can avoid some of these problems. However, it fails to achieve the benefits encountered by Pepsi or Coca-Cola. Resources have to spread across many brands and markets, taking significant management time and planning. There are upsides, but undoubtedly there are downsides, too.

CHAPTER 11

Branding and packaging

121

OBJECTIVES •

To recognize the importance of brands and brand equity.

•

To understand the types and benefits of brands and how to select, name, protect and licence them.

•

To explore the concepts of brand loyalty, brand advocacy and brand communities.

•

To appreciate the best practice guidelines for creating strong brands.

•

To examine the roles of brand attributes, brand values and brand personality in brand development.

•

To explore the changing nature of branding in the digital era.

•

To understand the role of branding at the corporate level and in reputation management.

•

To become aware of the major packaging functions and packaging design considerations.

•

To consider the ways in which packaging is used in marketing strategies.

•

To examine the functions of labelling and the legal issues associated with labelling.

PURPOSE AND PERSPECTIVE Brands and packages are important aspects of a product‘s design that help customers identify the products they want. This chapter defines branding, including benefits, types of brands and how brands are selected. The importance of brand equity, brand attributes, values and personality, and strong brands are then explored. Brand loyalty, brand advocacy and brand communities are also introduced. How companies go about choosing brands and methods of protecting them are considered. Issues to do with licensing a brand are then discussed. The chapter goes on to consider how businesses manage brands and how they ensure that their brands contribute effectively to the company‘s fortunes. The functions of packaging, issues to be considered in packaging design and development and how the package can be a major element in marketing strategy are then explored. The chapter concludes with a discussion of labelling.

122

LECTURE OUTLINE I.

II.

Introduction A. Branding is a key aspect of product or service differentiation and is a core activity of a company‘s marketing function.

B. Brands enable customers to readily identify their favoured products and marketers to more easily communicate their advantages.

1. Marketers invest in persuading targeted customers to prefer their products over those of competitors as they strive to create brand loyalty.

2. Creating a well differentiated and memorable image for the brand is a core requirement for a marketing-oriented organization.

C. Brand equity is increasingly important and results from the financial and marketing value that can be placed on a brand owing to its market position and standing.

1. Brand awareness, brand loyalty, perceived brand quality and brand associations create brand equity.

2. An effective brand has ‗brand strength‘ and marketers will generally have defined its brand attributes, values and personality.

D. Packaging and labelling are part of the marketing process.

1. Packaging includes the immediate container (the primary packaging) and the shipping packaging (the secondary packaging). a) Both must exhibit functionality to protect and convey the product inside and to facilitate its easy use and storage. b) Packaging should also support the product‘s branding and differentiation.

E. Labelling is integral to packaging.

1. It must conform to regulations and ethical controls.

2. Labelling should be informative, truthful and – to assist in product differentiation – distinctive.

Branding A. Definitions 1. A brand is a name, term, design, symbol or any other feature that identifies one seller‘s good or service as distinct from those of other sellers.

2. A brand name is that part of a brand that can be spoken, including letters, words and numbers. a) A brand name is often a product‘s only distinguishing characteristic.

3. A brand mark is the element of a brand that cannot be spoken – often a symbol or design.

4. A trademark is a legal designation indicating that the owner has exclusive use of a brand or part of a brand and that others are prohibited by law from using it.

5. A trade name is the full and legal name of an organization rather than the name of a specific product.

B. Benefits of branding 1. To buyers a) Brands aid buyers by identifying specific products that they like and do not like, which facilitates the purchase of those items that satisfy individual needs. b) A brand helps a buyer evaluate the quality of products, especially when the person lacks the ability to judge a product‘s characteristics.

(1) A brand may symbolize a certain quality level to a purchaser, and the person in turn transfers that perception of quality to the unknown item.

123 A brand helps to reduce a buyer‘s perceived risk of purchase.

A brand can give buyers the psychological reward that comes from owning a brand that symbolizes status.

2. To sellers a) Sellers‘ brands identify each company‘s products, which makes repeat purchasing easier for consumers. b) Branding helps a company introduce a new product that carries the name of one or more of its existing products, because buyers are already familiar with the company‘s existing brands. c) Branding facilitates promotional efforts because the promotion of each branded product indirectly promotes all other products that are similarly branded. d) Branding also helps sellers by fostering brand loyalty, a strongly motivated and long-standing decision to purchase a particular product or service.

(1) When a company develops some degree of customer loyalty to a brand, it can charge a premium price for the product.

3. Recent developments a). Brand communities are groups of consumers and observers focused on a brand, often on-line, sharing experiences and positive endorsements.

1. They promote the brand and often help protect it or defend it against hostile criticisms.

2. They can be harnessed as brand ambassadors to help promote the brand, share new developments, test out concepts and provide marketing intelligence.

3. Many brand managers now encourage blog communities. Indeed, technology and very rapid communication/sharing digitally now enable dynamic branding. b). Brand advocacy is where consumers (and other parties) are encouraged to share positive views, by word-of-mouth, online (social media), or in print and broadcast media.

4. There are three degrees of brand loyalty: recognition, preference and insistence. a) Brand recognition is a customer‘s awareness that a brand exists and is an alternative to purchase. b) Brand preference is the degree of brand loyalty in which a customer prefers one brand over competitive offerings. c) Brand insistence is the degree of brand loyalty in which a customer strongly prefers a specific brand and will accept no substitutes.

Brand equity 1. Brand equity is the marketing and financial value associated with a brand‘s strength in a market. a) Underlying brand equity are the actual proprietary brand assets, such as patents and trademarks. b) Four additional underlying elements are brand name awareness, brand loyalty, perceived brand quality and brand associations.

2. Being aware of a brand leads to brand familiarity: familiar brands are more likely to be selected by customers.

3. Brand loyalty is a valued component of brand equity. a) It reduces a brand‘s vulnerability to competitors. b) It allows an organization to keep its existing customers and avoid spending vast resources gaining new ones. c) Loyal customers provide brand visibility and reassurance to potential customers. d) Retailers strive to carry brands with a strong customer following.

4. Customers associate a certain level of perceived quality with a brand. c) d)

C.

124 a)

D.

E.

A brand name stands for a certain quality level and can be used to judge quality by customers who may rely on the brand as a quality indicator. b) Perceived high quality helps support a premium price and can ease the introduction of brand extensions.

5. The set of associations linked to a brand is another key component of brand equity.

6. Although difficult to measure, brand equity represents the value of a brand to an organization. a) An organization might pay a premium price for an established brand rather than incur the costs and risks of creating and developing a brand from scratch. b) A brand‘s overall economic value rises and falls with the brand‘s profitability, brand awareness, brand loyalty, perceived brand quality and strength of positive brand associations.

7. Brand identity has been promoted by leading brand strategists, said to be the unique set of brand associations, promises and to reflect the nature of the customer relationship forged.

Brand personality, values and attributes.

1. Brand attributes are the bullet-point specific benefits to the consumer from purchasing or using the brand.

2. Brand values are the emotional benefits and less tangible identifiers attached to the brand, providing reassurance and credibility for targeted consumers, supplementing the specific brand attributes in making the brand attractive.

3. Brand personality traits are the psychological cues and less tangible desirable facets of a well presented brand.

4. Many companies readily identify brand attributes and are then able to scope out a few brand values, but the identification of an attractive set of brand personality traits is often more difficult. a) Once identified, such emotive sentiments often ‗bring the brand to life‘.

5. Targeted customers should never be left to deduce for themselves a brand‘s proposition and messages.

Types of brands 1. Manufacturer brands are initiated by producers and ensure that producers are identified with their products at the point of purchase. a) A manufacturer brand usually requires a producer to become involved with distribution, promotion and, to some extent, pricing decisions. b) The producer tries to stimulate demand for the product, which tends to encourage middlemen to make the product available.

2. Own-label brands are initiated and owned by resellers; manufacturers are not identified on the products. a) Retailers and wholesalers use own-label brands to develop more efficient promotion, generate higher gross margins and improve store images. b) Own-label brands give retailers or wholesalers freedom to purchase products of a specified quality at the lowest cost without disclosing the identity of the manufacturer.

3. Generic brands indicate only a product category and do not include the company name or other identifying terms. a) Generic brands are usually sold at lower prices than those of comparable branded items. b) Sales of generic brands account for less than 1 per cent of all retail grocery sales.

4. Competition between manufacturer brands and own-label brands is intensifying in several major product categories.

125 a)

F.

G.

The development of multiple manufacturer brands and distribution systems has helped combat the increased competition from own-label brands. b) By developing new brand names, producers can adjust various elements of a marketing mix to appeal to different target markets.

5. If a manufacturer refuses to produce an own-label brand for a reseller, a competing manufacturer will. a) Production of own-label brands lets the manufacturer use excess capacity during periods when its own brands are at non-peak production.

Choosing a brand name 1. Marketers should consider a number of factors when selecting a brand name. a) The name should be easy for customers to say, spell and recall. b) The brand name should indicate the product‘s major benefits and, if possible, should suggest the product‘s uses and special characteristics in a positive way, avoiding negative or offensive references. c) The brand should be distinctive, to set it apart from competing brands. d) If a marketer intends to use a brand for a product line, the brand must be designed to be compatible with all products in the line. e) A brand should be designed so that it can be used and recognized in all types of media. f) Brand names can be created from single or multiple words, initials, numbers or combinations of these. g) To avoid terms that have negative connotations, marketers sometimes use fabricated words that have no meaning when they are created.

2. Brand names can be created internally by the organization or by outside consultants, or by hiring a company specialising in brand name development.

3. Even though branding considerations apply to both goods and services, there are some special dimensions of service branding. a) The brand name of a service is usually the same as the company name. b) Service brand names must be flexible enough to encompass a variety of current services, as well as new ones that a company might offer in the future. c) Service marketers often use a symbol along with a brand name to make the brand distinctive and to convey a certain image.

Protecting a brand 1. Marketers should design a brand name that they can protect easily through registration. a) A company should develop a system for ensuring that its trademarks will be renewed as needed.

2. The company should be certain that the selected brand is unlikely to be considered an infringement on any existing brand already registered with the relevant patent office.

3. Marketers must guard against allowing a brand name to become a generic term used to refer to a general product category, because generic terms cannot be protected as exclusive brand names.

4. Brand names can be protected from becoming generic terms in several ways. a) Companies can spell the name with a capital letter. b) They can use the name as an adjective to modify the name of the general product class. c) Including the word ‗brand‘ just after the name is helpful. d) Companies can indicate that a brand is trademarked with the symbol ®.

5. In many foreign countries, brand registration is not possible and the first company to use a brand in such a country has the rights to it.

126 6.

H.

I.

J.

Brand counterfeiting is harmful because the usually inferior counterfeit product undermines consumer confidence in and loyalty to the real brand and reduces the brand owners‘ revenues from their legitimate products.

Branding policies 1. In establishing branding policies, the company must first decide whether to brand its products at all. a) If a company‘s product is homogeneous and similar to competitors‘ products, it may be difficult to brand. b) Marketers must also consider the degree to which consumers differentiate among brands of a product.

2. If a company chooses to brand its products, it may opt for one or more branding policies. a) Individual branding is a policy of naming each product differently.

(1) A major advantage of individual branding is that when an organization introduces a poor product, the negative images associated with it do not contaminate the company‘s other products.

(2) An individual branding policy may facilitate the use of market segmentation when a company wishes to enter many segments of the same market; separate, unrelated names can be used with each brand aimed at a specific segment. b) In overall family branding, all of the company‘s products are branded with the same name or at least part of the name.

(1) When a company‘s name is combined with other words to brand items, the quality image of the company‘s products increases consumer confidence in what they are buying.

(2) Overall family branding means that the promotion of one item with the family brand promotes the company‘s other products. c) Line family branding is the use of family branding only for products within a single line, not for all of the company‘s products. d) In brand extension branding, a company uses one of its existing brand names as part of a brand for an improved or new product that is usually in the same product category as the existing brand.

3. Branding policy is influenced by the number of the company‘s products and product lines, the characteristics of its target markets, the number and type of competing products available and the size of the company‘s resources.

Brand licensing 1. A growing number of companies are permitting approved manufacturers to use their trademarks on other products for a licensing fee.

2. The advantages of licensing include extra revenues, low cost to free publicity, new images and trademark protection.

3. The major disadvantages of licensing are a lack of manufacturing control and the proliferation of too many unrelated products bearing the same name.

4. Licensing arrangements can also fail because of poor timing, inappropriate distribution channels or mismatching of product and name.

Managing brands 1. Brands need to create product differentiation, assist in establishing a competitive advantage and encourage product awareness, so marketers must manage them with care.

127 2.

III.

Most companies operate with a portfolio of separate brands and products and must make difficult decisions about the level of support and resources that each should receive.

3. Without an understanding of brand loyalty and brand switching, it is difficult to manage brands effectively.

4. Effort must be put into researching brand loyalty and brand perceptions in order to make decisions that accurately reflect consumers‘ views.

5. Research shows that to create successful brands, a company must: a) Prioritize quality b) Offer superior service c) Be first in the minds of targeted customers d) Differentiate brands, so that consumers perceive them as different e) Develop a unique positioning concept f) Support the brand and its positioning with a strong communications programme g) Deliver consistency and reliability over time.

6. Brand strength is a function of the product‘s attributes and functionality, its differentiation, plus any demonstrable added value to the purchaser or user.

7. There are four levels of brands: the tangible product, the ‗basic‘ brand, the ‗augmented‘ brand and the ‗potential‘ of the brand.

8. There are three essential acid tests for determining whether a brand is successful. a) Has the brand captured the leading share in its market segment or distribution channel? b) Does the brand command prices sufficiently high enough to produce a high profit margin? c) Will the brand sustain its strong share of profits when rival and generic versions of the product enter the market?

9. Managing brands must include knowing when a brand is succeeding, when it is faltering but may be saved, and when it is a lost cause and should be deleted from the company‘s range of brands.

K. Corporate branding.

1. Corporate branding involves the application of product branding at the corporate level, reflected visibly through the company name, logo, and visual presentation, and in the business‘s underlying values.

2. Sometimes the terms corporate image and corporate identity are also used in relation to corporate branding.

3. Corporate branding plays a role in guiding all marketing activities. a) It is transmitted through tangible and intangible features.

4. To be effective, the corporate brand should be embedded in all company activities, including all aspects of internal and external communication.

Packaging and labelling A. Packaging involves the development of a container and label, complete with graphic design, for a product.

1. A package can be a vital part of a product, making it more versatile, safer or easier to use.

2. Package characteristics help shape buyers‘ impressions of a product at the time of purchase or during use.

B. Packaging functions 1. Firstly, packaging materials protect the product and maintain its functional form by preventing damage that could affect the product‘s usefulness and increase costs.

128 a)

C.

Packaging techniques have been developed to counter the danger of product tampering. b) Some packages are designed to foil shoplifters.

2. Another function of packaging is to offer convenience for consumers. a) The size or shape of a package may relate to the product‘s storage, convenience of use or replacement rate.

3. A third function of packaging is to promote a product by communicating its features, uses, benefits and image. a) At times, a reusable package is developed to make the product more desirable.

Major packaging considerations 1. Marketers should try to determine through research how much customers are willing to pay for packages.

2. Developing tamper resistant packaging is very important. a) Marketers should be aware of changes in packaging technology and legislation and be prepared to make modifications that will ensure consumer safety. b) Balanced against the costs of lost sales, loss of consumer confidence and a company‘s reputation, and potentially expensive product liability lawsuits, the costs of ensuring consumer safety through effective tamper resistant packaging are minimal.

3. Marketers should consider how much consistency in their package designs is desirable. a) If a company‘s products are unrelated or aimed at vastly different target markets, no consistency may be the best policy. b) In family packaging, a company uses similar packaging for all its products or includes one major element of the design in every package to promote an overall company image.

(1) Sometimes this approach is used only for lines of products.

4. Marketers must consider a package‘s promotional role. a) Through verbal and non-verbal symbols, the package can inform potential buyers about the product‘s content, features, uses, advantages and hazards. b) A company can create desirable images and associations by its choice of colour, design, shape and texture in packages. c) A package may perform a promotional function when it is designed to be safer or more convenient to use, if such characteristics help stimulate demand. d) To develop a package that has definite promotional value, a designer must consider size, shape, texture, colour and graphics.

(1) Beyond the obvious limitation that the package must be large enough to hold the product, a package can be designed to appear taller or shorter.

(2) The shape of the package can help communicate a particular message.

(3) Colours on packages are often used to attract attention.

(4) People associate certain feelings and experiences with specific colours.

(5) Marketers must decide whether a particular colour will evoke positive or negative feelings when it is linked to a specific product.

(6) Marketers must also decide whether a specific target market will respond favourably or unfavourably to a particular colour.

5. Packaging must also meet the needs of the reseller. a) Wholesalers and retailers consider whether a package facilitates transportation, storage and handling.

6. Marketers must consider whether to develop packages that are environmentally responsible.

129 Marketers must carefully balance society‘s desires to preserve the environment against consumers‘ desires for convenience.

Packaging development 1. A mix of aesthetic considerations and structural necessities are needed to guarantee the functionality of packaging. a) Material selection is an important stage in the design process. b) Decisions are needed on information layout and the hierarchy of messages, frontof-pack versus back-of-pack detailing, choice of language and jargon, photography and images, illustrations and use of colour, deployment of symbols and icons, final finishes and effects. c) There are often practical requirements to consider.

Packaging and marketing strategy 1. Packaging can be a major component of a marketing strategy. a) A unique cap or closure, a better box or wrapper, or a more convenient container size may give a product a competitive edge. b) The right type of package for a new product can help it gain market recognition very quickly. c) Marketers should view packaging as a major strategic tool for convenience products.

2. Marketers alter packaging for a number of reasons. a) A package may be redesigned because the existing design is no longer in style, new product features need to be highlighted or new packaging materials have become available. b) Packages may be altered to make the product more convenient or safer to use, or to reposition the product in the marketplace. c) Choosing the right packaging material is an important consideration when redesigning as different materials vary in popularity at different times.

(1) With more emphasis on the environment and recyclability, glass is becoming more popular.

3. A secondary use package is one that can be reused for purposes other than its initial use. a) Secondary use packages can be viewed by customers as adding value to products. b) Secondary use packaging can also stimulate unit sales.

4. Category consistent packaging is used to package products in line with the packaging practices associated with a particular product category. a) Some product categories such as ketchup have traditional package shapes, while other product categories are characterized by recognizable colour combinations.

5. Innovative packaging such as a unique cap, design, applicator or other feature will sometimes be used by marketers to make the product competitively distinctive. a) Using innovative packaging can be effective if the innovation makes the product safer or easier to use or provides better protection for the product. b) Sometimes unique packages that are inconsistent with traditional packaging practices are used to make a brand stand out relative to its competitors. c) Using innovative packaging usually requires a considerable amount of resources, not only for the package design itself but also to make customers aware of the unique packaging and its benefits.

6. Marketers sometimes package products in twin packs, triple-packs, six-packs or other forms of multiple packaging. a)

D.

E.

130 a)

F.

G.

For certain types of products, multiple packaging is used to increase demand because it increases the amount of the product available at the point of consumption. b) Multiple packaging can make products easier to handle and store and also facilitate special price offers. c) Multiple packaging may increase consumer acceptance of a product by encouraging the buyer to try the product several times.

7. Packaging of a product may be changed to make it easier to handle in the distribution channel. a) Changes might involve the outer carton, special bundling, shrink wrapping or palletizing. b) Sometimes the shape of a package may be changed to facilitate handling. c) Retailers may be able to get more shelf facings with a rectangular package as opposed to a round one. d) Outer containers are sometimes changed so that they will more easily proceed through automated warehousing systems.

Criticisms of packaging 1. Some packages suffer from functional problems; they do not work well or are inconvenient.

2. Certain types of packages have a questionable impact on the environment.

3. Much packaging criticism focuses on health and safety issues, such as containers with sharp edges or those using aerosol propellants.

4. Sometimes packages are perceived as deceptive. a) Shapes, colours or designs sometimes make a product appear larger than it actually is. b) Inconsistent use of size designations can lead to customer confusion.

5. Sometimes the cost of the package is higher than the cost of the product itself.

Labelling 1. Labelling is packaging information that can be used for a variety of promotional, informational and legal purposes.

2. Labelling can be used to facilitate the identification of a product by presenting the brand and a unique graphic design.

3. Labels have a descriptive function and can provide information about the product. a) Labels indicate the grade of the product. b) Labels describe the source of the product. c) Labels describe the contents and major features of the product. d) Labels provide information on how to use and care for the product. e) Labels provide nutritional information and describe the product‘s type and style, and the size and number of servings.

4. Labels can fulfil a promotional function by using graphics that attract attention.

5. Although consumers respond favourably to the inclusion of information on labels, research on consumers‘ actual use of such information yields mixed results.

6. Labels for many products include a universal product code (UPC) or barcode, which identifies the product and provides inventory and pricing information that can be read by an electronic scanner.

7. Because many similar products are available, the label serves as an attention-getting device, or ‗silent salesperson‘, and is an important element in the marketing mix.

131

ANSWERS TO DISCUSSION AND REVIEW QUESTIONS 1.

What is the difference between a brand and a brand name? Compare and contrast the terms brand mark and trademark.

A brand name is a name, term, design, symbol or any other feature that identifies a seller‘s products and differentiates them from competitors‘ products. A brand name is that part of a brand that can be spoken, including letters, words and numbers.

A brand mark is the element of a brand that cannot be spoken, such as a symbol or design. A trademark is a legal designation indicating that the owner has exclusive use of a brand or part of a brand and that others are prohibited by law from using it.

2.

How does branding benefit customers and organizations?

Brands aid buyers by helping them identify specific products that they like and do not like, which in turn facilitates the purchase of items that satisfy individual needs. A brand also helps a buyer evaluate the quality of products, especially when the person lacks the ability to judge a product‘s characteristics. Brands identify a seller‘s products, thus facilitating repeat purchases by consumers. To the extent that buyers become loyal to a specific brand, the company‘s market share for that product achieves a certain level of stability. A stable market share places a company in a position to use its resources more efficiently. When a company develops some degree of customer loyalty for a brand, it can charge a premium price for the product. Branding helps a company introduce a new product that carries the name of one or more of its existing products.

Branding facilitates promotional efforts because each branded product indirectly promotes all of the company‘s other products that are similarly branded.

3.

What are the advantages associated with brand loyalty?

The advantages include market share stability, more efficient resource allocation, capacity to charge a premium price, brand extension possibilities and potential competitive edge.

4.

In what ways have social media and the web enabled brands to create communities or supporters?

Most brands have created online communities to which interested consumers can turn to share their views, experiences, tips and annoyances. Some organizations have put significant resources into encouraging such digital communities to thrive, either under the overt influence of the brand owner or via third parties who want to act as focal points, ambassadors or informed experts. Most of us would be surprised if we paused to consider how many digital communities we are in, where brands are discussed and promoted.

5.

Why are companies seeking to identify or create brand advocates amongst their customers?

Who do you trust to tell you about the attributes of a product or service: representatives of the firm or other consumers? Many will say consumers, who have less vested interest in whether we buy a particular brand. Cascading information to consumers via other consumers is often less expensive than utilizing broadcast media for traditional advertising, and thanks to the digital world and social media, consumer-to-consumer communication is now rapid, extensive and routinized amongst many consumer groups.

6.

In what ways have brand managers been forced to relinquish control over what is communicated about their brands in the digital era?

Information search is now readily available at the touch of a Google search button. No longer do consumers or business buyers depend on advertising, brochures or salespeople for insights into their options. Comparison web searches and sponsored pop-ups take the control over which

132 brands are found in such online searches out of the hands of individual brand managers, unless they and their digital agencies invest in managing this process. The biggest change, however, is the way in which social media enables consumers to engage with each other – and other third parties – to discuss product options, brand perceptions and to share the pros and cons of separate options. Think about recent purchases you have made: did advertising steer you or was it more the views of your peers. This is a huge shift in the way purchasing is conducted.

7.

What are the distinguishing characteristics of own label brands?

Own-label brands are initiated and owned by resellers. Manufacturer brands are owned and initiated by producers.

8.

Given the competition between own label brands and manufacturer brands, should manufacturers be concerned about the popularity of own label brands? How should manufacturers fight back in the brand battle?

Manufacturers indeed should be concerned about the increasing popularity of own-label brands.

As resellers gain more market control with their own brand names, manufacturers become more removed from the marketplace and more dependent on resellers to sell their products. If a reseller decides to drop a manufacturer and start its own production operation, the manufacturer could go out of business. On the other hand, own-label brands are an excellent opportunity for manufacturers weak in marketing or with excess production capacity.

A producer should consider manufacturing products for own-label brands when it has excess production capacity and the acceptance of an own-label brand contract will increase profits. Also, the producer may consider manufacturing an own-label brand when it appears that an otherwise competing producer may accept the contract.

Manufacturers should fight back by developing products that buyers want. If manufacturers use promotion and distribution policies designed to inform and serve buyers and if product quality can be maintained, manufacturer brands may be demanded over competing own-label brands.

9.

Identify and explain the major considerations marketers take into account when selecting a brand.

When selecting a brand, marketers must consider a number of factors. A brand name should be easy to say, spell and remember. To avoid consumer confusion, brands should be compatible with those of other products in the product line. Choosing a name that suggests the product‘s uses and special characteristics, as well as indicating the product‘s major benefits, is important. Marketers try to select a brand that is distinctive enough to set it apart from competitors but avoids negative or offensive implications. Finally, marketers strive to choose a brand that can be used and recognized in all types of media. Because service brands are usually the same as the company name, service marketers do not always have the flexibility to choose a brand that meets all of the above criteria.

10. The brand name JCB is sometimes used generically to refer to construction equipment such as diggers or backhoe loaders. How can JCB protect this brand name?

A generic term is used to refer to a general product category. Generic terms cannot be protected as exclusive brand names. To keep a brand name from becoming a generic term, the company should spell it with a capital letter and use it as an adjective to modify the name of the general product class. An organization can deal with this problem directly by advertising that its brand is a trademark and should not be used generically. The company can also indicate that the brand is trademarked by placing the symbol ® next to the brand name. JCB‘s legal team frequently intervenes with the media to stop other companies‘ products being labelled as JCB or to manage

133 negative publicity connected with diggers (e.g. when a digger was used to steal a cash dispenser by dragging it out of a wall, the BBC News described the incident as ‗thieves used a JCB digger‘… subsequently news bulletins made no mention of JCB).

11. Identify and explain the four major branding policies and give examples of each. Can a company use more than one policy at a time? Explain your answer.

With individual branding, each product is named differently. For example, Procter & Gamble uses an individual branding policy for its line of detergents, which includes Tide, Bold, Gain, Bonus, Dash, Cheer, Oxydol and Daz. In overall family branding, all of a company‘s products are branded with the same name or at least part of a name, such as Heinz.

In line family branding, a company uses family branding only for products within a line, not for all of its products. Colgate Palmolive, for example, produces a line of cleaning products that all carry the Ajax name. Colgate also produces several brands of toothpaste, but they do not carry the Ajax brand.

In brand extension branding, a company uses one of its existing brand names as part of a brand for an improved or new product that is usually in the same product category as the existing brand. For example, the makers of Arrid deodorant extended the Arrid name to Arrid Extra-Dry and Arrid Double-X. When selecting a branding policy, marketers are not limited to a single policy for the entire company. The selection of a branding policy is influenced by the number of products and product lines the company produces, the characteristics of its target markets, the number and types of competing products available and the size of the company‘s resources.

12. What are the major advantages and disadvantages of licencing?

Brand licencing involves an agreement whereby a company permits approved manufacturers to use its trademark on other products for a licensing fee. The advantages of licencing include a.

extra revenue earned from the licencing fee.

b.

low cost to free publicity.

c.

new images that potentially give new life to a brand.

d.

trademark protection.

Disadvantages of licencing may be

e.

lack of manufacturing control that could hurt the company‘s reputation if consumers extend negative opinions to the company‘s own products as well.

f.

consumer confusion because too many unrelated products carry the same name.

g.

failed agreements because of poor timing, inappropriate distribution channels or mismatching product and name.

13. Why is there more to a brand than its name? Explain your response.

There is more to a brand than simply a catchy name and visible logo. It is recognized that there are four levels of brands: the tangible product, the ‗basic‘ brand, the ‗augmented‘ brand and the ‗potential‘ of the brand. Level 1, the tangible product, is the degree of quality, performance, features and actual attributes. Level 2, the ‗basic‘ brand, is the identity, differentiation and positioning. Level 3, the ‗augmented‘ brand, is the aggregated impact from supplementary

134 products and service support. Level 4, the ‗potential‘ of the brand, is reached when customers will not willingly accept substitutes and are unhappy to switch to rival brands.

14. What are the most commonly found foundations for successful brands? Illustrate your response with brand examples.

The most commonly found foundations for successful brands, which are illustrated by many wellknown brand names that students can refer to, are: prioritising quality; offering superior service; being first in the minds of targeted customers; differentiating brands, so that consumers perceive them as different; developing a unique positioning concept; supporting the brand and its positioning with a strong communications programme; and delivering consistency and reliability over time.

15. What constitutes brand strength?

Brand strength is a function of the product‘s attributes and functionality, its differentiation, plus any demonstrable added value to the purchaser or user.

16. What are the differences between brand attributes, brand values and brand personality?

Brand attributes are the specific benefits to the consumer of purchasing the brand. Brand values represent what the brand stands for, they are the emotional benefits and less tangible identifiers attached to the brand, providing reassurance and credibility for targeted consumers, supplementing the specific brand attributes in making the brand attractive. Brand personality includes the psychological cues and less tangible desirable facets of a well presented brand.

17. What is brand equity and why is this notion increasingly important?

Brand equity is the marketing and financial value associated with a brand‘s strength in a market. It is important because a well-managed brand is an asset to an organization.

18. What are the three core criteria for assessing the success of a brand?

The three core criteria for assessing brand success are: (1) whether the brand has captured the leading share in its market segment or distribution channel; (2) whether the brand commands prices sufficiently high to provide a profit margin; and (3) whether the brand will sustain its strong share of profits when rival and generic versions of the product enter the market.

19. Describe the functions that a package can perform. Which function is most important?

Why? A package can perform several functions, including protection, economy, convenience and promotion. First, packaging materials are needed to protect the product or to maintain it in functional form. The package should effectively reduce damage that could affect the product‘s usefulness and increase costs (economy). Second, consumers may be concerned with convenience.

Third, packaging can promote a product by communicating its features, uses, benefits and image.

Students can debate which function they feel is most important for manufacturers to address, giving examples.

20. When developing a package, what are the major issues that a marketer should consider?

When making packaging decisions, marketers must take into account a variety of issues. Cost is a critical consideration when developing a package. Some available processes and designs are very expensive, so before making packaging decisions, marketers engage in research to determine how much customers are willing to pay for packages. Because packaging must comply with packaging regulations, marketers make sure that packages are tamper resistant. When new technology is developed or new legislation is passed, marketers modify packages to protect consumers and

135 comply with the law. Another consideration is how much consistency of packaging there should be among the various products a company markets. If products are aimed at different target markets, marketers may opt for no consistency, but if the desire is to promote an overall company image, a company may package all of its products in a similar way, an approach known as family packaging. A package‘s promotional role is an important consideration because packages inform potential buyers about the product‘s content, features, uses, advantages and hazards, as well as creating a product image. Marketers try to choose features that enhance a package‘s promotional value. The size and shape of a package must lend itself to easy handling by wholesalers and retailers, or they may refuse to carry the product. Finally, marketers must consider the issue of environmentally responsible packaging, attempting to balance concern for the environment with consumers‘ preference for convenience.

21. In what ways can packaging be used as a strategic tool?

Because a package has the potential to give a product a competitive edge, marketers often regard packaging as an important strategic tool. Altering a package can make a product more convenient or safer, promote a new feature or assist product repositioning. A secondary use package, one that can be re-used for purposes other than its initial use, can stimulate sales by adding value to the product. Because certain product categories are characterized by recognizable types of packaging, a company often uses these traditional shapes and colours when introducing a brand in one of those categories to facilitate easy recognition by potential buyers. Sometimes an innovative package design attracts consumers by distinguishing a brand from its competitors, resulting in increased sales. For certain types of products, multiple packaging is used to increase demand. This strategy is based on the belief that if consumers have more of a product at home, they will use more and want more. In addition, multiple packaging can make products easier to handle and simplify special price offers. Improved packaging facilitates distribution and shelving, making a product more attractive to those who handle and sell it.

22. What are the major criticisms of packaging?

Several aspects of packaging evoke criticism. The simplest criticism is that some packages just don‘t work well. Environmental irresponsibility, such as lack of biodegradability, is a growing packaging criticism. Some critics focus on safety issues, such as containers with sharp edges or aerosol containers that create health hazards. Finally, packaging is sometimes criticized as being deceptive. For example, certain shapes or colours may make a product appear larger than it actually is. This question is useful in class discussions to encourage students to express their opinions about environmental issues, safety and deception as they relate to packaging.

22.

How is the sustainability drive impacting on packaging decisions?

EU directives have altered many practices. Government policy has impacted, too, such as recent charges for plastic carrier bags imposed on UK retailers. The biggest driver is from society at large, as consumers seek to behave more responsibly or are forced to do so by regulators and changing practices. Many councils have altered rubbish collections to force households to recycle, which is having an impact on the products bought and packaging decisions. Retailers such as Tesco have stated their aims to reduce their carbon footprint, placing significant pressure on their suppliers to reduce theirs and modify packaging, production processes and logistics. The list of forces on the marketing environment – political, regulatory, legal, technological, societal and competitive – to alter packaging on the basis of sustainability is huge.

24.

What are the major functions of labelling?

Marketers use labelling in a variety of ways. By highlighting the brand with an eye-catching graphic design, the label can facilitate product identification. Labels serve a descriptive function,

136 specifying the product‘s source, contents, major features, use and proper care. For certain products, labels can be strictly informative, furnishing specific product grade, nutritional content and number of servings. Through the use of attention-getting graphics, labels also serve a valuable promotional function.

COMMENTS ON THE WEB TASK AND CASES WEB TASK As perhaps befits a Scandinavian company, the environment has always been close to Tetra Pak‘s thinking, ―A renewable resource… the main raw material we use, paperboard, is made from wood‖.

The company has been solving certain packaging solutions for nearly 50 years. For example, distributing milk to schoolchildren in safe, hygienic and easy to use/store containers. There have been numerous improvements to such containers, embracing not only technological improvements but also the latest advice on consumer safety and food safety legislation. None of Tetra Pak‘s products remains unchanged for long.

This innovative company never rests on its laurels, so the answer to Question 2 will be ever-changing.

The website will unashamedly promote these developments. While the company strives to develop packaging solutions with better functionality for manufacturers, shippers, retailers and consumers, the development activity is led by technical enhancements and by the forces of the marketing environment.

Tetra Pak – protects what’s good. Packaging should save more than it costs. This website genuinely is worth a browse.

APPLIED MINI-CASE ASDA had previously retailed clothes but wanted a larger market share. In this fashion-conscious market, with many rival fashion brands, it was decided to turn to the creator of leading clothing retail chain Next and fashion industry icon, George Davies. The George brand was a logical output from this partnership, enabling ASDA to promote the clothing range without overtly linking to the value-led branding of ASDA. The associated media hype around George Davies‘ creation was an added benefit.

In the case of Marks and Spencer, the retailer‘s declining fortunes were well documented, and fashionconscious younger female shoppers were failing to buy at M&S stores. A new brand was required to overtly appeal to these consumers and to disassociate the range from the out-dated St Michael (M&S‘s former own label) brand and the Marks and Spencer corporate brand.

CASE STUDY: REBRANDING MACMILLAN The case highlights how branding is universally adopted by organizations across all sectors, from Government departments, to fast moving consumer goods and here to the charity sector. The digital era has brought a need to brand in order to be search engine compliant and ease those seeking an organization to quickly locate its web pages, but the digital era also provides much lower cost branding possibilities and better targeting than previously were available. For the charity sector this is particularly important.

Question 1 asks why marketers might want to utilize the web and digital for branding. The time most of us spend online is a clue, with gaming, viewing of movies and TV programmes, social networking and information gathering becoming routine online for most of us. Mobile communications have exaggerated this further, along with ever-improving smartphone and tablet technology that makes such access quick, painless and universally available. To ignore the digital domain for brand building is to

137 jettison a mainstay activity for so many consumers. The growth of online consumer-to-consumer communication and sharing of opinions through social media is a great opportunity for charities, but also one not to ignore at the expense of rival charities gaining the upper hand.

Question 2 considers ways in which the online domain is often outside the control of marketers. The ease of sharing our views about a brand, product or service experience means we can instantly impact on a brand manager‘s strategy, positively or negatively. Such activity can be orchestrated, such as the work by those opposing the alleged tax avoidance by a certain high street fashion retailer, a grocery giant and mobile phone operator. There are examples when a competitor has deliberately nurtured or even sparked a negative digital debate about a competing brand, knowing that its own sales will probably benefit as a result. Social media have put so much more power in the hands of consumers, media pundits and those who choose to influence them. The digital environment has provided real-time communication across many audiences and stakeholders.

Question 3 explores this point about social media explicitly. How often does someone you know Facebook an endorsement about a product or service experience, or moan about a bad experience?

Tweets, blogs and emails abound about brands, products, customer service, pricing, and so much more.

Keeping up with such online discussions is costly and time consuming, but many brands now recognize that failure to do so may allow brand reputational damage, loss of custom and opportunities for competitors. Digital monitoring agencies provide brand managers with hourly or instant updates of digital chatter. Some experts, however, argue that discussions are better left to fizzle out rather than be fuelled or given credibility by the interjection of the brand owner. No matter, digital communications and social networking have changed the ways in which we communicate, the immediacy and the spread of opinion – whether it is supportive or negative.

CHAPTER 12

Developing products and managing product portfolios

OBJECTIVES •

To become aware of organizational alternatives for managing products.

•

To understand how organizations develop a product idea into a commercial product.

•

To understand the importance and role of product development in the marketing mix.

•

To acquire knowledge of the management of products during the various stages of a product‘s life cycle.

•

To become aware of how existing products can be modified.

•

To learn how product deletion can be used to improve product mixes.

•

To examine tools for the strategic planning of product or market portfolios.

138

PURPOSE AND PERSPECTIVE This chapter (1) examines organizational alternatives in managing products, (2) discusses new product development as well as line extensions and the product adoption process, (3) presents strategies for managing products as they move through their life cycles, and (4) considers tools that can be used to strategically plan product or market portfolios.

First the chapter covers the product manager, brand manager, marketing manager and venture or project team approaches to managing products. Next, it discusses in detail the seven phases of new product development and the five stages of the product adoption process. The chapter next outlines the management of products in various life cycle stages, including product modification and product deletion. Finally, the chapter looks at some analytical tools associated with the planning of product portfolios: the BCG product portfolio matrix, the market attractiveness-business position model or directional policy matrix (DPM), Profit Impact on Marketing Strategy (PIMS), and the ABC sales: contribution analysis.

139

LECTURE OUTLINE I.

II.

Introduction A. Companies must create new ideas for products and turn some of these into marketable products or service propositions.

B. As additional products are included in a company‘s portfolio, it becomes more difficult to decide on which investment and sales/marketing resources should be focused.

1. Product portfolio techniques assist such decision-making.

C. Marketers must be aware of the relative standing of their product and brands in relation to the product life cycle concept.

Organizing to manage products A. There are several alternatives to the traditional functional form of business organization.

1. The product manager approach a) A product manager is responsible for a product, a product line or several distinct products that make up an interrelated group within a multi-product organization. b) A brand manager is responsible for a single brand. c) Product and brand managers operate cross-functionally to coordinate the activities, information and strategies involved in marketing an assigned product. d) This form of organization is used by many large, multiple product companies in the consumer goods business. e) It is increasingly popular with marketers responsible for services brands and business-to-business markets.

2. The marketing manager approach a) A marketing manager is responsible for managing the marketing activities that serve a particular group or class of customers. b) This approach is especially effective when a company engages in different types of marketing activities to provide products to diverse customer groups.

3. The venture or project team approach a) The venture or project team is designed to create entirely new products that may be aimed at new markets. b) Venture teams, unlike product or marketing managers, are responsible for all aspects of a product‘s development: research and development, production and engineering, finance and accounting, and marketing. c) Venture teams work outside established organizational divisions to create inventive approaches to new products and markets.

(1) As a result of this flexibility, new products can be developed to take advantage of opportunities in highly segmented markets. d) Members of the venture team come from different functional areas of the organization. e) Venture teams and other innovative organizational forms are especially important for well established companies operating in mature markets.

(1) These companies must take a dual approach, managing mature products while encouraging the development of new ones.

B. New product development 1. Developing and introducing new products is frequently expensive and risky.

140 2.

3.

4.

5.

6.

7.

A new product may be genuinely new, an innovative variation of an existing product or a product that a given company has not marketed previously, although similar products may be available from other companies.

Before a product is introduced, it goes through the seven phases of new product development: (1) idea generation, (2) screening ideas, (3) concept testing, (4) business analysis, (5) product development, (6) test marketing and (7) commercialization.

Idea generation is the process by which businesses and other organizations seek product ideas that will help them achieve their objectives. a) Companies trying to manage their product mixes effectively usually develop systematic approaches for generating new product ideas. b) New ideas may be generated internally and can come from marketing managers, researchers, sales personnel, engineers or other organizational personnel. c) Brainstorming and incentives or rewards for a good idea are typical intraorganization devices for stimulating the development of ideas. d) New product ideas may also arise from sources outside the company – customers, competitors, advertising agencies, management consultants and private research organizations.

The process of screening ideas involves (1) assessing whether the ideas match organizational objectives and resources, and then (2) choosing the best ideas for further review. a) The company‘s overall ability to produce and market the product is analyzed. b) Other aspects of the idea that should be weighed are the nature and wants of buyers, and possible environmental changes. c) More new product ideas are rejected during the idea screening phase than during any other phase. d) A checklist of new product requirements is used to ensure that the screening process is as systematic as possible. e) To screen ideas properly, marketers may find it necessary to test product concepts, by describing or showing consumers the product concept.

Concept testing is a phase in which a small sample of potential buyers, often in focus groups, is presented with a product idea through a written or oral description, or perhaps a few drawings. a) This testing determines consumers‘ attitudes and initial buying intentions regarding the product. b) The results of this low-cost procedure can be used by product development personnel to better understand which product attributes and benefits are most important to potential customers.

During the business analysis phase, the product idea is evaluated to determine its potential contribution to the company‘s sales, costs and profits. a) The product‘s fit with the organization‘s existing product mix is analyzed. b) The appropriateness of the company‘s expertise is considered. c) Present and future market demand for the product is studied. d) Expected environmental and competitive changes and their effects on the product‘s future sales, costs and profits are examined. e) The adequacies of the organization‘s research, development, engineering and production capabilities are considered. f) The need for new facilities and their cost and speed of construction are reviewed. g) The availability of financing for development and commercialization or its obtainability at terms consistent with a favourable return on investment is considered.

141 The likely impact of the new product on the company‘s existing products is examined. i) In this phase, companies seek market information – supplied by consumer surveys, along with secondary data – that is needed for estimating potential sales, costs and profits.

8. Product development is the phase in which the organization determines if it is technically feasible to produce the product and if it can be produced at costs low enough to make the final price reasonable. a) The idea or concept is converted into a prototype or working model, which should reveal tangible and intangible attributes associated with the product in consumers‘ minds. b) The product‘s design, mechanical features and intangible aspects must be linked to wants in the marketplace. c) The development phase of a new product is frequently lengthy and expensive; thus a relatively small number of product ideas are put into development. d) If the product appears sufficiently successful to merit testing, then during the latter part of the development phase marketers begin to make decisions regarding branding, packaging, labelling, pricing and promotion for use in the test marketing phase.

9. Test marketing is the limited introduction of a product in geographic areas chosen to represent the intended market. a) Test marketing is not an extension of the development phase; it is a sample launching of the entire marketing mix to determine the reactions of probable buyers. b) Test marketing provides several important benefits.

(1) It lessens the risk of product failure.

(2) It lets marketers expose a product in a natural marketing environment to gauge its sales performance.

(3) It allows marketers to identify weaknesses in the product or in other parts of the marketing mix; corrections can thus be made more cheaply than if the product had already been introduced nationwide.

(4) It allows marketers to experiment with variations in advertising, price and packaging in different test areas to measure the extent of brand awareness, brand switching and repeat purchases that result from alterations in the marketing mix. c) The validity of test marketing results depends heavily on selecting test sites that provide an accurate representation of the intended target market. d) Test marketing is expensive and involves risks.

(1) A competitor may invalidate test results in an attempt to ‗jam‘ the test programme by increasing advertising and promotions, lowering prices and offering special incentives – all to combat the recognition and purchase of a new brand.

(2) Competitors may copy the product in the testing phase and rush to introduce a similar product.

(3) Some alternative methods, such as simulated test marketing and scannerbased test marketing, are less expensive and risky.

(4) Some marketing research companies offer test marketing services to help provide independent assessment of products.

10. Commercialization is the process of refining and settling plans and preparing budgets for full scale manufacturing and marketing of the new product. h)

142 a)

III.

Marketing management analyses the results of test marketing to find out what changes in the marketing mix are needed before the product is introduced. b) The company has to gear up for production and may face sizeable capital expenditure and personnel costs. c) The product enters the market during the commercialization phase.

(1) One study indicates that only 8 per cent of new product projects started by major companies reach this phase. d) When introducing a product, marketers often spend enormous sums for various forms of promotion.

(1) Combined with capital outlays, such expenditures may not be recovered for several years. e) Commercialization is easier if buyers accept the product rapidly, which they are more likely to do if marketers make them aware of the product‘s benefits.

C. Line extensions 1. A line extension is the development of a product that is closely related to one or more existing products in the existing product line but is designed specifically to meet somewhat different needs of customers.

2. Line extensions are more common than new products because they are a less expensive, lower risk alternative for increasing sales.

3. A line extension may focus on a different market segment or may be an attempt to increase sales within the same market segment by more precisely satisfying the needs of people in that segment.

D. Product adoption process 1. There are five stages of the product adoption process that buyers go through in accepting a product. (This is a core concept students should understand and is returned to in our examination of the promotion ingredient of the marketing mix.) a) Awareness – buyers become aware of the product. b) Interest – buyers seek information and are generally receptive to learning about the product. c) Evaluation – buyers consider the product‘s benefits and determine whether to try it. d) Trial – buyers examine, test or try the product to determine its usefulness relative to their needs. e) Adoption – buyers purchase the product and can be expected to use it when the need for this general type of product arises again.

2. Most products are introduced through a process called a roll-out, starting in a set of geographic areas and gradually expanding into adjacent areas. a) The advantages of gradual product introduction are that it reduces risks associated with product failure, eliminates the need to develop a national distribution network overnight and gives production more time to gear up to demand. b) The disadvantages of gradual introduction are that competitors can observe and monitor results and then market their own similar products. c) Avoiding competition is critical when a company introduces a brand into a market in which it already has one or more brands.

(1) Marketers usually want to avoid cannibalizing sales of their existing brands, unless the new brand generates substantially larger profits.

Product life cycle management A. Marketing strategy in the growth stage

143 The goal in the growth stage is to establish the product‘s position and to fortify it by encouraging brand loyalty.

2. As profits increase, the organization must brace itself for the entrance of aggressive competitors. a) To achieve greater penetration of an overall market, segmentation may have to be used more intensely.

(1) This would require developing product variations to satisfy the needs of customers in several different market segments.

(2) Marketers should analyze the product position regarding competing products and correct weak or omitted attributes.

(3) Quality, functional or style modifications may be required.

3. Marketers should see that gaps in the marketing channel are filled and that the physical distribution system is running efficiently. a) Marketers may move from an exclusive or selective distribution to a more intensive distribution of dealers to achieve greater market penetration.

4. Advertising expenditure may be slightly lower than in the introductory stage but still needs to be substantial. a) As sales increase, promotion costs as a percentage of total sales should drop.

5. After recovering development costs, a business may be able to lower prices. a) As sales volume increases, efficiencies in production can result in lower costs. b) These savings can be passed on to buyers. c) Price cuts can improve price competition and discourage new competitors from entering the market.

Marketing strategy for mature products 1. As products are in the maturity stage of their life cycles, marketers must always be ready to improve the product and the marketing mix. a) During maturity, the competitive situation stabilizes and some of the weaker competitors drop out. b) New marketing strategies or product modification may be called for as experienced customers seek new benefits. c) Symptoms of a mature product include (1) price cutting, (2) increased competitive action, (3) shifting from a product orientation to a non-product orientation and (4) slowing growth.

2. Product modification means changing one or more characteristics of a company‘s product. a) This strategy is more likely to be used in the maturity stage to give a company‘s existing brand a competitive edge. b) Altering a product mix by product modification entails less risk than developing a new product because the product is already established in the market. c) If certain conditions are met, product modification can improve a company‘s product mix.

(1) The product must be modifiable.

(2) Existing customers must be able to perceive that a modification has been made.

(3) The modification should make the product more consistent with customers‘ desires so that it will provide greater satisfaction. d) Product modifications fall into three major categories: quality, functional and style modifications.

3. Quality modifications are changes that affect a product‘s dependability and durability. a) They are usually executed by altering the materials or the production process.

1.

B.

144 Reducing a product‘s quality may allow a company to lower its price and direct the item at a larger target market. c) Increasing a product‘s quality may give a company an advantage over competing brands.

(1) Higher quality may enable a company to charge a higher price by creating customer loyalty and lowering customer sensitivity to price.

(2) On the other hand, higher quality may require the use of more expensive component parts, less standardized production processes, and other manufacturing and management techniques that force the company to charge higher prices.

4. Functional modifications are changes that affect a product‘s versatility, effectiveness, convenience or safety. a) Functional modifications usually require redesign of the product. b) They may make the product useful to more people, thus enlarging the market for the item. c) Functional changes can improve the product‘s competitive position by providing benefits that competing products do not offer. d) Functional modifications can help a company achieve and maintain a progressive image.

5. Style modifications change the sensory appeal of a product by altering its taste, texture, sound, smell or visual characteristics. a) These changes may help differentiate the product from its competition. b) The major drawback to style modification is that its value is highly subjective.

(1) A company may modify a product to improve its style, but customers may actually find the modified product less appealing.

6. During the maturity stage, marketers actively encourage dealers to support the product by offering promotional assistance or help in lowering inventory costs. a) Marketers go to great lengths to serve dealers and to provide incentives for selling the manufacturer‘s brand since own label or retailer brands are a threat at this time.

7. Maintaining market share during the maturity stage requires moderate and sometimes heavy advertising expenditure. a) Advertising makes an effort to differentiate a brand from its numerous competitors. b) Sales promotion efforts are aimed at both consumers and resellers.

8. A greater mixture of pricing strategies is used during the maturity stage. a) Marketers sometimes develop price flexibility to differentiate offerings in product lines. b) Mark-downs and price incentives are more common, but price may rise if distribution and production costs increase.

9. Marketers of mature products also often alter packaging and even positioning strategies.

Marketing strategy for declining products 1. As a product‘s sales curve turns downwards, profits continue to fall.

2. In this stage, marketers must determine whether to eliminate the product from the product line or seek to reposition it in an attempt to extend its life. a) Usually, a declining product has lost its distinctiveness because similar competing products have been introduced. b) Competition engenders increased substitution and brand switching as buyers become insensitive to minor product differences. b)

C.

145 For these reasons, marketers do little to change a product‘s style, design or other attributes during its decline. d) New technology, product substitutes or environmental considerations may also indicate that the time has come to delete a product.

3. During a product‘s decline, outlets with strong sales volumes are maintained and unprofitable distribution outlets are weeded out. a) A new marketing channel, such as a factory outlet, may be used to liquidate the remaining inventory of an obsolete product.

4. Advertising expenditures are at a minimum. a) Advertising or special offers and sales promotions may slow the rate of decline or regain buyers‘ attention temporarily, but as the product continues to decline, the sales staff will shift its emphasis to more profitable products.

5. To squeeze out all possible remaining profits, marketers may maintain the price despite declining sales and competitive pressures. a) Prices may be increased as costs rise if a loyal core market still wants the product. b) In other situations, the price may be cut to reduce existing inventory so that the product can be deleted.

D. Deleting products 1. Product deletion is the process of eliminating a product that no longer satisfies a sufficient number of customers. a) Generally, a product cannot satisfy target market customers indefinitely. b) A declining product reduces a company‘s profitability, draining resources that could be used to modify other products or develop new ones. c) When a dying product completely loses favour with customers, the negative feelings may transfer to some of the company‘s other products.

2. It is often difficult to delete a product over the protests of management, salespeople and loyal customers.

3. Instead of letting a weak product become a financial burden, a company should periodically and systematically monitor each product‘s impact on the overall marketing mix. a) A review should analyze a product‘s contribution to the company‘s sales for a given period and should include estimates of future sales, costs and profits associated with the product. b) A systematic review allows a company to improve product performance and to ascertain when to delete products.

4. There are three ways to delete a product: (1) phase it out, (2) run it out or (3) drop it immediately. a) A phase out approach lets the product decline without changing the marketing strategy.

(1) No attempt is made to give the product new life. b) A run out policy calls for intensified marketing efforts in core markets, elimination of some marketing expenditures or price reductions to exploit any strengths left in the product. c) An immediate drop is the best strategy when losses are too great to prolong the product‘s life.

IV. Tools for managing product portfolios A. The Boston Consulting Group (BCG) product portfolio analysis c)

146 Product portfolio analysis is a strategic planning tool that takes a product‘s market growth rate and its relative market share into consideration in determining a marketing strategy.

2. A balanced product portfolio matrix results from a number of actions, not from the analysis alone. a. Managers use portfolio models to examine the competitive position of a product (or product line) and the opportunities for improving that product‘s contribution to profitability and cash flow.

3. The BCG analytical approach is more of a diagnostic tool than a guide for making strategy prescriptions.

4. Based on a growth-share matrix developed by the BCG, marketing managers classify a company‘s products into four basic types: a.

Stars are products with a dominant share of the market and good prospects for growth.

(1) However, they use more cash than they generate to finance growth, add capacity and increase market share. b. Cash cows have a dominant share of the market but low prospects for growth.

(1) They typically generate more cash than is required to maintain market share. c.

Dogs have a subordinate share of the market and low prospects for growth.

(1) These products are often found in mature markets. d. Problem children, sometimes called ‗question marks‘, have a small share of a growing market and generally require a large amount of cash to build share.

Market attractiveness-business position model 1. The market attractiveness-business position model is a two-dimensional matrix that helps determine which SBUs have an opportunity to grow and which should be divested. The directional policy matrix (DPM) is a more commonly used name for this model. a.

Rather than using single measures to define the vertical and horizontal dimensions of the matrix, the model employs multiple measurements and observations.

(1) The vertical dimension – market attractiveness – includes all the strengths and resources that relate to the market.

(2) The horizontal axis – business position – is a composite of factors as they relate to the product in building market share. b. General Electric‘s Strategic Business Planning Grid, a slight variation of the market attractiveness-business position model, is credited with extending the product portfolio planning tool to examine market attractiveness and business strength.

The ABC sales: contribution analysis 1. The ABC sales: contribution analysis is an approach that examines the financial worth to a company of its products, product groups or customers.

2. Poor performers can be earmarked and dropped; under-performers can be identified for further support; star performers can be maximized.

3. There are three important conclusions to be drawn from an ABC analysis: a.

It can identify highly attractive customers, markets or products. b. It can determine accounts with high sales figures but low contributions. c.

It can challenge the historical perspective that often clouds judgement as to what constitutes a good product, market or customer.

1.

B.

C.

147 D.

The approaches presented are not intended as formulae for success or prescriptive guidelines, but as supplements to management judgement.

ANSWERS TO DISCUSSION AND REVIEW QUESTIONS 1.

What organizational alternatives are available to a company with two product lines, each consisting of four product items?

Any of the three organizational approaches (product manager, marketing manager, venture or project team, or a combination) may be appropriate. The question initially suggests that the product manager form of organization is more appropriate because a product manager could be designated for each product line. Immediate adoption of this organizational approach, however, disregards (1) the type of product items in each product line, which may vary immensely, (2) the type and location of markets and (3) the product items that are unique to a market or are used in more than one market.

2.

When is it more appropriate to use a product manager than a marketing manager?

The product manager approach is more appropriate when there are multiple products flowing into a single market. A marketing manager approach is better when there is a single product that flows into multiple markets. Sometimes a combined approach may be appropriate, such as when the products and markets criss-cross or when a product is suitable for several markets.

3.

What type of company might use a venture team to develop new products?

The venture team approach is appropriate for new products, especially those designed for markets with which the company is unfamiliar. Some companies routinely create a taskforce to take on a new market opportunity.

4.

What are the advantages and disadvantages of such a team?

A venture team offers several advantages. The responsibility for all product development remains with a group that develops the product from inception to commercialization. Usually, the organizational chart is horizontal rather than vertical; this cuts across all formal organizational lines. Finally, all functional areas are involved. Disadvantages of the venture team approach are that it disrupts the formal organizational system and does not offer complete continuity. Often, after the product is developed, it is turned over to a product manager.

5.

Do small companies that manufacture one or two products need to be concerned about developing and managing products? Why or why not?

Any manufacturing company, regardless of size or number of products, must be concerned about developing and managing products. This may be especially critical to a company with only one or a few products, because the company‘s profits (and sales) are derived entirely from this product.

To maintain its current position, the company must continually seek ways to improve its product and thus remain competitive; otherwise, customers will turn to substitute products that provide similar benefits. Managing the product involves more than product modification; it also includes designing appropriate promotion, pricing and place/distribution strategies that are based on an appraisal of environmental factors such as economic, technological, social, consumer and legal/political forces.

6.

Why is product development a cross-functional activity within an organization? That is, why must finance, engineering, manufacturing and other functional areas be involved?

148 Long range strategic planning strengthens the company‘s commitment to product development.

Such commitment involves various functional areas in the process of commercializing a product idea. To develop the product successfully, a company typically needs several years and considerable resources that require capital budgeting. The legal function is essential in obtaining patents and copyrights, clearing brand names and so on. Engineering needs to develop the product idea into a product that customers want (based on marketing information) and that the company is capable of producing (production). The financial commitment for developing product prototypes, acquiring appropriate production equipment, testing the product in the market and launching the product may be substantial; thus, the financial function is necessary to obtain needed capital and maintain the proper cash flows.

7.

Develop a list of information sources for new product ideas for the car industry.

Following is a list of possible information sources for new product ideas for the car industry: a.

b.

8.

Individuals outside the company (1)

Advertising agencies

(2)

Private research organizations

(3)

Foreign car manufacturers and other competitors

(4)

Management consultants

(5)

Industry experts, trade bodies and analysts

Focus group interviews involving (1)

Car users with various socio-economic attributes

(2)

Pre-school children

(3)

Science clubs

(4)

Secondary school students

(5)

Young, new drivers

(6)

Recent accident victims

c.

Other modes of transport

d.

Online and social media opinions, including brand community groups/discussions

e.

Individuals inside the company (1)

Marketing managers

(2)

Researchers

(3)

Sales personnel

(4)

Engineers

(5)

Company suggestion boxes

(6)

Customer service managers analyzing complaints

What are the advantages and disadvantages of test marketing?

The advantages of test marketing include the following: a.

It provides an opportunity to obtain a measure of sales performance in a natural setting.

149 b.

It identifies weaknesses in the marketing strategy.

c.

It enables companies to experiment with various marketing strategies.

d.

It helps avoid perceived risks of product failure.

The disadvantages of test marketing include the following:

9.

a.

The cost is high.

b.

Competitors can observe a product‘s success or failure and adjust their own marketing strategies accordingly.

c.

Competitors have an opportunity to sabotage test marketing.

d.

Competitors may rush to introduce a similar product and be first in giving the product its full market introduction.

Compare and contrast three ways of modifying a product.

There are three options: (1) quality modifications concerning a product‘s dependability and durability; (2) functional modifications concerning a product‘s versatility, effectiveness, convenience or safety; and (3) style modifications concerning the sensory appeal of a product.

For production modification to be an appropriate alternative, certain conditions must exist. First, the product itself must be modifiable – some products, such as raw materials, are not. Some products have many features that are modifiable, and some have only a limited selection of modifiable features. Second, target market members must perceive that a modification has been made. Finally, the modification must make the product more consistent with customers‘ desires so that it will provide satisfaction.

Quality modification is related to the product‘s dependability and durability and is made by altering the materials or production process, while functional modification affects the versatility, effectiveness, convenience or safety of the product and deals with the redesign of one or more parts.

An organization can change the materials or the production process itself while preserving the product‘s features. Although quality modifications can affect the price of the product more readily, functional modifications may help reposition the product, provided that more features are offered.

10. What are the stages of the product adoption process, and how do they affect the commercialization phase?

There are five stages of the product adoption process: (1) awareness, (2) interest, (3) evaluation, (4) trial and (5) adoption. In terms of commercialization, there are several implications. First, to gain awareness, a business must promote its wares. Samples and simulated trials can assist consumers in the interest and evaluation stages. Emphasis on quality and warranties may assist at the evaluation and trial stages. Production and distribution must be linked to the purchase (adoption) stage and to levels of repeat buying. Not all consumers will rush to be the first to adopt a new product. Marketers must identify those in the target audience who are more likely to be innovators or early adopters.

11. Detail the key stages of the product life cycle.

The product life cycle assumes that products follow a path from introduction to growth, into maturity and then decline. Different strategies are appropriate for products at different stages in their life cycle.

150 12. How can a company prolong the life of a mature product? What actions should be taken to try to stem the product‟s decline?

The life of a mature product can be prolonged by making improvements to the product and marketing mix. This may involve modifying product quality, making style or packaging changes, developing new product uses, altering pricing strategy or committing to heavy advertising expenditure. In addition, dealers may be encouraged to support the product by being offered promotional support.

Stemming a product‘s decline can be achieved by making special offers; developing innovative sales promotions, perhaps involving coupons and premiums; selling through new outlets; or adopting a more flexible pricing policy.

13. Give several reasons why a company might be unable to eliminate an unprofitable product.

There are several reasons why a company might not be able to delete unprofitable products. The product might be maintained to keep a complete product line, thus providing a competitive advantage. Some organizations may keep an unprofitable product because it is still new and better performance is expected of it in the future. Finally, management, salespeople and loyal customers may be opposed to the deletion.

14. In what ways do the stages of the product life cycle impact on a company‟s management of its product portfolio?

Products in different stages of the product life cycle should be managed in different ways. During the growth stage, as sales increase, the goal is to establish the product‘s position and to fortify it by encouraging brand loyalty. When profits increase, the company must prepare for the entry of aggressive competitors, possibly targeting specific segments. Product offerings may need expanding during this stage. To achieve greater penetration of an overall market, segmentation may have to be used more intensively. Marketers should analyze the product position regarding competing products and correct weak or omitted attributes. Quality, functional or style modifications may be required. Marketers should see that gaps in the marketing channel are filled and that the physical distribution system is efficient. A move may be needed from an exclusive or selective distribution to a more intensive distribution of dealers to achieve greater market penetration. Advertising expenditure may be slightly lower than in the introductory stage but still needs to be substantial.

Marketing strategy for mature products involves marketers in being ready to improve the product and the marketing mix. Now the competitive situation stabilizes and some of the weaker competitors drop out. New marketing strategies or product modification may be needed, involving changing one or more characteristics of the product. This may help build competitive edge and may be more risky than developing a new product. Product modifications fall into three major categories: quality, functional and style modifications. Maintaining market share during the maturity stage requires moderate and sometimes heavy advertising expenditure. Price flexibility to differentiate offerings in product lines may also be needed.

During decline, a product‘s sales curve turns downwards and profits continue to fall. Marketers must determine whether to eliminate the product from the product line or seek to reposition it in an attempt to extend its life. Usually, a declining product has lost its distinctiveness because similar competing products have been introduced. Competition engenders increased substitution and brand switching as buyers become insensitive to minor product differences. During a product‘s decline, outlets with strong sales volumes are maintained and unprofitable distribution outlets are weeded out. Advertising expenditures are at a minimum. To squeeze out all possible remaining profits, marketers may maintain the price despite declining sales and competitive

151 pressures. Prices may be increased as costs rise if a loyal core market still wants the product.

Product deletion is the process of eliminating a product that no longer satisfies a sufficient number of customers. This can be achieved through a phase-out approach, via a run-out policy or by immediate drop.

15. What are the major considerations in developing the BCG product portfolio matrix? Define and explain the four basic types of products suggested by the Boston Consulting Group.

When developing a product portfolio matrix, consideration must be given to the competitive position of a product and the opportunities for improving the product‘s contributions to profitability and cash flow. The four basic types (developed by the BCG) are as follows: a.

Stars – Products in this category are market leaders that are also growing fast. They will have substantial reported profit but need a lot of cash to finance growth.

b.

Cash cows – Products in this category have a dominant share of the market but low prospects for growth. They generate more cash than is necessary to maintain share. All efforts should focus on maintaining market leadership.

c.

Dogs – The greatest number of products fall into this category. There can be only one market leader. These products are usually at a cost disadvantage and have few opportunities for growth at a reasonable cost.

d.

Problem children – These products have a small share of a growing market and demand an enormous amount of cash. If the cash is not forthcoming, the product will become a dog.

The long run health of the company depends on having some products that generate cash and others that utilize the cash to support growth.

16. What are the advantages of the directional policy matrix (DPM) over the BCG product portfolio matrix?

Many marketers believe that market attractiveness equates to more than simply the growth rate of a market/product/brand market share. Whereas BCG analysis uses only market growth to represent market attractiveness, the DPM enables marketers to use more variables in assessing market attractiveness. Similarly, BCG analysis captures business strength using the single variable of relative market share. The DPM enables a broader mix of variables to be applied. Better still, those within an organization can decide what constitutes the most appropriate combination of variables for market attractiveness and business strength within their particular sector and context.

Furthermore, decisions about the relative weighting of the different variables can also be made inhouse.

4.

What are the diagnostic capabilities of the ABC sales: contribution analysis?

The ABC sales: contribution analysis examines the financial worth to a company of its products, product groups or customers. Through this approach poor performers can be earmarked and dropped; under performers can be identified for further support; star performers can be maximized. ABC analysis is able to identify highly attractive customers, markets or products, determine accounts with high sales figures but low contributions, and challenge the historical perspective that often clouds judgement.

COMMENTS ON THE WEB TASK AND CASES WEB TASK

152 City thrills or open roads… The Mini is marketed as a design icon that fits certain people‘s aspirational lifestyles. The fun and style of the brand are conveyed through the Mini Adventure TV advertisements, and on the website via animations following this theme. As well as details of the product range, pricing, used cars and a section for owners – Ministry – the website offers games, films, motor show links and a section for children.

The Bling, The Mojo, The Groover, The Hipster, The Business, The Timeless, are all lifestyle groups that have been turned into customized Minis. How? By selecting from a huge array of accessories and paint jobs. The challenge is to ‗make your own Mini‘, and increasingly consumers are doing so. While most manufacturers of cars strive for economies of scale by offering restrained ranges and accessory options, Mini recognized that this causes consumers to feel that they are driving a faceless car identical to that owned by thousands of others. Some consumers may be happy with this mass market approach, but Mini has identified that there are segments desiring individualized products and tailored driving experiences. Few car producing rivals are able to offer Mini‘s customization options.

APPLIED MINI-CASE Tangible products can be patented, tested repeatedly, controlled in terms of likely customer satisfaction, replicated easily in the sales process by staff, and consumed many times by the ultimate purchaser. It‘s not so easy for experiential services, such as visiting a cinema. The less tangible aspects of the augmented product are less easy to control and to offer to the market consistently. However, they may be less readily copied by rivals. Certainly, they are likely to enhance customer satisfaction levels.

Inclusion of the augmented product complicates product development but provides significant opportunity for differentiation versus rival offerings and enhances the likelihood of customer satisfaction.

CASE STUDY: SELLOTAPE OR ADHESIVE TAPE? INCREASING MARKET PENETRATION – A CLASSIC TALE JCB is the generic term for backhoe loaders (diggers) in the construction industry, just as Hoover is for vacuum cleaners and Sellotape is for clear adhesive tape. Used by schoolchildren, parents, office workers, DIYers, etc., most consumers have a roll of tape in their homes. But, just as with a jar of mustard, one is often enough. Colman‘s introduced other varieties of mustard (French, American, Italian) and encouraged more diverse use (as an ingredient in sauces, for example) to increase market penetration. These were strategies adopted by Sellotape as it launched a more varied range of products aimed at a mix of market segments.

Question 1 examines the product life cycle of different Sellotape products, with traditional Sellotape in the mature stage (possibly even declining, owing to stiff competition) and the new lines in their growth stages. Management implications for mature products involve determining whether to modify products, increase advertising expenditure or adopt pricing strategies in order to maintain market share and profits. Marketers must decide when to attempt to extend the life of declining products and when to shift resources into modifying other existing products or developing and promoting new products.

Question 2 asks why Sellotape relaunched and extended its range. Increased competition, new technology enabling products to be targeted at DIYers, shrewder target marketing that recognizes more diverse needs (e.g. children‘s activities), consumer ‗boredom‘ with the brand and the need for a ‗kick start‘ to its image and promotional activity, and new company ownership requiring further growth were some of the key factors that contributed to Sellotape‘s decision to relaunch and extend the range.

Question 3 brings in the notion of new lines to develop competitive positioning. As market leader in its core market, Sellotape needed to defend its position against attack from rivals and find new opportunities for overall growth in the market by seeking new applications in more varied target

153 markets. By resting on its laurels for too long, Sellotape‘s enviable market position had been seriously eroded by rival brands and products.

CHAPTER 13

The marketing of services

OBJECTIVES •

To understand the nature and characteristics of services.

•

To classify services.

•

To understand the development of marketing strategies for services.

•

To understand the problems involved in developing a differential advantage in services.

•

To examine the crucial concept of service quality.

•

To explore the concept of marketing in non-profit situations.

•

To understand the development of marketing strategies in non-profit organizations.

•

To describe methods for controlling non-profit marketing activities.

PURPOSE AND PERSPECTIVE This chapter presents concepts that apply specifically to the marketing of services. Services marketing involves marketing in non-profit organizations such as education, healthcare, charities and government as well as in for-profit areas such as entertainment, tourism, finance, personal services and professional services.

The chapter initially focuses on the growing importance of service industries to the economy, addressing the unique characteristics of services and the problems they present to marketers, and presenting various classification schemes that can help services marketers develop marketing strategies.

After a brief discussion of a variety of marketing mix considerations, the problems of creating a differential advantage in services are examined and the concept of service quality is explored. The chapter then defines non-profit marketing and examines the development of non-profit marketing strategies and the control of non-profit marketing activities.

Non-profit marketing is growing in importance, as public bodies, utilities and charities utilize the marketing process.

154

LECTURE OUTLINE I.

II.

Introduction A. A service is an intangible product involving a deed, a performance or an effort that cannot be physically possessed.

B. Service marketing involves marketing in non-profit organizations, such as education, healthcare, charities and government, as well as for profit-making areas such as entertainment, tourism, finance, personal services and professional services.

The nature and characteristics of services A. Few products can be classified as a pure good or pure service.

1. Although many products contain both tangible and intangible attributes, intangible dominant products are typically considered services.

2. Tangible dominant products are typically classified as goods, and intangible dominant products are typically considered services.

B. Growth and importance of services 1. In the UK and in Europe, as in the United States, the importance of services in the economy is growing. a) Nearly two-thirds of the EU workforce is employed in the sector. b) There are services intended for consumers – consumer services – and those designed to satisfy businesses – business services.

2. Economic prosperity has been a major catalyst for consumer services growth, leading to an increase in financial services, travel, entertainment and personal care. a) Lifestyle changes have similarly encouraged expansion of the service sector.

(1) Smaller families result in more free time and relatively higher disposable income.

(2) More women in the workforce has resulted in ‗buying in‘ outside services for meal preparation, house cleaning, home maintenance and preparation of tax returns.

(3) Europeans have become more fitness and recreation oriented and have more leisure time. b) An aging population has promoted tremendous expansion of healthcare services. c) The number and complexity of goods needing servicing have spurred demand for repair services.

3. Business or industrial services have prospered as well, including repairs and maintenance, consulting and professional advice, installation, equipment leasing, marketing research, advertising, temporary office personnel and caretaking services. a) Expenditures for business and industrial services have risen faster than expenditures for consumer services.

(1) This growth has been attributed to the increasingly complex, specialized and competitive business environment. b) There are three key reasons behind the growth of business-to-business services: (1) Specialization – the delegation of non-care tasks such as advertising, executive recruitment and car fleet management.

(2) Technology – the increase in sophistication leading to the ‗buying in‘ of expert knowledge and skills such as computing consultants.

(3) Flexibility – the need in many organizations to avoid fixed overhead costs, resulting in the use of services on an ad hoc basis.

C. Characteristics of services

155 1.

III.

Services have four basic characteristics: (1) intangibility, (2) inseparability of production and consumption, (3) perishability and (4) heterogeneity.

2. Intangibility is an inherent quality of services that are performed and therefore cannot be tasted, touched, seen, smelt or possessed. a) Services have a few tangible attributes, called search qualities, that can be viewed prior to purchase, such as the array of tools in a car mechanic‘s shop. b) Experience qualities are those qualities such as satisfaction, courtesy and pleasure, that can be assessed only after purchase and consumption.

(1) Restaurants and holidays are examples of services that are high in experience qualities. c) Credence qualities are those qualities that cannot be assessed even after purchase and consumption.

(1) An appendix operation, car repairs, consulting and legal representation are examples of services high in credence qualities.

3. In relation to production and consumption, inseparability is a characteristic of services that means they are produced at the same time as they are consumed. a) A medical examination is an example of simultaneous production and consumption. b) Because of high consumer involvement in most services, standardization and control are difficult to maintain.

4. Perishability is a characteristic of services whereby unused capacity in one time period cannot be stockpiled or inventoried for future time periods. a) The consumer of a service generally has to be present and directly involved in the consumption of the service at the time of its production.

5. Heterogeneity is variability in the quality of service because services are provided by people, and people perform inconsistently. a) Direct contact and interaction between the client and the provider of services is a distinguishing feature of services. b) As a result, standardization and quality are extremely difficult to control. c) Services marketers need to provide efficient, standardized service at an acceptable level of quality while simultaneously treating each customer as a unique person.

6. Client-based relationships need to be maintained over time for the success of many services.

7. Customer contact varies across services, market segments and between separate clients, particularly in the digital era, but the degree of customer contact has consequences for marketers, as explained next.

Classification of services A. Services can be meaningfully analyzed by using a five-category classification scheme: (1) type of market, (2) degree of labour intensiveness, (3) degree of customer contact, (4) skill of service provider and (5) goal of the service provider.

1. Services can be viewed in terms of the market type or type of customer they serve – consumer or industrial.

2. Services such as childcare, education and hairdressing are labour intensive, while other services, such as telecommunications, fitness centres and public transport, are more equipment intensive. a) Labour based services are more susceptible to heterogeneity. b) Marketers of people-based services must recognize that the service providers are often viewed as the service itself.

156 c)

Strategies relating to selecting, training, motivating and controlling employees are very important to the success of most service businesses.

3. High contact services, such as healthcare, hotels, estate agencies and restaurants, generally involve actions that are directed towards individuals. a) Thus, the physical appearance and ambience of the facility may be a major component of the consumer‘s overall evaluation of the service. b) Low contact services, in contrast, commonly involve actions directed at things. c) Because the consumer must be present during production of a high contact service, the process of production may be just as important as its final outcome.

4. Professional services tend to be more complex and more highly regulated than nonprofessional services. The skills required are another way of classifying services.

5. Services can be classified according to the goal of the service provider – profit or non-profit. a) Most non-profit organizations, such as the public sector and charities, provide services rather than goods.

IV. Developing marketing strategies for services A. Strategic considerations 1. Marketers must develop the right service for the right people at the right price, in the right place with the right positioning and image.

2. Marketers must then communicate with consumers so that they are aware of the needsatisfying services available to them.

3. The key aspects of effective target marketing and of managing the implementation of the determined marketing strategy apply strongly to the marketing of services.

4. One of the unique challenges, services marketers face is matching supply and demand. a) Marketing strategies for coping with fluctuations in demand for services include the following: (1) Use differentiated pricing.

(2) Alter the product.

(3) Change place/distribution.

(4) Use promotional efforts.

(5) Modify customer service levels.

(6) Alter branding and positioning. b) Non-marketing strategies, involving internal, employee related actions, include the following: (1) Hire extra staff/lay off employees.

(2) Work employees overtime/part time.

(3) Cross-train employees.

(4) Use employees to perform non-vital tasks during slack time.

(5) Sub-contract work/seek sub-contract work.

(6) Slow the pace of work.

(7) Turn away business.

B. Creating a differential advantage in services 1. A differential advantage, or competitive edge, is something desired by the customer that only one company – not its rivals – can offer (see also Chapter 7 and Part VIII of Marketing: Concepts and Strategies).

2. Achieving and sustaining a differential advantage is more difficult for services due to the intangibility of the service product and the central role of people in its delivery. a) Intangibility minimizes product differentiation. b) No – or little – patent protection exists. c) Few barriers to entry enable competitors to set up and copy successful initiatives.

157

V.

d) The interface with customers is difficult to control. e) Growth is hard to achieve; key personnel can only be spread so far. f) Service quality is irregular. g) It is difficult to improve productivity and lower the cost to the consumer. h) Innovation leads to imitation. i) Restrictive regulations abound, particularly in the professions.

3. Due to the difficulty in establishing a differential advantage in services, it is increasingly important for businesses to do the following: a) Identify well-defined target market segments. b) Evaluate competitors‘ service offerings and marketing programmes. c) Research customers‘ satisfaction levels. d) Reinforce and communicate any differential advantage through branding and promotional campaigns.

C. The extended marketing mix for services 1. The standard marketing mix comprises the ‗4Ps‘: product, promotion, price and place/distribution.

2. These plus three additional elements, process, physical evidence (ambience) and people – also known as the ‗7Ps‘ – form the extended marketing mix for services (discussed in detail in Chapter 21). a) The need to add ingredients to the marketing mix is a direct result of the characteristics of services.

Service quality A. Service quality is defined as customers‘ perception of how well a service meets or exceeds their expectations.

1. Service quality is judged by customers, not by the organization.

2. Thus it is important for service organizations to determine what customers expect and then develop service products that meet or exceed those expectations.

B. Customer evaluation of service quality 1. The biggest obstacle for customers in evaluating service quality is the intangible nature of the service. a) Most customers lack the knowledge or the skills to evaluate the quality of many types of services. b) As a result, customers must place a great deal of faith in the integrity and competence of the service provider.

2. Service marketers‘ success depends on understanding how consumers judge service quality.

3. Five dimensions that consumers use when evaluating service quality include (1) tangibles, (2) reliability, (3) responsiveness, (4) assurance and (5) empathy. a) Of the five dimensions, reliability is the most important in determining customer evaluations of service quality.

4. Tangible attributes, or search qualities, are often the only aspects of a service that can be viewed before purchase and consumption. a) Services marketers must therefore ensure that these tangible elements are consistent with the overall image of the service product.

5. One of the most important factors in customer judgements of service quality is service expectations, which involves impressions from past experiences, word-of-mouth communication and the company‘s advertising.

C. Delivering exceptional service quality 1. To increase the likelihood of providing high quality service, a service company must understand the four service quality factors: (1) analysis of customer expectations, (2)

158 establishing service quality specifications, (3) controlling employee performance and (4) managing service expectations.

2. Providers need to understand customer expectations when designing a service to meet or exceed those expectations. a) Customers usually have two levels of expectations – desired and acceptable. b) The difference between these two levels of expectation is called the customer‟s zone of tolerance.

3. Once an organization understands its customers‘ needs, it must establish goals, or service specifications, to help ensure good service delivery. a) The most critical aspect of service quality specifications is managers‘ commitment to service quality. b) Employee performance must be agreed and monitored to manage service delivery.

4. Once an organization sets service quality standards and managers are committed to them, the organization must find ways to control employee performance. a) Customer contact employees are the most important link to the customer, and thus their performance is critical to customer perceptions of service quality. b) Customer contact employees must be recruited and trained well. c) The evaluation and remuneration system used by the organization also plays a part in employee performance.

5. Service companies must set realistic expectations about the service they can provide. a) Through advertisements, service companies make promises about the kind of service they will deliver. b) To deliver on promises made, a company needs to have good internal communication among its departments. c) The best way to ensure positive word-of-mouth communication is to provide exceptional service quality.

VI. Non-profit marketing A. Non-profit marketing includes activities conducted by individuals and organizations to achieve some goal other than the ordinary business goals of profits, market share or return on investment.

1. Although a non-profit organization has primary goals that are non-economic, it may be required to become involved in profit making in order to achieve those goals.

2. Non-profit marketing can be divided into two categories: non-profit organization marketing and social marketing. a) Non-profit organization marketing is the application of marketing concepts and techniques to organizations such as hospitals and colleges. b) Social marketing is the development of programmes designed to influence the acceptability of social ideas, such as recycling or the regeneration of deprived inner-city areas. These include behavioural change interventions or nudge strategies. c) Cause-related marketing is the linking of an organization‘s products to a particular social cause on a short-term or ongoing basis.

3. In non-profit marketing, the objects of exchange may not be specified in financial terms. a) Usually, such exchanges are facilitated through negotiation and persuasion.

(1) Negotiation is mutual discussion or communication of terms and methods in an exchange situation.

(2) Persuasion is the act of prevailing upon someone by argument to facilitate an exchange.

159 b)

B.

C.

D.

Often negotiation and persuasion are conducted without reference to or awareness of the role that marketing plays in transactions.

Why is non-profit marketing different?

1. Whereas the chief beneficiary of the business enterprise is whoever owns or holds shares in it, in theory the only beneficiaries of a non-profit organization are its clients, its members or the public at large.

2. Non-profit marketing offers a greater opportunity for creativity than most business organizations enjoy. a) Evaluating the performance of services, however, is more difficult for trustees or board members of non-profit organizations than for owners of for-profit organizations.

3. Non-profit organizations may be controversial. a) Marketing does not attempt to state what an organization‘s goals should be or to debate the issue of non-profit versus business goals. b) Marketing attempts only to provide a body of knowledge and concepts to help further an organization‘s goals. c) Individual marketers must decide whether they approve of an organization‘s goal orientation. d) While profit and consumer satisfaction are appropriate goals for business enterprises, there might be considerable disagreement about the goals of a controversial non-profit organization.

Non-profit marketing objectives 1. The basic aim of non-profit organizations is to obtain a desired response from a target market. a) The response could be a change in values, a financial contribution, the donation of services or some other type of exchange.

2. Non-profit marketing objectives are shaped by the nature of the exchange and the goals of the organization.

3. Non-profit marketing objectives should state the rationale for an organization‘s existence. a) Serving and adapting to the perceived needs and wants of a target public, or market, enhances an organization‘s chance to survive and achieve its goals.

Developing non-profit marketing strategies 1. Non-profit organizations must develop marketing strategies by defining and analyzing a target market and creating and maintaining a marketing mix that appeals to that market.

2. The concept of target markets needs to be revised slightly to apply to non-profit organizations, which may attempt to serve many diverse groups. a) A target public is broadly defined as a collective of individuals who have an interest in or concern about an organization, a product or a social cause. b) When an organization is concerned about changing values or obtaining a response from the public, it views the public as a market. c) In non-profit organizations, direct consumers of a product are called client publics and indirect consumers are called general publics.

(1) For example, the client public of a university is its student body, and its general public includes parents, graduates, employees and the University Senate.

(2) The client public usually receives most of the attention when an organization develops a marketing strategy.

160 d)

E.

Techniques and approaches to segmenting and defining target markets in the business organization (see Chapter 8) also apply to non-profit target markets.

3. Developing a marketing mix a) When considering the product variable of the marketing mix, it is important to recognize that non-profit organizations deal more often with ideas and services than with goods.

(1) It is important for organizations to have clearly defined exactly what they are providing.

(2) The intangibility of services means that the marketing of ideas and concepts is more abstract than the marketing of tangibles and requires considerable effort to present benefits. b) Place/distribution decisions relate to how these ideas and services will be made available to clients.

(1) If the product is an idea, selecting the right media (the promotional strategy) to communicate the idea will facilitate distribution.

(2) By nature, services consist of assistance, convenience and availability.

(3) In terms of the marketing channel, independent wholesalers available to a business enterprise do not exist in most non-profit situations, and production and consumption of ideas and services are often simultaneous, so a very short channel – non-profit organization to client – is prevalent. c) Promotion is used widely in non-profit organizations to communicate with clients and the public.

(1) Direct mail is the primary means of fundraising for social services.

(2) Press advertising, public relations, sponsorship and the internet are other popular means of promotion for non-profit organizations.

(3) Face-to-face selling is used, for example, when non-profit organizations send volunteers to recruit new members or request donations.

(4) Sales promotion is used widely when non-profit organizations undertake special events to obtain funds, communicate ideas or provide services. d) The broadest definition of price (valuation) must be used when considering nonprofit products or services.

(1) Financial price may or may not be charged for a non-profit product.

(2) Opportunity cost is the value of the benefit that is given up by selecting one alternative instead of another.

(3) Pricing strategies of non-profit organizations often stress public and client welfare over equalization of costs and revenues. e) The additional elements that must be included in the marketing mix for services include: (1) Process – ease of transaction (2) Physical evidence/ambience – the environment in which the service is offered is integral to the consumer‘s experience and often to the consumption of the service product.

(3) People – capable administrators, sympathetic helpers and trustworthy fundraisers must project a caring yet efficient image to the client and general public.

Controlling non-profit marketing activities 1. To control marketing activities in non-profit organizations, managers use information obtained in the marketing audit to make sure that goals are achieved (see Chapter 24).

2. The purpose of control is not only to point out errors but also to revise organizational goals and marketing objectives as necessary.

161 3.

4.

5.

To control non-profit marketing activities, managers must make a proper inventory of activities performed and be prepared to adjust or correct deviations from standards. a) Knowing where and how to look for deviations and knowing what types of deviations to expect are especially important in non-profit situations. b) In non-profit marketing, managers must clearly define what activity is being examined and how it should function.

The detection and correction of deviations from standards are major purposes of control, but standards must support the organization‘s overall goals.

Techniques for controlling overall marketing performance must be compatible with the nature of an organization‘s operations. a) Budgetary control is not tied to standards of profit and loss; responsible management of funds is the objective. b) Central control responsibility can facilitate orderly, efficient administration and planning.

ANSWERS TO DISCUSSION AND REVIEW QUESTIONS 1.

Identify and discuss the distinguishing characteristics of services. What problems do these characteristics present to marketers?

Services are intangible, inseparable, heterogeneous and perishable. Intangibility causes problems such as impossibility to store, inability to protect through patents, inability to display or readily communicate, and pricing difficulty. Inseparability means that the consumer is involved in production and that centralized mass production is difficult. Heterogeneity makes it difficult to standardize or control the quality of the service produced. Perishability means that the service cannot be stockpiled or inventoried.

2.

What is the significance of „tangibles‟ in service industries?

Tangibles such as facilities, employees or communication are often viewed as a part or indication of service quality. The bank clerk, hairdresser or solicitor may represent the service through his or her appearance and actions. Therefore, it is important that service personnel train, behave and dress to fit the expected image of the service.

3.

Use the five-category classification scheme (table 13.2) to analyze a car valeting service and discuss the implications for marketing mix development.

Services can be classified by (1) type of market (consumer or industrial), (2) degree of labour intensiveness (labour based or equipment based), (3) degree of consumer contact (high contact or low contact), (4) skill of the service provider (professional or non-professional) and (5) goal of the service provider (profit or non-profit). Car valeting can be either a consumer service or a businessto-business service if the customer is a corporate client. It is labour based, low contact, nonprofessional and profit oriented. Various marketing mix schemes should be generated by students.

4.

How do search, experience and credence qualities affect the way consumers view and evaluate services?

Search qualities can be viewed prior to purchase. Experience qualities (satisfaction, courtesy, pleasure) can be assessed only after purchase and consumption. Credence qualities cannot be assessed even after purchase and consumption. Because services are mainly intangible, there are few search qualities to evaluate. Since the product cannot be seen or touched prior to purchase, experience qualities are often the key means for assessing satisfaction. To illustrate, an airline‘s performance is best evaluated after passengers arrive at their final destinations. Credence qualities are usually based on reputation and image. For example, it is hoped that the image of a doctor or

162 solicitor is related to past performance and that the product (performance) has consistency. In the long run, experience qualities are probably the most important in evaluating services.

5.

What additional elements must be included in the marketing mix for services? Why? Process – ease of transaction. Physical evidence/ambience – the environment in which the service is offered is integral to the consumer‘s experience and often to the consumption of the service product. People generally provide the service and present a human face for the product and brand on offer.

6.

Why is it difficult to create and maintain a differential advantage in many service organizations?

The prime causes include the following:

7.

a.

Intangibility of the service product

b.

The central role of people

c.

Product differentiation minimized by intangibility

d.

No, or little, patent protection

e.

Few barriers to entry, enabling competitors to set up and copy successful initiatives

f.

Difficulty in controlling interface with customers

g.

Difficulty in achieving growth

h.

Irregularity in service quality

i.

Difficulty in improving productivity and lowering cost to the consumer

j.

Innovation leading to imitation

k.

Restrictive regulations, particularly in the professions

Analyze the demand for the hire of sunbeds and discuss ways to cope with fluctuating demand.

The demand for sun beds tends to be heavier in the autumn and winter when there‘s no natural sun. The heaviest demand on service personnel in terms of dropping off and picking up beds at customers‘ homes is seasonal and also varies within the working day (7.30 a.m. to 9.00 a.m.) and later in the afternoon and evening (4.30 p.m. to 8.00 p.m.). Price promotions are common during summer months, while long term rentals are encouraged through duration related discounting.

Branding is becoming more common, stressing the safety record and maintenance history of the beds.

8.

What is the most important dimension in determining customer evaluation of service quality?

Service quality is perceptual and requires marketing research to probe customer perceptions and satisfaction. It is extremely important for non-profit organizations to understand customer expectations. It is also necessary to establish service quality specifications, control employee performance and manage service expectations.

9.

Compare and contrast the controversial aspects of non-profit versus business marketing.

Non-profit marketing is conducted by individuals and organizations to achieve some goal other than the ordinary goals of business, such as profit, market share or return on investment. Business marketing is usually conducted for the benefit of an owner, a shareholder or a manager. In theory,

163 the only beneficiaries of a non-profit organization are its clients, its members or the public at large. Although a non-profit organization has primary goals that are non-economic, it may be required to become involved in profit making in order to achieve those goals. While profit and consumer satisfaction are appropriate goals for business enterprises, there might be considerable disagreement about the goals of a controversial non-profit organization.

10. Relate the concepts of product, place/distribution, promotion and price to a marketing strategy aimed at preventing drug abuse.

The product is the prevention of drug abuse. In other words, the product is a social cause with the goal of preventing drug abuse. The price would be what the drug abuser has to give up to stop using drugs. This would usually be a value exchange. Promotion includes the advertising and personal contacts used by the employees and volunteers of the drug abuse programme.

Place/distribution includes the media selected to communicate the idea of preventing drug abuse.

Locations or availability of presenting anti-drug messages and ideas are also part of the distribution.

11. What are the differences between clients, publics and consumers? What is the difference between a target public and a target market?

Clients are often considered to be those individuals directly involved in an exchange transaction with a non-profit organization. Publics involve members of society who may have an interest in the exchange transaction between private parties. The term consumer is used synonymously with client. A target public is a collective of individuals who have an interest in or concern about an organization, a product or a social cause. If a non-profit organization views the entire society as the group at which to direct its message and with which to exchange, then the public becomes the same as the target market.

12. Provide examples of social marketing interventions and consider who are the target audiences.

Programmes intended to nudge or change behaviours for the well-being of the individual and of society include energy saving, sustainable living, recycling, smoking cessation, healthier eating, personal debt management, gambling addiction, and so forth. Target audiences for each differ, but all involve identifying a viable target market segment and understanding the partnerships and relationships with other parties necessary to create, execute and manage the interventions or campaigns.

13. Discuss the development of a marketing strategy for a university. What marketing decisions should be made in developing this strategy?

The development of a marketing strategy for a university would consist of pinpointing a target market (defined in terms of the types of students the university would serve) and developing a marketing mix. The marketing mix would relate to the product (the types of educational programmes offered), promotion (including the advertising and personal selling activities of the university), availability or place/distribution (where the university is located and its various branches) and the price (tuition and other expenses that relate to attending a university).

14. Why is the concept of market segmentation relevant in the marketing of social causes?

In a nutshell, cynics and those intent on continuing on their existing path are not the most desirable targets. Success for such programmes requires honing messages and propositions around the needs, behaviours, characteristics and perceptions of those most likely to be interested/engaged and the sub-set of these whose actions and behaviours might then change. This is the skill of market segmentation.

164

COMMENTS ON THE WEB TASK AND CASES WEB TASK The service continuum runs from tangible goods to intangible services, with some services ‗sitting‘ in the middle, such as airlines. While the transport provision of the airline product is intangible, there are tangible aspects of the service such as the comfort of the seats, quality of the food and entertainment provision on board the flight. comparethemarket.com‘s proposition offers advice, options and pricing comparisons for anyway somewhat nebulous products such as insurance policies, the benefits for which are unclear until the policy holder ever makes a claim. It is far to the right on Figure 13.1 - highly intangible.

By providing plain talking, apparently fact-based suggestions and offering an air of impartiality, to provide a set of options across numerous suppliers/brands. Pop-ups and information boxes seek to demystify the consequences of selecting certain options in the response fields. A set of options is tailored to the user in a ‗no-fuss‘ manner. The site seeks to be the customer‘s ally.

Experience qualities are those qualities that can only be assessed post-purchase. Credence qualities cannot be assessed even after purchase and consumption. Insurance per se is dominated by credence qualities. The online comparison sites to some extent, too, although users can quantify their perceived savings. These savings and the ease of functionality of seeking options online are experience qualities.

For the insurance policy itself, these are less obvious. In many respects, until the policy holder is unfortunate enough to have to submit a claim, the experience qualities cannot be assessed.

APPLIED MINI-CASE Ultimately, service quality hinges on the degree to which a customer perceives that a supplier‘s marketing mix has come up to expectations and has satisfied the customer‘s needs. However, this assessment is largely subjective and reflects a mix of issues. These are detailed on page 385 and relate to the tangibles of product delivery and the more subjective issues of reliability, responsiveness of the supplying business, assurance and empathy. The product/service must be shown to be relevant to the customer‘s specific needs and behaviour. Delivery of service quality requires an analysis of customer expectations, service quality specification, employee performance and the managing of service expectations.

CASE STUDY: MARKETING FOR CHARITIES The case looks at how recently charities have turned to marketing activities more usually associated with consumers to help them generate revenue for good causes. This has been coupled with an increase in professionalism, often involving the appointment of marketing managers, strategists and public relations executives. The benefits are now being felt by charities such as Barnardo‘s and Cancer Research UK in their use of a wider range of fundraising approaches than ever before.

Question 1 asks why charities such as Barnado‘s and Cancer Research UK are turning more to the marketing tactics of consumer goods companies. These charities are adopting these consumer marketing tactics because they believe they will help them generate more revenue for good causes. In particular, there is a growing recognition that fundraising activities need to be tailored to target different groups in the community who may be donors.

Question 2 asks about the kinds of donor to which most charities appeal and questions how collection methods might vary for different groups. Different donor groups can be broken down into consumer and corporate donors (see also question below). Consumer donors include long-term donors and those who respond to particular appeals. Long-term donors account for 15 per cent of revenue. Most

165 consumer donations, especially those arising from particular appeals, arise as a result of face-to-face fundraising. Direct marketing, such as through direct mail and telephone calls is also still a key way of collecting funds, with donations by post being the second major channel. For long-term donors direct debit or covenant arrangements are commonplace. In recent times, the public‘s imagination is being captured by media-based activities: television appeals etc. Once again, these can be particularly effective in capturing one-off donations. Some charities are capitalizing on the internet to generate funds from younger donors.

Question 3 considers how the marketing strategy might vary according to whether a charity is targeting consumers or corporate donors. The marketing strategy would need to be tailored to fit the particular target audience. For consumer markets, an understanding of the group or groups being targeted would be needed, including their characteristics, donation behaviour and media preferences. These features would help the charity to develop a suitable marketing programme, presenting appropriate messages through the most suitable media for the target group. A similar approach would be needed for corporate donors. However, correctly identifying individuals within these organizations with the power to make donations, whether long-term or as a one-off gift, would be critical. Once identified, appropriate marketing materials would need to be prepared. Consideration may need to be given to the kinds of organizations offering a close fit with the particular charity. For example, a burger chain targeting young people may be an appropriate target for a children‘s charity.

CHAPTER 14

Marketing channels

OBJECTIVES •

To understand the marketing channel concept and the nature of marketing channels.

•

To discuss the functions of marketing channels.

•

To examine different types of channels.

•

To examine channel integration and levels of market coverage.

•

To consider the selection of distribution channels and the emergence of direct marketing.

•

To understand the impact of multi-channel management on marketing.

•

To explore the behavioural aspects of channels, especially the concepts of cooperation, relationship building, conflict and leadership.

•

To examine legal issues in channel management.

PURPOSE AND PERSPECTIVE This chapter analyzes the marketing channel and the intermediaries that participate. Marketing is divided into channels for consumer products and channels for industrial (business-to-business) products. The justification for intermediaries is also examined, including creating utility, facilitating exchange efficiencies, alleviating discrepancies, standardizing transactions and providing customer service. The familiar constructs of sorting, accumulating, allocating and assorting are used to discuss the functions of intermediaries. Types of channels are then described – for consumer products and

166 services, and for industrial (business-to-business) products and services – and the use of multiple marketing channels is explained. The fundamentals of channel integration, both vertical and horizontal, are introduced, and the three levels of market coverage – intensive, selective and exclusive – are explored. Next, factors that influence the selection of distribution channels are considered. The behavioural aspects of marketing channels, including the concepts of channel cooperation and relationship building, conflict and leadership are examined. The chapter concludes by analyzing the legal ramifications of selected channel management practices, including restricted sales territories, tying contracts, exclusive dealing and refusal to deal.

The internet has radically altered marketing channel policies in many organizations. This theme is explored further in Part IV (Distribution and channel decisions) and also in Part V (Promotion decisions).

167

LECTURE OUTLINE I. II.

Introduction The nature of marketing channels and supply chain management A. A channel of distribution (or marketing channel) is a group of individuals and organizations that direct the flow of products from producers to customers.

1. Providing customer satisfaction should be the driving force behind all marketing channel activities.

2. Channels of distribution make products available at the right time, in the right place and in the right quantity.

3. The challenge is getting the balance between optimizing customer satisfaction and making an adequate return on investment.

B. Most channels of distribution have marketing intermediaries, though there is a current growth of direct marketing in which a supplier interacts with consumers without the use of intermediaries.

1. A marketing intermediary, or middleman, links producers to other middlemen or to those who ultimately use the products.

2. Marketing intermediaries perform the following channel activities: a) Marketing information b) Marketing management c) Facilitating exchange d) Promotion e) Price f) Physical distribution g) Customer service h) Relationship building 3. Merchants take title to products and resell them. a) Retailers purchase products for the purpose of reselling them to users. b) Merchant wholesalers re-sell products to other wholesalers and to retailers.

4. Functional middlemen do not take title to products. a) Functional wholesalers, such as agents and brokers, expedite exchanges between producers and resellers and are compensated through fees or commissions.

C. Channel members share certain significant characteristics.

1. Each member has different responsibilities within the overall structure of the distribution system, but mutual profit and success can be attained only if channel members cooperate in delivering products to the market.

2. The area of relationship management is increasingly important in delivering adequate customer service to target market customers.

3. Distribution decisions exercise a powerful influence on the rest of the marketing mix. a) They determine a product‘s market presence and buyers‘ accessibility to the product. b) As organizations increasingly offer their products through multiple channels, the challenge of maintaining quality of delivery irrespective of the channel used is very much to the fore. c) The strategic significance of these decisions is heightened by the fact that they entail long-term commitment, since changing distribution systems is not an easy task.

168 D.

III.

It may be necessary for companies to use different distribution paths in different countries or for different target segments.

1. The links in any channel, however, are the merchants (including producers) and agents who oversee the movement of products through that channel.

E. Marketing channels are commonly classified into channels for consumer products or channels for industrial or business-to-business products.

F. Supply chain management refers to long-term partnerships among marketing channel members that reduce inefficiencies, costs and redundancies in the marketing channel and develop innovative approaches to satisfying targeted customers.

1. An important function of the marketing channel is the joint effort of all channel members to create a supply chain: a total distribution system that serves customers and creates a competitive advantage.

2. The goal is to provide customers with the product or service demanded in a more coordinated way that builds upon the combined strengths of the members of the distribution channel.

3. Key tasks in supply chain management include: planning and coordination of marketing channel partnerships; sourcing necessary resources, goods and services to support the supply chain; facilitating delivery; and relationship building in order to nurture ongoing customer relationships.

Functions of marketing channels A. Marketing channels serve many functions, most of which are accomplished through both independent and joint efforts of channel members.

1. These functions include (1) creating utility, (2) facilitating exchange efficiencies, (3) alleviating discrepancies, (4) standardizing transactions and (5) providing customer service.

B. Creating utility 1. Marketing channels create four types of utility: time, place, possession and form. a) Time utility is having products available when the customer wants them. b) Place utility is created by making products available in locations where customers wish to purchase them. c) Possession utility is created by giving the customer access to the product to use or to store for future use. d) Form utility is created by channel members assembling, preparing or otherwise refining the product to suit individual customer needs.

C. Facilitating exchange efficiencies 1. Marketing intermediaries can reduce the costs of exchanges by efficiently performing certain services or functions. a) If one intermediary, specialized in facilitating exchanges, serves both producers and buyers, the number of transactions and costs involved can be reduced.

2. Although they are criticized by the press, consumers, public officials and other marketers, wholesalers perform functions that other channel members would have to perform if wholesalers were eliminated. a) Consumers might end up paying a great deal more for products because eliminating wholesalers would not remove the need for services that wholesalers provide and prices would then reflect the costs of less efficient channel members.

D. Alleviating discrepancies 1. The functions performed within marketing channels help to overcome two major distribution problems: discrepancies in quantity and discrepancies in assortment. a) A discrepancy in quantity exists when the quantity of a product that a company can produce efficiently is more than the average customer wants.

169 2.

An assortment is a combination of products put together to provide customer benefits. a) A discrepancy in assortment exists when consumers want a broad assortment, but an individual manufacturer produces a narrow assortment.

3. Quantity and assortment discrepancies are resolved through sorting activities of channel members. a) Sorting activities are functions allowing channel members to divide roles and separate tasks.

(1) Sorting out is separating conglomerates of heterogeneous products into relatively uniform, homogeneous groups based on product characteristics.

(2) Accumulation is the development of a bank, or inventory, of homogeneous products with similar production or demand requirements.

(3) Allocation is the breaking down of large, homogeneous inventories into smaller lots.

(4) Assorting is the process of combining products into collections or assortments that buyers want to have available in one place.

E. Standardizing transactions 1. Marketing channels help to standardize the transactions associated with numerous products. a) In many purchase situations, the price is not negotiable. b) Marketing channel members tend to limit customers‘ options with respect to units of measure, package sizes, delivery schedules and location of the exchange.

F. Providing customer service 1. Channel members participate in providing customer service. a) Retailers of durable goods are expected to provide in-store advice and demonstrations, technical know-how, delivery, installation, repair services, parts and perhaps instruction or training. b) Channel members above retailers are responsible for supporting retailers‘ efforts to provide end-user service and satisfaction.

2. In mature markets with relatively little product differentiation between rival brands, it is often the customer service provided through the distribution channel that provides marketers with a competitive edge.

3. In many markets, customer service maintains an ongoing, mutually satisfactory relationship between supplier and consumer and may be responsible for maintaining brand loyalty.

IV. Types of channel A. Different distribution paths have been developed since marketing channels appropriate for one product may be less suitable for others.

1. The various marketing channels can be classified generally as channels for consumer products and services, or channels for industrial, business-to-business products and services.

B. Channels for consumer products (see Figure 14.3) 1. Channel A – producer to consumer – is a direct channel that includes customers who harvest their own fruit from commercial growers or buy products from door-to-door salespeople. a) Although this channel is the simplest, it is not necessarily the cheapest or the most efficient method of distribution. b) E-commerce – the use of the internet for marketing communications, selling and purchasing – has in recent years led to a growth in direct marketing for a variety of products, notably travel tickets, books, videos and CDs, financial services and merchandise retailed by the traditional mail order catalogue operators.

170 Channel B – producer to retailer to consumer – is used by large retailers such as Marks & Spencer that can buy in quantity from a manufacturer. a) Clothing, food and cars are commonly sold through this type of marketing channel.

3. Channel C – producer to wholesaler to retailer to consumer – is a very practical option for a producer that sells to hundreds of thousands of consumers through thousands of retailers. a) Manufacturers of tobacco products, confectionery, some home appliances, hardware and many convenience goods use this type of marketing channel.

4. Channel D – producer to agent to wholesaler to retailer to consumer – is used for products intended for mass distribution, such as processed foods.

5. A long channel may be the most efficient distribution channel for certain consumer goods. a) When several channel intermediaries are available to perform specialized functions, costs may be lower than if one channel member is responsible for all the functions in all territories.

6. Besides these channels, a manufacturer may use sales branches or sales offices.

Channels for business-to-business products or services (see Figure 14.4) 1. Channel E – producer to business-to-business buyer – is most feasible for many manufacturers of industrial goods because there are fewer customers, and those customers may be clustered geographically. a) Buyers of complex industrial products can receive technical assistance from the manufacturer more easily in a direct channel. b) As with consumer markets, e-commerce and the desire to develop one-to-one relationships have led to a growth in the use of this marketing channel option.

2. Channel F – producer to business-to-business distributor to business-to-business buyer – is used when a line of industrial products is aimed at a large number of customers. a) This channel includes business-to-business or industrial distributors, merchants who take title to products and carry inventory. b) Industrial distributors can be most effectively used when a product has broad market appeal, is easily stocked and serviced, is sold in small quantities and is needed rapidly to avoid high losses.

3. Channel G – producer to agent to business-to-business buyer – may be chosen when a manufacturer without its own marketing department needs market information, when a company is too small to field its own salesforce or when a company wants to introduce a new product.

4. Channel H – producer to agent to business-to-business distributor to business-tobusiness buyer – a variation of Channel G, is used when a manufacturer without a salesforce has industrial customers who purchase products in small quantities or if they must be resupplied frequently and therefore need access to decentralized inventories.

Multiple marketing channels 1. When aiming at diverse target markets, a manufacturer may use several marketing channels simultaneously, with each channel involving a different group of intermediaries. a) Multiple channels can be used when the same product is directed to both consumers and industrial customers.

2. Dual distribution is distributing the same products under different brand names through two or more different channels.

3. A strategic channel alliance exists when the products of one organization are distributed through the marketing channels of another organization.

2.

C.

D.

171 a)

V.

The products are often similar with respect to target markets or product uses, but they are not direct competitors.

4. Multi-channel marketing is increasingly common for most brands, with the growth of online and digital marketing providing an attractive option for brands to build relationships and make sales alongside their traditional channels as described above. a) Some start-ups have in fact opted still for single channel marketing, but trade exclusively online and bear none of the costs associated with stores and physical distribution to numerous locations. b) Omni-channel marketing is the term used for multi-channel marketing which embraces all available channels to offer customers a seamless brand experience across a company‘s channels.

Channel integration A. Channel functions may be transferred among intermediaries, to producers and even to customers.

1. Channel members can either combine and control most activities or pass them on to another channel member.

2. Channel members cannot eliminate functions. a) Unless buyers themselves perform the functions, channel members must pay for the labour and resources needed for the functions to be performed.

3. Some marketing channels are determined by consensus while others are organized and controlled by a single leader, which could be a producer, a wholesaler or a retailer, depending on the industry. a) The channel leader may establish channel policies and coordinate the development of the marketing mix.

4. Channel integration may stabilize supply, reduce costs and increase coordination of channel members.

B. Vertical channel integration 1. Vertical channel integration combines two or more stages of the channel under one management. a) One member of a marketing channel may purchase the operations of another member or simply perform their functions, eliminating the need for that intermediary as a separate entity. b) Total vertical channel integration encompasses all functions, from production to ultimate buyer. c) Members coordinate efforts to reach a desired target market.

(1) Channel members regard other members as extensions of their own operations. d) Vertically integrated channels are often more effective against competition because they result in increased bargaining power, the ability to inhibit competitors and the sharing of information and responsibilities.

2. A vertical marketing system (VMS) is a marketing channel in which a single channel member coordinates or manages channel activities to achieve efficient, low-cost distribution aimed at satisfying target market customers. a) A corporate VMS combines all stages of the marketing channel, from producers to consumers, under a single ownership. b) An administered VMS is composed of independent channel members who achieve a high degree of inter-organizational management by informal coordination. c) A contractual VMS, the most popular type of vertical marketing system, involves inter-organizational relationships that are formalized through contracts.

172 C.

Horizontal channel integration 1. Horizontal channel integration combines institutions at the same level of channel operation under one management.

2. Advantages include efficiencies and economies of scale in purchasing, marketing research, advertising and specialized personnel. a) Horizontal integration may enable a business to generate sufficient sales revenue to integrate vertically as well.

3. Disadvantages include decreased flexibility, difficulties in coordination and the need for additional marketing research and large-scale planning.

VI. Different levels of market coverage A. The kind of coverage that is appropriate for different products is determined by the characteristics and behaviour patterns of buyers: B. In intensive distribution, all available outlets are used for distributing a product.

1. This method is appropriate for convenience products (see Chapter 8) and packaged consumer items.

2. The availability of these products is more important than the nature of the outlet.

C. In selective distribution, only some available outlets in an area are used to distribute a product.

1. This method is appropriate for shopping products such as durable goods and exclusive fragrances.

2. Selective distribution and company owned stores are often used to motivate retailers to provide adequate pre-sale service.

3. Many industrial products are sold on a selective basis to maintain a certain degree of control over the distribution process.

D. In exclusive distribution, only one outlet in a relatively large geographic area is used to distribute a product.

1. This method is appropriate for speciality products that are purchased infrequently, such as rare wines and expensive imported sports cars.

2. Exclusive distribution gives a company tighter image control because the types of distributors and retailers that distribute the product are closely monitored.

VII. Choosing distribution channels A. Choosing the most appropriate distribution channels for a product can be complex.

1. Producers must evaluate intermediaries carefully with regard to their sales and profit levels, performance records, other products carried, clientele, availability and so forth.

2. Other factors include organizational objectives and resources, market characteristics, buying behaviour, product attributes and environmental forces.

3. In some markets, these factors may indicate that multiple channels should be used.

B. Organizational objectives and resources 1. Producers must carefully consider their objectives and the cost of achieving them in the marketplace.

2. The organization must determine if it possesses sufficient financial and marketing clout to control its distribution channels.

3. Companies must also consider how effective their past distribution relationships and methods have been and question their appropriateness regarding current objectives.

C. Market characteristics 1. Beyond the basic division between consumer markets and industrial markets, several market variables influence the design of distribution channels. a) Geography is one factor; in most cases, the greater the distance between the producer and its markets, the less expensive is distribution through intermediaries rather than through direct sales.

173 b)

Market density must also be considered: when customers tend to be clustered in several locations, the producer may be able to eliminate middlemen. c) Market size, measured by the number of potential customers in a consumer or industrial market, is yet another variable.

2. The growing popularity of direct marketing and web-based marketing, which results in direct customer-supplier relationships, is forcing marketers to reappraise their market characteristics and deployment of channel intermediaries.

D. Buying behaviour 1. To be able to match intermediaries with customers, the producer must have specific, current information about customers who are buying the product and how, when, and where they are buying it.

2. The producer must also understand how buyer specifications vary according to whether buyers perceive products as convenience, shopping or speciality items.

3. Buyers may be reached most effectively when producers are creative in opening up new distribution channels.

E. Product attributes 1. Complex industrial products that require providing technical services to buyers both before and after the sale are usually shipped directly to buyers.

2. Perishable or highly fashionable consumer products with short shelf lives are also marketed through short channels.

3. In some cases, the lower the price per unit, the longer the distribution chain.

4. Additional attributes that affect distribution channel selection include the product‘s weight and bulkiness, and the relative ease of handling the product.

F. Environmental forces 1. Producers making decisions about distribution channels must consider the broader forces in the total marketing environment – that is, the political, legal, regulatory, societal/green, technological, economic and competitive forces (see Chapter 3).

VIII. Behaviour of channel members A. The marketing channel is a social system with its own conventions and behaviour patterns.

1. Each channel member performs a different role in the system and agrees (implicitly or explicitly) to accept certain rights, responsibilities and rewards, as well as sanctions for non-conformity.

2. Marketers need to understand these behavioural issues to make effective channel decisions and to maintain relationships with facilitating channel members and loyal customers.

B. Channel cooperation and relationship building 1. Channel cooperation is vital if each member is to gain something from other members. a) Without such cooperation, neither overall channel goals nor individual member goals can be realized. b) Policies must be developed that support all essential channel members, otherwise failure of one link in the chain could destroy the channel.

2. If a marketing channel is considered a unified system, individual members will be less likely to take actions that would create disadvantages for other members.

3. If channel members agree to direct their efforts towards a common target market, roles can be structured for maximum marketing effectiveness.

4. It is crucial to define precisely the tasks that each member of the channel is to perform. a) This definition is to provide a basis for reviewing the intermediaries‘ performance. b) It also reduces conflict because each channel member knows exactly what is expected of it.

174 5.

Long-term relationships can improve channel cooperation and help individual channel members better adapt to the needs of the others.

C. Channel conflict 1. Although all channel members work towards the same general goal – distributing goods and service profitably and efficiently – members may sometimes disagree about the best methods for attaining this goal.

2. Channel conflict arises when a given channel member does not conduct itself in the manner expected by other channel members.

3. Communication difficulties are a particular form of channel conflict and can lead to frustration, misunderstandings and poorly coordinated strategies.

4. Channel conflict also arises when dealers over emphasize competing products or diversify into product lines traditionally handled by other, more specialized intermediaries.

5. Conflict sometimes develops when producers strive to increase efficiency by circumventing intermediaries.

6. To resolve conflict, the role of each channel member must be specified, and channel members must institute measures of channel coordination.

D. Channel leadership 1. Channel leadership may be assumed by producers, retailers or wholesalers, and occurs when a channel member influences and directs overall channel performance.

2. Leaders must possess channel power, the ability to influence another channel member‘s goal achievement.

3. Channel leaders derive power from seven sources, two of them economic and five noneconomic. a) The economic sources of power are (1) control of resources and (2) the size of the company. b) The non-economic sources include (1) reward power, (2) expert power, (3) referent power, (4) legitimate power and (5) coercive power.

IX. Legal issues in channel management A. The laws governing channel management are based on the general principle that the public is best served when competition and free trade are protected.

1. Courts and regulatory agencies determine under what circumstances channel management practices violate this underlying principle and must be restricted and when these practices may be permitted.

2. Channel members need to be aware that attempts to control distribution functions may have legal repercussions.

B. Restricted sales territories 1. Restricted sales territories is a system by which a manufacturer tries to prohibit intermediaries from selling its products outside designated sales territories.

2. Courts have adopted conflicting positions regarding this policy.

3. At present, the producer‘s intent in establishing restricted territories and the overall effect of doing so on the market must be evaluated for each case individually.

C. Tying contract 1. The tying contract is an arrangement whereby a supplier (usually a manufacturer or franchiser) furnishes a product to a channel member with the stipulation that the channel member must purchase other products as well. a) Suppliers might institute this arrangement to move weaker products along with more popular items. b) A related practice, full line forcing, occurs when a supplier requires that channel members purchase the supplier‘s entire line to obtain any of the products.

175 2.

D.

E.

Courts accept tying contracts when the supplier alone can provide products of a particular quality, when the intermediary is free to carry competing products as well and when a company has just entered the market.

Exclusive dealing 1. Exclusive dealing is a system by which a manufacturer forbids an intermediary to carry products of competing manufacturers.

2. Exclusive dealing is generally legal if dealers and customers in a given market have access to similar products or if the exclusive dealing contract strengthens an otherwise weak competitor.

Refusal to deal 1. Refusal to deal is a situation in which suppliers will not do business with wholesalers or dealers simply because these wholesalers or dealers have resisted policies that are anti-competitive or in restraint of trade.

2. Within existing distribution channels, suppliers may not refuse to deal with wholesalers or dealers for resisting policies that are anti-competitive or in restraint of trade.

3. Suppliers are further prohibited from organizing some channel members in refusal to deal actions against other members who choose not to comply with illegal policies.

ANSWERS TO DISCUSSION AND REVIEW QUESTIONS 1.

Compare and contrast the four major types of marketing channel for consumer products.

Through which type of channel is each of the following products most likely to be distributed: (a) new cars, (b) cheese biscuits, (c) cut-your-own Christmas trees, (d) new textbooks, (e) sofas, (f) soft drinks?

The first type of consumer product channel is from producer directly to consumer. Although this type of channel is the simplest, it is not always the cheapest or most efficient. The second type of channel is producer to retailer to consumer and is efficient when large retailers can buy in large quantities from producers. The third channel, producer to wholesaler to retailer to consumer, is one of the most traditional types and is practical for producers of goods that sell to hundreds of thousands of consumers. The last type of consumer product distribution channel is from producer to agent to wholesaler to retailer to consumer. This method is most often used by producers of mass market products.

The specified products are most likely to be distributed as follows:

2.

a.

new cars – producer to retailer to consumer.

b.

cheese biscuits – producer to food broker or agent to wholesaler to retailer to consumer. In some cases, the producer may sell to a wholesaler without using a broker.

c.

cut-your-own Christmas trees – producer to consumer. Increasingly, the internet plays a role in this channel.

d.

new text books – producer to retailer (bookshop or Amazon.com) to consumer.

e.

sofas – producer to wholesaler to retailer to consumer, or possibly producer to retailer to consumer.

f.

soft drinks – because soft drinks are bottled locally, the channel would be producer to retailer to consumer.

“Shorter channels are usually a more direct means of distribution and therefore are more efficient.” Comment on this statement.

176 Shorter marketing channels are not always the most efficient method of distribution. If the above statement were true, there would be no need for wholesalers, and all products would flow directly from producers to consumers. Durable household goods and convenience goods such as sweets and gum are by their nature usually sold in convenient locations. Without longer channels, it would cost the producers more to get their products to the many outlets that sell the products.

3.

Describe an industrial distributor. What types of product are marketed through industrial distributors?

An industrial distributor is an intermediary that oversees the movement of industrial products through the distribution channel. Although it is an independent business organization, the industrial distributor takes title to products and carries inventories. An industrial product is one that is used in production or in everyday business activities, as opposed to ultimate consumption.

The industrial distributor usually carries standardized industrial products, such as maintenance supplies and tools. The functions of industrial distributors vary with the number of links in the channel.

4.

Why might a producer choose to use more than one marketing channel?

A producer uses more than one marketing channel to reach diverse target markets, such as when the same product is directed to both consumers and industrial buyers. In other cases, companies may sell similar products under different brand names through multiple channels, a practice called dual distribution.

5.

Why do consumers often blame intermediaries for distribution inefficiencies? List several reasons.

To consumers, intermediaries are not always visible in the distribution system and therefore are not worth what they cost. Throughout history, form utility has been perceived as having more value for consumers than time and place utility. However, many consumers do not realize that if the intermediaries were eliminated, either the producer or the consumer would have to perform the intermediaries‘ functions, leading to higher prices if the producer were to perform those functions.

Many people believe that intermediaries are parasitic and therefore contribute to inefficiency. In other words, the role and function of intermediaries are not understood.

6.

How do the major functions that intermediaries perform help resolve discrepancies in assortment and in quantity?

Sorting helps resolve assortment discrepancies by separating conglomerates of heterogeneous products into uniform groups based on product characteristics. Accumulating relieves quantity discrepancies by letting intermediaries build up particular inventories and allocate products based on customer demand. Allocating resolves quantity discrepancies by allowing wholesalers to buy efficiently in lorry loads and break down the inventories into smaller lots. Assorting resolves assortment discrepancies by collecting products in a way that satisfies consumer demand.

7.

How does the number of intermediaries in the channel relate to the assortments retailers need?

Assortments are combinations of products put together from various sources, or intermediaries.

Therefore, as the number of assortments at the retail level increases, the number of intermediaries necessary to help retailers collect these assortments increases.

8.

Can one channel member perform all channel functions?

One channel member cannot always perform all channel functions most efficiently. The member often lacks the capacity or facilities needed to perform each function, so it may be more efficient

177 for other channel members to perform some or even all of the channel functions. There are exceptions in which individual organizations do tackle all roles, but not many.

9.

Identify and explain the major factors that influence decision-makers‟ selection of marketing channels.

Selecting marketing channels depends first on organizational objectives and resources. The producer must consider what it is trying to accomplish in the marketplace and what resources can be brought to bear on the task. Next, selection depends on market characteristics – variables such as geography, market size and market density. Third, distribution channels depend on buying behaviour. To match intermediaries with customers efficiently, producers must know which customers are buying the product and when, where and how they are buying it. Product attributes also influence channel selection; considerations include the product‘s complexity, perishability, bulkiness, weight, ease of handling and value. Finally, environmental forces should be considered when selecting distribution channels. Factors such as technology, inflation, interest rates and demographic shifts affect distribution at every level.

10. Name and describe companies that use (a) vertical integration and (b) horizontal integration in their marketing channels.

Companies that use vertical integration in their marketing channels include KFC, Esso and Safeway. All of these companies combine two or more stages of their distribution channels under one management. For example, KFC delivers food products and supplies to its own franchise operators.

Companies that use horizontal integration include Sears and Arcadia (Burtons) Group. These companies combine institutions at the same level in the channel. For instance, Sears integrates horizontally by adding more retail outlets.

11. Explain the major characteristics of each of the three types of vertical marketing system (VMS).

A VMS is a centrally controlled marketing channel. A corporate VMS combines successive channel stages from producers to consumers under a single ownership. An administered VMS is a centrally coordinated system with a channel leader to establish strategy. In a contractual VMS, channel members are linked by legal agreements that spell out each member‘s rights and obligations.

12. Explain the differences among intensive, selective and exclusive methods of distribution.

In intensive distribution, the product is distributed through many outlets for the convenience of customers; products include sweets and soft drinks. Selective distribution is used for typewriters, stereos and other products that buyers are willing to compare in price, design and style. Exclusive distribution is used for speciality products that are purchased infrequently or require a high degree of adjustment to buyers‘ needs, such as Rolex watches and Jaguar automobiles.

13. What impact has the growing popularity of eCommerce had on marketing channels?

As explored in the chapter, promotion and selling via the internet have become increasingly popular in both consumer and business-to-business markets. Therefore, channel A (see Figure 14.3) and channel E (see Figure 14.4) have grown in popularity. Of course, intermediaries (e.g. wholesalers and retailers or industrial distributors) are also utilizing the web to promote and sell their stock lists. Despite the financial difficulties of ‗dot.com‘ businesses, the internet has dramatically altered marketing channel policies in most organizations. Also see Chapter 19.

178 14. “Channel cooperation requires that members support the overall channel goals to achieve individual goals.” Comment on this statement.

Cooperation is required of all channel members to provide an integrated system that will deliver the products that customers desire. Failure of one link in the channel could cause customer dissatisfaction and therefore channel failure.

15. How do power bases within the channel influence the selection of the channel leader?

Channel power is based on the ability of one channel member to influence the goal achievements of another member. The amount and types of power a channel member possesses determine how much influence the member can exert over other channel members. Examples of the types of power bases are reward, expert, referent, legitimate and coercive.

16. Why is multi-channel marketing increasingly the norm?

As explored further in Chapter 19, the onset of the digital era has provided great opportunities to engage more instantly and in a tailored fashion with targeted consumers and business users, whether directly or via third party web sites.

17. What considerations should influence multi-channel selection?

The channel still must be seen as relevant by targeted customers and offer them the functionality and reassurance, brand experience and emotional satisfaction they seek from their brands. Online does not alter these core ‗must haves‘. Brands must understand the consequences of not having a face-to-face point of contact and of losing the benefits associated with stores or depots, if they opt for online. If practicing multi-channel marketing, they should seek to harmonize customer experience and branding across their selected channels. Too few brands recognize these needs.

COMMENTS ON THE WEB TASK AND CASES WEB TASK While it is possible that a few very large orders for many machines may be handled directly by these manufacturers of construction equipment, in practice most orders pass through dealers appointed by these companies to interface with customers. As in the car market, these dealers also handle servicing, spare ports and often resale of used equipment. Without dealerships to showcase products and to act as service depots, both companies will struggle to develop suitable relationships with their customers. As a result, both websites not only assist customers to locate their nearest dealers, but also promote the qualities of these dealers and the standards of operation to which they should adhere.

While highly reliable, breakdowns do occur. Few construction sites have spare machines sitting idly by, so spare part provision and prompt call out action are essential aspects of providing customer service.

Both of these brands have created enviable reputations for product quality and design. Their brand reputations hinge equally on the abilities and ‗can do‘ attitude of their dealer personnel. As in the car market, few manufacturer personnel ever have direct contact with JCB or Caterpillar customers: that important relationship building role is left to the appointed dealer staff.

APPLIED MINI-CASE The owners of many music store chains have diversified and acquired stakes in music download companies and other entertainment ventures, in order to move with changing consumer behaviour.

However, the traditional music store chains have also moved with the trends to offer a wider mix of

179 entertainment facilities in-store (e.g. gaming, DVDs, music downloads, mobile ringtones and other lifestyle products). One music store chain is currently experimenting by creating a ‗theatre of dreams‘ concept, including video gaming stations to use in-store, internet café, music downloads, youth clothing books as well as traditional music products. However, with bands and labels streaming new releases and cutting out stores, the decline of traditional outlets has been significant, resulting in niche specialists serving specific market segments.

CASE STUDY: FIRST DIRECT’S INNOVATIVE BANKING CHANNELS In 1989 Midland Bank (HSBC) changed the face of personal banking by launching the innovative first direct. This separately managed banking system operates outside the traditional marketing channels for banks, has no branches and therefore incurs no branch overhead and operating costs. first direct offers free banking and conducts its services over the telephone. The case examines this innovative use of marketing channels and considers its likely appeal to different customer groups.

Question 1 asks why innovation in marketing channels is generally difficult to achieve.

Place/distribution is considered to be more difficult to alter than are the pricing and promotion elements of the marketing mix. When distribution breaks down, customers quickly become disgruntled. Because distribution decisions have a powerful influence on other marketing mix elements, adopting an innovative approach to marketing channels is likely to have repercussions for other marketing decisions. Furthermore, channel decisions tend to involve long term commitments and to lead to relationships being built up with other intermediaries. Often these relationships are fundamental to the successful distribution of a particular product or service, and companies cannot afford to jeopardize them by altering the distribution approach.

Question 2 asks how first direct differed from its rivals and what gave it its differentiation when it was first launched. Obviously, first direct has adopted a novel approach to personal banking. Although the products offered are not new, customers of this service can conduct their banking remotely, often more cheaply than before, at any time of the day or night. They need not put up with the restricted opening hours, long queues and parking difficulties associated with traditional branches. Each of these characteristics potentially offers first direct a differential advantage. How sustainable that advantage is depends on whether the concept retains its popularity with customers and on the success that rivals have copying first direct‘s telephone banking. The search is now on for a new competitive edge based on service quality. Internet banking has also grown in popularity, with first direct adopting this channel of distribution along with most rivals.

Question 3 asks why some potential customers might have reservations about the innovative nature of the service. While first direct will appeal to certain customer groups (it is aimed at the ―more financially aware and independent income earner‖), more traditional customers may feel safer with the heritage, security, values and face-to-face contact associated with branch-based banking.

CHAPTER 15

Channel players and physical distribution

180

OBJECTIVES •

To explore the nature of marketing channels and the main intermediaries.

•

To understand the nature of wholesaling in its broadest forms in the marketing channel.

•

To examine channel players that facilitate wholesaling and distribution.

•

To understand the purpose and function of retailing in the marketing channel.

•

To describe and distinguish retail locations, major store types and non-store retailing.

•

To understand how physical distribution activities are integrated into marketing channels and overall marketing strategies, and to examine physical distribution objectives.

•

To learn about order processing, materials handling and different types of warehousing and their functions.

•

To appreciate the importance of inventory management and the development of adequate assortments of products for target markets.

•

To gain insight into different transportation methods and how they are selected and coordinated.

PURPOSE AND PERSPECTIVE This chapter addresses wholesalers‘ and distributors‘ activities within a marketing channel, plus the importance of physical distribution management. Following a discussion of the nature and importance of wholesaling, the chapter examines the services wholesalers offer producers and retailers, pointing out that wholesaling activities must be performed during distribution of all goods, whether a wholesaling institution is involved or not. Next, wholesalers are classified based on the activities they perform in the marketing channel. Three general categories of wholesale establishments are described: (1) merchant wholesalers, (2) agents and brokers and (3) manufacturers‘ sales branches and offices. The chapter then covers five types of facilitating agencies that assist in performing wholesaling activities: public warehouses, finance companies, transport companies, trade shows and trade markets. Changing patterns in wholesaling are then discussed. (Tutors should note that the term ‗wholesaling‘ is an all-embracing term for channel intermediaries including dealers and distributors and is not meant in the ‗cash and carry‘ retailing context.)

This chapter also overviews marketing decisions as they apply to physical distribution. The primary objective of this section of the chapter is to provide an understanding of how physical distribution activities are integrated into marketing channels and contribute to overall marketing strategies. Basic concepts of physical distribution and their importance are considered. The performance objectives outlined include customer service, total distribution costs and cost trade-offs. The major decisions involving order processing, materials handling, warehousing, inventory management and transportation are examined, beginning with the three aspects of order processing: order entry, order handling and order delivery. The importance of efficient materials handling, or the physical handling of products, is noted. The next section looks at the essential processing functions a warehouse performs and considers differences among private warehouse facilities, public facilities and distribution centres. Inventory management is presented as the development and maintenance of adequate assortments of products for target markets. The concept of economic order quantity (EOQ) and its calculations are described. The chapter then discusses the five major modes of transport, analyzes transport selection criteria and explains how two or more modes of transport may be combined for greater efficiency. The final section examines the strategic relationship of physical distribution to other elements in the marketing mix: product design and packaging, pricing and promotion.

181

LECTURE OUTLINE I.

II.

The nature and importance of wholesaling A. Wholesaling includes all transactions in which the purchaser intends to use the product for resale, for making other products or for general business operations.

1. Wholesaling establishments are engaged primarily in selling products directly to industrial, reseller, government and institutional users.

2. Used in the broadest sense, wholesaling refers to intermediaries‘ activity in the marketing channel between producers and business-to-business customers to facilitate the exchange – buying and selling – of goods.

B. A wholesaler is an individual or organization engaged in facilitating and expediting exchanges that are primarily wholesale transactions.

C. Supply chain management is a related topic: the orchestration of the channel of distribution – from sourcing supplies, manufacture to delivery to the customer – often with the intention of creating long-term mutually beneficial relationships.

The activities of wholesalers A. In the United States and Europe more than 50 per cent of all products are exchanged, or their exchange is negotiated, through wholesaling institutions.

1. Owing to the strength of large, national retailers in the UK, wholesaling is not as important in consumer markets.

2. The distribution of all goods requires wholesaling activities, whether a wholesaling institution is involved or not. a) Major wholesaling activities: (1) Supply chain management (2) Wholesale management (3) Negotiating with suppliers (4) Promotion (5) Warehousing and product handling (6) Transport (7) Inventory control and data processing (8) Security (9) Pricing (10) Financing and budgeting (11) Management and marketing assistance to clients 3. Wholesalers provide marketing activities for organizations above and below them in the marketing channel.

B. Services for producers 1. Wholesalers perform specialized accumulation and allocation functions that allow producers to concentrate on developing and manufacturing products to match consumers‘ wants.

2. Wholesalers serve as extensions of a producer‘s salesforce by selling a manufacturer‘s products to retailers and by initiating sales contacts with the manufacturer.

3. Wholesalers provide four forms of financial assistance: (1) paying transport costs, (2) reducing warehousing expenses and inventory investment by holding goods in inventory, (3) extending credit and assuming losses from buyers who turn out to be poor credit risks and (4) providing working capital by buying a producer‘s entire output.

4. Wholesalers are also conduits for information with the marketing channel (keeping manufacturers up to date on market developments, etc).

182 5.

III.

Wholesalers also have beneficial close contact with retailers because of their strategic position in the marketing channel.

C. Services for retailers 1. Wholesalers help their retailer customers select inventory and purchase supplies.

2. Wholesalers perform physical distribution activities more efficiently than producers or retailers because they buy in large quantities and deliver to customers in smaller lots. a) Wholesalers can provide quick and frequent delivery at low cost even when demand fluctuates, allowing their customers to avoid holding large product inventories.

3. Wholesalers maintain wide product lines at relatively low cost, relieving retailers of storage and warehousing costs. a) When wholesalers provide storage and warehousing, they generally take on the ownership function as well, freeing retailers‘ and producers‘ capital for other purposes.

4. Wholesalers are very important in reaching global markets and it is anticipated that in the future more wholesalers will operate across borders. a) This becomes more likely as changing EU regulations and the movement towards European monetary union reduce EU restrictions.

Classifying wholesalers A. Wholesalers are classified according to whether they are owned by the producer and whether they take title to products they handle, and by the range of services they provide and the breadth and depth of their product lines.

B. Merchant wholesalers 1. Merchant wholesalers take title to goods and assume the risks associated with ownership. a) They account for over half of all wholesale revenues. b) They are often called jobbers, distributors, assemblers, exporters or importers. c) They fall into two categories: full service or limited service (fully detailed in Table 15.2).

2. Full service wholesalers offer the widest possible range of wholesaling activities, including product availability, suitable assortments, bulk breaking functions, financial assistance and credit lines, technical advice and after sales service. They often provide their immediate customers with marketing support. a) General merchandise wholesalers are middlemen who carry a wide product mix but offer limited depth within the product lines.

(1) Distributors are companies that buy and sell on their own account but tend to deal in the goods of only certain specified manufacturers. b) Limited line wholesalers carry only a few product lines – such as groceries, lighting fixtures, drilling equipment construction equipment – but offer an extensive assortment of products within those lines. c) Speciality line wholesalers are middlemen, such as shellfish wholesalers, who carry the narrowest range of products – usually a single product line or a few items within a product line – and offer detailed product knowledge and depth of choice.

(1) Rack jobbers are speciality-line wholesalers of products such as cosmetics and magazines that own and maintain their own display racks in drugstores and supermarkets.

3. Limited service wholesalers are middlemen who provide only some marketing services and specialize in a few functions.

183 a)

C.

Cash and carry wholesalers are middlemen whose customers are retailers or small industrial businesses who provide their own transport and collect from wholesale depots. b) Truck wholesalers, or truck jobbers, are limited-service wholesalers that transport a limited line of products directly to customers for on-the-spot inspection and selection. c) Drop shippers, or desk jobbers, take title to goods and negotiate sales, but never take actual possession of products; rather, they forward orders and arrange shipments for direct delivery. d) Mail order wholesalers use catalogues instead of salesforces to sell to retail, institutional and industrial buyers.

Agents and brokers 1. Agents and brokers negotiate purchases and expedite sales but do not take title to products. a) They are functional middlemen, intermediaries who perform a limited number of marketing activities in exchange for a commission. b) Agents are middlemen who represent buyers or sellers on a permanent basis. c) Brokers are middlemen employed temporarily by either buyers or sellers. d) They are usually specialists in particular products or types of customer and can provide valuable sales expertise. e) They enable manufacturers to expand sales when resources are limited, to benefit from the services of a trained salesforce and to hold down personal selling costs. f) Agents and brokers face increased competition from merchant wholesalers, manufacturers‘ sales branches and offices, and direct sales efforts, including the growing use of the Internet.

2. Manufacturers‟ agents are independent middlemen or distributors who represent two or more sellers and usually offer customers complete product lines. a) They sell and take orders year-round much as a manufacturers‘ sales office does. b) They are restricted to particular territories and handle non-competing and complementary products. c) The advantages they offer include their wide range of contacts and strong customer relationships. d) The chief disadvantage of using agents is the high commission rate they charge for new product sales.

3. Selling agents market either all a specified product line or a manufacturer‘s entire output. a) They perform every wholesaling activity except taking title to products, and they usually assume the sales functions for several producers at a time. b) They have no territorial limits and have complete authority over prices, promotion and distribution. c) They are used most often by small producers or manufacturers who find it difficult to maintain a marketing department. d) Selling agents represent non-competing product lines and are commonly used in the distribution of such products as textiles, clothing and lumber.

4. Commission merchants are agents who receive goods on consignment from local sellers and negotiate sales in large central markets. a) They have broad powers with respect to prices and terms of sale, and they specialize in obtaining the best price possible under market conditions. b) They offer planning assistance and sometimes extend credit but do not provide promotional support.

184 c)

Their services are most useful to small producers who must get products to buyers but choose not to field a salesforce or accompany the goods to market themselves.

5. Brokers seek out buyers or sellers and help negotiate exchanges. a) They are not involved in financing, physical possession or price setting but offer specialized knowledge of a product and a network of established contacts. b) They are especially useful to sellers of products that are marketed only occasionally, such as insurance or real estate. c) Food brokers, the most common type of broker, are intermediaries who sell food and general merchandise items to retailer owned and merchant wholesalers, grocery chains, industrial buyers and food processors.

D. Manufacturers‘ sales branches and offices 1. Sales branches are manufacturer owned middlemen selling products and providing support services to the manufacturers‘ salesforces, especially in locations where large customers are concentrated and demand is high.

2. Sales offices are manufacturer owned operations that provide support services normally associated with agents. a) Like sales branches, they are located away from manufacturing plants, but unlike branches, they carry no inventory.

3. Manufacturers may set up sales branches or sales offices so that they can reach customers more effectively by performing wholesaling functions themselves, or when specialized wholesaling services are not available through existing middlemen.

IV. Facilitating agencies A. Facilitating agencies – transport companies, insurance companies, advertising agencies, marketing research agencies and financial institutions – perform activities that enhance channel functions.

1. Facilitating agencies assist in the operation of the channel, but they do not buy, sell or take title to products.

2. They are functional specialists that efficiently and effectively perform special tasks for channel members without getting involved in directing or controlling channel decisions.

B. Public warehouses 1. Public warehouses are storage facilities that are available for a fee.

2. Many warehouses order, deliver, collect accounts and maintain display rooms for products.

3. To use goods as collateral for a loan, a channel member may place products in a bonded warehouse.

4. Field public warehousers know where their clients can borrow working capital and are sometimes able to arrange low-cost loans.

C. Finance companies 1. Finance companies provide loans to wholesalers and retailers by taking title to products while allowing the wholesalers and retailers to retain physical possession of the goods. a) Such ‗floor planning‘ financing enables wholesalers and retailers to offer a greater selection of products and thus increase sales.

2. Factors are organizations that provide clients with working capital by buying their accounts receivable or by lending money. a) Factors usually lend money for a longer time than banks. b) They may help clients improve their credit and collection policies and may also provide management expertise.

185 D.

V.

Transport companies 1. Rail, air, road and other carriers are facilitating agencies that help manufacturers and retailers transport products. a) Railways ship large volumes of bulky goods at low cost. b) Air transport is relatively expensive but is often preferred for shipping high value or perishable goods. c) Trucks, which usually carry short haul, high value goods, now carry more and more products because factories are moving closer to their markets. d) Pipelines now transport powdered solids and fluidized solid materials, as well as petroleum and natural gas.

2. Transport companies sometimes take over the functions of other middlemen, eliminating the need for large inventories and branch warehouses and also performing accumulation functions.

E. Trade shows and trade markets 1. Trade shows and trade markets enable manufacturers or wholesalers to exhibit products to potential buyers and thus help the selling and buying functions.

2. Trade shows are industry exhibitions that offer both selling and non-selling benefits. a) On the selling side, trade shows let vendors identify prospects; gain access to key decision-makers; disseminate facts about their products, services and personnel; and actually sell products and service current accounts through contacts at the show. b) The non-selling benefits include opportunities to maintain the company image with competitors, customers and the industry; to gather information about competitors‘ products and prices; and to identify potential channel members. c) Trade shows can permit direct buyer-seller interaction and may eliminate the need for agents.

(1) Companies exhibit at trade shows because of the high concentration of prospective buyers for their products.

3. Trade markets are relatively permanent facilities that businesses can rent to exhibit products year-round. a) At these markets, such products as furniture, home decorating supplies, toys, clothing and gift items are sold to wholesalers and retailers.

Retailing A. Retailing includes all transactions in which the buyer (consumer) intends to use or consume the product through personal, family or household use.

1. A retailer is a business that purchases products for the purpose of reselling them to the ultimate consumer from a store, by direct marketing or increasingly online. a) By collecting assortments, retailers offer utility in terms of place, time, possession and form.

2. Retailers must decide on their preferred type of location: The central business district (CBD) or traditional hub of a city or town centre is preferred by retailers requiring high footfall and prepared to pay high rates to have prime pitch sites with high customer thresholds; other options are suburban centres, edge-of-town sites, retail parks or secondary sites around the CBD. 3. Major store types include large department stores, variety stores, catalogue showrooms, supermarkets and superstores, hypermarkets, discount sheds, warehouse clubs, speciality shops, markets, convenience stores, factory village outlets, and cash and carry warehouses.

186 4.

Category management is where a key supplier selects the range from a variety of suppliers and manages that product category in-store on behalf of the retailer.

Particularly common in supermarkets.

5. Category killers are large stores focusing on a narrow range of merchandise, which makes life difficult for smaller retailers competing for the same customers in that merchandise category.

6. Non-store retailing is outside of the confines of a retail store or depot. In-home retailing, telemarketing, vending and mail order are examples. a) Some non-store retailing is in the category of direct marketing, which is the use of non-personal media, the Internet or telesales to introduce products to consumers, who then purchase via the web, phone or mail. b) In-home retailing involves contacting consumers in their homes, often with demonstrations and party plans. c) Telemarketing is the selling of products and services by calling pre-screened prospects or cold-calling. d) Vending uses automated machines to vend products. e) Mail order retailing enables buyers to view and select via catalogues, direct mailings, television and radio, magazines and newspapers, and the web.

VI. Physical distribution A. Physical distribution is a set of activities – consisting of order processing, materials handling, warehousing, inventory management and transportation – used in the movement of products from producers to consumers, or end users.

1. Setting up an effective physical distribution system can be a significant decision point in developing an overall marketing strategy because it can decrease costs and increase customer satisfaction. a) An effective system creates time and place utility, which maximizes the value of products by delivering them when and where they are wanted.

2. Physical distribution deals with physical movement of products and inventory holding both within and among marketing channel members.

3. The physical distribution system is often adjusted to meet the unique needs of a channel member.

B. Physical distribution objectives 1. The main objective of physical distribution is to decrease costs while increasing customer service.

2. Physical distribution managers strive for a reasonable balance of service, costs and resources, determining what level of customer service is acceptable yet realistic.

C. Customer service 1. Customer service is a set of activities through which all businesses, in varying degrees, attempt to satisfy customers‘ needs and wants. a) In terms of physical distribution, customer service refers to availability, promptness and quality.

2. Levels of service a) At the most basic level, customers need fair prices, acceptable product quality and dependable deliveries. b) At a higher level, customers may desire sizeable inventories, efficient order processing, availability of emergency shipments, progress reports, post-sale services, prompt replacement of defective items and warranties. c) Service needs vary from customer to customer, so companies must analyze – and adapt to – customer preferences.

187 A company‘s failure to provide the desired level of service may mean the loss of customers.

3. Service standards and policies a) Companies must examine competitors‘ service levels and match those standards as long as the costs can be balanced by the sales generated.

(1) In extremely competitive businesses, such as the market for vehicle parts, businesses may concentrate on product availability. b) Service standards should be developed and stated in terms that are specific, measurable and appropriate for the product. c) Standards should be communicated clearly to both customers and employees and rigorously enforced. d) Minimum order sizes are often necessary to ensure that transactions are profitable. e) The overall objective of any service policy should be to improve customer service just to the point beyond which increased sales would be negated by increased distribution costs.

D. Total distribution costs 1. Decreasing costs in one area of the physical distribution system often increases costs in another area.

2. By using a total cost approach, a physical distribution manager can view the distribution system as a whole, rather than as a collection of unrelated activities. a) The emphasis shifts from lowering the separate costs of individual functions to minimizing the total cost of the entire system.

3. Total cost analysis weighs inventory levels against warehousing expenses; materials handling costs against various modes of transport; and all distribution costs against customer service standards.

4. A distribution system‘s lowest total cost is the lowest overall cost compatible with the company‘s stated service objectives.

E. Cost trade-offs 1. Cost trade-offs involve the off-setting of higher costs in one area of the distribution system by lower costs in another area, to keep the total system cost effective.

2. Trade-offs are strategic decisions to combine (and re-combine) resources for greatest cost effectiveness.

VII. Order Processing A. Order processing – the first stage in a physical distribution system – is the receipt and transmission of sales order information.

1. Efficient order processing facilitates product flow.

2. Computerized order processing speeds the flow of information from customer to seller.

3. When carried out quickly and accurately, order processing contributes to customer satisfaction, repeat orders and increased profits.

B. There are three main tasks in order processing: (1) order entry, (2) order handling and (3) order delivery.

1. Order entry begins when customers or salespeople place purchase orders by mail, telephone, fax or computer.

2. Order handling involves several activities. a) Orders are transmitted to the warehouse. b) The warehouse verifies the availability of products. c) The credit department checks prices, terms and customers‘ credit ratings. d) The warehouse fills the order and packs it for shipment.

(1)

188 3.

The warehouse arranges order delivery by scheduling pick up with an appropriate carrier.

C. Order processing can be done manually or electronically, depending on which method provides greater speed and accuracy within cost limits.

1. Manual order processing suffices for a small volume of orders and is more flexible in special situations.

2. Electronic order processing is more practical for a large volume of orders. a) It enables order processing, production planning, inventory, accounting and transport planning to be integrated into a total information system. b) Most companies now use Electronic Data Interchange (EDI), which uses IT to integrate order processing with production, inventory, accounting and transportation.

VIII. Materials handling A. Materials handling, or the physical handling of products, is important for efficient warehouse operations and in transport from points of production to points of consumption.

1. The characteristics of the product itself often determine how it will be handled.

B. Materials handling procedures and techniques should increase the usable capacity of a warehouse, reduce the number of times a product is handled, improve customer service and increase customer satisfaction.

C. Packaging, loading, movement and labelling systems must be coordinated to maximize cost reduction and customer satisfaction.

1. Unit loading is grouping one or more boxes on a pallet or skid, permitting movement of efficient loads by mechanical means, such as forklifts, trucks or conveyor systems.

2. Containerization is the practice of consolidating many items into a single large container that is sealed at its point of origin and opened at its destination. a) Containers can be conveniently stacked and sorted as units at the point of loading. b) Containerization greatly increases efficiency and security in shipping.

IX. Warehousing A. Warehousing is the design and operation of facilities for storing and moving goods.

1. It provides time utility by enabling companies to compensate for dissimilar rates of production and consumption.

2. It helps stabilize the prices and availability of seasonal items.

B. Warehousing functions 1. Warehouses perform the following basic distribution functions: a) Receiving goods b) Identifying goods c) Sorting goods d) Despatching goods to storage e) Holding goods f) Recalling and picking goods g) Marshalling the shipment h) Despatching the shipment C. Types of warehouses 1. A company‘s choice of warehouse is an important strategic consideration as by using the right warehouse, it may be able to reduce transportation and inventory costs or improve its service to customers; the wrong warehouse may drain company resources.

Many companies operate their own warehouses, while others outsource to expert providers of logistics management.

X. Inventory management

189 A.

B.

C.

Inventory management involves developing and maintaining adequate assortments of products to meet customer needs.

1. Carrying too few products results in stock-outs, or shortages of products, which result in fewer sales and customers switching to alternative brands.

2. Carrying too many products increases costs and the risks of product obsolescence, pilferage and damage.

3. The objective of inventory management is to minimize inventory costs while maintaining an adequate supply of goods.

There are three types of inventory costs.

1. Carrying costs are holding costs, which include expenditures for storage space and materials handling, financing, insurance, taxes and losses due to spoilage.

2. Replenishment costs are related to the purchase of merchandise and include the price of goods, handling charges and expenses for order processing.

3. Stock-out costs include sales lost when demand for goods exceeds supply and the clerical and processing expenses of back ordering.

Inventory managers deal with two important issues: when to reorder and how much merchandise to order.

1. The reorder point, the inventory level that signals the need to order more inventory, is determined by three factors: a) The order lead time; the expected time between the date an order is placed and the date the goods are received and made ready for resale to customers b) The usage rate at which a product is sold or used up during a specific time period c) The quantity of safety stock on hand d) The reorder point can be calculated using the following formula: reorder point = (order lead time × usage rate) + safety stock 2.

Safety stock is the inventory needed to prevent stock-outs. a) Large safety stocks ensure product availability, improve the level of customer service and lower processing costs. b) Small safety stocks cause frequent reorders and high order processing costs but reduce the overall cost of carrying inventory. c) The economic order quantity (EOQ) specifies the order size that minimizes the total cost of ordering and carrying inventory.

(1) The objective of minimum total inventory cost must be balanced against the customer service level necessary for maximum profits.

3. Miscalculations in reorder points or order quantities create inventory problems. a) Warning signs include an inventory that grows at a faster rate than sales, surplus or obsolete inventory, customer deliveries that are consistently late or lead times that are too long, inventory that represents a growing percentage of assets, and large inventory adjustments or write-offs. b) Inventory systems can be planned so that the number of products sold and the number of products in stock are determined at certain checkpoints. c) Techniques to improve inventory management include the just-in-time concept and the 80/20 rule.

XI. Transportation A. Transportation adds time and place utility to a product by moving it from where it is made to where it is purchased and used.

190 B.

C.

D.

A company may even build its distribution and marketing strategy around a unique transport system if the system ensures on-time deliveries that will give the business a competitive edge.

Transport modes 1. There are five major transport modes, or methods of moving goods: motor vehicles, railways, inland waterways, airways and pipelines.

Criteria for selecting transport 1. Remember that the choice of a transport mode involves many trade-offs.

2. Costs, transit time, reliability, capability, accessibility, security and traceability are all factors to consider.

3. Outsourcing is where a third party is empowered to manage and control a particular activity – such as catering or in this context, a company‘s logistics.

ANSWERS TO DISCUSSION AND REVIEW QUESTIONS 1.

Is there a distinction between wholesalers and wholesaling? If so, what is it?

A wholesaler is an individual, business or establishment that functions as an intermediary, selling to industrial, reseller and institutional users. Wholesaling activities can be performed by any channel member, including retailers and producers. Wholesaling includes all market transactions in which purchases are intended for resale or for use in making other products.

2.

Generically, what services do wholesalers provide to producers and retailers?

For producers, wholesalers perform specialized accumulation and allocation functions, thereby letting producers concentrate on developing products that match consumers‘ wants. Wholesalers also provide services such as financial assistance, storage and transport. They are excellent sources of information and working capital.

Wholesalers help retailers select inventory and negotiate final purchases. Wholesalers also provide transport, storage, information, materials handling and warehousing. Because they provide the fastest delivery at the lowest cost, they create time and place utilities.

3.

Drop shippers take title to products but do not accept physical possession. Commission merchants take physical possession of products but do not accept title. Defend the logic of classifying drop shippers as wholesale merchants and commission merchants as agents.

Drop shippers are classified as wholesale merchants because they take title and assume the risk of product ownership, although they do not take physical possession. Commission merchants take physical possession but do not assume the risk associated with product ownership; they return unsold merchandise to the owner. Product ownership therefore differentiates agents from merchants and determines the classifications of drop shipper and commission merchant.

4.

What are the advantages of using agents to replace merchant wholesalers? What are the disadvantages?

One advantage of using agents to replace merchant wholesalers is that selling expenses can sometimes be lowered because agents receive a commission only when they sell a product for the producer. Also, agents may work harder for a company if their remuneration is a commission. The disadvantages of using agents are that (a) agents generally do not perform as many functions for the producer as merchant wholesalers do, (b) agents cannot be controlled to the extent that merchant wholesalers can, (c) agents do not assume risk and do not help the producer own stocks of inventory and (d) agents will not usually perform any transport or storage functions.

191 5.

Why are manufacturers‟ sales offices and branches classified as wholesalers? Which independent wholesalers are replaced by manufacturers‟ sales branches? Which independent wholesalers are replaced by manufacturers‟ sales offices?

Manufacturers‘ sales offices and branches are classified as wholesalers because their main function is to perform wholesaling activities. Manufacturers‘ sales branches serve the same functions as merchant wholesalers, and manufacturers‘ sales offices serve essentially the same function as agents.

6.

Discuss the role of facilitating agencies. Identify three facilitating agencies and explain how each type performs this role.

Facilitating agencies are highly specialized companies that perform some wholesaling functions.

Transport companies help manufacturers and retailers transport products without the aid of middlemen. These companies often combine small shipments into full loads to decrease costs to customers.

Trade shows and trade markets assist in buying and selling functions by allowing manufacturers or retailers to exhibit products to potential buyers.

Public warehouses provide storage facilities, relieving producers of the need to build their own or use those of a merchant wholesaler. They also often provide services such as placing orders, delivering goods and maintaining display rooms.

Finance companies make loans to wholesalers and retailers by assuming ownership of products while allowing the wholesalers and retailers to retain physical possession of the goods. Factors also provide working capital by buying accounts receivable and may provide management expertise as well.

7.

What role do retailers undertake in distribution?

They are the final link in the channel interfacing with consumers. By collecting assortments, retailers offer utility in terms of place, time, possession and form.

8.

What are the principal types of retailers?

Major store types include large department stores, variety stores, catalogue showrooms, supermarkets and superstores, hypermarkets, discount sheds, warehouse clubs, speciality shops, markets, convenience stores, factory village outlets, and cash and carry warehouses.

9.

Describe the most common forms of non-store retailing and what is driving growth for some of these.

Non-store retailing includes in-home retailing, telemarketing, vending, mail order and direct marketing, which is the use of non-personal media, the internet or telesales to introduce products to consumers, who then purchase via the web, phone or mail. At-home purchasing and mobile marketing, both fueled by the web, are the main drivers for growth.

10. Discuss the cost and service trade-offs involved in developing a physical distribution system.

The main objective of physical distribution is to decrease costs while increasing service.

Companies often give customer service high priority, and service may be as important in attracting customers as the cost of the company‘s product. On the one hand, the large inventories and rapid transport essential to high levels of customer service drive up costs. On the other hand, reduced inventories and slower, cheaper methods of transport result in customer dissatisfaction and lost sales. Therefore, the overall objective of service policy should be to improve customer

192 service to the point just beyond which an increase in sales from the service will off-set any increase in distribution costs associated with the service.

11. What factors must physical distribution managers consider when developing a customer service mix?

There are several factors a physical distribution manager should consider when developing a customer service mix. Because service needs vary from customer to customer, the manager must first analyze and accommodate customer preferences. The manager should also examine the service levels that competitors offer. Then the manager may try to identify and correct the causes of customer complaints and billing and shipping errors.

12. What is the advantage of using a total cost approach to distribution?

Physical distribution managers strive to minimize the cost of each element in the system (order processing, materials handling, warehousing, inventory and transport). However, decreasing costs in one area may often increase costs in another. The total cost approach to physical distribution calls for analyzing the costs of all possible combinations of distribution alternatives, even those that might be too expensive by themselves. By using the total cost approach, physical distribution managers can view the distribution system as a whole rather than as a collection of unrelated activities. Because a distribution system‘s minimized cost is the lowest overall cost compatible with the company‘s stated service objectives rather than a function of a combination of the cheapest elements, the total cost approach is advantageous.

7.

What are the main tasks involved in order processing?

There are three main order processing tasks. Order entry begins when customers or salespeople place purchase orders by mail, telephone, fax or computer. Order handling involves verifying product availability, approving the credit purchase and filling the order. Order delivery involves scheduling pick up with an appropriate carrier.

14. How does a product‟s package affect materials-handling procedures and techniques?

The protection functions of packaging have a strong impact on physical distribution. Decisions about packaging materials and methods affect the efficiency of physical handling. Materials handling techniques and procedures should maximize a warehouse‘s usable capacity, reduce the number of times a product is handled and improve customer service. The design of the package should be coordinated to help meet these objectives. For example, a package‘s size and shape should allow the goods to be stacked and moved efficiently, and its material and design should ensure the package‘s ability to withstand rigorous handling.

15. Explain the major differences between private and public warehouses. What is a field public warehouse?

A private warehouse is operated by a company for the purpose of distributing its own products.

Private warehouses provide benefits such as property appreciation but also incur fixed costs such as insurance, taxes, maintenance and debt expenses. They provide little flexibility when a company wishes to move inventories to more strategic locations.

Public warehouses rent storage space and physical distribution facilities to other companies.

Public warehouse costs are variable rather than fixed and therefore usually lower.

A field public warehouse is established by a public warehouse at the customer‘s inventory location. The warehouser then becomes the custodian of the products and issues a receipt that can be used as collateral for a loan.

8.

Describe the costs associated with inventory management.

193 Inventory management involves the development and maintenance of adequate product assortments to meet customer needs. There are several forms of costs associated with inventory management. Carrying costs include expenditures for storage space, materials handling, financing, insurance, taxes and losses due to spoilage. Replenishment costs relate to the purchase of merchandise (price, handling charges and processing costs). Stock-out costs include sales and customer goodwill lost due to the demand for goods exceeding the supply on hand as well as the processing expenses of back ordering. A company must control the costs of obtaining and maintaining inventory to meet its goals and objectives.

9.

How can managers improve inventory control? Give specific examples of techniques.

Managers can improve inventory control by planning a system so that the number of products sold and the number of products in stock are determined at certain checkpoints. For example, a tag containing information about product size, colour and model can be removed from the item at the checkout stand and used in inventory control. Computerized cash registers provide continuous inventory and sales updates (e.g. grocery stores use optical scanners to read the barcodes on each product).

10. Compare the five major transport modes in terms of costs, transit time, reliability, capability, accessibility, security and traceability.

Motor vehicles provide the most flexible schedules because they can go almost anywhere. Costs of distribution through motor vehicles are higher because of the small shipments carried. The vehicles are more vulnerable to bad weather. They are less reliable and traceable because the smaller shipments require re-handling of the products.

Railways are an inexpensive means of shipping products over land for long distances. Transit time for railroads is high; however, improving technologies and innovations allow some trains to bypass classification yards, reducing transit time. Railways are fairly reliable, capable of providing specific equipment and conditions for particular goods (e.g. refrigeration), and accessible because of the currently improving network of rail links. Security on railways is fairly easy to maintain; the traceability of products transported on railways depends largely on the individual shipping organization.

Inland waterways are the cheapest method for shipping low value goods. This mode of transport is slow, however, and cannot serve inland markets without supplementary transport. Damage due to water and weather is a factor. Security and traceability are fairly stable because of the small amount of handling involved in large shipments.

Air freight is the fastest and most expensive method of shipping. The capacity of air transport depends on the individual aircraft. This method can reduce theft and damage to products, helping lower total costs. Like waterways, however, air transport must be supplemented with another transport method.

Pipelines are the most automated transport mode. They are characterized by limited accessibility but are reliable and ensure low product damage and theft. Pipelines move products slowly but continuously. Allowances should be made for shrinkage, usually due to evaporation.

11. Discuss how the elements of the marketing mix affect physical distribution strategy.

The strategic importance of physical distribution is evident in each element of the marketing mix.

Product – the design of the product and the package must allow for efficient stacking, storage and transport. There may be additional warehousing and shipping demands for increased assortments of colour, size and model.

194 Price – competitive pricing depends on the company‘s ability to provide reliable delivery or emergency shipment of replacement parts.

Promotion – campaigns must be coordinated with distribution functions to ensure that advertised products will be available to buyers and that the salesforce can handle the extra order processing resulting from promotional activities.

Place/distribution – planners must consider order processing, warehousing, inventory planning, materials handling and transport issues in setting policies and meeting objectives.

COMMENTS ON THE WEB TASK AND CASES WEB TASK Students are asked to select a well-known retailer, such as Tesco, John Lewis, H&M or IKEA and to log-on to its website and eCommerce offering.

There are significant differences online, with deeper and broader merchandise ranges possible than instore, suggested range hook-ups, and wider selection of payment options. CRM enables these retailers to match displays and suggestions to returning visitors‘ known purchasing patterns and requirements.

Retailers are able to offer a wider selection to customers on-line without holding large inventories at numerous store locations, while collecting customer insight and data, and managing an ongoing relationship with those purchasing on-line.

APPLIED MINI-CASE The case examines Heathrow Airport‘s focus since the late 1980s on retailing, exemplified by the malllike offering in the latest terminals to open there. The captive audience provides tenant retailers – wellknown high street brands – with high and ever-changing footfall, which provides the airport‘s operator with a strong revenue stream. The retailing on offer also helps to alleviate travellers‘ boredom and provides a stimulating environment for users.

CASE STUDY: TODAY’S CASH-AND-CARRY MEGA-DEPOTS DEPEND ON EFFECTIVE STOCKHOLDING AND PHYSICAL DISTRIBUTION During the 1980s, many new players entered the UK cash-and-carry market, leading to over capacity and liquidation in the 1990s. The smaller operations have been hit particularly hard; now 70 per cent of the market is held by four dominant players. Traditionally, cash-and-carry companies competed almost entirely on the basis of price. Although price remains the key, customers are now being offered better service and marketing support, as the main players attempt to stimulate sales. This case considers how companies like Booker, Bestway and Makro are changing their approach to move away from just discounting.

Question 1 considers how the major cash-and-carry companies are responding to changing customer needs. They have done this by investing in staff training, new stores, computer systems, sales teams and own-label products as well as by offering marketing and promotional support, better stocking systems and improved physical distribution.

Question 2 focuses on the importance of state-of-the-art inventory management and physical distribution systems to companies such as Makro or Bestway. Customer service is being improved by

195 upgrading depots with new equipment, better stocking systems and improved physical distribution.

Computerization has helped lower costs and improve efficiency in a number of ways. Bestway has used its new software to give each depot a comprehensive invoicing, mailing, sales data, customer information and stock control system. This helps in monitoring stock levels and targeting customers.

For customers, the benefits of better stock availability are obvious. Some of the key players have used their systems to reduce their product lines without upsetting customers.

CHAPTER 16

An overview of marketing communications

OBJECTIVES •

To explore the scope of marketing communications.

•

To understand the role of promotion in the marketing mix.

•

To examine the process of communication.

•

To understand the product adoption process and its implications for promotional efforts.

•

To understand the aims of promotion.

•

To explore the elements of the promotional mix.

•

To appreciate the nature of integrated marketing communications (IMC).

•

To acquire an overview of the major methods of promotion.

•

To explore factors that influence the selection of promotional mix ingredients.

•

To appreciate the role of marketing communications in marketing strategy.

PURPOSE AND PERSPECTIVE This chapter is the first of three dealing with promotion decisions and activities. Its primary objective is to give students an overview of promotion (marketing communications). First, a theoretical foundation on which to build an understanding of promotion is presented. Consequently, the first part of this chapter focuses on the role of promotion in organizations, the communication process and promotion and the product adoption process. Next, the aims of promotion and concept of the promotional mix is introduced and the major elements that comprise it briefly described, including integrated marketing communications (IMC). Finally, a number of factors that affect marketers‘ decisions when selecting specific ingredients to include in a promotional mix for a product are analyzed.

196

LECTURE OUTLINE I.

II.

The role of promotion A. People tend to view promotion as inherently either positive or negative.

1. The negative view is that promotional activities paint a distorted view of reality by providing only selected information to customers. a) Proponents of this view suggest that promotional activities are unnecessary and wasteful and that promotion costs are too high, resulting in higher prices. b) They may also argue that too much promotion has caused changes in social values, such as increased materialism.

2. The positive approach believes that promotional activities can project wholesome values, or that advertising, as a powerful economic force, can free countries from poverty by communicating information. a) It has been argued that advertising of consumer products was a factor in the decline of communism and the move towards a free enterprise system in eastern Europe.

3. None of these impressions, however, is completely accurate.

B. The role of promotion in a company is to communicate with individuals, groups or organizations to directly or indirectly facilitate exchanges by informing and persuading one or more of the audiences to accept the company‘s products.

1. Marketers try to communicate with selected audiences about their company and its goods, services and ideas in order to facilitate exchanges. a) Information is targeted at potential customers, interest groups (such as environmental and consumer groups), current and potential investors and regulatory agencies. b) Cause-related marketing links the purchase of products to philanthropic efforts for a particular cause to boost sales and generate goodwill.

2. Promotion can play a comprehensive communications role. a) Some promotional activities can be directed towards helping a company justify its existence and maintain positive, healthy relationships between itself and various groups in the marketing environment. b) Although a company can direct a single type of communication, such as an advertisement, towards numerous audiences, marketers often design a communication precisely for a specific target market.

(1) A company frequently communicates several different messages concurrently, each to a different group.

C. To gain maximum benefit from promotional efforts, marketers must make every effort to properly plan, implement, coordinate and control communications.

1. The concept of integrated marketing communications helps to harmonize and coordinate an organization's promotional activities.

2. Effective promotional activities are based on information from the marketing environment, often obtained from an organization's marketing information system.

3. The degree to which marketers can effectively use promotion to maintain positive relationships depends largely on the quantity and quality of information an organization takes in.

The communication process A. Communication can be viewed as the transmission of information.

197 1.

B.

Both the sender and the receiver of the information must share an understanding of the symbols used to transmit information, usually pictures or words.

2. Communication is defined here as a sharing of meaning. a) Implicit in this definition is the notion of transmission of information, because sharing necessitates transmission.

3. Marketing communication is the transmission of persuasive information about a good, service or idea, targeted at key stakeholders and consumers within the target market segment. a) Marketing communications centre on the promotional mix, which comprises advertising, public relations, personal selling, sale promotion, direct mail, sponsorship and the internet.

The communication process 1. Communication begins with a source – a person, group or organization that has an intended meaning it attempts to share with an audience. a) Developing a strategy can enhance the effectiveness of the source‘s communication 2. A receiver is the individual, group or organization that decodes a coded message. a) A receiving audience is two or more receivers who decode a message.

3. To transmit meaning, a source must convert the meaning into a series of signs that represent ideas or concepts. a) This is called the coding process or encoding.

4. When encoding meaning into a message, a source must take into account certain characteristics of the receiver or receiving audience. a) To share meaning, the source should use signs that are familiar to the receiver or receiving audience. b) When encoding a meaning, the source should try to use signs that the receiver or receiving audience uses for referring to the concepts the source intends.

5. To share a coded meaning with the receiver or receiving audience, a source must select and use a medium of transmission. a) A medium of transmission is the tool used to carry the coded message from the source to the receiver or receiving audience. b) When a source chooses an inappropriate medium of transmission, several problems may arise.

(1) A coded message may reach some receivers, but not the right ones.

(2) A coded message may reach the intended receivers in an incomplete form because the intensity of the transmission is weak.

6. In the decoding process, signs are converted into concepts and ideas.

7. Noise exists when the decoded message is different from what was encoded; it has many sources and may affect any or all parts of the communication process. a) When a source selects a medium of transmission through which an audience does not expect to receive a message, noise is likely to occur. b) Noise sometimes arises within the medium of transmission itself: radio static, faulty printing processes and laryngitis are sources of noise. c) Noise will occur if the source uses a sign that is unfamiliar to the receiver or has a different meaning from the one the source intended. d) Noise may also originate in the receiver; they may be unaware of a coded message because his or her perceptual processes block it out or because the coded message is too obscure.

8. The receiver‘s response to a message is feedback to the source; the source usually expects and normally receives feedback, although it may not be immediate.

198 a)

9.

III.

During feedback, the receiver or receiving audience is the source of a message that is directed towards the original source, which then becomes a receiver and must decode the message.

(1) Communication can thus be viewed as a circular process. b) During face-to-face communication, such as in personal selling, both verbal and non-verbal feedback can be immediate, enabling communicators to adjust their messages quickly to improve the effectiveness of their communication.

(1) This may be why face-to-face sales presentations create higher behavioural intentions to purchase services than do telemarketing sales contracts. c) When mass communication such as advertising is used, feedback is often slow and difficult to recognize.

(1) Advertisers obtain feedback in the form of changes in sales volume or in consumers‘ attitudes and awareness levels, monitored through tracking research.

Each communication channel has a limit on the volume of information it can handle effectively. a) This limit, called channel capacity, is determined by the least efficient component of the communication process.

(1) For example, an individual source can talk only so fast, and there is a limit to how much an individual receiver can take in aurally; beyond a certain point, meaning cannot be shared.

Promotion and the product adoption process A. One long run purpose of promotion is to influence and encourage buyers to accept or adopt goods, services and ideas.

1. An advertisement may be informative or entertaining, yet it may fail to entice the audience to purchase the product.

2. But the ultimate effectiveness of promotion is determined by the degree to which it affects product adoption among potential buyers or increases the frequency of current buyers‘ purchases.

B. To establish realistic expectations about what promotion can do, product adoption should not be viewed as a one-step process.

1. Rarely can a single promotional activity cause an individual to buy a previously unfamiliar product.

C. The product adoption process, a series of stages in the acceptance of a product, is commonly divided into the following five stages (Figure 16.3): 1. Awareness stage – Individuals become aware that the product exists but have little information about it and are not concerned about obtaining more.

2. Interest stage – Customers are motivated to obtain information about the product‘s features, uses, advantages, disadvantages, price or location.

3. Evaluation stage – Individuals consider whether the product will satisfy certain criteria that are crucial for meeting their specific needs.

4. Trial stage – Individuals use or experience the product for the first time, possibly by purchasing a small quantity, taking advantage of a free sample or demonstration, or borrowing the product from someone.

5. Adoption stage – Individuals move into the final stage of product adoption when they choose the specific product, when they need a product of that general type. a) Because a person enters the adoption process, it cannot be assumed that she or he will eventually adopt the new product.

199 b) c) d)

D.

E.

F.

Rejection may occur at any stage, including adoption.

Product adoption and product rejection can be temporary or permanent.

Even if adoption occurs, there is no guarantee of brand loyalty and marketers must work hard to ensure repeat buying and an ongoing relationship.

People respond to different information sources at different stages of the adoption process.

1. Mass communication sources, such as television advertising, are often effective for moving large numbers of people into the awareness stage.

2. Mass communication sources may also be effective for people in the interest stage who want to learn more about a product.

3. During the evaluation stage, individuals often seek information, opinions and reinforcement from personal sources such as relatives, friends and associates.

4. In the trial stage, individuals depend on salespeople for information about how to use the product properly to get the most out of it. a) Friends and peers may also be important sources during the trial stage. b) Marketers must use advertising carefully when consumers are in the trial stage – if advertisements greatly exaggerate the benefits of a product, the consumer may be disappointed when the product does not meet expectations.

5. In the adoption stage, both personal communication from sales personnel and mass communication through advertisements may be required.

6. Even though the particular stage of the adoption process may influence the types of information source consumers use, marketers must remember that other factors – such as the product‘s characteristics, price and uses, as well as the characteristics of customers – also affect the types of information source that buyers desire and believe.

7. Marketers designing a promotional campaign must determine which stage of the adoption process a particular target audience is in before they can develop the message. a) Often a campaign will include several different advertisements and promotional mix tools in order to appeal simultaneously to different consumers who are at different stages in the product adoption process.

Product adopter categories 1. Depending on the length of time it takes them to adopt a new product, people can be divided into five major adopter categories: a) Innovators are the first to adopt a new product; they enjoy trying new products and tend to be venturesome. b) Early adopters choose new products carefully and are viewed as ‗the people to check with‘ by those in the remaining adopter categories. c) People in the early majority adopt just prior to the average person; they are deliberate and cautious in trying new products. d) Late majority people, who are quite skeptical about new products, eventually adopt them because of economic necessity or social pressure. e) Laggards, the last to adopt a new product, are oriented towards the past.

2. When developing promotional efforts, a marketer should bear in mind that people in different adopter categories often need different forms of communication and different types of information or message.

Aims of promotion 1. There are five basic promotion communication aims, known as the five communication effects: a) Category need – the consumer‘s perception of his or her need for a product in a certain category b) Brand awareness – the consumer‘s ability to identify a manufacturer‘s or retailer‘s brand in sufficient detail to distinguish it from other brands

200 Brand attitude – a consumer‘s particular impression of a brand, formed by emotions and logic or cognitive beliefs d) Brand purchase intention – the consumer‘s decision and efforts to purchase the particular product e) Purchase facilitation – circumstances that make it possible for the consumer to purchase the product: availability, location, price and familiarity of vendor (1) A manufacturer must ensure that other marketing mix factors – product, people, place (distribution) and price – do not hinder the purchase.

IV. The promotional mix A. Several types of promotional methods can be used to communicate with individuals, groups and organizations.

1. The specific combination of ingredients an organization uses to promote a product is the promotional mix. a) The four traditional ingredients of a promotional mix are advertising, personal selling, publicity and public relations, and sales promotion. b) Increasingly, sponsorship and direct mail are elements of the promotional mix. c) The internet, mobile marketing and direct marketing are more recent additions to the promotional mix (see Chapter 19). d) For some products, businesses use all of the ingredients; for other products, two or three will suffice.

B. Promotional mix ingredients 1. Advertising is a paid form of non-personal communication about an organization and its products that is transmitted to a target audience through a mass medium such as television, radio, newspapers, magazines, direct mail, public transport, outdoor displays, catalogues or the internet. a) Individuals and organizations use advertising to promote goods, services, ideas, issues and people. b) Because advertising is highly flexible, it offers the options of reaching a large target audience or focusing on a small, precisely defined segment of the population. c) Advertising offers several benefits.

(1) Advertising can be an extremely cost-efficient promotional method because it reaches a vast number of people at a low cost per person.

(2) Advertising lets the user repeat the message a number of times. (a) Advertising repetition has been found to be especially effective for brand name extensions beyond the original product category.

(3) Advertising a product in a certain way can add to its value.

(4) The visibility an organization gains from advertising enhances the company‘s public image. d) Advertising also has several disadvantages.

(1) Although its cost per person reached may be low, its absolute monetary outlay can be extremely high, limiting and sometimes preventing the use of advertising in a promotional mix.

(2) Advertising rarely provides rapid feedback.

(3) It is difficult to measure the effects of advertising on sales.

(4) It ordinarily has a less persuasive impact on customers than, for example, personal selling.

(5) The choice of media for advertisers is also growing increasingly complex (more satellite channels, role of the internet, interactive television etc.) and prone to error unless handled by specialist media buyers. c)

201 2.

3.

4.

5.

Personal selling involves informing customers and persuading them to purchase products through personal communication in an exchange situation.

Telemarketing, direct selling over the telephone, relies heavily on personal selling. a) Like advertising, personal selling has both advantages and limitations.

(1) The cost of reaching one person through personal selling is considerably more than through advertising, but personal selling efforts often have a greater impact on customers.

(2) Personal selling provides immediate feedback, which allows marketers to adjust their message to improve communication and to determine and respond to customers‘ needs for information. b) When a salesperson and a customer communicate face-to-face, they use several types of interpersonal communication.

(1) The predominant communication form is language, which includes both speech and writing.

(2) Kinesic communication, or body language, includes movement of the head, eyes, arms, hands, legs or torso.

(3) Proxemic communication occurs in face-to-face interactions when either party varies the physical distance that separates the two people.

(4) Tactile communication is interpersonal communication through touching, including shaking hands. c) Management of salespeople is very important in making this component of promotion effective – salespeople who are directly involved in planning sales activities develop greater trust in their company and have increased sales performance.

Publicity and PR a) Publicity is non-personal communication in news story form about an organization and/or its products that is transmitted through a mass medium at no charge. b) Although both advertising and publicity are transmitted through mass communication, the sponsor does not pay the media costs for publicity and is not identified. c) Nevertheless, publicity should never be viewed as free communication.

(1) There are clear costs associated with preparing news releases and encouraging media personnel to broadcast or print them.

(2) A business that uses publicity regularly must have employees to perform these activities or obtain the services of a public relations consultancy or an advertising agency. d) Publicity must be planned and implemented so that it is compatible with, and supportive of, other elements in the promotional mix.

(1) However publicity cannot always be controlled to the extent that other elements of the promotional mix can be. e) The public relations mechanism manages and controls the process of effectively using publicity. It is the planned and sustained effort to establish and maintain goodwill and understanding between an organization and its target publics.

(1) Public relations is a powerful ingredient of the promotional mix.

Sales promotion is an activity or material that acts as a direct inducement by offering added value to or incentive for the product to resellers, salespeople or consumers – coupons, on-pack deals, bonuses etc.

202 a)

6.

7.

8.

Currently, marketers spend about half as much on sales promotion as they do on advertising but sales promotion appears to be growing in use more than advertising. b) Marketers frequently rely on sales promotion to improve the effectiveness of other promotional mix ingredients, especially advertising and personal selling.

(1) For many business-to-business marketers, sales promotions (such as trade shows) are very important. c) Marketers design sales promotion to produce immediate, short run sales increases. d) A marketer‘s use of sales promotion tends to be irregular – infrequent, ad hoc campaigns unlike the generally continuous or cyclical use of advertising or personal selling.

Sponsorship is the financial or material support of an event, activity, person, organization or product by an unrelated organization or donor. a) Funds are made available to the recipient of the sponsorship in return for prominent public recognition of the benefactor‘s generosity and display of the sponsor‘s name, products and brands. b) Sponsorship is no longer confined to the arts or the sporting world.

(1) Research and development, buildings, degree courses, charitable events – all often benefit from sponsorship. c) The donor or sponsor gains the benefits of enhanced company, brand or individual reputation and awareness, as well as, possibly, improved morale and employee relations.

Direct mail is a method of communication used to entice prospective customers or charitable donors to invest directly in products, services or worthy causes. a) The direct mail industry takes a significant slice of the promotional budgets for many companies and organizations. a) It can be used as a pre-sell technique prior to a sales call, to generate orders, qualify prospects for a sales call, follow up a sale, announce special or localized sales and raise funds for charities and not-for-profit organizations. b) Good database management is essential, and the material must be carefully targeted to overcome the growing public aversion to ‗junk mail‘.

The internet – a network of computer networks stretching across the world, linking computers of different types and firmly established in many office workers‘ daily routines and accessed in millions of households – has been identified by marketers as an opportunity for providing existing and potential customers with company, product and brand information. a) Web-based marketing is particularly important in many business-to-business markets. b) Scrambling of confidential information such as credit card and bank account details has enabled the recent explosion in the number of purchases made online. c) As a promotional mix ingredient, the internet provides a tool that can be quickly updated or modified and that can produce material aimed at very tightly defined target groups or even individual consumers.

(1) The internet is increasingly part of the promotional mix and, for direct marketers, the actual point of the sales transaction.

(2) Many television and press advertisements for services or consumer goods now direct their target audience to associated websites for additional information – consumers can then interact with these hosts via email etc.

203 d)

Websites, which must be tailored to match the target customer buying behaviour, require expert design and updating. e) Intranets – internal in-company internet networks – have improved communications within many organizations, becoming an important facet of internal marketing (discussed in Chapter 23). f) The web enables interactive and frequently updated communication tailored to individual customers. On the move, too, thanks to smartphones and tablets. Hence the massive uptake of digital marketing, as explored in Chapter 19.

9.

Currently experiencing a surge in popularity, direct marketing now encompasses all the communications tools that enable a marketer to deal directly with targeted customers: direct mail, telemarketing, direct response television advertising, door-todoor/personal selling and the internet, including mobile marketing. a) Direct marketing is a decision by a company‘s marketers to select a marketing channel that avoids dependence on marketing channel intermediaries and to focus marketing communications activity on promotional mix ingredients that deal directly with targeted customers. b) Now adopted by a host of businesses, of all elements of the promotional mix, it is reported to be the fastest growing, but this is partly a reflection of the large number of promotional mix ingredients that it includes. c) The development of any direct marketing campaign must strive to reflect targeted customer behaviour, needs and perceptions; provide a plausible proposition that is clearly differentiated from competitors‘ propositions; and match an organization's corporate goals and trading philosophy. d) Direct marketing is not a substitute for the traditional promotional mix.

10. Integrated marketing communications (IMC) is the coordination and integration of all marketing communication tools, avenues and sources within a company into a seamless programme that maximizes the impact on consumers and other end users, at minimal cost. a) This is currently popular, with the intention being to maximize the impact on consumers and other target audiences, at minimal cost. b) IMC avoids the waste and duplication inherent in some organizations in which each element of the promotional mix is controlled by separate managers and may even be executed through different external agencies. c) There is nothing worse than advertising, public relations, sponsorship, packaging and sales promotion being implemented by different agencies in a poorly coordinated fashion. d) IMC is the integration of the whole promotional mix, but also all business-tobusiness, marketing channel, customer-focused and internally direct communications.

(1) Rather than treating all aspects of the promotional mix and internal marketing separately, often utilizing many different departments and external agencies in an uncoordinated manner, the company instead opts to fully harmonize these activities.

(2) This does not have to result in only one supplying agency being commissioned: coordination ensures shared goals and common approaches to execution in a carefully scheduled manner. e) The benefits of IMC include greater clarity to customers, marketing channel members, employees and suppliers, as well as reduced costs, stronger impact in the marketplace and more effective branding.

204 C.

Selecting promotional mix ingredients 1. Marketers vary the compositions of promotional mixes for many reasons. a) An organization's promotional mix (or mixes) is not an unchanging part of the marketing mix. b) The specific promotional mix ingredients used and the intensity with which they are used depend on a variety of factors.

2. Promotional resources, objectives and policies a) The quality of an organization's promotional resources affects the number and relative intensity of promotional methods that can be included in the promotional mix.

(1) If a company‘s promotional budget is extremely limited, the company is likely to rely on personal selling because it is easier to measure a salesperson‘s contribution to sales than to measure the effect of advertising.

(2) A business must have a sizeable promotional budget if it is to use regional or national advertising and sales promotion activities. (a) A large promotional budget, however, does not necessarily imply that the company will use a greater number of promotional methods b) An organization's promotional objectives and policies also influence the types of promotion used.

(1) If a company‘s objective is to create mass awareness of a new convenience good, its promotional mix is likely to lean heavily towards advertising, sales promotion and possibly publicity.

(2) If a company hopes to educate consumers about the features of durable goods, its promotional mix may combine a moderate amount of advertising, possibly some sales promotion efforts to attract customers to retail stores and a great deal of in-store personal selling, this being an excellent way to inform customers about these types of products.

3. Characteristics of the target market a) The size, geographic distribution and socio-economic characteristics of an organization's target market also help dictate the ingredients to be included in a product‘s promotional mix. b) If the size of the market is limited, personal selling probably will be emphasized, because it can be effective for reaching small numbers of people.

(1) When markets for a product consist of millions of customers, organizations use advertising and sales promotion because these methods can reach masses of people at a low cost per person. c) The geographic distribution of a company‘s customers can affect the combination of promotional methods used.

(1) Personal selling is more feasible if a company‘s customers are concentrated in a small area than if they are dispersed across a vast area.

(2) Advertising may be more practical when the company‘s customers are numerous and dispersed. d) Socio-economic characteristics such as age, income or education level may dictate the types of promotional techniques that a marketer selects.

4. Characteristics of the product a) Generally, promotional mixes for industrial products concentrate on personal selling, whereas advertising plays a major role in promoting consumer goods.

(1) This generalization should be treated cautiously since industrial goods producers do use some advertising to promote their goods, particularly in the trade press.

205 (2)

5.

Personal selling is used extensively for services and consumer durables, such as insurance, cars and houses, and consumer convenience items are promoted mainly through advertising and sales promotion.

(3) Publicity appears in promotional mixes for industrial goods, consumer goods and services.

(4) Many organizations use direct mail, and more are now examining the growing use of corporate sponsorship.

(5) Most organizations are also developing websites. b) Marketers of seasonal products may have to emphasize advertising, and possibly sales promotion, because off-season sales will not support an extensive yearround salesforce. c) The price of a product also influences the composition of the promotional mix.

(1) High priced products call for more personal selling because consumers associate greater risk with the purchase of such products and usually want the advice of a salesperson.

(2) For low priced convenience items, retailers use advertising rather than personal selling since the profit margins on many of these items are too low to justify the use of salespeople and most customers do not need advice. d) The stage of the product life cycle affects marketers‘ decisions regarding the promotional mix.

(1) During the introduction stage, a good deal of advertising may be necessary for both industrial, business-to-business and consumer products to make potential users aware of a new product.

(2) The growth and maturity stages call for a heavy emphasis on advertising for consumer non-durables, whereas industrial and business-to-business products often require a concentration of personal selling and some sales promotion efforts during these stages.

(3) In the decline stage, marketers usually decrease advertising and use personal selling and sales promotion more frequently. e) The intensity of market coverage is another factor affecting the composition of the promotional mix.

(1) When a product is marketed through intensive distribution, the business depends heavily on advertising and sales promotion.

(2) Where marketers have opted for selective distribution, marketing mixes vary considerably as to type and number of promotional methods.

(3) Items handled through exclusive distribution frequently demand more personal selling and less advertising. f) A product‘s use also affects the combination of promotional methods employed.

Cost and availability of promotional methods a) The cost and availability of promotional methods are major factors to analyze when developing a promotional mix.

(1) National advertising and sales promotion efforts require large expenditures; however, if they reach extremely large numbers of people, the cost per individual may be quite small. (a) Not all forms of advertising are expensive (local newspapers, radio stations etc.).

(2) Although there are numerous media vehicles, a company may find that no available advertising medium effectively reaches a certain market.

206 (3)

D.

The problem of media availability becomes even more pronounced when marketers try to advertise in other countries – some media, such as television, simply may not be available to advertisers. (a) In Scandinavia, television advertising is minimal.

Push policy versus pull policy 1. One element that marketers should consider when they plan a promotional mix is whether to use a push policy or a pull policy. a) With a push policy, a producer promotes the product only to the next institution down the marketing channel.

(1) Each channel member in turn promotes to the next channel member.

(2) A push policy normally stresses personal selling.

(3) Sometimes sales promotion, direct mail and advertising are used in conjunction with personal selling to push the products down through the channel. b) With a pull policy, a business promotes directly to consumers in order to develop a strong consumer demand for its products.

(1) It does so through advertising, sales promotion, direct mail, sponsorship and packaging that helps manufacturers build and maintain market share.

(2) The policy is intended to ‗pull‘ the goods down through the channel by creating demand at the consumer level.

2. A push policy can be combined with a pull policy.

ANSWERS TO DISCUSSION AND REVIEW QUESTIONS 1.

What is the major task of promotion/marketing communications?

Promotion‘s major task is to communicate with individuals, groups or organizations directly or indirectly to facilitate exchanges by influencing one or more of them to accept the organization's products.

2.

What significant developments have impacted most on marketers‟ use of marketing communications?

Big data and better customer insights, supported by smarter CRM systems enable much more focused targeting than before. The rapid take-off of digital marketing, including mobile marketing, has provided marketers with an immediacy and customization of messaging as never before, 24/7 and anywhere. However, with the digital era has come social media, which provides further opportunities for facilitating communication, but also removes so much control of messaging from the brand itself, as explored in Chapter 19.

3.

What is communication? Describe the communication process. Is it possible to communicate without using all of the elements in the communication process? If so, which ones can be omitted?

Communication is a sharing of meaning. The communication process involves several steps. First, the source places the meaning into a code, a process sometimes called encoding. The source must use signs that are familiar to the receiver or receiving audience and refer to the same concepts or ideas. The coded message is sent through a medium of transmission to the receiver or receiving audience. After the receiver or receiving audience receives the message, the message is decoded and the receiver usually supplies feedback to the source. When the decoded message differs from what was encoded, a condition called noise exists.

Communication is not possible without using all of the elements in the communication process.

207 4.

Identify several causes of „noise‟. How can a source reduce noise?

Noise may arise from faulty printing processes, interference or static in television or radio transmissions, or laryngitis. Signs with multiple meanings are also detrimental to the communication process because they result in noise. A source can reduce noise by employing familiar signs that the receiver or receiving audience uses to refer to concepts or ideas. The choice of the proper medium of transmission is important to avoid noise that arises from reaching the wrong audience or from weak transmissions.

5.

Describe the product adoption process. In certain circumstances, is it possible for a person to omit one or more of the stages in adopting a new product? Explain your answer.

The product adoption process consists of five stages. In the awareness stage, an individual becomes aware of the product. A person then moves into the interest stage and seeks more information about the product. In the evaluation stage, the individual decides whether the product will meet certain criteria for satisfying personal needs. During the trial stage, the individual actually tries the product. In the adoption stage, the individual decides to use the product regularly. Rejection of the product may occur in any stage.

All stages are present in the adoption process. They may occur so rapidly that the individual is not aware when one begins and the other ends. However, awareness, interest, evaluation, trial and adoption are all essential for product adoption.

6.

Describe a product that many people are in the process of adopting. Have you begun the adoption process for this product? If so, what stage have you reached?

This question is intended to make students think about the adoption process. Possible product examples include unleaded petrol, video discs, cellular phones or a new pop star.

7.

What is category need? Illustrate your answer with examples.

Category need occurs when consumers realize that they want a certain product. If a consumer is to be motivated to consider a product, he or she must first perceive category need. Examples of category need include interest in buying a CD player or a video cassette recorder.

8.

9.

Identify and briefly describe the major promotional methods that can be included in an organization's promotional mix.

The four traditional ingredients of a promotional mix are advertising, personal selling, publicity and public relations, and sales promotion. Sponsorship and direct mail are now elements of the promotional mix. The Internet, mobile marketing and direct marketing are more recent additions to the promotional mix (see Chapter 19). For some products, businesses use all of the ingredients; for other products, two or three will suffice.

How does publicity differ from advertising?

Advertising is a paid form of non-personal communication about an organization and/or its products that is transmitted to a target audience through a mass medium. Personal selling is informing customers and persuading them to purchase products through personal communication in an exchange situation. Publicity is non-personal communication in news story form about an organization and/or its products that is transmitted through a mass medium at no charge. Sales promotion is an activity and/or material that acts as a direct inducement, offering resellers, salespeople or consumers added value or incentive for the product.

Publicity differs from advertising in that the sponsor does not pay the media costs for publicity and is not identified. In addition, the format of communication for publicity is a news story, as opposed to the print ads, television or radio commercials, or billboards used in advertising.

208 10. What forms of interpersonal communication in addition to language can be used in personal selling?

Communication may be accomplished through the use of kinesic, proxemic or tactile communication. Kinesic communication is body language. Proxemic communication concerns varying the physical space between the parties involved in communication. Tactile communication involves touching, such as shaking hands.

11. List the communications tools that direct marketing encompasses and explain the recent surge in popularity of this promotional tool.

New media opportunities provided by changing technologies and social behaviour – take-up of the internet and interactive television, for example – have provided the principal growth. Direct marketing involves any means by which a marketer contacts the targeted customer directly, including notably the internet, direct mail and telemarketing, but also the use of door-to-door selling and leaflet drops.

12. What is digital marketing and how does it impact on promotional strategy?

Using online platforms and digital channels of communication has revolutionized marketing and marketing communications, as described in Chapter 19. Enabling 1-2-1 interaction, tailored messaging and customization, 24/7 access to brands and the building of ongoing relationships in ways not previously possible.

13. How do target market characteristics determine which promotional methods to include in a promotional mix?

Market characteristics that influence the composition of the promotional mix include the size, geographic distribution and socio-economic characteristics of the target market, along with the behaviours and expectations of those within the market.

14. Assume that a company is planning to promote a cereal to both adults and children. Along what major dimensions would these two promotional efforts have to be different?

If a company were to promote a cereal to both adults and children, it would use different advertising and sales promotion efforts for each market. Advertising that appeals to children might include cartoon characterizations of the cereal, and the sales promotion might include a small toy or access to an online app. In the adult market, such methods would not be suitable; nutritional information, recipes or a contest might be appropriate.

15. How can a product‟s characteristics affect the composition of its promotional mix?

Both the type of product being promoted and the characteristics of that product affect the composition of the promotional mix. Whether the product is an industrial or a consumer good will affect the composition of the promotional mix. Whether a consumer good is a durable or nondurable good is another factor. Product characteristics, such as seasonality, price, stage of the product‘s life cycle, intensity of product distribution and uses of the product, are also determinants of the promotional mix.

16. Explain the difference between a pull policy and a push policy. Under what conditions should each be used?

A pull policy aims promotional efforts directly at consumers with the intention of developing a strong demand for the product. A push policy aims promotional efforts only at the next institution down the marketing channel. A pull policy is sometimes used to introduce convenience goods. A push policy is often used to promote items such as industrial goods and consumer durables.

209 17. What is integrated marketing communications (IMC) and what are the benefits of this approach?

Integrated marketing communications (IMC) is the coordination and integration of all marketing communication tools, avenues and sources within a company into a seamless programme that maximizes the impact on consumers and other end users, at minimal cost. IMC avoids waste and ensures harmonization to maximize branding and messaging impact.

COMMENTS ON THE WEB TASK AND CASES WEB TASK EE‘s award-winning website is an important part of the company‘s promotional activity, integrating advertising, sales promotions activity and publicity releases with customer involvement. The EE website is simply an extension of this brand building, harnessing the media behaviour of today‘s websavvy consumers.

Somewhere on community.ee.co.uk there is corporate and brand information, but fundamentally this is an entertainment and information site focusing on the interests of EE users. Social media are harnessed to create online communities and build relationships with consumers.

APPLIED MINI-CASE Nintendo, Sony, Atari, Microsoft and other gaming brands use traditional broadcast adverts when launching new models and software, but also harness celebrity and consumer blogs, stunts and competitions, in-store displays and sales, PR and social media networking. Not only to support new launches, but to build relationships and maintain communication with key target market segments. It is a cluttered and highly competitive market, with brands vying for attention and to maintain the interest of those targeted. Consumer-to-consumer communication in facilitated discussions and on social media between consumers directly is particularly important in this market. Just as with any product, marketers must understand the motivations and purchasing behaviour of these consumers, to be able to provide excitement and to compete effectively.

CASE STUDY: HÄAGEN-DAZS: EVERYDAY MADE EXTRAORDINARY Launched into a highly competitive marketplace, super-premium US-originated Häagen-Dazs ice cream has been incredibly successful in terms of brand awareness, sales and market share, and in gaining instore distribution. The innovative promotion behind the brand certainly has contributed to this success story. Ben & Jerry‘s premium ice cream (recently acquired by Wall‘s/Ola owner Unilever) is an arch rival, but is not so focused on the adult market.

Question 1 asks why the London launch of Häagen-Dazs utilized so many stunts and such a mix of promotional activity. The high cost of advertising promotion forced owner Grand Metropolitan (now Diageo) to support press advertising with sales promotion stunts. There is no doubt that the giveaways in London led to high launch awareness and supported the provocative, sexually explicit ‗adult‘ advertising for this ‗adult ice cream‘!

Question 2 asks why Häagen-Dazs targeted the adult market rather than families or children. In a crowded marketplace, Häagen-Dazs recognized the dominant market positions held by major brands and the freezer space already allocated to these brands by supermarkets, newsagents and corner shops.

To create an impression, the product had to be superior, with exciting, novel formulations and flavours and top notch ingredients, but also the target consumer had to be shrewdly selected. The ‗adult‘

210 premium positioning created significant consumer interest, encouraging stockists to find room for the special, branded freezer cabinets provided by Häagen-Dazs. The company had identified an underperforming marketing segment largely ignored by its rivals. A good product, smart imagery and brand positioning, and effective distribution have made Häagen-Dazs a force to be reckoned with.

Question 3 asks whether the ‗adult‘ positioning and promotional execution was risky, and why Häagen-Dazs deployed this positioning strategy. The risk was that the adult oriented ice cream could have been deemed juvenile and tacky by the targeted consumers, while retailers might have seen no reason to stock yet more freezers of ice cream. In addition, the highly innovative promotion may have been seen to be insensitive, rude and unrelated to ice cream. There was a risk, but marketing is about effective differentiation – and this is one story of being different that has worked!

CHAPTER 17

Advertising, public relations and sponsorship

OBJECTIVES •

To explore the nature and uses of advertising.

•

To become aware of the major steps involved in developing an advertising campaign.

•

To find out who is responsible for developing advertising campaigns.

•

To gain an understanding of publicity and public relations.

•

To examine the nature and uses of sponsorship.

•

To develop a sound understanding of these ingredients of the promotional mix and of marketing communications.

PURPOSE AND PERSPECTIVE This chapter builds a foundation for understanding promotion and overviews the promotional mix elements discussed in Chapter 15. It presents a more detailed discussion of three promotional mix ingredients – advertising, publicity and public relations, and sponsorship. First, the ways in which organizations use advertising are explored, and the major steps involved in developing an advertising campaign are analyzed. Possible alternatives regarding who is responsible for developing advertising campaigns are then discussed. Next, publicity and public relations are examined, along with methods for using publicity effectively and for dealing with unfavourable publicity. Current trends impacting on advertising and public relations are explored, and the chapter concludes with a discussion on the nature of corporate sponsorship, a fast-emerging element of the promotional mix. The chapter includes the latest industry statistics for the EU and the UK.

211

LECTURE OUTLINE I.

II.

The nature of advertising A. Advertising is a paid form of non-personal communication that is transmitted through mass media such as television, radio, newspapers, magazines, direct mail, public transport vehicles, outdoor displays and the internet.

1. Through advertising an organization can reach a variety of audiences, ranging from small, precise groups to extremely large audiences.

2. Although business organizations are thought to be the major users of advertising, many types of organizations take advantage of it, including governments, churches, universities, civic groups and charitable organizations.

3. Marketers sometimes give advertising more credit than it deserves and sometimes it is used where it should not be (for trying to differentiate basic products, such as flour and salt, for example).

4. Some of the general issues a marketer should consider when trying to decide whether advertising could be an effective ingredient in a product‘s promotional mix include the following: a) Does the product possess unique, important features? b) Are ‗hidden qualities‘ important to buyers? c) Is the general demand trend for the product favourable? d) Is the market potential for the product adequate? e) Is the competitive environment favourable? f) Are general economic conditions favourable for marketing the product? g) Is the organization able and willing to spend the money required to launch an advertising campaign? h) Does the company possess sufficient marketing expertise to market the product?

The uses of advertising A. Promoting products and organizations 1. Advertising can be classified as institutional or product advertising. a) Institutional advertising promotes organizational images, ideas or political issues.

(1) They may deal with broad image issues or aim to create a more favourable view of the organization.

(2) When a company promotes its position on a public issue – for instance, a tax increase or abortion – institutional advertising is referred to as advocacy advertising.

(3) Institutional advertising may be used to promote socially approved behavior like recycling and moderation in consuming alcohol. b) Product advertising promotes the uses, features, images and benefits of their goods and services.

B. Stimulating primary and selective demand 1. When a specific company is the first to introduce an innovation, it tries to stimulate primary demand – demand for a product category rather than for a specific brand of the product – through pioneer advertising. a) Pioneer advertising informs people about what a product is, what it does, how it can be used and where it can be purchased.

212 b)

C.

D.

E.

F.

G.

Because pioneering advertising is used in the introductory stage of the product life cycle when there are no competitive brands, it neither emphasizes the brand name nor compares brands. c) Product advertising is also used sometimes to stimulate primary demand for an established product (e.g. milk).

2. An advertiser uses competitive advertising to build selective demand – demand for a specific brand. a) Competitive advertising points out a brand‘s uses, features and advantages that benefit consumers but that may not be available in competing brands. b) An increasingly popular form of competitive advertising is comparative advertising, in which two or more specific brands are compared on the basis of one or more product attributes. c) Companies must not, however, misrepresent the qualities or characteristics of the comparison product, and, in certain countries, overt comparison of rival products or brands is prohibited.

Off-setting competitors‘ advertising 1. When marketers advertise to off-set or lessen the effects of a competitor‘s promotional programme, they are using defensive advertising. a) Although defensive advertising does not necessarily increase a company‘s sales or market share, it may prevent a loss in these areas.

2. Defensive advertising is used most often by companies in extremely competitive consumer product markets, such as the fast-food industry.

Making sales personnel more effective 1. Business organizations that stress personal selling often use advertising to improve the effectiveness of sales personnel.

2. Advertising created specifically to support personal selling activities tries to pre-sell a product to buyers by informing them about its uses, features and benefits and encouraging them to contact local dealers or sales representatives.

3. Advertising is often designed to support personal selling efforts for industrial products, insurance and consumer durables, such as cars and major household appliances.

Educating the market 1. A change to a business‘s strategy, such as entering new markets or introducing innovative products, requires an orientation programme for targeted customers and required channel member intermediaries, including possibly advertising.

2. A company may need to educate the market – customers and dealers – about changes in its marketing mix in existing markets, such as new product specifications, after sales policies or pricing.

Increasing the uses of a product 1. The absolute demand for any product is limited because people in a market will consume only so much of it. a) Given both this limit on demand and competitive conditions, marketers can increase sales of a specific product in a defined geographic market only to a certain point.

2. To improve sales beyond this point, marketers must either enlarge the geographic market and sell to more people or develop and promote a larger number of uses for the product. a) When promoting new uses, an advertiser attempts to increase the demand for its own brand without driving up the demand for competing brands.

Reminding and reinforcing customers

213 1.

III.

Reminder advertising lets consumers know that an established brand is still around and that it has certain uses, characteristics and benefits.

2. Reinforcement advertising tries to assure current users that they have made the right choice and tells them how to get the most satisfaction from the product. a) Both reminder and reinforcement advertising aim to prevent a loss in sales or market share.

H. Reducing sales fluctuations 1. The demand for many products varies from month to month because of such factors as climate, holidays, seasons and customs. a) A business cannot operate at peak efficiency when sales fluctuate significantly, because changes in sales volume necessitate changes in the production, inventory, personnel and financial resources required.

2. Advertising can be used to stimulate business during sales slumps. a) During peak sales periods, a marketer may refrain from advertising to prevent over-stimulation of sales to the point where the company cannot handle all the demand.

Developing an advertising campaign A. An advertising campaign is an attempt to reach a particular target market by designing a series of advertisements and placing them in various advertising media.

1. The number of steps and the order in which they are carried out may vary according to an organization's resources, the nature of its products, the types of target markets or audiences to be reached and the advertising agency selected.

2. The agreed overall objectives and strategy for the marketing communications will also steer the development of the campaign.

B. Identifying and analyzing the advertising target 1. The advertising target is the group of people at which advertisements are aimed. a) The advertising target often includes everyone in the company‘s target market. b) At times, however, marketers may wish to aim a campaign at only a portion of the target market.

2. Advertisers analyze advertising targets to establish an information base for a campaign. a) Information commonly needed includes the location and geographic distribution of the target group; the distribution of age, income, ethnic origin, sex and educational level; and consumer attitudes regarding the purchase and use of both the advertiser‘s products and competing products. b) It is crucial to know how consumers perceive the standing and brand positioning of the product vis-à-vis competitors‘ propositions – qualitative market research is very important in this process, especially the use of focus group discussions. c) The exact kinds of information that an organization will find useful depend on the type of product being advertised, levels of brand awareness of the characteristics of the advertising target, and the type and amount of competition.

3. Generally, the more advertisers know about the advertising target, the better able they are to develop an effective advertising campaign.

C. Defining the advertising objectives 1. Because advertising objectives guide campaign development, advertisers should define their objectives carefully to ensure that the campaign will accomplish what they want.

2. Advertising objectives should be stated clearly, precisely and in measurable terms. a) Precision and measurability allow advertisers to evaluate advertising success: to judge, at the campaign‘s end, whether the objectives have been met and, if so, how well.

214 (1)

D.

E.

A benchmark that states the current condition or position of the company should be included in the statement of advertising objectives.

(2) The statement should also indicate how far and in what direction an advertiser wishes to move from the benchmark.

(3) An advertising objective should specify a timeframe so that advertisers know exactly how long they have to accomplish the objective.

(4) Marketers must increasingly be able to assess the performance of their marketing programmes. b) Advertising objectives are usually stated in terms of either sales or communication.

(1) When an advertiser defines objectives in terms of sales, the objectives focus on raising absolute monetary sales, increasing sales by a certain percentage or increasing the company‘s market share.

(2) When objectives are stated in terms of communication, they are designed to increase brand or product awareness, make consumers‘ attitudes more favourable or increase consumers‘ knowledge of a product‘s features. c) Advertising objectives must be realistic.

(1) Advertising is merely a communications tool; it cannot overcome product deficiencies or a poorly developed marketing strategy.

Creating the advertising platform 1. An advertising platform consists of the basic issues or selling points that an advertiser wishes to include in the advertising campaign. a) Although the platform sets forth the basic issues, it does not indicate how they should be presented.

2. A marketer‘s advertising platform should consist of issues that are important to consumers. a) One of the best ways to determine what those issues are is to survey consumers about what they consider most important in the selection and use of the product involved. b) The selling features of a product must not only be important to consumers; if possible, they should also be features that competitive products do not have. c) Research is the most effective method for determining the issues of an advertising platform, but it is expensive.

(1) As a result, the most common way to develop a platform is to base it on the opinions of personnel within the company and individuals in the advertising agency, if an agency is used.

(2) Qualitative research, typically involving focus groups, is often used to test the validity of these insiders‘ views before the campaign is produced.

(3) This trial-and-error approach generally leads to some successes and some failures.

3. Because the advertising platform is a base on which to build the message, marketers should analyze this step carefully. a) If the advertisements communicate information that consumers do not consider important when they select and use the product, the campaign will fail.

Determining the advertising budget 1. The advertising budget is the total amount of money that a marketer allocates for advertising over a period of time.

2. It is difficult to determine this amount because there is currently no way to measure the precise effects of spending a certain amount of money on advertising.

215 Many factors affect a business‘s decision about how much to spend for advertising, including geographic size of the market, distribution of buyers within the market, type of product being advertised and the company‘s sales volume relative to that of competitors. a) Advertising budgets for industrial products are usually quite small relative to the sales of the products, whereas consumer convenience items generally have large budgets.

4. Various techniques are used to determine the advertising budget. a) In the objective and task approach, marketers initially determine campaign objectives and then attempt to list the tasks required to accomplish them.

(1) The costs of the tasks are then calculated and added to arrive at the amount of the total budget.

(2) Marketers usually find it hard, however, to estimate the level of effort needed to achieve certain objectives – as a result of this problem, advertisers do not often use the objective and task approach. b) In the percentage of sales approach, marketers multiply a company‘s past sales, plus a factor for planned sales growth or decline, by a standard percentage based on both what the company traditionally spends on advertising and what the industry averages.

(1) The major flaw in this approach is that it assumes that sales create advertising, rather than the reverse – in times of declining sales the amount spent on advertising will also decline.

(2) Though illogical, this technique has gained wide acceptance because it is easy to use and less disruptive competitively – in times of declining sales, however, many businesses do increase their contribution to advertising in the hope of reversing the decline. c) In the competition matching approach, marketers either match their major competitors‘ budgets or allocate the same percentage of sales for advertising as their competitors do.

(1) Remember that a company‘s competitors probably have different advertising objectives and different resources available for advertising. d) In the arbitrary approach, a high-level executive in the company states how much can be spent on advertising for a certain time period.

(1) This often leads to under-spending or over-spending.

(2) Although hardly a scientific budgeting technique, it is expedient. e) Establishing the advertising budget is critically important – if set too low, the campaign cannot achieve its full potential for stimulating demand, if too high, the over-spending that results wastes financial resources.

Developing the media plan 1. To derive the maximum results from media expenditures, a marketer must develop an effective media plan. a) A media plan sets forth the exact media vehicles to be used for advertising and the dates and times when the advertisements will appear. b) The effectiveness of the plan determines how many people in the advertising target will be exposed to the message and, to some degree, the effects of the message on those individuals.

2. To formulate a media plan, the planner selects the media for a campaign and draws up a time schedule for each medium. a) The media planner‘s primary goal is to reach the largest number of people in the advertising target for the amount of money spent on media.

3.

F.

216 b)

G.

A secondary goal is to achieve the appropriate message reach and frequency for the target audience while staying within the budget.

(1) Reach refers to the percentage of consumers in the advertising target actually exposed to a particular advertisement in a stated time period.

(2) Frequency is the number of times these targeted consumers are exposed to the advertisement. c) Most consumers, unless highly stimulated by the advertising, are not prepared to read, watch or hear an advertisement that many times – the platform, creativity and media choices must be smart enough to overcome this lack of interest.

3. When selecting media, the planner must first decide which kinds of media to use. a) The major types of media are radio, television, newspapers, magazines, direct mail, outdoor displays, public transport, the internet or a combination of two or more of these. b) After making the general media decision, the planner selects specific sub-classes within each medium.

4. Media planners take many factors into account when devising a media plan. a) They analyze the location and demographic characteristics of people in the advertising target because the various media appeal to particular demographic groups in particular locations. b) They consider the size and type of audiences that specific media reach.

5. The cost of media is an important but troublesome consideration. a) Planners try to obtain the best coverage possible for the money spent.

6. The content of the message sometimes affects the choice of media. a) Print media can be used more effectively than broadcast media to present many issues or numerous details. b) When colours, patterns and textures are important, media that offer high quality reproduction, such as magazines or television, should be used.

7. Data on the amounts of advertising expenditure in Europe by media indicate that different countries give greater priority to certain types of advertising media (Table 17.1).

8. The variety of vehicles within each medium presents planners with a vast number of choices. a) The multitude of factors that affect media rates obviously add to the complexity of media planning. b) A cost comparison indicator lets an advertiser compare the costs of several vehicles within a specific medium in relation to the number of people reached by each vehicle.

Creating the advertising message 1. The basic content and form of an advertising message are a function of several factors. a) The product‘s features, uses and benefits affect the content of the message. b) Characteristics of people in the advertising target, including sex, age, education, ethnic origin, income, occupation and other attributes, influence both the content and the form. c) To communicate effectively, an advertiser must use words, symbols and illustrations that are meaningful, familiar and attractive to the people who constitute the advertising target: the target audience. d) The objectives and platform of an advertising campaign also affect the content and form of its messages.

(1) If a company‘s advertising objectives involve large sales increases, the message demands hard hitting, high impact language and symbols.

217 (2)

2.

When campaign objectives aim at increasing brand awareness, the message may use repetition of the brand name and words and illustrations associated with it.

(3) The advertising platform is the foundation on which campaign messages are built. e) The choice of media also influences the content and form of the message.

(1) Effective outdoor displays and short broadcast spot announcements require concise, simple messages.

(2) Magazine, newspaper and internet advertisements can include more detail and long explanations.

(3) Since some publishers produce regional issues of magazines and newspapers, advertisements and editorial content can be tailored to a particular geographic area of the advertising target.

The basic components of a print advertising message are copy and artwork. a) Copy is the verbal portion of advertisements and includes headlines, subheadlines, body copy and the signature.

(1) When preparing advertising copy, marketers attempt to move the target audience through a persuasive sequence called AIDA: attention, interest, desire and action.

(2) The headline is critical because it is often the only part of the copy that people read.

(3) The sub-headline links the headline to the body copy and sometimes helps explain the headline.

(4) Body copy consists of an introductory statement or paragraph, several explanatory paragraphs and a closing paragraph. (a) Some copy writers have adopted a pattern or set of guidelines to develop body copy systematically: (b) identify a specific desire or problem for consumers (c) suggest the good or service as the best way to satisfy that desire or solve that problem (d) state the advantages and benefits of the product (e) indicate why the advertised product is the best for the buyer‘s particular situation (f) substantiate the claims and advantages (g) prompt the buyer into action (5) The signature, which identifies the sponsor of the advertisement, contains the company‘s trademark, logo, name and address and should be attractive, legible, distinctive and easily identified in a variety of sizes. b) Radio copy should be informal and conversational to attract listeners‘ attention and achieve greater impact, and should consist of short, familiar terms. c) In television copy, the audio material must not overpower the visual material and vice versa.

(1) Copy and artwork are combined through the use of a storyboard, a series of miniature television screens or cartoons used to show the sequence of major scenes in the advertisement. d) Artwork consists of the illustration and the layout of the advertisement.

(1) Although illustrations are often photographs, they can also be presented in forms such as drawings, graphs, charts and tables.

218 (2)

H.

I.

Illustrations are used to attract attention, encourage the audience to read or listen to the copy, communicate an idea quickly or communicate an idea that is difficult to put into words.

(3) Consumers tend to recall the visual portion of advertisements better than the verbal portions.

(4) Illustration techniques for advertisements are varied (a) Product alone (b) Emphasis on special features (c) Product in setting (d) Product in use (e) Product being tested (f) Result of product‘s use (g) Dramatizing headline (h) Dramatizing situation (i) Comparison (j) Contrast (k) Diagrams, charts and graphs (l) Phantom effects (m) Symbolic (n) Testimonials (5) The layout is the physical arrangement of the illustration, headline, subheadline, body copy and signature.

(6) The final layout is the result of several stages of production – as it moves through these stages, the layout helps people involved in designing the advertising campaign exchange ideas and also provides instructions for production personnel.

Executing the campaign 1. The execution of an advertising campaign requires an extensive amount of planning and coordination and many people are involved.

2. Implementation requires detailed schedules to ensure that various phases of the work are completed on time.

3. Advertising management personnel must evaluate the quality of work and take corrective action when necessary.

4. In some instances, changes have to be made during the campaign so that it meets campaign objectives more effectively or responds to consumer research feedback.

Evaluating the effectiveness of the advertising 1. There are a variety of ways to test the effectiveness of advertising: a) Measuring achievement of advertising objectives b) Gauging the effectiveness of copy, illustrations or layouts c) Assessing certain media 2. Advertising can be evaluated before, during and after the campaign. a) Evaluations performed before an advertising campaign that attempt to assess the effectiveness of one or more elements of the message are called pre-tests.

(1) To pre-test advertisements, marketers sometimes use a consumer focus group, a semi-structured discussion, led by a moderator, involving actual or potential buyers of advertised products who are asked to judge one or several dimensions of the advertisements.

(2) Such tests are based on the beliefs that consumers are more likely than advertising experts to know what will influence them.

219 (3) Brainjuicer and other online research tools enable marketers to test out concepts and compare new ideas with existing advertising concepts. b)

Measurement of effectiveness during a campaign is usually accomplished by using enquiries, in which an advertiser uses several direct response advertisements simultaneously.

(1) The advertiser records the number of returned coupons and forms and determines which advertisement generated the most response. c) Evaluation of advertising effectiveness after the campaign is over is called a post-campaign test or post-test.

(1) If an advertiser sets objectives in terms of communication, the post-test should measure changes in dimensions such as product awareness, brand awareness or attitude change.

(2) Typically, qualitative marketing research – focus groups or depth interviews – is used before, during and after a campaign to monitor shifts in consumers‘ perceptions.

(3) If the advertiser sets objectives in terms of sales, the post-test should measure the change in sales or market share that can be attributed to the advertising campaign.

(4) Unfortunately, such changes cannot be measured precisely – many factors independent of advertisements affect a company‘s sales and market share. d) Post-test methods based on memory include recognition and recall tests that are usually performed by research organizations through consumer surveys.

(1) In a recognition test, individual respondents are shown the actual advertisement and are asked whether they recognize it.

(2) In an unaided or spontaneous recall test, subjects are asked to identify advertisements that they have seen recently but are given no clues to help them remember.

(3) A similar procedure is used in an aided or prompted recall test, except that subjects are shown a list of products, brands, company names or trademarks to jog their memory.

(4) The major justification for using recognition and recall methods is that individuals are more likely to buy a product if they can remember an advertisement about it than if they cannot – but this is not always the case.

(5) Viewers judge advertisements placed in happy programmes as more effective and recall them somewhat better. e) Researchers are also using a sophisticated technique called single source data to help evaluate advertisements.

(1) With this technique, individuals‘ behaviour is tracked electronically, from television sets with microcomputers that record which channels are watched to checkout counters with barcode scanners that record purchase data that are sent to research facilities.

(2) These techniques are offering more insight into people‘s buying patterns than ever before.

IV. Who develops the advertising campaign?

A. An advertising campaign may be handled by (1) an individual or a few people within the company, (2) an advertising department within the organization or (3) an advertising agency.

B. In very small companies, one or two individuals are responsible for performing advertising activities.

220 1.

V.

Usually, these individuals depend heavily on personnel at local newspapers and broadcast stations for copywriting, artwork and advice about scheduling media.

C. In certain types of large businesses, especially in larger retail organizations, advertising departments create and implement advertising campaigns.

1. Depending on the size of the advertising programme, an advertising department may consist of a few multi-skilled people or a sizeable number of specialists, such as copywriters, artists, media buyers and technical production coordinators.

D. When an organization uses an advertising agency, the organization and the agency usually develop the advertising campaign jointly.

1. The degree to which each party participates in the campaign‘s total development depends on the working relationship between the company and the agency. a) The company ordinarily relies on the agency for copywriting, artwork, technical production and formulation of the media plan.

2. An advertising agency can assist a business in several ways. a) The agency, especially a large one, supplies the company with the services of highly skilled specialists – not only copywriters, artists and production coordinators but also media experts, researchers and legal advisers. b) Agency personnel are usually more objective than a client‘s employees about the organization's products. c) When an agency is used it is important to carefully coordinate the activities of the various suppliers providing advertising, public relations, direct mail, sales promotion, web design, sponsorship, and so forth. d) The services of an advertising agency can be obtained at a low or moderate cost because the agency usually receives its compensation through a 15 per cent commission on media purchases. e) Clients pay a bonus to the agency for meeting targets or receive a payback (refund) if the advertising fails to deliver.

Publicity and public relations (PR) A. Publicity is communication in news story form about an organization and/or its products that is transmitted through a mass medium at no charge – although the publicity activity will incur production and personnel costs.

1. Within an organization, publicity is sometimes viewed as part of public relations, a larger, more comprehensive communications function.

B. Public relations is a planned and sustained effort to establish and maintain goodwill and mutual understanding between an organization and its target publics: customers, employees, shareholders, trade bodies, suppliers, government officials and society in general.

1. Most publicity will be targeted at a single stakeholder type, whereas public relations is ongoing communication across all of an organization's key stakeholder groups.

2. Publicity is the result of various public relations efforts.

3. There are three broad categories of public relations: a) The PR event – a public relations event concerned with a specific purpose such as an open day or VIP visit b) The PR campaign – a period of PR activity involving several events and techniques but with definite start and end dates c) The PR programme – an ongoing, lengthy duration, awareness building or awareness maintaining multi-technique PR activity 4. Since the end of the 1980s, public relations has been the fastest growing element in the promotional mix.

221 5.

C.

D.

There is an important distinction between marketing public relations and corporate public relations – the public relations tools may be the same, but the issues and stakeholders differ between marketing public relations and corporate public relations.

Publicity and advertising compared 1. Advertising messages tend to be informative or persuasive, whereas publicity is primarily informative.

2. Advertisements are sometimes designed to have an immediate impact on sales; publicity messages are more subdued.

3. Advertisements identify sponsors; publicity releases do not.

4. The sponsor pays for media time or space for advertising but not for publicity, so there is no guarantee of inclusion.

5. Communications through publicity are usually included as part of a television programme or a print story, but advertisements are normally separated from broadcast programmes or editorial portions of print media so that the audience or readers can easily recognize them.

6. Publicity may have greater credibility than advertising among consumers because as a news story it may appear more objective.

7. Advertising provides the opportunity to repeat the same messages as many times as desired; publicity is generally not subject to repetition.

Kinds of publicity 1. Marketers can use various kinds of publicity mechanisms. a) The most commonly used form of publicity mechanism is the press (news) release, usually consisting of a single page of typewritten copy containing fewer than 300 words – now often transmitted via email to key journalists.

(1) These are often used to introduce new products b) A feature article is a longer manuscript (up to 3,000 words) that is usually prepared for a specific publication. c) A captioned photograph includes a brief description that explains the picture‘s content.

(1) These are especially effective for illustrating a new or improved product with highly visible features. d) A press conference is a meeting called to announce a major news event. e) Letters to the editor and editorials are sometimes prepared and sent to newspapers and magazines. f) Films and tapes are sometimes distributed to broadcast companies in the hope that they will be aired. g) The digital environment might have exposed brands to instant judgement and ridicule on social media – a nightmare for PR agencies which must combat such hostility – but it has also presented PR executives with a new armoury, including blogs and tweets from client personnel, VIPs and celebrities or from members of the brand‘s online community.

2.

3.

The broader remit of public relations also includes training personnel to handle the media; arranging interviews; establishing links with VIPs and influential bodies; managing visits, seminars and meetings; and maintaining information flows within the organization. a) PR consultants also utilize the Internet to liaise with stakeholders, and they often help clients to set up their websites.

The selection of the specific types of publicity to be used depends on considerations that include the type of information to be transmitted, the characteristics of the target

222

E.

F.

G.

H.

audience, the receptivity of media personnel, the importance of the items to the public and the amount of information that needs to be presented. a) Sometimes a marketer uses a single type of publicity in a promotional mix, and in other cases they may use a variety of publicity mechanisms. b) Third party endorsement, a recommendation from an opinion leader or respected personality, increases the credibility of publicity and public relations.

Uses of publicity 1. Publicity is used to make people aware of a company‘s products, brands or activities.

2. Publicity can help a company maintain a certain level of positive public visibility.

3. Publicity can enhance a particular image, such as innovativeness or progressiveness.

4. Companies also try to overcome negative images through publicity.

5. Some businesses seek publicity for a single purpose, and others for several purposes.

Publicity releases can tackle a multitude of specific issues (Table 17.3): 1. Marketing developments 2. Company policies 3. News of general interest 4. Reports on current developments 5. Personalities – names are news 6. Slogans, symbols, endorsements It must be remembered that an organization has a number of audiences – customers, suppliers, distributors, shareholders, journalists – as well as its internal markets: employees and management, that all need to be targeted by publicity.

Requirements of a publicity programme 1. To obtain maximum benefit from publicity, a company should create and maintain a systematic and continuous publicity programme.

2. A single person or department should be responsible for managing the programme.

3. Relationships must be maintained with the media, particularly to facilitate crisis management public relations.

4. Effective public relations is impossible without well developed ongoing contacts with newspaper, television and radio journalists. a) Personal contact with news personnel is often necessary to determine how the organization's publicity programme can be designed to facilitate the work of media people. b) A great deal of publicity material is rejected by media personnel because it lacks newsworthiness or is poorly written.

(1) Guidelines and checklists can help avoid these flaws.

(2) Marketers who hire the services of a PR consultant do so to ‗buy‘ the consultancy‘s media contacts and its expertise in maintaining an ongoing flow of activity that appeals to journalists.

5. Usually, the effectiveness of publicity is measured by the number of releases actually published or broadcast. a) To monitor print media and determine which releases are published and how often, an organization can hire a cuttings service – a business that cuts out, counts and sends published news releases to client companies. b) Many leading exponents of public relations believe there must be four facets to an effective PR programme: (1) Research – on the problem opportunity (2) Action – that includes assessment and planning (3) Communication – of key messages to relevant publics (4) Evaluation – of the effects of these messages

223

I.

c) A PR consultancy can be very helpful in achieving these four requirements.

Dealing with unfavourable publicity 1. Companies can receive unfavourable publicity regarding an unsafe product, an accident, the actions of a dishonest employee or another negative event.

2. A single negative event that produces unfavourable publicity can wipe out a company‘s favourable image and consumer attitudes that took years to build through promotional efforts.

3. To protect an organization's image, it is important to avoid unfavourable publicity or at least to lessen its effects. a) The main way to avoid unfavourable publicity is to reduce negative incidents and events through safety programmes, inspections and effective quality control procedures. b) It is important to establish policies and procedures for the news coverage of negative events.

(1) These policies and procedures should aim at reducing negative impact.

(2) In most cases, organizations should expedite news coverage of negative events rather than to try to discourage or block it.

(3) The expediting approach not only tends to diminish the fall-out from negative events but also fosters a positive relationship with media personnel.

4. Crisis management involves various methods to help an organization remain in control of an unfavourable incident: a) Identifying key targets (publics) for which to provide publicity b) Developing a well rehearsed contingency plan c) Reporting the facts quickly and accurately d) Providing access for journalists e) Monitoring social media chat and coverage, with interventions as appropriate 5.

J.

K.

The organization must remain in control of the situation and the material being published or broadcast.

Limitations in using publicity 1. Messages transmitted through publicity must be viewed by media personnel as being newsworthy, which means they must be timely, interesting and accurate.

2. The marketer cannot maintain control over the content or the timing of the communication.

3. Media personnel can alter the length and content of publicity releases to fit the publisher‘s or broadcaster‘s requirements. a) The most important parts of the message from the company‘s perspective may be deleted.

4. Frequently, publicity releases often appear at times or in locations that do not effectively reach the organization's target audiences.

5. Nevertheless, properly managed publicity offers an organization substantial benefits at a relatively low costs – compared with advertising, the costs of PR are usually trivial.

Trends that affect advertising and public relations 1. The world of advertising is facing significant changes, including a mixture of market trends and client-induced pressures. a) A growing number of agencies are having to offer pan-European capabilities as major advertisers believe they must consider pan-European campaigns. b) There is increasing pressure on advertising agencies and public relations consultancies to justify the value of their activities and campaigns.

224 There is a conflict between clients‘ (the advertisers) short-term sales requirements and the agency‘s desire for longer term brand building – developing a brand‘s image and standing with a view to creating long-term benefits for brand awareness and brand value. d) The recession of the early 1990s caused many clients to downgrade their advertising budgets and to re-evaluate their promotional spend.

(1) Few medium sized agencies now exist, the field having polarized into major international groups and numerous local or regional small companies.

2. The sphere of public relations is also undergoing significant change. a) Clients are demanding pan-European and international services. b) Through the development of technology, such as the internet and interactive television, plus new advertising formats, such as the growing use of ‗advertorials‘ and infomercials, there is a move to more overt competition between public relations consultancies and advertising agencies. c) The maturing public relations industry is seeking to enhance its own image by becoming more professional.

(1) It is recruiting higher calibre personnel and providing better training, while ensuring that their output is assessed in terms of client goals and expectations.

(2) These enhancements require time and high budgets in an ever more competitive market VI. Sponsorship A. Sponsorship is the financial or material support of an event, activity, person, organization or product by an unrelated organization or donor.

1. Generally, funds will be made available to the recipient of the sponsorship deal in return for the prominent exposure of the sponsor‘s name or brands.

B. Increasing popularity of sponsorship 1. Sponsorship has become an established way of funding the arts, including orchestras; ballet, opera, or theatre companies; museums and art galleries.

2. Sponsorship is becoming essential to guarantee the survival of many sporting clubs.

3. The popularity of corporate sponsorship has grown dramatically, with sponsors believing that there are two key benefits to the company and its products. a) First and foremost is media coverage.

(1) Benefits include visible company advertisements, extensive brand name displays and product demonstration opportunities. b) The second benefit of corporate sponsorship is internal.

(1) Many organizations believe that their sponsorship of events helps improve the morale of their workforce.

(2) Sponsorship can not only reassure the workforce and reaffirm the company‘s leading position in its marketplace but also give employees a ‗warm‘, positive feeling towards their employer. c) Sponsorship is not confined to the promotion and exposure of corporate brands, but increasingly many marketing managers are looking for suitable activities to sponsor for individual brands.

C. Applications for sponsorship 1. Sponsorship, formerly a tool of public relations and the domain of public relations consultancies, is now becoming a specialist area and a separate component of the promotional mix. c)

225 a)

D.

Public relations consultancies still handle many sponsorship deals, but a growing number of specialist sponsorship advisers now introduce sponsors to appropriate recipients.

2. Sponsorship is prominent in many fields besides sports and the arts, including universities and colleges, hospitals, research and charities.

3. If a company believes its brand reputation will be enhanced and its brand awareness improved by its involvement with an organization or an event, sponsorship becomes an important element in its promotional mix.

Reputable partnerships 1. As with any promotional activity, the sponsor must ensure that the recipient organization, event or product is recognized by the sponsor‘s target audience, that it is welcome and acceptable to its target audience, and that it is reputable and ethical in its dealings. a) Reputable partnerships – reputable and ethical dealings between a recognized, welcome and acceptable recipient organization and a sponsoring organization – are essential.

2. The sponsor does not want to invest its promotional budget in activities not recognized by its own target market.

3. The recipient, too, needs to be wary of the donor‘s image and reputation.

ANSWERS TO DISCUSSION AND REVIEW QUESTIONS 1.

What is the difference between institutional and product advertising?

Product advertising promotes goods and services. It is used by businesses, governments, and private, non-business organizations to promote the uses, features, images and benefits of their goods and services. Institutional advertising promotes organizational images, ideas and political issues.

2.

When should advertising be used to stimulate primary demand? When should advertising be used to stimulate selective demand?

In the introductory stage of the product life cycle, advertising is used to stimulate primary demand. This advertising generally is referred to as pioneer advertising because it stimulates demand for products in a general product category. When competitors enter the market, competitive advertising stimulates selective demand by pointing out each brand‘s uses, features and advantages.

3.

What are the major steps in creating an advertising campaign?

The major steps in the creation of an advertising campaign are the following: a.

Identify and analyze an advertising target.

b.

Define the advertising objectives.

c.

Create the advertising platform.

d.

Determine the advertising budget.

e.

Develop the media plan.

f.

Create the message.

g.

Evaluate the effectiveness of the advertising.

226 4.

What is an advertising target audience? How does a marketer analyze the target audience after it has been identified?

The advertising target is the group of people towards whom the advertisements are aimed. After identifying the advertising target, a marketer generally analyses it with regard to location and geographic distribution of people; distribution of age, income, ethnic origin, sex and educational level; and consumers‘ attitudes regarding the purchase and use of both the advertiser‘s products and competitors‘ products. The exact kind of information needed depends on the type of product being advertised, the characteristics of the target, and the type and amount of competition.

5.

Why is it necessary to define advertising objectives?

Advertising objectives must be defined to give the development of the campaign direction and purpose.

6.

What is an advertising platform and how is it used?

An advertising platform consists of the basic issues or selling points that an advertiser wishes to include in the advertising campaign. The advertising platform is used as the base from which to develop the message.

7.

What factors affect the size of an advertising budget? What techniques are used to determine this budget?

The size of the geographic market and the distribution of the buyers within it influence the size of an advertising budget. Also, the type of product – industrial, consumer durable or consumer convenience item – affects the proportion of revenue that is appropriated for advertising.

Techniques used for determining the advertising budget include the objective and task approach, the percentage of sales approach, the competition matching approach and the arbitrary approach.

The objective and task approach involves determining the objectives of the advertising campaign and ascertaining the tasks necessary to accomplish them. After the tasks are determined, their costs are added to ascertain the amount of the total budget. In the percentage of sales approach, the marketer simply multiplies the company‘s past sales, forecasted sales or a combination of the two by a standard percentage based on what the company traditionally has spent on advertising or based on industry averages. In the competition matching approach, the advertiser tries to match major competitors‘ budgets in terms of absolute amount or percentage of sales. In the arbitrary approach, a high-level executive in the company states how much can be spent on advertising for a certain period.

8.

Describe the steps required in developing a media plan.

First, the planner decides which general kinds of media to use and selects specific sub-classes within each medium. Then the planner selects the specific media vehicles to be used. Finally, the planner creates a time schedule showing the dates and/or times the advertisements will run.

9.

What is the role of copy in an advertising message?

Copy is used to attract readers‘ attention and create interest. It also identifies a specific desire or problem of consumers, suggests the advertised product as the best way to solve that problem, states the advantages and benefits of the product, indicates why the advertised product is the best for the buyer‘s particular situation, substantiates the claims and advantages of the product, and asks the buyer to take action.

10. What role does an advertising agency play in developing an advertising campaign?

227 If a company uses an advertising agency, the development of the advertising campaign is usually a joint effort, with the agency performing functions such as copywriting, artwork, technical production and the formulation of the media plan. The use of an agency provides a company with highly skilled specialists who are generally more objective than the company‘s employees and have more experience in advertising. In addition, the cost to the company is generally low or moderate.

11. Discuss several ways to post-test the effectiveness of an advertisement.

Post-test evaluation of advertising may be performed in several ways. The specific dimensions to be tested are determined by the advertising objectives. If the objectives are set in communication terms, post-tests may include consumer surveys and experiments. If the objectives are stated in terms of sales, effectiveness can be determined by ascertaining changes in sales or in market share that are attributable to the advertising campaign. However, because of the expense associated with consumer surveys and experiments and the problems in determining the direct effects of advertising on sales, many advertisers use recognition and recall tests to evaluate advertising. In recognition tests, each respondent is shown the actual advertisement and asked if he or she recognizes it. In recall tests, the respondent is not shown the actual advertisement but instead is asked about what advertisements he or she has seen recently. Recall may be tested in a ‗spontaneous‘ or ‗prompted‘ manner.

12. What is publicity? How does it differ from advertising?

Publicity is communication in news story form regarding an organization and/or its products that is transmitted through a mass medium at no charge. Publicity differs from advertising in several ways. Publicity is mainly informative, whereas advertising is informative, persuasive or both.

Publicity is lower key and more subdued than advertising. Publicity does not have identified sponsors; advertisements do, and the sponsor pays for the media time or space. More credibility is attached to publicity because it is presented as a news story within the broadcast programme or editorial portion of the media used. Unlike advertising, publicity does not allow a company to repeat the same messages or issues as many times as desired.

13. How do organizations use publicity? Give several examples of press releases that you have observed recently in local media.

Publicity is used to make people aware of the company‘s products, brands or activities. It is used to promote positive public visibility and to overcome negative images. The remainder of the discussion of this question should be answered using local examples. The majority of pieces in each evening‘s local newspaper have stemmed from press releases sent to the local newspaper office.

14. What are target publics? Why must they be carefully identified and handled by a PR department?

Target publics are groups of customers, employees, shareholders, trade bodies, suppliers, government officials or society in general – anyone with an interest in an organization, its products and activities. By carefully identifying and handling these publics, a company is more likely to achieve maximum benefits from publicity programmes. Relationships with the media require particular attention. A company that establishes and maintains good working contacts with media personnel, such as reporters and editors, is more likely to develop suitable publicity material and have it accepted for publication. Such contacts can be especially important in facilitating crisis management.

15. How should an organization handle negative publicity? Identify a recent example of a company that received negative publicity. Did the company deal with it effectively?

228 One way to handle negative publicity is to avoid events (such as accidents) that generate such publicity. However, an organization also needs to have a definite set of policies and procedures to deal with coverage of negative events to lessen their effects. In most situations, the best approach is to facilitate coverage rather than try to hide the event or reduce coverage. If the organization expedites coverage, less misinformation and fewer rumours are likely to result. The discussion of the remaining two parts of this question should be based on recent real-world examples.

16. Define PR and highlight its main roles.

Public relations is a planned and sustained effort to establish and maintain goodwill and mutual understanding between an organization and its target publics. It develops ongoing programmes to maintain a brand‘s visibility, ensure positive views are expressed about the brand, and to support the brand messaging as part of a brand positioning strategy.

17. Explain the problems and limitations associated with using PR. How can some of these limitations be minimized?

Limitations of publicity arise from the media personnel‘s requirements that publicity messages be newsworthy, timely and accurate. Many communications that a company may wish to present through publicity do not qualify as newsworthy. Marketers have little control over the content or timing of publicity releases and have no control over the locations in which the releases are presented.

18. In what ways has the arrival of social media complicated life for the PR professional?

Digital communication, its immediacy and two-way interaction, tailoring and use of social media have been hugely important in giving PR a lift and helping in the work of PR professionals.

Blogs, tweets, online discussions have all become mainstays of PR activity. However, negative views can be readily expressed and shared by dissatisfied consumers and planted by adversaries and other third parties, requiring vigilance and attention.

19.

What is the role in marketing of the social media influencer?

Social media influencers are as popular as many movie and pop stars, with their own followers.

These followers or fans trust the opinions of SMIs. Because of this they are hugely valuable to marketers, who often pay for product placements and endorsements. The risk is reputational damage to a brand if the SMI incurs negative reactions to their vlogs and blogs.

20. How can sponsorship enhance brand awareness for a sponsoring organization?

In return for supporting an event, activity, person, organization or product, the donor organization will often receive prominent exposure for its name or brands. The high level of media coverage that can result from sponsorship activities ensures that many people see and are aware of the brand name. For example, the display of company banners and examples of the sponsor‘s product range (which may also be available for demonstration) have obvious benefits for the organization as potential customers become increasingly aware of the brand. On becoming aware of the sponsor‘s benevolent attitude towards the recipient organization, these potential customers may begin to view the sponsor in a more positive light.

21. What factors must an organization consider before selecting a sponsor or recipient organization?

The organization must ensure that any recipient organization, event or product is recognized by its target audience and is reputable and ethical in its dealings. It would be dangerous to invest resources in activities with which its target audience did not have sympathy, or to become involved with a recipient organization that has a poor reputation. Such actions could have

229 disastrous implications for the sponsor‘s reputation and brands. The recipient organization also needs to pay attention to the donor‘s image and reputation when arranging sponsorship agreements.

COMMENTS ON THE WEB TASK AND CASES WEB TASK Both brands link strongly into street culture and the lifestyle activities of their targeted consumers, notably through sports, music and entertainment. Whether it is with racing drivers, stars of athletics or football or chart hits, both brands have harnessed the icons of youth to help promote their products and offer credibility to their branding. Both brands have already achieved brand awareness: their goals are for brand insistence. The lifestyle advertising and links with well known sports and entertainments personalities are pivotal to creating differentiation over their rivals in the all-important youth target market. Possibly, creativity is dominant in the advertising process, given that the target audience selection is ready-made and both brands harness all media options in an integrated marketing communications strategy.

APPLIED MINI-CASE Many companies are regularly approached for sponsorship, but a marketing manager must ensure that the recipient organization or individual is credible, behaves ethically and is unlikely to partake in any activities that may damage the sponsor‘s reputation. The key requirement, however, is that the activity or organization being sponsored must have a natural synergy with the sponsor‘s own target market customers. Researching customers‘ lifestyles and other purchases may indicate which activities warrant sponsorship. The recipient‘s activity must also be deemed newsworthy in order to gain visibility for the sponsor‘s brand.

CASE STUDY: WHERE NEXT FOR THE GIG ECONOMY? THE CHALLENGES FOR PR ADVISORS The PR industry exists to build the brand reputation of its clients, to create positive vibes and interests, and to combat any flak facing their clients. The business models adopted in the so-called gig economy have raised serious questions about the practices and values of many businesses. The apparent lack of rights and benefits for the workforce regularly have hit the headlines. In this case, Uber found itself facing a court ruling. Deliveroo is another well-known gig economy success which has found itself criticized. There are others.

Question 1 asks how you would have advised these companies. The ‗textbook‘ response is to show that the company is listening and wants to alter practices. However, the essence of the business models for many gig economy operators is not to have employees on their books in the ways many companies traditionally have employed staff. To suggest sweeping changes in reality might therefore be unrealistic. Nevertheless, the Supreme Court ruling required a response.

Question 2 considers the audiences to address. In any PR activity it is important to early-on identify the key target publics and audiences which must be influenced, managed or even opposed. In this case, a key audience is made up of the drivers themselves; the employees seeking improved terms and conditions. However, users – customers – were also concerned and needed to know how Uber might respond to the Court ruling. The media for certain was a key audience. Each audience required bespoke messaging and engagement. To ignore protest and negativity publicity is rarely sensible, as it leaves the ‗share of voice‘ open to detractors and opponents.

230 Question 3 focuses on whether, as a PR advisor, you could have shaped your client‘s thinking and altered their messaging. As indicated above, the finances within the business model hinder sweeping changes. This means that in practice, perhaps only considered and gentle steps were feasible. As is so often the situation when what on the face of it the circumstances are cut and dried, when tasked with acting, the realities of managing the situation are far from straightforward. It is always fascinating to find out how students navigate this conundrum.

CHAPTER 18

Sales management, sales promotion, direct mail, direct marketing and the internet

OBJECTIVES •

To understand the nature and major purposes of personal selling.

•

To learn the basic steps in the personal selling process.

•

To identify the types of salesforce personnel.

•

To gain insight into sales management decisions and activities.

•

To appreciate the role of key account management.

•

To become aware of what sales promotion activities are and how they can be used.

•

To become familiar with specific sales promotion methods.

•

To understand the role of direct mail in the promotional mix.

•

To be aware of the importance of the internet in marketing communications.

•

To comprehend the growing role of digital marketing.

•

To appreciate direct marketing‘s use of the promotional mix.

PURPOSE AND PERSPECTIVE This chapter covers personal selling, sales promotion and direct mail in detail. In addition, the growing use of the internet in marketing communications and the massive uptake of direct marketing – largely due to increased use of the internet and e-commerce – are also discussed.

To help students build an understanding of the purposes and roles of salespeople, the basic elements of the personal selling process and the types of salespeople used in organizations are discussed. Much of the section on personal selling is devoted to a discussion of sales management decisions and activities.

The topics covered include establishing salesforce objectives; determining the size of the salesforce; and recruiting, selecting, training, compensating, motivating, routing, scheduling and controlling salespeople.

The next section reviews how sales promotion activities are blended with other elements in a promotional mix. The objectives for which organizations use sales promotion are also discussed. Next, major characteristics of a number of sales promotion methods are examined.

231 The uses, characteristics, and strengths and weaknesses of direct mail are considered. The chapter then explores the role of the internet in marketing communications and e-commerce, and concludes by examining the manner in which direct marketing has grown in popularity, with associated implications for many ingredients of the promotional mix.

LECTURE OUTLINE I.

The nature of personal selling and sales management A. Personal selling is the process of informing customers and persuading them to purchase products through personal communication in an exchange situation.

1. Most business-to-business transactions depend heavily on the role of personal selling.

B. There are two primary advantages of personal selling.

1. Personal selling provides marketers with the greatest freedom to adjust a message to satisfy customers‘ information needs.

2. Personal selling is precise, enabling marketers to focus on the most promising sales prospects.

C. A major disadvantage of personal selling is its cost.

1. Generally, it is the most expensive ingredient in the promotional mix, owing to the associated costs of salaries, cars and expenses.

2. Personal selling costs are increasing faster than advertising costs – businesses spend more money on personal selling than on any other promotional mix ingredient.

D. A selling career can offer high income, a great deal of freedom, a high level of training and a high level of job satisfaction – but unfortunately, consumers often view personal selling negatively.

3. In the UK the Office for Fair Trading is currently leading a drive to limit the use of door-to-door selling – a form of personal selling – because of the high numbers of complaints by households feeling overly pressured or intimidated.

4. Major businesses, professional sales associations and academic institutions are making an effort to change the negative stereotypes associated with salespeople – with ethical standards of selling practice, for example.

E. Personal selling goals involve finding prospects, persuading prospects to buy and keeping customers satisfied.

1. Because most potential buyers seek information before they make a purchase decision, salespeople must ascertain prospects‘ informational needs and then provide the relevant information.

2. To do so, sales personnel must be well trained regarding their products and the selling process in general. a) In addition, salespeople need to monitor new products being developed and should be aware of all competitors‘ sales activities in their sales territories. b) Sales personnel are a useful source of marketing intelligence, a fact often ignored by their marketing colleagues.

3. Marketers depend on repeat sales for long term survival and must therefore keep their customers satisfied – much of the burden for providing customer satisfaction falls on salespeople. a) To this end, sales efforts often are directed towards providing buyers with information and service after the sale.

232 b)

II.

Such activities allow a salesperson to evaluate the strengths and weaknesses of the company‘s product and other marketing mix ingredients.

(1) These observations can be used to develop and maintain a marketing mix that can better satisfy both customers and the company.

4. A salesperson may be involved in achieving one or more of the three general goals. In some organizations: a) there are people whose sole job is to find prospects b) this information is relayed to salespeople, who then contact the prospects c) after the sale, these same salespeople may do the follow-up work, or a third group of employees may have the job of maintaining customer satisfaction 5. In many smaller organisations, a single person handles all of these functions – no matter how many personnel are involved, several major sales tasks must be performed to achieve these general goals.

6. The literature assisting sales management is extensive and tends to focus on the sales management process: a) the importance of preparation – understanding the products and prospective customers, predicting sales and developing systems for recording sales-related data b) the techniques for introducing the sales personnel to prospective customers, either face-to-face or via telecommunications c) the requisites for effective presentations – or pitches – and written sales proposals d) the skills required to turn a potential customer‘s interest into commitment e) how to negotiate f) the skills necessary to capture the order g) the ability to close the sale (win the order) 7. Sales personnel not only address prospective customers, they are often involved in managing ongoing client relationships, and in ensuring repeat orders are won and handled competently.

8. Personal selling involves direct customer-sales person contact, but in addition to face-to-face interaction, personal selling now often benefits from improved telecommunications and telesales.

9. Personal selling can customize messages for individual customer prospects and build ongoing relationships with existing customers – though the per capita cost is high.

Elements of the personal selling process A. Prospecting and evaluation 10. Though no two salespeople use exactly the same selling methods, many move through a general selling process consisting of seven elements or steps: (1) prospecting and evaluating, (2) preparing, (3) approaching the customer, (4) making the presentation, (5) overcoming objections, (6) closing and (7) following up.

11. Developing a list of potential customers is called prospecting. a) A salesperson seeks the names of prospects from several sources, including company sales records, referrals, trade shows, newspaper announcements, public records, telephone directories, trade association directories, telemarketing lists and many other sources.

233 b)

Sales personnel also use responses from advertisements, leads from seminars and meetings and referrals from existing customers.

12. After developing the prospect list, a salesperson evaluates prospects to determine if they are able, willing and authorized to buy the product. a) Some prospects are deleted, while others deemed acceptable are ranked according to their desirability or potential.

B. Preparing 1. Before contacting prospects, a salesperson should find and analyze information about each prospect‘s specific product needs, current use of brands, feelings about available brands and personal characteristics.

2. Being well informed about a prospect makes a salesperson better equipped to develop a presentation that precisely communicates with the prospect.

A. Approaching the customer 1. The approach, the manner in which a salesperson contacts a potential customer, is a critical step in the sales process because the prospect‘s first impression of the salesperson may be a lasting one, with long run consequences. a) During the initial visit, the salesperson strives to develop a relationship rather than just push a product.

2. Types of approaches a) In the referral approach, the salesperson explains to a prospect that an acquaintance, an associate or a relative suggested the call. b) In the cold canvass method, the salesperson calls on potential customers without their prior consent. c) In the repeat contact approach, the salesperson mentions a prior meeting.

3. The type of approach used depends on the salesperson‘s preferences, the product being sold, the company‘s resources and the characteristics of the prospect.

B. Making the presentation or sales pitch 1. During the sales presentation, the salesperson must attract and hold the prospect‘s attention to stimulate interest and stir up a desire for the product. a) The salesperson should have the prospect touch, hold or actually use the product. b) If possible, the salesperson should demonstrate the product. c) Audio-visual materials may be used to enhance the presentation.

2. During the presentation, the salesperson must not only talk but also listen to gain information about the prospect‘s specific needs. a) Even though the presentation has been planned in advance, the salesperson must be able to adjust the message to meet the prospect‘s information needs.

C. Overcoming objections and reassuring the prospect or customer 1. An effective salesperson usually seeks out a prospect‘s objections in order to address them.

2. One of the best ways to overcome a prospect‘s objections is to anticipate and counter them before the prospect has an opportunity to raise them. a) This approach can be risky because the salesperson may mention some objections that the prospect would not have raised.

3. If possible, the salesperson should handle objections when they arise.

D. Closing the deal or transaction 1. Closing is the stage in the selling process in which the salesperson asks the prospect to buy the product or products.

2. During the presentation, the salesperson may use a ‗trial close‘ by asking questions that assume the prospect will buy the product.

234 a)

III.

The reactions to such questions usually indicate how close the prospect is to buying. b) The trial close allows prospects to indicate indirectly that they will buy the product without having to say the difficult words ―I‘ll take it‖.

3. Often, closing can be an important stimulus to uncover hidden objections, which can then be addressed.

E. Following up to ensure customer satisfaction and enable repeat business 1. After a successful closing, the salesperson must follow up the sale.

2. In the follow-up stage, the salesperson should determine if the order was delivered on time and was installed properly, if installation was required, and learn what problems or questions have arisen regarding the product.

3. The follow-up step can also be used to determine customers‘ future product needs.

4. This step provides information and ideas that may prove helpful in selling to other likely customers, as well as the opportunity to cement relationships with existing customers.

Types of salespeople A. Sometimes the same salesperson performs all three sets of tasks.

B. A product‘s uses, characteristics, competitive position, complexity, customer profile, selected marketing channel(s), promotional mix, price and margin influence the kinds and numbers of sales personnel recruited.

C. Order getters 1. Order getters are employees who increase a company‘s sales by selling to new customers and by increasing sales to existing customers. a) This entails a process, often termed creative selling, of recognizing buyers‘ needs, informing prospects, and persuading them to try and then buy the product.

2. There are two types of order getters: a) Current customer order getters call on people who have already purchased a business‘s products. b) New business order getters are crucial for a company‘s longer-term survival as all businesses require additional, new customers.

D. Order takers 1. Taking orders is a repetitive task that sales staff perform to maintain and perpetuate ongoing relationships with customers. a) Order takers are employees who ensure that repeat customers have sufficient quantities of products when and where they are needed in order to maintain and perpetuate ongoing relationships. b) This is especially important in many business-to-business markets in which manufacturers depend on components for production of their own products. c) Most order takers handle repeat orders for standardized products that are purchased routinely, minimizing the sales effort d) IT systems increasingly link suppliers with customers, enabling the relationship to be handle remotely and automatically.

2. Order takers can be classified into two groups: a) Inside order takers are located in a business‘s call centre or offices and receive orders by post, fax, e-mail or telephone.

(1) They do occasionally deal face to face with customers; for example, sales assistants inside retail stores are classified as inside order takers. b) Field order takers – the field force – are salespeople who travel to customers, relying on ongoing relationships and customer loyalty to achieve sales targets.

235 3.

In many businesses, order takers generate the bulk of sales, rather than being passive functionaries who simply record orders.

E. Support personnel 1. Support personnel facilitate the selling function but often do more than solely participate in the selling process. a) Particularly common in industrial or business-to-business markets, support personnel locate prospects, educate customers, build goodwill and provide aftermarket, after-sales service.

2. There are three main categories of support personnel: a) Missionary salespeople are employed by manufacturers to assist their customers‘ selling efforts. b) Trade salespeople are employees who take orders as well as help trade customers promote, display and stock their products. c) Technical salespeople are employees who give technical assistance to current customers.

(1) In markets with standardized products and little product differentiation, marketers may offer superior technical support and customer service as a means of developing a differential advantage over competitors.

IV. Management of the salesforce A. The salesforce is directly responsible for generating a business‘s primary input: sales revenue.

1. The morale and, ultimately, the success of a company‘s salesforce are determined in large part by adequate compensation, room for advancement, sufficient training and management support – all key areas of sales management. a) When these elements are not satisfactory, sales staff may leave for more satisfying jobs elsewhere.

2. It is important to evaluate the input of salespeople because effective salesforce management helps to determine a company‘s success.

B. Establishing salesforce objectives 1. Sales objectives tell salespeople what they are expected to accomplish during a specified period. a) These objectives give the salesforce direction and purpose and serve as performance standards for the evaluation and control of sales personnel.

2. Sales objectives should be stated in precise, measurable terms and should specify the time period, customer type and geographic areas involved.

3. Sales objectives usually are established for both the total salesforce and each salesperson. a) Objectives for the entire force are normally stated in terms of sales volume, market share or profit. b) Sales objectives, or quotas, for an individual salesperson are commonly stated in terms of monetary or unit sales volume.

(1) Other bases used for individual sales objectives include average order size, average number of calls per time period and the ratio of orders to calls.

C. Determining salesforce size 1. The size of the salesforce affects the company‘s ability to generate sales and profits, the compensation methods used, salespeople‘s morale and overall salesforce management. a) Salesforce size must be adjusted from time to time because a company‘s marketing plans change, as do markets and forces in the marketing environment.

236 b)

D.

E.

It is dangerous to cut back the size of the salesforce to increase profits by cutting costs.

(1) The organization that loses capacity through cutbacks may not have the energy to accelerate when growth returns or better market conditions prevail.

2. Several analytical methods are used to determine the size of the salesforce, though marketing managers normally temper their decisions with a good deal of subjective judgement.

Recruiting and selecting salespeople 1. Recruiting is a process by which the sales manager develops a list of applicants for sales positions.

2. A set of required qualifications should be established by the sales manager before recruiting to ensure that the recruiting process results in a pool of qualified salespeople.

3. Since there is no set of generally accepted traits that characterize effective salespeople, a sales manager must develop a set tailored to the sales tasks in a particular company. a) The sales manager should prepare a job description that lists the specific tasks to be performed by salespeople. b) The sales manager should analyze the characteristics of the company‘s current successful salespeople – as well as those of its ineffective sales personnel – to develop a set of specific requirements and should be aware of potential weaknesses that could lead to failure.

4. A sales manager generally recruits applicants from several sources: departments within the company, other companies, employment agencies, educational institutions, respondents to advertisements and individuals recommended by current employees.

5. One technique used to determine whether potential candidates will be good salespeople is an assessment centre. a) Assessment centres are intensive training environments that place candidates in realistic problem settings in which they must assign priorities to their activities, make decisions and act on their decisions.

6. Sales management should design a selection procedure that includes enough steps to yield the information needed to make accurate selection decisions. a) Because each step incurs a certain expense, there should be no more steps than necessary. b) The stages of the selection process should be sequenced so that the more expensive steps are near the end, when fewer people move through them.

7. Recruitment should be a continuous activity aimed at reaching the best applicants. a) The selection process should systematically and effectively match applicants‘ characteristics and needs with the requirements of specific selling tasks. b) The selection process should ensure that new sales personnel are available where and when they are needed. c) Recruitment and selection of salespeople are not one-off decisions – the market and marketing environment change. d) Maintaining the proper mix of salespeople requires the continued attention of the company‘s sales management.

Training sales personnel 1. Many organizations have formal training programmes, while others depend on informal on-the-job training. a) The developers of training programmes need to consider who should be trained, what should be taught and how the training should occur.

237 2.

F.

A sales training programme can concentrate on the company, on products, on selling methods or on all three. a) For experienced company sales staff, training usually emphasizes product information, although it also describes new selling techniques and any changes in company plans, policies and procedures.

3. A sales training programme can be aimed at newly hired salespeople, experienced sales staff or both. a) Ordinarily, new sales personnel require comprehensive training, whereas experienced personnel need both refresher courses about established products and training in new product information. b) Training programmes can be directed towards the entire salesforce or at one segment of it.

4. Sales training may be done in the field, at educational institutions, in company facilities or in several of these locations. a) Some businesses train new employees before assigning them to a specific sales position. b) Other business organizations put new recruits into the field immediately and provide formal training only after they have gained some experience.

5. The length of training programmes differs. a) Sales training for new personnel can be as short as several days or as long as three years. b) Sales training for experienced personnel is often scheduled during a period when sales activities are not too demanding. c) Because training experienced salespeople is usually an ongoing effort, a company‘s sales management must determine the frequency, sequencing and duration of these activities.

6. Sales managers, as well as other salespeople, often engage in sales training – whether daily, on the job, or periodically in sales meetings. a) Sales people sometimes receive training from technical specialists within their own organizations or sometimes special sales training programmes are bought in – films, texts, manuals etc. b) The choice of methods and materials for a particular sales training programme depends on the type and number of trainees, the programmes content and complexity, its length and location, the size of the training budget, the number of teachers and the teachers‘ preferences.

Compensating sales personnel 1. Desirable characteristics of a compensation plan a) A compensation plan should attract, motivate and retain the most effective individuals. b) A compensation plan should be designed to give sales management the desired level of control and to provide sales personnel with acceptable levels of freedom, income and incentive. c) A compensation plan should be flexible, equitable, easy to administer and easy to understand. d) A good compensation programme facilitates and encourages proper treatment of customers.

2. Studies evaluating the impact of financial incentives on sales performance indicate four general responses: a) For price-sensitive individuals, an increase in incentives will usually increase their sales efforts, and a decrease in financial rewards will diminish their efforts

238 b) c)

G.

Unresponsive salespeople will sell at the same level regardless of the incentive Leisure-satisfied salespeople tend to work less when the incentive system is implemented d) Income satisfiers normally adjust their performance to match their income goal 3. In formulating a compensation or remuneration plan, sales management must strive for a proper balance of freedom, income and incentives 4. The developer of a compensation programme must determine the general level of compensation required and the most desirable method of calculating it. a) In analyzing the required compensation level, sales management must ascertain a salesperson‘s value to the company on the basis of the tasks and responsibilities associated with the sales position. b) The sales manager may consider a number of factors, including the salaries of other types of personnel in the company, competitors‘ compensation plans, costs of salesforce turnover and the size of non-salary selling expenses and perks.

5. To deliver the required compensation level, a company may use one or more of three basic compensation methods: a) In a straight salary compensation/remuneration plan, salespeople are paid a specified amount per period, and this sum remains the same until they receive a pay increase or decrease. b) In a straight commission compensation plan, salespeople‘s compensation is determined solely on the basis of their sales for a given time period. c) In a combination compensation/remuneration plan, salespeople are paid a fixed salary and a commission based on sales volume.

6. Proper administration of the salesforce compensation programme is crucial for developing high morale and productivity among sales personnel. a) To maintain an effective compensation programme and retain productive employees, sales management should periodically review and evaluate the plan and make necessary adjustments.

Motivating salespeople 1. Effective salesforce motivation is achieved through an organized set of activities performed continuously by the company‘s sales management.

2. Periodic motivational sales meetings have four main functions: a) Recognizing and reinforcing the work of salespeople b) Sharing sales techniques that are working c) Focusing employees‘ efforts on matching the corporate goals and evaluating their progress towards achieving these goals d) Teaching the sales staff about new products and services 3. Although financial compensation is important, a motivational programme must also satisfy a salesperson‘s non-financial needs. a) Sales personnel, like other people, join organizations to satisfy personal needs and achieve personal goals. b) Positive non-financial motivational incentives include such things as enjoyable working conditions, power and authority, job security and an opportunity to excel.

4. Sales contests and other incentive programmes that offer an opportunity to earn additional rewards can be effective motivators. a) Some companies have found such incentive programmes to be powerful motivating tools that marketing managers can use to achieve corporate goals. b) For an incentive system to succeed, however, the marketing objectives must be accepted by the participants and prove effective in the marketplace.

239 5.

H.

I.

Some organizations also use negative motivational measures: financial penalties, demotions, even the termination of employment.

Managing sales territories 1. The effectiveness of a salesforce that must travel to its customers is influenced to a degree by sales management‘s decisions regarding sales territories. a) Sales managers deciding on territories must consider the size and shape of sales territories and the routing and scheduling of salespeople.

2. Size and shape of sales territories a) Sales managers usually try to create territories that have similar sales potential or require about the same amount of work. b) Territories with equal sales potential will usually be unequal in geographic size, so salespeople assigned the larger territories will have to work longer and harder to generate a certain sales volume. c) Territories that require equal amounts of work will cause salespeople who are compensated totally or partially by commissions to have unequal income potentials. d) Many sales managers try to balance territorial workload and earnings potential by using differential commission rates. e) A territory‘s size and shape should be designed to provide the best possible customer coverage and to minimize selling costs. f) Sales territory size and shape should take into account the density and distribution of customers.

3. Routing and scheduling salespeople a) Several factors affect the routing and scheduling of sales personnel.

(1) Major determinants are the geographic size and shape of a sales territory and the number and distribution of customers within it.

(2) Number and distribution of customers and frequency and duration of sales calls also affect routing and scheduling decisions. b) The person in charge of routing and scheduling must consider the sequence in which customers are called on, the specific roads or transport schedules to be used, the number of calls to be made in a given period and the time of day the calls will occur. c) Major goals of routing and scheduling should be to minimize non-selling time and maximize selling time.

(1) Planners should try to achieve these goals in a way that holds a salesperson‘s travel and accommodation costs to a minimum. d) Many companies use agencies to construct databases of actual and potential customers and associated sales territories – these territories can share out actual and potential customers and allocate the salesforce in relation to the time taken to service them.

Controlling and evaluating salesforce performance 1. To control and evaluate salesforce activities properly, sales management needs information. a) A sales manager cannot observe the field salesforce daily and so relies on call reports, customer feedback and invoices.

2. The dimensions used to measure a salesperson‘s performance are determined largely by sales objectives normally set by the sales manager. a) Indicators of performance evaluated by sales managers include average number of calls per day, average sales per customer, actual sales relative to sales

240

V.

potential, number of new customer orders, average cost per call and average gross profit per customer.

3. To evaluate a salesperson, a sales manager may compare one or more of these dimensions with a pre-determined performance standard. a) Sales managers commonly compare one salesperson‘s current performance either with the performance of other employees operating under similar selling conditions or with his or her past performance. b) They may also judge factors that have less direct bearing on sales performance, such as personal appearance and knowledge of the product and competitors.

4. After evaluating their salesforce, sales managers must take corrective action when needed. a) They may have to adjust performance standards, provide additional sales training or try other motivational methods.

5. Many industries, especially technical ones, are now monitoring their salesforce and increasing productivity through the use of laptop computers and internet links. a) Companies that have provided their salesforces with the latest technology expect an increase in sales to result.

J. Internal marketing It is important to share the marketing strategy and communicate the intended customer value propositions with the sales team.

K. Business development In business markets, many companies have a business development function or team, combining the roles and activities of the sales team and the marketing team.

L. Key account management An important aspect of managing the sales team is to focus dedicated personnel on relationship building and ensuring customer satisfaction in very large accounts. This is known as key account management. The loss of such an account could prove very damaging.

Sales promotion A. The nature of sales promotion 1. Sales promotion is an activity or material (or both) that acts as a direct inducement and offers added value to or incentive to buy the product to resellers, salespeople or consumers. a) The promotion may have brought the sale forward or helped in competitive markets. b) Sales promotion includes all promotional activities and materials other than personal selling, advertising, publicity and public relations, and sponsorship. c) Sales promotions are designed to generate short-term sales and goodwill towards the promoter. d) Sales promotion has grown dramatically in the last 20 years, largely because of the focus of business on short-term profits and value and the significant change in promotion expenditures in recent years has been the transfer of funds usually earmarked for advertising to sales promotion.

2. An organization often uses sales promotion activities in conjunction with other promotional efforts to facilitate personal selling, advertising or both. a) The ratchet effect is the stepped impact of using sales promotion and advertising together. b) Because the most effective sales promotion efforts are closely interrelated with other promotional efforts, decisions regarding sales promotion often affect advertising and personal selling decisions, and vice versa.

241 B.

Sales promotion opportunities and limitations 1. Sales promotion can increase sales by providing an extra incentive to purchase.

2. The purposes of sales promotion include the following: a) To identify and attract new customers b) To introduce a new product c) To increase reseller inventories d) To increase demand 3. Marketers need to ensure that the sales promotion objectives are consistent with the organization‘s overall objectives, as well as with its marketing and promotion objectives.

4. Although sales promotion can support a brand image, excessive price reduction sales promotion, such as discount coupons or two-for-one pack offers, can affect a brand image adversely.

5. In the future, brand advertising may become more important relative to sales promotion.

6. There are trade-offs between advertising and sales promotion, and the marketing manager must determine the right balance to achieve maximum promotional effectiveness.

VI. Sales promotion methods A. Most sales promotion methods can be grouped into the two categories of consumer sales promotion and trade sales promotion.

1. Consumer sales promotion techniques are techniques that encourage or stimulate consumers to patronize a specific retail store or to try a particular product.

2. Trade sales promotion methods are techniques that encourage wholesalers, retailers or dealers to carry and market a producer‘s products.

B. Marketers must consider a number of factors when deciding which sales promotion methods to use.

1. The characteristics of the product (size, weight, costs, durability, uses, features and hazards) must be taken into account.

2. Target market characteristics (age, sex, income, location, density, usage rate and shopping patterns) must also be considered.

3. The way in which the product is distributed, the number and types of resellers, and the competitive and legal environmental forces may also influence the choice.

C. Consumer sales promotion techniques 1. Coupons are a promotion method that reduces the purchase price of an item in order to stimulate consumers to try a new or established product, to increase sales volume quickly, to attract repeat purchasers or to introduce new package sizes or features.

2. Demonstrations are occasions at which manufacturers show how a product actually works in order to encourage trial use and purchase of the product.

3. Frequent user incentives reward consumers who engage in repeat purchases.

4. Loyalty cards are a mechanism whereby regular customers who remain loyal to a particular company are rewarded with discounts or free merchandize.

5. Trading stamps, an older form of frequent user incentive, are stamps, dispensed in proportion to the amount purchased, that can be accumulated and redeemed for goods.

6. Point-of-sale (PoS) materials are enhancements designed to increase sales and introduce products, such as outside signs, window displays, counter pieces, display racks and self-service cartons.

7. Free samples are give aways used to stimulate trial of a product, increase sales volume in the early stages of the product‘s life cycle or obtain desirable distribution.

242 8.

With money refunds, consumers submit proof of purchase and are mailed a specific amount of money.

9. Premiums are items offered free or at a minimum cost as a bonus for purchasing a product.

10. Price-off offers is a method of encouraging customers to buy a product by offering a certain amount off the regular price shown on the label or package.

11. Consumer competitions are contests designed to generate traffic at the retail level in which consumers compete for prizes based on their analytical or creative skill.

12. Consumer sweepstakes is a method of stimulating sales in which consumers submit their names for inclusion in a draw for prizes.

D. Trade sales promotion methods 1. A buy back allowance is a certain sum of money given to a purchaser for each unit bought after an initial deal is over.

2. A buying allowance is a temporary price reduction given to resellers who purchase specified quantities of a product.

3. The count and re-count is a promotion method based on the payment of a specific amount of money for each product unit moved from a reseller‘s warehouse in a given time period.

4. Free merchandize are give aways sometimes offered to resellers who purchase a stated quantity of the same or different products.

5. A merchandize allowance is a manufacturer‘s agreement to pay resellers certain amounts of money for providing special promotional efforts, such as advertising or displays.

6. Cooperative advertising is an arrangement whereby a manufacturer agrees to pay a certain amount of a retailer‘s or dealer‘s media costs for advertising the manufacturer‘s products.

7. A dealer listing is an advertisement that promotes a product and identifies the names of participating retailers or dealers who sell it.

8. Premium or push money is additional compensation/remuneration provided to salespeople to push a line of goods.

9. A sales competition is a way to motivate distributors, retailers and sales personnel by recognizing and rewarding outstanding achievements.

10. A dealer loader is a gift to a retailer or dealer who purchases a specified quantity of merchandize.

VII. Direct mail A. Direct mail is part of the direct marketing category of promotions.

1. Direct mail is printed advertising material delivered to a prospective customer‘s or donor‘s home or work address. a) Direct mail is used to solicit interest in products or services. b) Advertising agencies, public relations consultants and sales promotion houses have been using mail shots for several decades.

2. Six per cent of all promotional budgets is spent on direct mail.

3. The direct mail industry believes it warrants recognition as a separate element of the promotional mix.

B. Uses for direct mail 1. Direct mail is used in consumer and business-to-business markets and has a number of uses. a) It delivers the promotional messages and sometimes the product through the postal service, private delivery businesses and in-home fax machines. b) Direct mail is used to create brand awareness and stimulate product adoption.

243 c)

C.

D.

E.

F.

It is used to generate orders, pre-sell prior to a sales call, qualify prospects for a sales call, screen out non-prospects, follow up a sale, announce special sales and localized selling initiatives, and raise funds for charities and non-profit organizations.

Attention-seeking flashes 1. Direct mail packages must prompt the recipient to open them, rather than treat them as junk mail – unwanted mail often binned unread by uninterested recipients. a) Flashes are headers (such as ‗Prize inside‘) printed on a direct mail package to gain the recipients‘ attention and encourage them to open the package.

2. With the boom in direct mail and the growing adverse reaction to junk mail, persuasive phrases are often not enough. a) Packaging design is becoming more important in encouraging recipients to open direct mail.

The package 1. The direct mail package is a mix of mailing envelope, covering or explanatory letter, circular, response device and return device.

2. The mailing envelope must overcome the recipients‘ inertia, often through catchy flashes and design flair.

3. The letter must be personalized and clear, appeal to the beliefs and lifestyle of the recipient and elicit interest in the product or service in question.

4. The circular, which may take the form of a booklet, broadsheet, jumbo folder, brochure or flyer, contains the service or product details and specifications and is the primary selling tool in the pack.

5. The response device is typically an order form, which must be legally correct, must repeat the selling message and product benefits, and must be simple to read and fill out and comprehensive in the information requested. a) Alternatively, the response device can be toll free telephone numbers (0800) or credit card hotlines.

6. The return device is any mechanism, such as an information request form, order form or payment slip, that enables the recipient to respond with an order or donation and is usually accompanied by a pre-printed – and often pre-paid – return envelope.

Mailing lists 1. Eighty per cent of direct mail is opened, 63 per cent is partially read and still less leads to an order or donation. a) Depending on the scale of the targeted audience, however, the costs are relatively low.

2. To be effective, direct mail must be appropriately targeted. a) This involves the purchase or compilation of up-to-date mailing lists, directories of suitable relevant recipients or targets.

3. One third of addresses on a mailing list change each year due to deaths and relocations.

4. Internal lists are compiled in-house from customer addresses, account details and records of enquiries.

5. External lists are produced by list brokers or mailing houses and are bought or rented at commercial rates. a) External list suppliers may undertake the complete direct mail operations. b) The external lists can be addresses of product category customers or general lists of targets with suitable demographic profiles and lifestyles. c) Many of the geodemographic databases were originally developed to help with the targeting of direct mail.

Copywriting

244 1.

The printed and product material included in the direct mail package must be written, designed and produced to appeal to the targets. a) The material must be prepared by people who understand the emotions and attitudes of prospective customers.

2. Copywriting, the creation and wording of the promotional message, is an important skill in the promotional mix, especially in the production of direct mail.

3. The text must appeal to the target audience; sell the product; reassure the reader; be informative, clear and concise; and lead to a positive response.

G. Strengths and weaknesses of direct mail 1. Strengths a) The medium offers a wide variety of styles and formats. b) The package can be personalized and customized. c) It will often be received and read alone, not in competition with promotions from other products and services. d) Extensive and detailed information can be included. e) Marketing research and database management can lead to accurate targeting that can hit otherwise inaccessible areas.

2. Weaknesses a) Customers may view direct mail as junk mail and bin it without opening it. b) Used on a large scale, it can be costly and needs updating. c) In many countries suitable mailing lists are not available. d) Response rates may be low.

VIII. The internet and digital marketing A. The Internet is a network of computer networks stretching across the world, linking computers of different types and providing consumers in their homes and businesspeople at work with a world of information.

B. Most businesses have developed a website in order to promote their message on the web and to capitalize on the growing use of the Internet by commerce and consumers.

1. A website is a coherent document readable by a web browser, containing simple text or complex hypermedia presentations.

C. E-commerce is the use of the internet for commercial transactions. It has led to greater use of the web by marketers (see Chapter 4).

1. As such, the internet has become not only a promotional tool but a marketing channel.

D. As more and more households connect to the Internet through increasing numbers of connections, worldwide confidence in using this medium is growing.

1. As with any new product, however, there are innovators, early adopters, the early majority and those who resist this new way of conducting business, or who do not have the resources.

E. The internet website is capable of frequent and speedy information changes and can be tailored to appeal to narrowly defined target markets.

1. When linked with email, it provides companies with relationship building opportunities.

2. Not all target markets are prepared to use the web for commercial transactions, however.

F. The Internet has also become a popular internal marketing approach, courtesy of intranets – internal, in-company Internet networks for routine communications, fostering group communications, providing uniform computer applications, distributing the latest software or informing colleagues of marketing developments and new product launches.

G. There is a clear process for developing a website, which includes: 1. the planning of the site‘s goals

245 2.

3.

4.

5.

6.

analysis of the required content examination of rival sites design and build of the site implementation using hypertext mark-up language (HTML) ongoing development to ensure that, once up and running, the site reflects user views and is updated regularly H. To be effective, a website must contain information perceived relevant and interesting by a company‘s targeted customers.

1. Marketers should ensure that their particular targeted customers are in fact prepared and able to access the Internet.

2. The pages of the site need to be stylish and eye-catching but also easy to interpret.

3. Website branding, ethos and image should be consistent with the branding of existing products and other promotional mix executions.

4. The information on the website should be updated regularly and accurately and tailored carefully to reflect the buying behaviour of the targeted customer.

5. As with any marketing activity, the website needs to be designed to be memorable and distinctive.

I. Far from being a minor task, website design is a specialized activity that requires the skills of a qualified webmaster and the careful design of material to reflect the characteristics of the product, the brand and the intended consumer.

J. Search engine optimization is a major aspect of online marketing: ensuring the Google searches show the brand high in its listing.

K. Digital marketing goes way beyond the development of a web site, harnessing a wealth of tools to drive traffic, solicit interest, generate sales, foster positive chatter and be noticed. As explained in Chapter 19.

L. A fast-growing facet of digital marketing is mobile marketing, reflecting the fact that most consumers are potentially available anywhere and anytime, via smart phones and tablets, apps and broadband.

M. Social media is another game-changer in the digital era, providing marketers with new opportunities to communicate and to harness insights into their customers‘ behaviours.

However, social media have provided consumers with opportunities to share their views – not always positive ones – with other consumers, cutting out the control over marketing messages previously held by brand managers.

N. Interactive marketing harnesses CRM, the web, the digital toolkit and direct marketing to develop ongoing dialogues and relationships with customers.

IX. Direct marketing A. Direct marketing is one of the ‗in‘ concepts of marketing, due largely – but not entirely – to the boom in the Internet.

1. Direct marketing encompasses all the communications tools that enable a marketer to deal directly with targeted customers: a) Direct mail b) Telemarketing c) Direct response television advertising d) Door-to-door/personal selling e) The internet 2. Increasingly marketers are utilizing the direct marketing toolkit to do more than simply generate sales, although sales generation remains the foremost task for direct marketers.

B. Direct marketing is a decision by a company‘s marketers to select a marketing channel that avoids dependence on marketing channel intermediaries and to focus marketing

246

C. D. E.

F.

communications activity on promotional mix ingredients which deal directly with targeted customers.

1. Direct marketing is an interactive system. a) It contacts targeted consumers directly, can tailor messages to the individual and solicits direct feedback.

2. Direct marketing is communication in its broader sense.

3. The interactive nature of direct marketing allows consumer responses to be tracked.

4. Direct marketers do not use retail outlets, wholesale depots or industrial distributors. a) They can contact consumers at home or at work via direct mail, telephone or fax, and increasingly via Internet links.

Direct marketing evolved from mail order businesses, such as Littlewoods or GUS, but has been fuelled by e-commerce and the Internet.

Direct marketing, telemarketing, personal selling, direct response advertising and the use of the internet are all on the increase owing to the increased adoption of direct marketing.

To be welcomed by targeted customers and effective in terms of generating sales, the deployment of any direct marketing campaign must do the following: 1. Strive to reflect targeted customer behaviour, needs and perceptions.

2. Provide a plausible proposition that is clearly differentiated from competitors‘ propositions.

3. Match an organization‘s corporate goals and trading philosophy.

Direct marketing is not a substitute for marketing practice per se, nor for the traditional promotional mix.

1. It is an increasingly popular deployment of marketing that stems from marketers‘ strategic choices in terms of marketing channel and the selection of which promotional mix tactics best facilitate contact with prospective customers.

ANSWERS TO DISCUSSION AND REVIEW QUESTIONS 1.

What is personal selling? How does personal selling differ from other types of promotional activity?

Personal selling is a process of informing customers and persuading them to purchase products through personal communication in an exchange situation. It differs from other types of promotional activities in that it is the most precise method. It allows a marketer to adjust the message in order to satisfy a customer‘s information needs and to focus on the most promising prospects instead of directing promotional efforts at a group of people.

2.

What are the primary purposes of personal selling?

The primary purposes of personal selling can be grouped into three general categories: (a) to find individuals and/or organizations that are prospective buyers, (b) to transform prospects into buyers and (c) to maintain customer satisfaction.

3.

Identify the elements of the personal selling process. Must a salesperson include all these elements when selling a product to a customer? Why or why not?

The personal selling process consists of several elements or steps. The first step is prospecting and evaluating. This involves developing a list of potential customers. After developing a list of acceptable prospects, but before contacting a prospect, comes the preparation step, in which the salesperson finds and analyzes information regarding a prospect‘s specific product needs, current brands being used, feelings about available brands and personal characteristics. In the third step, the approach, the salesperson contacts the prospect. During the fourth step, making the presentation, the salesperson must attract and hold the prospect‘s attention, stimulate interest and

247 develop desire for the product. The fifth step is overcoming a prospect‘s objections. The sixth step is the closing, in which the salesperson asks the prospect to buy the product or products. The seventh and final element in the selling process is the follow-up. In this step, the salesperson contacts the buyer to see whether the order was delivered on time and was installed properly (if installation was required), to see if the buyer has any problems or questions regarding the product and to determine the buyer‘s future product needs. For personal selling to be effective, all seven elements should be included in the selling process.

4.

How does a salesperson find and evaluate prospects? Do you find any of these methods ethically questionable?

A salesperson seeks the names of prospects from several sources, including company sales records, consumers‘ information requests from advertisements, other customers, newspaper announcements (marriages, births, deaths), public records, telephone directories and trade association directories. After developing the prospect list, the salesperson evaluates each prospect to determine whether the prospect is able, willing and authorized to buy the product. After this evaluation, some prospects may be deleted while others are deemed acceptable and are ranked according to their desirability or potential. The question about ethics will elicit varied responses.

Some students may perceive the use of sources such as public records, directories and announcements as unethical. Others may feel that this practice is ethical but that the sources of information are less satisfactory than are sales records and consumers‘ information requests.

5.

Are order getters more aggressive or creative than order takers? Why or why not?

Order getters generally are considered to be more aggressive and creative than order takers because they are more responsible for eliciting sales. These sales may be either new sales or sales to current customers. In either case, the salesperson is responsible for recognizing the potential buyer‘s needs and then providing the prospect with the necessary information. Order takers, on the other hand, engage in more repetitive tasks that involve perpetuating a long-lasting, satisfying relationship with customers.

6.

Identify several characteristics of effective sales objectives.

Sales objectives should be stated in precise, measurable terms and be specific regarding the time period and the geographic areas involved. They usually are established for the total salesforce and for each salesperson. These objectives inform salespeople regarding their accomplishments during a specified time period, provide the salesforce with direction and purpose, and provide performance standards for the evaluation and control of sales personnel.

7.

How should a sales manager establish criteria for selecting sales personnel? What are the general characteristics of a good salesperson?

A sales manager must develop a set of characteristics that make people especially well suited to the sales tasks in the particular company. To this end, the sales manager should prepare a job description that enumerates the specific tasks to be performed by the salesperson and should analyze the characteristics of the company‘s successful salespeople as well as the ineffective ones.

Based on these two areas, the sales manager should be able to develop a set of specific requirements.

Although for years marketers have attempted to create a comprehensive set of traits that characterize effective salespeople in general, currently there is no such list.

8.

What major issues or questions should be considered when developing a salesforce training programme?

248 The major issues or questions to consider when developing a salesforce training programme are the following:

9.

a.

Who should be trained? Training programmes can be directed towards the total salesforce or towards a segment of it.

b.

When and where should the training occur? Sales training may be performed in the field, at educational institutions, in company facilities or in several of these locations.

c.

What should be taught? The content of sales training programmes can deal with general company background, plans, policies and procedures; product information regarding features, uses, advantages, problem areas, parts, service, guarantees, packaging, sales terms, promotion and distribution; and selling methods.

d.

How should the information be taught? The specific methods and materials used in a particular sales training programme depend on the type and number of trainees, programme content, complexity, length of the training programme, size of the training budget, location, number of teachers and the teachers‘ preferences.

Explain the major advantages and disadvantages of the three basic methods of compensating salespeople. In general, which method do you prefer? Why? The straight salary method of compensation provides salespeople with maximum security, gives the sales manager a large degree of control over salespeople, is easy to administer and yields predictable selling expenses. Its disadvantages include the lack of incentive, the necessity of close supervision of the salesperson‘s activities, and the level of selling expenses during periods of sales decline. Advantages of the straight commission method of salesperson compensation include providing the maximum amount of incentive, encouraging salespeople to sell certain items by increasing the commission rate on these items, and relating selling expenses directly to sales resources. Disadvantages of this method are the lack of control over the salesforce, the possibility of inadequate service to smaller accounts and the decreased predictability of selling expenses. The combination method of compensation provides a certain level of financial security to salespeople, provides some degree of incentive and yields selling expenses that fluctuate with sales revenue.

Unpredictability, selling expenses and difficulties in administration are disadvantages of this method.

The students‘ preferences for compensation methods will reflect individual attitudes towards each method. Because each method has advantages and disadvantages, arguments can be made for any of them.

10. How does a sales manager who cannot be with each salesperson in the field on a daily basis control the performance of sales personnel?

Because a sales manager ordinarily does not travel with each salesperson, information is needed in order to control the performance of the salesforce. This information can be supplied through salespeople‘s call reports, customer feedback and invoices. Call reports and work schedules submitted by sales personnel provide the sales manager with detailed information about current interactions with clients and indicate salespeople‘s plans during a specific future period. Today‘s mobile office solutions enable managers to keep track of their team‘s activities, showing who is where, visiting whom and addressing what issues. Databases capture information to build better customer insight so it becomes evident if a salesperson is failing in his or her duties.

11. What is key account management?

Key account management recognizes that not all accounts (individual business customers) are equally important or demanding. The biggest and strategically most important – those which if

249 lost to a competitor would create a significant shortfall in sales – are treated differently and given dedicated personnel to look after them and develop ongoing relationships.

12. How does key account management work alongside market segmentation?

Generally, a company first creates market segments and prioritizes some of these as its key target markets. Within these, the biggest and fastest growing accounts (individual business customers) are handled in one-to-one relationships by dedicated sales staff, the key account managers.

11. What is sales promotion? Why is it used?

Sales promotion is an activity and/or material that acts as a direct inducement, offering added value or incentive for the product to resellers, salespeople or consumers. Sales promotion activities and materials are used to achieve the following goals: a.

Identify and attract new customers.

b.

Introduce a new product.

c.

Increase the total number of users for an established brand.

d.

Encourage greater usage among users.

e.

Educate consumers regarding product improvements.

f.

Bring more customers into retail stores.

g.

Stabilize a fluctuating sales pattern.

h.

Increase reseller inventories.

i.

Combat or off-set competitors‘ marketing efforts.

j.

Obtain more and better shelf space and displays.

12. Does sales promotion work well in isolation from the other promotional mix elements?

Organizations often use sales promotion in conjunction with other elements of the promotional mix. For example, it is sometimes used to facilitate personal selling, advertising or both. The ratchet effect describes the impact of using sales promotion and advertising together. The ratchet effect, which has been identified in many markets, shows that sales promotion brings forward sales and has an immediate effect. An advertising campaign takes time to generate sales but can switch other brand users and non-users.

15. For each of the following, identify and describe three techniques and give several examples: (a) consumer sales promotion methods, and (b) trade sales promotion methods.

Possible answers include the following: a.

Consumer sales promotion methods (1)

Coupons are used to induce trial of new or improved products, increase volume quickly, attract repeat purchasers and introduce new package sizes or new features.

Coupons state savings on the purchase of an item and become part of the purchase price or are accepted as cash. They are distributed by mail, in magazines and newspapers, or in the product itself. Dry goods, such as flour, sometimes contain coupons. Coupons may be for a specific brand or for a kind of product, and they may be distributed through retailers, free-standing inserts (FSIs) or as direct mail/leaflet drops.

250 (2)

Demonstrations are supplied by the manufacturer and are good for attracting attention.

They frequently show how a product works and sometimes involve the preparation and distribution of the product. An example is the demonstration of a product in an appliance store.

(3)

Frequent user incentives are incentive programmes that reward customers who engage in repeat purchases. For example, most major international airlines offer a frequent flier programme through which customers who have flown a specified number of miles are rewarded with free tickets for additional travel.

(4)

A loyalty card is a mechanism whereby regular customers who remain loyal to a particular company are rewarded with discounts or free merchandize. This kind of frequent user incentive helps foster customer loyalty to a specific company or group of cooperating companies that provides extra incentives for patronage.

(5)

Trading stamps are a premium given in proportion to the amount of purchase for buying at a particular location. These stamps are used by many kinds of retailers and are saved by consumers and redeemed for goods. Trading stamps are often given at grocery stores, department stores and even banks.

(6)

Point-of-sale (PoS) materials include outside signs, window displays, counter pieces, display racks and self-service cartons. These are used to encourage retailers to carry a company‘s product.

(7)

Free samples may be distributed by mail, by door-to-door delivery, in stores or on packages. This type of promotion is used to stimulate trial of a new or improved product, increase volume quickly in early life cycle stages and aid in obtaining retail distribution of the product. Recent examples of free samples include soaps and toothpastes.

(8)

Money refunds offer a specified amount of money to be sent to the consumer by mail after proof of purchase is established. These are used to promote trial of a product and to require multiple purchases to obtain proof of purchase. Such items as shampoos and razors have offered money refunds. Money refunds in the form of rebates have even been offered on cars.

(9)

Premiums are items offered free or at minimal cost as a bonus for purchasing a particular product. They can be placed on or in the package or can be distributed in stores or through the mail. They are used to attract competitors‘ customers, introduce different sizes of current products, add variety to promotional efforts and stimulate loyalty. Small toys offered in cereal boxes are examples of premiums.

(10) Price-off offers entice the buyer to receive a certain amount off the regular price as shown on the label or package. These provide a strong incentive to try a product and are used to promote sales of lagging products. Such offers may appear on many convenience items, including toothpaste, detergent and coffee.

(11) Consumer contests involve competition for prizes and are usually based on analytical or creative skills. An example of this technique would be to award £100 for writing a jingle for a new shampoo.

(12) Consumer sweepstakes require entrants to submit their names for inclusion in a drawing. Sweepstakes are often sponsored by cigarette manufacturers. b.

Trade sales promotion methods

251 (1)

A buy back allowance is a secondary sales promotion method used after a deal to stimulate repurchase. Such allowances are used to encourage cooperation in the initial transaction and in restocking.

(2)

Buying allowances are temporary price reductions to resellers for the purchase of specified quantities. They are used as an incentive to handle new products, achieve temporary price reductions or stimulate the purchase of an item in quantities larger than usual.

(3)

Count and re-count involves the payment of a specific amount of money for each unit of product moved from the reseller‘s warehouse during a given period. This method is used to alleviate retail stock-outs and reduce warehouse inventory.

(4)

Free merchandize may be offered to a reseller who purchases a stated quantity of the same or different products.

(5)

Using merchandize allowances, the manufacturer agrees to compensate resellers with certain amounts of money for providing special reseller promotional efforts such as advertisements or displays. This technique is used for high volume, high profit, easily handled products.

(6)

Cooperative advertising involves an agreement by a manufacturer to pay a certain amount of the retailer‘s media costs. The amount is based on the quantity of products purchased by the retailer.

(7)

A dealer listing is dual purpose advertising that announces a product or consumer promotion and contains names of participating retailers that carry the product.

(8)

Premium or push money is used as an incentive to push a line of goods by providing additional compensation to salespeople.

(9)

Sales contests use recognition to motivate resellers, retailers and salesforces.

(10) Dealer loaders are premiums granted to a retailer for the purchase of specified quantities of merchandize.

13. What types of sales promotion methods have you observed recently?

This is an open-ended question that will enable students to recall some sales promotion methods that they have observed. Methods used to promote retail establishments, new products or established products will probably be more familiar to students than those used to promote to resellers.

14. How does direct mail gain the interest of its recipients?

If it is to succeed, direct mail must prompt the receiver to open it rather than throw it away. The use of attention seeking flashes or headers printed prominently on the address labels can help.

Examples of flashes include ‗Prize money‘, ‗Your opportunity to win‘ and ‗Not a circular‘.

However, as the amount of direct mail increases and customers become more aware of it, often persuasive phrases are not enough. Packaging design is an increasingly important element in encouraging receivers to open the mail. For example, the use of attractive or unusual shapes and designs can all be useful tools.

15. What are the problems facing users of direct mail?

The problems users of direct mail face are growing. Consumers are becoming much more aware of this form of promotion and increasingly view it as ‗junk mail‘, fit only for the rubbish bin.

Increasingly irritated by the delivery of such material, some consumers are therefore unlikely to

252 respond positively to it. There are now organizations offering services to consumers not wishing to have their names and addresses included on any commercially available databases or mailing lists. As companies seek more creative ways of using direct mail, the costs are rising, especially as the mail shots must be regularly updated to remain fresh. In some markets, it is difficult to find up-to-date mailing lists. This reduces the response rates and raises costs further. Where databases are available, companies in many countries are increasingly having to contend with consumer protection legislation limiting their use.

16. Marketers initially viewed the internet primarily as a means to disseminate product and manufacturer information. What technological advances had to be made before the internet could be used for selling opportunities?

Some of the technological factors that have increased the use of the internet for selling opportunities include faster connection speeds and the scrambling of payment details to provide secure financial transactions. Other factors that have enhanced internet selling opportunities include websites that are more appealingly designed and carefully targeted, the associated media hype of e-commerce, the appearance of well-known brands on the web, and increasing consumer usage and awareness of the Internet.

17. What are the essential requirements for a website likely to appeal to targeted consumers?

The website must contain information perceived as relevant and interesting by a company‘s targeted customers. Targeted customers must be prepared and able to access the Internet. The pages of the site must be stylish, eye-catching, easy to interpret, memorable and distinctive.

Website branding and imagery needs to be consistent with the brand positioning of existing products, the product‘s packaging and other promotional mix executions. The website‘s ethos must not contradict the work of the rest of the marketing mix or the product‘s heritage.

Information must be accurate and regularly updated, as well as being tailored to reflect the buying behaviour of targeted customers.

21.

Why is mobile marketing exciting many brand managers?

Consumers are potentially available anywhere and anytime, via smart phones and tablets, apps and broadband.

18. Discuss the ways social media poses challenges to marketers?

Social media have provided consumers with opportunities to share their views – not always positive ones – with other consumers, cutting out the control over marketing messages previously held by brand managers. The wealth of data and customer insight available from social media is proving to be overwhelming for many marketers.

19. In what ways is direct marketing an „interactive‟ system? Which marketing channel intermediaries are bypassed due to the nature of this system?

Direct marketing is interactive in that it tends to use forms of communication necessitating a response, such as telephone, Internet interaction, and personal selling. With the exception of direct mail, leaflet drops and direct response advertising, such responses often have to be instantaneous.

Such forms of marketing communication contact the targeted customer directly and many flow into order taking, negating the need for retailers, wholesalers or industrial distributors. However, not all customers wish to buy in this manner and not all products are suitable for either direct marketing or e-commerce.

COMMENTS ON THE WEB TASK AND CASES

253

WEB TASK Best practice says that good websites find out customer profiling information about users in order to appropriately tailor future information and product selection. For example, Amazon is particularly effective in identifying customer information and responding with bespoke promotions and product suggestions.

Unfortunately, many early websites failed to reflect the brand‘s existing image and positioning, often not linking with the rest of the promotional mix. While increasingly this is no longer a deficiency, few websites strive to differentiate themselves from those of their competitors. The likes of Pepsi and Nike are not the norm. Just as products should be differentiated from rivals – in a way that is relevant to targeted customers – so should websites.

Many businesses operate their channels through separate management teams, so the customer experience across channels seems confusing and brand consistency is poor. Others, such as John Lewis, have a similar experience and look, carefully controlled, whether in store or online.

The checklist presented in Table 18.2 (a copy of which is in the set of PowerPoint images provided for tutors using Marketing: Concepts and Strategies) is a good starting point for students to use when critiquing the effectiveness of their selected website.

APPLIED MINI-CASE Key issues relate to the characteristics of the target market, how clustered customers are or how readily accessible they are via specific media or trade shows, how web-literate they are and how receptive to non-personal marketing communications. There may be ‗norms‘ in terms of industry practice, forcing a company to behave like its rivals in order to seem acceptable to clients. In many cases, a small budget can be stretched to enable trade press and classified advertising, attendance at a trade fair, the creation of a website and some direct mailing activity. Sales personnel are costly, but most businesses have some managers – even the proprietor – involved in personal selling.

CASE STUDY: A MARKETING CLASSIC: PROMOTING FREE FLIGHTS AND HOW HOOVER CAME UNSTUCK Leading electrical appliance producer Hoover‘s attempts to boost sales by offering free flights to purchasing consumers led to the company‘s sale and created a ‗textbook‘ lesson on how not to run a sales promotion.

Question 1 considers how damaging the sales promotion campaign was to the Hoover name and reputation. The media attack was unrelenting and damaging statements were even made in Parliament.

The company compounded the problem by failing to remedy the situation quickly. While a sales promotions agency was largely at fault, Hoover‘s name was dragged through the mud with the ultimate sacrifice being paid: the US parent pulled out and sold off the European operation. Customer loyalty has returned, but it has taken perhaps a decade to overcome the adverse publicity of this affair.

Question 2 asks how Hoover could have avoided these problems. Effective public relations was only part of the solution. Any sales promotion must be carefully thought out and openly implemented, and customers must not be dissatisfied. The basic requirements for running any promotional campaign were not effectively deployed in this instance. Internal controls were ineffective and remedial action slow to materialize. The problem should never have materialized in the first place, however.

Question 3 asks how Hoover should have utilized the public relations toolkit to overcome the adverse publicity. Public relations crisis management states that there is a need to have a clear process in place

254 for controlling the media and limiting damage, yet this was not the case at Hoover. Worse, the crisis was allowed to run and initial remedies were a recipe for disaster. The situation was not managed by Hoover, journalists and interested target publics were not given Hoover‘s version of events and Hoover‘s own actions appeared to worsen the situation.

CHAPTER 19

Digital marketing

OBJECTIVES • • • • • • • • •

To explore how digital has impacted on consumer behaviour and decision-making.

To appreciate the new requirements of understanding search engine management and content marketing, types of digital media and multi-screen marketing.

To examine the all-important issue of social media strategy.

To explore the use of social media influencers.

To appreciate the growing role of mobile marketing.

To recognize the change to public relations brought about with online public relations.

To consider the way in which digital is driving innovation.

To understand the challenges of turning big data into meaningful insights.

To explore the requirements for organizations in deciding on a multiple channel-tomarket strategy.

PURPOSE AND PERSPECTIVE This digital era is exciting for marketers, providing immediate two-way interaction with consumers, the opportunity for tailored offerings, data capture and much smarter management of customers. This chapter explores how digital has impacted on consumer behaviour and decision-making; the new requirements of understanding search engine management and content marketing, types of digital media and multi-screen marketing; the all-important issue of social media strategy; the exciting options provided by mobile marketing; email marketing and online public relations; the way in which digital is driving innovation like never before; turning ‗big data‘ into meaningful insights; and, the challenges for organizations in deciding on a channel-to-market strategy, addressing multiple channels and restructuring their operations to manage these choices.

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LECTURE OUTLINE I.

Digital marketing A. Digital marketing is the use of technology-led channels of communication and selling to manage customer interaction and provide customer experience in a digitally connected environment.

B. It makes use of computers, smartphones and tablets; websites, emails and apps; as well as some non-web-based channels such as TV, radio and SMS messaging, to engage with consumers and business customers.

C. Social media is a pivotal aspect of the digital era.

D. Many brands now harness digital within their communications strategy, but also within their channels strategy. The advent of digital has enabled multi-channel marketing for many brands.

E. There are key benefits from digital marketing: 1. Additional options for marketing communications, as Internet viewing, web searches and Google become routinized behaviours.

2. More direct and multiple channel options, with some brands opting for digital-only routes to market.

3. Faster and more direct customer insight capture.

4. Relationship-building with customers, prospects and other parties.

5. 24/7 access to customers as never before possible.

F. There are challenges for marketers, however: 6. Marketers have less control than ever before over brand messaging, shaping customers‘ perceptions and controlling marketing information, notably as social media permits consumer-to-consumer sharing of views.

7. Marketers face data overload as ‗big data‘ are hard to decipher for key insights and pearls of wisdom.

8. Consumers and pressure groups are raising privacy concerns.

9. Through social media, consumers learn how a brand has treated others, so they may lose trust in their once-favoured brand.

10. Digital requires a host of new skills and different agency partners for marketers to juggle.

II. Changing consumer behaviour A. The traditional buying behaviour activities, as described in Chapters 5 and 6 – have been modified. Information search is often online, posted review comments and social media gossip help shape opinions and product choices, purchasing is no longer confined to in-store or indepot; customer behaviour is now more easily observed, mapped and understood.

B. Marketers must ensure digital searches find their brands, that they are aware of social media opinions, and that their product is available to acquire on-line.

III. Applying digital marketing A. Search engine management 1. These changes in behaviours force marketers to prioritize the management of search engines.

256 2. Search engine optimization (SEO) is the management of search engines so as to increase a brand’s rankings on search engine selections.

3. A popular metric in digital agencies is pay per click, to ensure strong click-through from searches to a brand’s site or that of its stockists.

B. Once directed to a site, the ‘right’ content must be evident, linked to the brand’s positioning strategy and customer value proposition.

C. Content marketing is the creation of relevant and interesting text, audio, video and rich media content.

D. A keyphrase leverages SEO and search marketing.

E. The types of media available to marketers have mushroomed. Digital media are two-way, immediate and tailored to selected targeted segments and individuals. Web sites, mobile sites, blogs, Twitter, display ads, searches, sponsorships, word-of-mouth, viral and buzz marketing are digital media.

F. Multi-screen marketing is another development in the digital era. Brands used to communicate to customers, but now it is two-way and multi-faceted, and consumers share views with other consumers. Many consumers use TV and cinema screens, computers, smartphones and tablets, often several at the same point in time. Marketers must reflect these behaviours and ensure appropriately designed content appears across these media.

IV. Social media strategy A. As explained in the first chapter, social media has huge reach and covers a diverse and growing part of the population.

B. Social media might permit consumer-to-consumer interaction and sharing of views, but it also provides a brand’s marketers with a means for near-instant communication about their brands, as well as a means for monitoring and understanding consumers’ views about a brand, competitors or aspects of the marketing mix such as pricing or advertising platforms.

C. Social media marketing is the process of gaining website traffic or social mentions through social media sites, by creating content attracting the attention of readers who will share these views and messages through their own social networks.

D. An important aspect is for marketers to use social media to find out, learn, and develop customer and market insight. A related aspect is the use of online digital brand communities, consisting of consumers, observers or advocates focused on a particular brand and intent on sharing admiration for this brand.

E. Social media influencers (SMIs) are YouTubers, vloggers and Instagrammers. Many have millions of followers. Their views influence the purchase decisions of these ‘fans’, so many leading brands pay to ensure their products feature and are discussed positively. The risk is that an SMI says something inappropriate and falls into disrepute, tarnishing by association the brands they endorse.

V. Mobile marketing A. Mobile marketing encourages consumer engagement anywhere and any time via smartphones and tablets, via mobile apps, which provide users with information, entertainment, networking and location-based services.

257 B. This has provided marketers with 24/7 and almost anywhere possibilities for engaging with customers and prospects, but this development also provides more C2C communication and permits competitors to pursue a rival brand’s own customers more readily.

VI. Email marketing A. While most students will opt for Instagram, Snapchat, Facebook and Flickr, email is still hugely important for marketers to engage with customers, build databases of contacts and tailor offers and promotions.

VII. Online public relations A. Online PR is web-based communication and interaction with an organization’s publics, stakeholders and target audiences in order to manage reputation, create awareness and build relationships.

B. Digital has radically altered much of marketing’s toolkit and behaviours of brands, but for PR executives it has opened up a whole new set of options, with more immediate, two-way and tailored access to intended targets than ever before.

VII. Innovation A. Digital has enabled 24/7 tailored interaction with customers on-the-move, in-store, at-home or at work. The accompanying toolkit has spawned many innovations.

1. The desire to monetize these activities by driving revenue through a website or blog is a new option for many brands, as is bundling customer insight data and selling them on to third parties.

2. Crowdsourcing is new form of fund-raising, in this case to support product creation and marketing mix activities.

3. The next wave of innovation will result from marketers, consumers and other parties harnessing the internet of things.

VIII. Big data and analytics A. The digital era has created a wealth of market, customer and product insights accruing in real-time, to potentially over-load marketers and their agencies. The ability to sift through these big data insights has the potential to give marketers an edge, develop a better understanding of customers, market trends and competitor developments, and to provide strategic direction for ongoing marketing programmes.

B. Market insight is the learning about consumers, competitors and market trends to identify strategic direction and improve returns.

C. A related development is the growth of marketing analytics: the processes and technologies enabling marketers to evaluate the success of their marketing initiatives by measuring performance across all channels and activities, using important business metrics such as return on investment.

D. Key metrics related to digital marketing include site hits, click-through rates, conversion rates, bounce rates, abandonment rates, cost per conversations.

IX. Managing multiple channels

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A. Some start-ups have opted for digital-only channels to market. Most established brands and most new players have harnessed multiple channels, mixing the traditional routes to market (see Chapter 20) with online digital channel options.

B. Omni-channel marketing is where a marketer opts to use all available channels to provide customers with a seamless brand experience across a company’s channels.

ANSWERS TO DISCUSSION AND REVIEW QUESTIONS 1. Define what is meant by the term digital marketing.

Digital marketing is the use of technology-led channels of communication and selling to manage customer interaction and provide customer experience in a digitally connected environment. It makes use of computers, smartphones and tablets; websites, emails and apps; as well as some nonweb-based channels such as TV, radio and SMS messaging, to engage with consumers and business customers.

2. What are the main benefits for marketers of adopting digital marketing?

Digital marketing provides additional options for marketing communications, as Internet viewing, web searches and Google become routinized behaviours. More direct and multiple channel options, with some brands opting for digital-only routes to market. Faster and more direct customer insight capture. Relationship-building with customers, prospects and other parties. 24/7 anytime/anywhere access to customers as never before possible.

3. What are some of the biggest challenges and concerns associated with the growth of digital marketing?

Marketers have less control than ever before over brand messaging, shaping customers‘ perceptions and controlling marketing information, notably as social media permits consumerto-consumer sharing of views. Marketers face data overload as ‗big data‘ are hard to decipher for key insights. Consumers and pressure groups are raising privacy concerns.

Through social media, consumers learn how a brand has treated others, so they may lose trust in their once-favoured brand. Digital requires a host of new skills and different agency partners for marketers to manage.

4. Considering examples of your choice, outline some of the changes to the consumer buying decision-making process brought about by digital?

The traditional buying behaviour activities, as described in Chapters 5 and 6, have been modified. Information search is often online; posted review comments, comparison web sites and social media gossip help shape opinions and product choices; purchasing is no longer confined to in-store or in-depot; customer behaviour is now more easily observed, mapped and understood. Marketers must ensure digital searches find their brands, that they are aware of social media opinions, and that their product is available to acquire online.

5. What is search engine optimization (SEO) and why is it important?

Marketers must manage search engines to ensure their brands are visible and that interested consumers or business customers head their way. Search engine optimization (SEO) is the management of search engines so as to increase a brand‘s rankings on search engine selections.

6. Explain what is meant by content marketing.

259 Once directed to a site, the ‗right‘ content must be evident, linked to the brand‘s positioning strategy and customer value proposition. Content marketing is the creation of relevant and interesting text, audio, video and rich media content. A keyphrase leverages SEO and search marketing.

7. In what ways have media options changed with the advent of digital?

The types of media available to marketers have mushroomed. Digital media are two-way, immediate and tailored to selected targeted segments and individuals. Websites, mobile sites, blogs, Twitter, display ads, searches, sponsorships, word-of-mouth, viral and buzz marketing are types of digital media.

8. What is meant by multi-screen marketing?

Multi-screen marketing is another development in the digital era. Brands used to communicate to customers and control such one-way messaging, but now it is two-way and multi-faceted, and consumers directly share views with other consumers. Many consumers use TV and cinema screens, computers, smartphones and tablets, often several at the same point in time.

9. What is the impact of social media on marketing?

The biggest change is that social media removes control of brand messaging and the sharing of information about a product from marketers, giving much more power to other parties and to other consumers. Social media might permit consumer-to-consumer interaction and sharing of views, but it also provides a brand‘s marketers with a means for near-instant communication about their brands, as well as a means for monitoring and understanding their views about a brand, competitors or aspects of the marketing mix such as pricing, customer service or advertising platforms.

10. In what ways do consumers embrace social media to influence their own product choices and those of others?

From gaining initial ideas about a product or becoming aware of its existence, to information search and the creation of a short-list, to deciding on which to purchase or whether to buy at all, to knowing where and how, social media impacts on every stage of the buying process, as students will gladly testify and illustrate.

11. How do marketers use social media to test out ideas and research their hunches?

Marketers plant ideas or suggestions about new products, pricing, branding or customer service ideas in order to tease out opinions or test the water. They can quickly modify their proposals in order to re-test views. They also suggest points relating to competitors‘ products, policymakers‘ plans and decisions, and towards aspects of the marketing environment. Marketing research agencies also harness social media for surveying and opinion research.

12. In what ways has the growth of C2C in a digital world altered the nature of marketing?

Marketers are no longer in control or the dominant voice within the channel. They do not like this but know they must adjust. One response has been to establish and support online brand communities and advocacy partners.

13. What is the use of social media influencers to brand managers?

Social media influencers (SMIs) are YouTubers, vloggers and Instagrammers. Many have millions of followers. Their views influence the purchase decisions of these ‗fans‘, so many leading brands pay to ensure their products feature and are discussed positively. Some SMIs

260 are encouraged to talk negatively about competing brands. The risk is that an SMI says something inappropriate and falls into disrepute, tarnishing by association the brands they endorse.

14. In what ways has mobile marketing been a game-changer?

Once consumers had to buy by visiting the source of manufacture or from retailers only. Now they may opt to buy from the comfort of their classroom, bedroom, home, workplace or anywhere, even while on the move, 24 hours a day in many cases.

15. Using examples of your choice, consider how well-known brands are embracing mobile marketing.

Whether Amazon, movie/music streaming, Google or major store brands, sports apps or degree programme intranets, students will not struggle to suggest examples. They should be encouraged to consider how these brands have modified their marketing practices, marketing communications, channels and customer management practices in order to maximize this new opportunity.

16. What is meant by email marketing? For what purposes is it most useful?

While most students will opt for Instagram, Snapchat, Facebook and Flickr, email is still hugely important for marketers to engage with customers, build databases of contacts and tailor offers and promotions, particularly in B2B markets.

17. Why has PR largely transferred to a digital environment?

Online PR is web-based communication and interaction with an organization’s publics, stakeholders and target audiences in order to manage reputation, create awareness and build relationships. Digital has radically altered much of marketing’s toolkit and the behaviours of brands, but for PR executives it has opened up a whole new set of options, with more immediate and tailored access to intended targets than ever before.

18. What are some of the latest innovations being driven by digital and social media?

Online digital brand communities, mobile marketing, ‗big data‘ capture and analysis, 24/7 access to customers, C2C communication, crowdsourcing, the internet of things, enhanced analytics, new performance metrics, etc.

19. What is meant by the term big data? In what ways are big data altering marketing practices?

The digital era has created a wealth of market, customer and product insights accruing in realtime, to potentially over-load marketers and their agencies. The ability to sift through these big data insights has the potential to give marketers an edge; develop a better understanding of customers, market trends and competitor developments; and to provide strategic direction for ongoing marketing programmes. Big data are data too large, numerous, complex and frequently updated to be analyzed with traditional tools.

20. Why are marketing analytics now so important?

Market insight is the learning about consumers, competitors and market trends to identify strategic direction and improve returns. A related development is the growth of marketing analytics, which is the processes and technologies enabling marketers to understand the implications from analyses of market data and to evaluate the success of their marketing initiatives, by measuring performance across all channels and activities using important business metrics such as return on investment.

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21. In what ways are online marketing activities measured?

Key metrics related to digital marketing include web hits, click-through rates, conversion rates, bounce rates, abandonment rates, cost per conversations.

22. What is meant by omni-marketing?

Omni channel marketing is where a marketer opts to use all available channels to provide customers with a seamless brand experience across a company‘s channels.

23. Why is multi-channel management such an important aspect of marketing strategy?

Most established brands and most new players to a market have harnessed multiple channels, mixing the traditional routes to market with online and digital channel options. Customer experience and customers‘ views of a brand should be managed across these channels to ensure consistency and adequate returns.

COMMENTS ON THE WEB TASK AND CASES WEB TASK Students are asked to select one of their favourite retailers, whose physical stores they also visit.

They are asked to access this brand‘s online platform via a desktop computer and by their smartphone, noting similarities in functionality and brand experience, as well as any differences or inconsistencies. Increasingly, there should not be huge variations in customer experience, but often there are. Students are then asked to consider how the brand experience differs between visiting a store and accessing this brand online. Again, these experiences should link-up and offer a single brand experience, but often this is still not the case. Students might be surprised at these inconsistencies. They probably will also identify examples of good practice.

APPLIED MINI-CASE The online BBC site permits users to tailor their content to suit their needs and preferences. In many sections, there are requests to provide feedback and pop-ups seek feedback. There is a surprising degree of interactivity within this site, given it is not overtly seeking to retail products or services. If users go into the educational parts of the BBC or decide to use iPlayer, there is even great opportunity to tailor content, develop histories and profiles, and for an interactive and ongoing relationship.

CASE STUDY: DIGITAL AND UNIVERSITY CHOICES As a tutor, how did you select your degree programme options and short-list universities to visit?

What sources of information shaped your thinking? How is it different today, with online guides, universities adopting SEO to ensure visibility, social media enabling prospective students to share opinions and canvass their friends and followers?

Question 1 asks what information sources were used and trusted. University web sites, ranking schemes published by The Times or Guardian, online guides, universities‘ own web sites, the views of parents, teachers, current students, as well as online discussion groups and contacts on social media. Everyone will have their own views.

262

Question 2 looks to how providers of courses must manage search engines, join appropriate discussion groups, play the rankings game, but also this question anticipates that students will say how they wanted to be part of the current cohort‘s online community, see students‘ blogs and be able to be buddied-up to current students digitally, in order to develop a relationship and feel reassured about their choices.

Questions 3 poses the dilemma… It is easier to learn about prospective candidates‘ views, needs and expectations; to communicate interactively and develop an ongoing dialogue; to use CRM to ensure candidate eventually turn up on campus or enrol online. However, it is far easier than ever before for competitors to convey their alluring messages and for candidates to fully appreciate the myriad of options before them.

CHAPTER 20

Pricing

OBJECTIVES •

To understand the characteristics and role of price.

•

To be aware of the differences between price and non-price competition.

•

To explore key factors that affect pricing decisions.

•

To examine different pricing objectives.

•

To consider issues unique to the pricing of products for business markets.

•

To analyze the concept of economic value to the customer.

•

To understand the eight major stages of the process used to establish prices.

•

To learn about demand for a product and to analyze the relationships between demand, costs and profits.

•

To explore the selection of a pricing strategy and to understand how to determine a specific price.

PURPOSE AND PERSPECTIVE This chapter introduces basic pricing concepts and issues. First, it begins by considering the characteristics of price before exploring the crucial role that it plays in determining a business‘s profitability. Next, it looks at some of the differences between price and non-price competition. Then various factors that affect marketers‘ pricing decisions are identified and examined. These major factors are grouped into nine categories: organizational and marketing objectives, major pricing objectives (such as survival, profit, return on investment, market share, cash flow, status quo and product quality), costs, other marketing mix variables, channel member expectations, buyers‘ perceptions, competition, legal and regulatory issues, and perceived value for money. The chapter then examines selected issues

263 related to the pricing of products for business markets and concludes by analyzing the concept of economic value to the customer.

264

LECTURE OUTLINE I.

II.

III.

Introduction A. To a buyer, price is the value placed on what is exchanged.

1. Something of value – usually buying power – is exchanged for satisfaction or utility. a) Buying power depends on a buyer‘s income, credit and wealth. b) Buyers must weigh up the usefulness of a product or the satisfaction derived from it against its cost to decide whether the exchange is worthwhile.

B. In most societies financial price is the basis of market exchanges.

1. It can be used to quantify almost anything of value that is exchanged, including ideas, services, rights and goods.

2. Barter, the trading of products, is the oldest form of exchange.

C. Price is critical to the marketing mix because it affects directly how much revenue is generated.

1. As it can be changed very quickly, price is more flexible than other marketing mix elements.

2. Because of the psychological impact of price on customers, price also has a symbolic value. a) It is therefore desirable to take a broader view of pricing, which takes into account issues such as target customers‘ perceptions of value for money and requirements for easy payment terms.

The characteristics and role of price A. Terms used to describe price 1. Price is expressed in different terms for different exchanges. a) Examples include premium, fine, fee, fare, toll, rent, commission, deposit, tip, interest and taxes. b) The value of many products is called price.

2. The purpose of the concept of price is to quantify and express the value of the items in a market exchange.

B. The importance of price to marketers 1. Price is the only marketing mix variable that can be changed quickly to respond to changes in demand or to competitors‘ actions.

2. Price is also a key element in the marketing mix because it relates directly to the generation of total revenue (see Table 20.1). a) Profits = (Price x Quantities Sold) – Total Costs 3. Because price has a psychological impact on customers, marketers can use it symbolically. a) By raising the price, they can emphasize the quality of a product and try to increase the status associated with its ownership. b) Lowering a price can attract bargain-hunting customers who are prepared to spend extra time and effort to save a small amount.

Price and non-price competition A. A product offering can compete on either a price or a non-price basis – the choice will affect not only pricing decisions but also those associated with other marketing mix decision variables.

B. Price competition

265 1.

Price competition is a policy whereby a marketer emphasizes price as an issue and matches or beats the prices of competitors.

2. Price competition gives a marketer flexibility. a) Prices can be altered to account for changes in the company‘s costs or in demand for the product, or when competitors cut prices.

3. A major drawback of price competition is that competitors also have the flexibility to adjust their prices and can quickly match or beat an organization's price cuts.

4. EDLP (everyday low pricing) involves budget savings that are passed on to the consumer through reduced prices. a) Companies hope to strengthen customer loyalty by permanently cutting prices of key brands. b) EDLP is funded by reducing promotions budgets so that retail prices can be cut while retailers‘ margins remain static.

C. Non-price competition 1. Non-price competition is a policy in which a seller elects not to focus on price but to emphasize other factors instead. a) A seller emphasizes distinctive product features, service, product quality, promotion, packaging or other factors to distinguish its product from competing brands. b) Price is not always the key factor for customers in deciding what to buy. c) If customers prefer a brand because of non-price issues, they may not be easily lured away by competing companies and brands. d) The implication is that price is not the most durable factor in terms of maintaining customer loyalty.

2. The features that set a particular brand apart from its competitors should be extensively promoted and difficult for competitors to copy.

3. A marketer attempting to compete on a non-price basis is still not able to ignore competitors‘ prices. a) The company must be aware of competitors‘ prices and will probably price its brand near or slightly above competing brands. b) Price remains a crucial marketing mix component in situations that call for nonprice competition.

IV. Factors affecting pricing decisions A. Organizational and marketing objectives 1. Marketers should set prices consistent with the organization's goals and mission.

2. Decision-makers should also make pricing decisions that align with the organization's marketing objectives.

B. Pricing objectives are overall goals that describe what a company wants to achieve through its pricing efforts.

C. The types of pricing objectives a marketer uses will have considerable bearing on the determination of prices.

D. Marketers often use multiple pricing objectives, including those that emphasize survival, profit, return on investment, market share, cash flow, status quo or product quality (Table 20.): 1. Survival a) A fundamental pricing objective is survival. b) Most organizations will tolerate difficulties such as short run losses and internal upheaval if they are necessary for survival c) Because price is a flexible and convenient variable to adjust, it is sometimes used to increase sales volume to levels that match the company‘s expenses.

266 2.

3.

4.

5.

6.

7.

Profit a) Though businesses may claim that their objective is to maximize profits, in practice this objective is difficult to measure. b) Because of this difficulty, profit objectives tend to be set at levels that are viewed as satisfactory. c) Specific profit objectives may be stated in terms of actual monetary amounts or in terms of percentage change relative to the profits of a previous period.

Return on investment a) Pricing to attain a specified return on the company‘s investment is a profit related pricing objective. b) Most pricing objectives based on return on investment (ROI) are achieved by trial and error, because not all cost and revenue data needed to project the return on investment are available when prices are set.

Market share a) Market share – a company‘s sales in relation to total industry sales – is a meaningful benchmark of success. b) Therefore, many companies establish pricing objectives to maintain or increase a product‘s market share. c) Maintaining or increasing market share need not depend on growth in industry sales. d) A company can increase its market share even though sales for the total industry are decreasing. e) On the other hand, assuming that the overall market is growing, a business‘s sales volume may increase as its market share within the industry decreases.

Cash flow a) Some companies set prices to recover cash as fast as possible, especially when a short product life cycle is anticipated. b) Financial managers are interested in quickly recovering capital spent to develop products. c) The use of cash flow and recovery as an objective over-simplifies the value of price in contributing to profits. d) A disadvantage of this pricing objective could be high prices, which might allow competitors with lower prices to gain a large share of the market.

Status quo a) In some cases, a business may be in a favourable position and may simply wish to maintain the status quo. b) Status quo objectives can focus on several dimensions, such as maintaining a certain market share, meeting (but not beating) competitors‘ prices, achieving price stability or maintaining a favourable public image. c) A status quo pricing objective can reduce a company‘s risks by helping to stabilize demand for its products. d) The use of status quo pricing objectives sometimes minimizes pricing as a competitive tool, leading to a climate of non-price competition within an industry.

Product quality a) Another objective might be product quality leadership in the industry. b) This goal normally dictates charging a relatively high price to cover the high product quality and, in some instances, the high cost of research and development.

267 E.

F.

G.

H.

I.

Because pricing objectives influence decisions in most functional areas – including finance, accounting and production – the objectives must be consistent with the company‘s overall mission and purpose.

Costs 1. Costs must be an issue when establishing price. a) A company may temporarily sell products below cost to match competition, to generate cash flow or even to increase market share.

(1) In the long run, however, an organization cannot survive by selling its products below cost.

2. A marketer should be careful to analyze all costs so that they can be included in the total costing associated with a product.

3. Marketers must also take into account the costs that a particular product shares with other products in the product line. a) Services are especially subject to cost sharing.

4. Most marketers view a product‘s cost as a minimum, or floor, below which the product cannot be priced.

Other marketing mix variables 1. Owing to the interrelation of all marketing mix variables, pricing decisions can influence decisions and activities associated with product, place/distribution, promotion and customer service variables. a) A product‘s price can affect the demand for the item.

(1) A high price may result in low unit sales, which in turn may lead to higher production costs per unit.

(2) Conversely, lower per unit production costs may result from a low price. b) For many products, buyers associate better product quality with a high price and lower product quality with a low price.

2. Premium priced products are often marketed through selective or exclusive distribution, whereas lower priced products in the same product category may be sold through intensive distribution.

3. The way a product is promoted can be affected by its price. a) Bargain prices are often included in advertisements, whereas premium prices are less likely to appear in advertising messages. b) Higher priced products are more likely to require personal selling efforts.

4. The price structure can affect a salesperson‘s relationship with customers. a) A complex pricing structure takes longer to explain to customers, is more likely to confuse the buyer and may cause misunderstandings that result in long-term customer dissatisfaction.

Channel member expectations 1. When making pricing decisions, a producer must consider what distribution channel members (such as wholesalers and retailers) expect. a) A channel member expects to receive a profit for the functions performed. b) Channel members often expect producers to provide discounts for large orders and quick payment. c) At times, resellers expect producers to provide several support activities, such as sales training, service training, repair advisory service, cooperative advertising, sales promotions and perhaps a programme for returning unsold merchandise to the producer.

(1) These support activities incur associated costs, so a producer must consider these costs when determining prices.

Buyers‘ perceptions

268 1.

J.

When making pricing decisions, marketers should be concerned with two vital questions: a) How will customers interpret prices and respond to them (what does the price communicate to customers)? b) How will customers respond to the price?

2. Customers‘ interpretation of and response to a price are to some degree determined by their assessment of what they receive compared with what they give up to make the purchase. a) At times, customers interpret a higher price as higher product quality, though this is not always the case – whether or not price is equated with quality depends on the types of customer and product involved.

3. When interpreting and responding to prices, how do customers determine if the price is too high, too low or about right? a) Internal reference price is a price developed in the buyer‘s mind through experience with the product. b) External reference price is a comparison price provided by others. c) Customers‘ perceptions of prices are also influenced by their expectations about future price increases, by what they paid for the product recently, by what they would like to pay for the product, time or financial constraints, the costs associated with searching for lower-priced products and expectations that products will go into a sale.

4. Buyers‘ perceptions of a product relative to competing products may allow a business to set a price that differs significantly from rivals‘ prices, either a premium price, or lower price.

5. Buyers can be characterized according to their degree of value consciousness, price consciousness and prestige-sensitivity. a) Marketers who understand these characteristics are better able to set pricing objectives and policies: b) Value-conscious consumers are those concerned about the price and quality of a product c) Price-conscious consumers are those striving to pay low prices d) Prestige-conscious consumers are individuals drawn to products that signify prominence and status Competition 1. A marketer needs to know competitors‘ prices so that a company can adjust its own prices accordingly. a) When adjusting prices, a marketer must assess how competitors will respond.

2. When a company is a monopoly and is unregulated, it can set whatever prices the market will bear. a) If the monopoly is regulated, it normally has less pricing flexibility.

(1) The regulatory body lets the organization set prices that generate a reasonable, but not excessive, rate of return.

3. In an oligopoly, when one company cuts its price to gain a competitive edge, other companies are likely to follow suit. a) The result is that very little is gained through price cuts.

4. Businesses engaged in a monopolistic competitive market structure are likely to practice non-price competition.

5. Under conditions of perfect competition, buyers view all sellers‘ products as the same. a) The price of the company‘s product is determined by the going market price. b) In this type of market structure, a marketer has no flexibility in setting prices.

269 K.

V.

Legal and regulatory issues 1. At times government action sways marketers‘ pricing decisions. a) To curb inflation, the government may invoke price controls, ‗freeze‘ prices at certain levels or determine the rates at which prices can be increased. b) With the privatization of once public utilities, the UK government set up regulatory bodies that stressed minimum and maximum charges.

2. Many regulations and laws affect pricing decisions and activities. a) Marketers must not only refrain from fixing prices but must develop independent pricing policies and set prices in ways that do not even suggest collusion. b) In the UK, the Monopolies and Mergers Commission prevents the creation of monopolistic situations. c) The consumer is protected by the Trade Descriptions Act, the Fair Trading Act, the Consumer Protection Act and many more. d) The European Union legislates to protect consumers within the community.

L. Perceived value 1. Marketers‘ pricing decisions must also take into account perceived value for money – the benefit consumers perceive to be inherent in a product or service, weighed against the price demanded. a) Sometimes the benefits are more psychological than tangible, while in other circumstances the benefits are real and can be measured.

2. Consumers will not pay more than they value the benefit inherent in a product or service. a) Consumers balance the price demanded, typically in monetary terms, against the anticipated level of use and satisfaction to be gained from buying and using the specific product.

Pricing for business markets A. Industrial markets consist of individuals and businesses that purchase products for resale, for use in their own operations or for producing other products.

1. Establishing prices for this category of buyers is sometimes different from setting prices for consumers. a) Differences in the size of purchases, geographic factors and transport considerations require sellers to adjust prices.

B. Price discounting 1. Producers commonly provide intermediaries with discounts on list prices. a) A trade or functional discount is a reduction on the list price given by a producer to an intermediary for performing certain functions, such as selling, transporting, storing, final processing and providing credit services. b) Quantity discounts are reductions from the list price that reflect the economies of purchasing in large quantities.

(1) Cumulative discounts are quantity discounts that are aggregated over a stated period of time.

(2) Non-cumulative discounts are one-off discounts based on the number of units purchased, the monetary value of the order or the product mix purchased. c) A cash discount is a simple price reduction given to a buyer for prompt payment or payment in cash. d) A seasonal discount is a price reduction given to buyers who purchase goods or services out of season. e) An allowance is a concession in price to achieve a desired goal.

270 (1)

C.

D.

E.

Trade-in allowances are price reductions granted for turning in a used item when purchasing a new one.

(2) Promotional allowances are price reductions granted to dealers for participating in advertising and sales support programmes intended to increase sales of a particular item.

Geographic pricing 1. Geographic pricing is pricing that involves reductions for transport costs or other costs associated with the physical distance between the buyer and the seller. a) An F.O.B. (free-on-board) factory price is the price of the merchandise at the factory before it is loaded onto the carrier vehicle, which must be paid by the buyer. b) An F.O.B. destination price is a price quotation indicating that the producer absorbs the costs of shipping the merchandise. c) Uniform geographic pricing is pricing in which the same price is charged to all customers regardless of geographic location. d) Zone prices are regional prices that take advantage of a uniform pricing system, adjusting prices for major geographic zones as transport costs increase. e) Base point pricing is a geographic pricing policy that includes the price at the factory plus freight charges from the base point nearest the buyer.

(1) This policy, which is now rarely used, can result in all buyers paying freights charges from one location, regardless of where the product was manufactured! f) Freight absorption pricing is a pricing policy in which the seller absorbs all or part of the actual freight costs.

Transfer pricing 1. Transfer pricing is the type of pricing used when one unit in a company sells a product to another unit within the same company. a) The price is determined by one of four methods: actual full cost, standard full cost, cost plus investment or market based cost.

2. The choice of method of transfer pricing depends on the company‘s management strategy and the nature of the units‘ interaction – the company may start using one method but then move to another.

Price discrimination 1. Price discrimination is a policy in which different prices are charged in order to give a particular group of buyers a competitive edge. a) If customers are not in competition with one another, different prices may be charged legally.

2. Price discrimination is a form of market segmentation that companies use to provide a marketing mix that satisfies different segments.

3. Price discrimination can also be used to modify demand patterns, support sales of other products, help move obsolete goods or excessive inventories, fill excess production capacity and respond to competitors‘ activities in particular markets.

4. For price discrimination to work, several conditions are necessary: a) The market must be segmentable. b) The cost of segmenting should not exceed the extra revenue from price discrimination. c) The practice should not breed customer discontent or break the law. d) Competition should not be able to steal the segment that is charged the higher price. e) The practice should not be illegal.

271 F.

Economic value to the customer 1. The ability to charge a higher price can have a major and positive impact upon profitability. a) In order to achieve higher prices, businesses must be able to offer the customer some kind of differential advantage. b) In industrial markets, this advantage must usually be measurable in economic terms because businesses are driven by the need to reduce costs and increase revenue.

2. Economic value to the customer (EVC) is the underlying principle that a premium price can be charged while still offering the customer better value than the competition.

3. A costly product may provide good economic value to the customer, including lower set-up or running costs, the provision of superior servicing or other after sales support, or a better warranty deal.

4. If EVC is to be demonstrated, the initial high price of the product must be justified by an overall lower lifetime cost.

VII. Stages for establishing prices A. Stage 1: selection of pricing objectives B. Stage 2: assessing the target market‘s evaluation of price and its ability to pay C. Stage 3: determining demand, making use of the demand curve and forecasting, and understanding price elasticity of demand.

D. Stage 4: analysis of demand, cost and profit relationships. Marginal analysis requires an appreciation of fixed costs, average fixed cost, variable costs, average variable cost, total cost, average total cost, marginal cost, marginal revenue, break-even analysis and the break-even point, E. Stage 5: evaluation of competitors‘ prices F. Stage 6: selecting a basis for pricing. Cost-based pricing includes cost plus pricing, markup pricing, demand-based pricing, competition-based pricing, marketing-oriented pricing.

G. Stage 7: selection of a pricing strategy. Differential pricing, product-line pricing, psychological pricing, professional pricing, promotional pricing and misleading pricing are considerations.

H. Stage 8: determining a specific price A. Industrial markets consist of individuals and businesses that purchase products for resale, for use in t

ANSWERS TO DISCUSSION AND REVIEW QUESTIONS 1.

Why are pricing decisions so important to a business?

Pricing decisions are important to a business because they relate directly to the generation of total revenue. This ties price into the other functional areas, such as finance, accounting and production. A change or error in price will have repercussions throughout the company.

Pricing is also important because it is indirectly related to quantities sold. Being the most flexible aspect of the marketing mix, price plays another important role by affecting production and inventory levels. Price even more indirectly influences total costs through its effect on quantities sold.

2.

Compare and contrast price and non-price competition. Describe the conditions under which each form works better.

Both price and non-price competition are competitive means by which companies attempt to gain market share and profit. They can be used separately or in unison, depending on the situation.

272 With price competition, a marketer emphasizes price as an issue and attempts to match or beat the prices of competitors that also are emphasizing low price. A seller competing on the basis of price has a great deal of flexibility in adjusting to meet competitive pressures. A disadvantage is that the competition can do the same thing.

Non-price competition occurs when a seller elects to emphasize distinctive product features, service, product quality, promotion, packaging or other factors to distinguish its product from competing brands. One advantage of this competitive strategy is that a company can build up customer loyalty to its brand. A disadvantage is that it is fairly rigid and inflexible once applied.

3.

How does a pricing objective of ROI differ from a pricing objective to increase market share?

A pricing objective of ROI is the desire to attain a specified rate of return on the company‘s investment and is a profit related pricing objective. It can also be relatively short term and can be achieved by cost cutting programmes. A company could have decreasing market share but increasing sales in a rapidly growing market, leading to – for now – reasonable returns.

Conversely, a company could maintain market share but lose sales volume in a deteriorating market. Market share takes a company‘s competitors, marketing environment and personal effort into account and is thus a more accurate indicator of company performance. Globally successful players tend to seek high market shares – the profits and ROI generally flow from such a strong position.

4.

Why is it crucial to consider both marketing objectives and pricing objectives when making pricing decisions?

It is important to a company that consumers consider the company consistent. The marketing objectives are set in conjunction with the organizational objectives that dictate the company‘s course of action. To tie pricing decisions into this helps facilitate the continuity of the company and contribute to the ease of coordination.

5.

In what ways do other marketing mix variables affect pricing decisions?

The product marketing mix variable has an important influence on pricing decisions because price is the value placed on what is exchanged. If the product is perceived as being of very high quality, a high price would correspond with this image.

The place where a product is sold is also vital. It is important to keep the image of the outlet and the product within a similar range.

Promotion is also an important variable to coordinate with price. Price has a psychological impact on customers, as do different advertising media and approaches. It is important to try to coordinate this factor with price.

6.

What types of expectations may channel members have about producers‟ prices, and how do these expectations affect pricing decisions?

A channel member expects to earn a profit. The amount of time required to handle the product is also a major consideration. Many resellers expect producers to provide several support activities, such as sales training, service training, repair advisory service, cooperative advertising, sales promotions and perhaps a programme for returning unsold merchandise. These activities affect pricing decisions because failure to price the product so that the producer can provide some of the activities may cause resellers to view the product less favourably.

7.

How do legal and regulatory forces influence pricing decisions?

273 Many regulations and laws affect pricing decisions and activities. Marketers must not only refrain from fixing prices but must develop independent pricing policies and set prices in ways that do not even suggest collusion. At times government action sways marketers‘ pricing decisions. To curb inflation, the government may invoke price controls, ‗freeze‘ prices at certain levels or determine the rates at which prices can be increased.

8.

Why must marketers consider consumers‟ perceptions of value for money when setting prices?

Consumers trade off, often automatically and intuitively, price paid versus anticipated product benefits or usage. Price paid is important to consumers, but so is value for money of the product or service, reflecting previous product experience, perceived quality, brand image, purpose, anticipated usages, overall appeal and competing offers.

9.

What is the difference between a price discount and price discrimination?

Price discrimination occurs when a seller gives one reseller or industrial buyer an advantage over competitors by providing products at prices lower than other, similar customers can obtain. Price discounting provides a discount because of a function performed, not because of favouritism.

10. Why is the concept of EVC important when setting prices in B2B markets?

EVC is the underlying principle that a premium price can be charged while still offering the customer better value than the competition. It moves away from winning business purely on the basis of low prices, an approach that is not sustainable by most businesses in the longer term. It is also important in consumer markets, but the formalized buying and involvement of the buying centre (see Chapter 6 of Marketing: Concepts and Strategies) often mean it is highly important to business-to-business buyers.

11. Identify the eight stages that make up the process of establishing prices.

Stage 1 is selecting pricing objectives that fit in with the company‘s overall objectives. Typical pricing objectives include survival, profit, return on investment, market share, cash flow, maintaining the status quo and product quality. Stage 2 is assessing the target market‘s evaluation of price and its ability to buy. Stage 3 is determining the nature and elasticity of demand.

Marketers must learn what type of demand schedule characterizes the product; how demand fluctuates with changes in buyers‘ attitudes, other components of the marketing mix and uncontrollable environmental factors; and whether demand is elastic or inelastic. Stage 4 – analysis of demand, cost and profit relationships – is necessary to estimate the economic feasibility of alternative prices. The two approaches to understanding demand, cost and profit relationships are marginal analysis and break even analysis. Stage 5, evaluating competitors‘ prices, is helpful in determining the role of price in the marketing strategy. Stage 6 is selecting a pricing policy to serve as a guiding philosophy designed to influence and determine pricing decisions. Among the most common pricing policies are pioneer pricing, psychological pricing, professional pricing and promotional pricing. Stage 7 is developing a method for calculating the price charged to customers. Four pricing methods are cost oriented-pricing (which includes cost plus pricing and mark-up pricing), demand-oriented pricing, competition-oriented pricing and marketing-oriented pricing. Stage 8 is determining a specific price.

110. Why do most demand curves demonstrate an inverse relationship between price and quantity?

Most demand curves have an inverse relationship between price and quantity because the quantity demanded for most products goes up as the price goes down. This means that the demand for most products is elastic – a change in price causes an opposite change in total revenue.

274 111. List the characteristics of products that have inelastic demand. Give several examples of such products.

Products typically have inelastic demand when people have strong needs and when there are very few substitutes for these products. Examples include many energy products and medicines 112. Explain why optimum profits should occur when marginal cost equals marginal revenue.

By producing and selling so that marginal costs equal marginal revenue, a company should obtain optimum profits because at this point the production of one additional unit would result in greater cost than the revenue received from the additional unit. This approach to pricing blends the increasing costs and the inefficiencies of production with the price elasticity of the demand schedule.

This economic concept gives the false impression that pricing can be highly precise. If revenue and cost remain constant, prices can be set for maximum profits. In practice, revenue and cost are constantly changing. In addition, this approach offers little help in pricing new products.

113. The Chambers Company has just gathered estimates in preparation for a break-even analysis for a new product. Variable costs are £7 a unit. The additional plant will cost £48,000. The new product will be charged £18,000 a year for its share of general overheads.

Advertising expenditure will be £80,000, and £55,000 will be spent on distribution. If the product sells for £12, what is the break-even point in units? What is the break-even point in sales volume?

The break-even point equals 40,200 units, or £482,400 in sales.

16. For what type of products would a pioneer price skimming policy be most appropriate? For what type of products would penetration pricing be more effective?

A pioneer price skimming policy would be most appropriate for products that have associated research and development costs, for example, cameras, computers, calculators and many technical products. Products introduced with penetration pricing usually have few differentiated advantages.

Penetration pricing is more effective for lower cost items such as food products and small household items.

17. Why do consumers associate price with quality? When should prestige pricing be used?

Consumers associate price with quality because of experience and because they have been socialized to believe that the higher the price, the higher the quality. Prestige pricing should be used when a marketer can determine that a higher price is consistent with buyers‘ attitudes towards the expected cost of a product.

18. What factors must be taken into consideration when adopting a marketing-oriented approach to pricing?

Factors that must be considered are: the marketing strategy being followed, competition, value to the customer, price-quality relationships, explicability (‗transparency‘ of the pricing decision), costs, product line pricing, negotiating margins within the marketing channel, political factors and the effect on distributors/retailers.

275

COMMENTS ON THE WEB TASK AND CASES WEB TASK The buyacar.co.uk website enables users to select a model of car and preferred financing options. The site reflects the key pieces of information sought by consumers seeking to purchase a used car and is designed to assist in their information search and purchase decision-making. The prices of different models, the same model with various specifications and subject to different financing arrangements are all readily available on this website, showing students the links between product features, brand desirability, financing plans and price to be paid.

APPLIED MINI-CASE Clearly, for such a prestigious product, the issues of prestige-pricing and the customer‘s perceived selfesteem are relevant, as explained on page 596. Buyers‘ perceptions are all-important in setting the prices for such premium brands. This is not a value-led proposition. The marketer needs to understand the types of purchases made by such affluent consumers and determine the role prestige brands play in these consumers‘ value systems and lifestyles. Qualitative marketing research will be necessary in order to produce a brand positioning map, as described at the end of Chapter 8.

CASE STUDY: ORDER JUST ABOUT ANYTHING FROM AMAZON AT A REASONABLE PRICE Amazon‘s scale, supplier base and customer reach enable it to offer very keen prices, including delivery options. In the highly competitive digital space for technology gadgets, this is particularly important, as is its cost base.

Question 1 explores whether Amazon‘s delivery costs are variable or fixed and how the company‘s profitability might be affected if Amazon stopped offering free delivery. Some costs are fixed, such as infrastructure investments, but many of the company‘s costs – such as staffing, packaging, freight and logistics, vary depending on the volumes being sold and shipped. More might be needed to support higher sales, but better per unit rates with suppliers and logistics partners can be negotiated with higher sales levels. Some customers will pay a premium for same-day or next-day delivery, whereas others will turn to rival suppliers if free delivery is not included in the customer value proposition. Different customer segments will have different responses.

Question 2 asks why would publishers be so concerned about the difference in price between a hardcover best-seller and the digital version. Shipping hard copies of books, storing and displaying them is costly and demands higher retail margins. Such costs are not incurred with downloads, which creates a competitive challenge hard to match. It also means lower retail prices and low margins for the producers.

Question 3 asks whether Amazon should be concerned about losing market share in e-book retailing and what are the implications for its pricing decisions. Any business worries about losing market share, but first movers know that a growth of competition as the market takes off is inevitable. Nevertheless, Amazon needs to continually uprate its proposition, evaluate rivals‘ marketing programmes and strive to remain competitive with its evolving customer value proposition and pricing strategy.

CHAPTER 21

276

Modifying the marketing mix for business markets, services and in international marketing

OBJECTIVES •

To recognize that in many situations the basic marketing mix requires modification.

•

To examine the nature of the marketing mix for business markets.

•

To understand the more complex and extended marketing mix required for services.

•

To recognize how marketers involved with global marketing modify the marketing mix to reflect separate markets.

PURPOSE AND PERSPECTIVE Parts III to VI of Marketing: Concepts and Strategies have examined the ingredients of the marketing mix in detail. While the marketing of consumer goods has been somewhat emphasized, it is important to acknowledge that the marketing of services and business products is moderately different. Those companies involved in international marketing, trading across national borders and cultures, are faced with additional issues that have an impact on their marketing activity. ‗Marketing is marketing‘, and the approach outlined in this text holds true across consumer, business, services and not-for-profit markets.

The marketing environment must be analyzed, as must consumer behaviour and customer needs, the competitive situation and general market trends. A marketing strategy must be determined that identifies segments, prioritizes target markets, judges the ability to compete and defines a desired brand or product positioning. Once the analysis and strategy stages are complete, marketing programmes must be developed that – through the marketing mix – implement the recommended marketing strategy.

Control mechanisms must be in place to ensure effective implementation of both the marketing strategy and the associated marketing mix programmes. However, there are differences in the characteristics of the respective markets that require that the ‗standard‘ marketing mix be modified. Chapter 20 explores these manipulations of the marketing mix, first by examining the characteristics of business (industrial) marketing mixes and their principal components: product, place/distribution, promotion and price. Then the complex and extended marketing mix for services – which adds the components of process, physical evidence (ambience) and people – is addressed. To conclude, the chapter highlights the strategic adaptation of marketing mixes for international markets.

277

LECTURE OUTLINE I.

Characteristics of business marketing mixes A. Product 1. Compared with consumer marketing mixes, the product ingredient of business marketing often includes greater emphasis on services, both before and after sales. a) Services, including on-time delivery, quality control, custom design and a comprehensive parts distribution system, may be important components of the product. b) Business marketers offer technical advice regarding product specifications, installation and applications. c) They must provide on-time delivery. d) They must ensure availability of parts to prevent costly production delays. e) They may include credit services for large purchases.

2. A business marketer must bear in mind that a customer may elect to make some items instead of buying them. a) In these cases, business marketers compete not only with one another, but also with their own potential customers.

3. Business marketers often concentrate on functional product features rather than on marketing considerations. a) Rather than concentrating just on selling activities, marketers must assume the role of consultants, seeking to solve their customers‘ problems and influence the writing of specifications. b) Most customers now expect this level of service.

4. The major consideration in industrial package design is protection. a) There is less emphasis on packaging as a promotional device.

5. Many industrial companies have customer service departments and call centres to facilitate buyer feedback. a) It is important that business marketers respond to valid complaints because the success of most industrial products depends on repeat purchases.

6. In a mature market, a business company can grow by attracting market share from a competitor or by developing new applications or uses for its products.

B. Place/distribution 1. The primary objective of physical distribution of industrial products is to ensure that the right products are available when and where needed.

2. Distribution channels tend to be shorter for industrial products than for consumer products. a) There are four recognized industrial distribution channels for products in business markets: (1) Most industrial products are sold through direct distribution channels, in which products are sold directly from producers to users.

(2) A second business distribution channel involves business distributors.

(3) A third business distribution channel employs manufacturers‘ agents.

(4) The fourth business distribution channel has both manufacturers‘ agents and industrial distributors between the producer and the business customer.

3. Business distributors are independent businesses that take title to products and carry inventories. a) Benefits of using business distributors

278 (1)

4.

5.

6.

7.

They can perform needed selling activities in local markets at relatively low cost to the manufacturer.

(2) They reduce a producer‘s financial burden by providing credit services to their customers.

(3) They can pass on market information to producers.

(4) They can reduce the producers‘ capital requirements by holding adequate inventories. b) Disadvantages of using business distributors (1) They may be difficult to control because they are independent companies.

(2) They frequently stock competing brands.

(3) They are less likely to handle items that are bulky, are slow sellers, need specialized facilities or require extraordinary selling efforts.

(4) They may lack the technical knowledge necessary to sell and service certain industrial items.

Manufacturers‘ agents are independent businesspeople who sell complementary products of several producers in assigned territories and are compensated through commissions; they do not take title and seldom take possession of products. a) Benefits of using agents (1) Agents possess considerable technical and market information.

(2) They have an established set of customers.

(3) Their commissions may cost the company less than a full-time salesforce. b) Disadvantages of using agents (1) The seller has little control over manufacturers‘ agents.

(2) Agents are reluctant to spend adequate time following up sales, putting forward special selling efforts or providing sellers with market information if such activities cut into selling time.

(3) Because they rarely maintain inventories, manufacturers‘ agents cannot quickly provide parts or repair services to customers.

Occasionally a channel may have both a manufacturer‘s agent and an industrial distributor. a) This channel is appropriate when a business marketer may wish to cover a large geographic area but maintains no salesforce because demand is seasonal or because the company can‘t afford one. b) This type of channel is also useful for a business marketer that wants to enter a new territory without expanding its existing salesforce.

When selecting a distribution channel, a business marketer must consider several questions: a) Is a certain type of channel available? b) What is the normal manner of purchasing particular products? c) What are the product‘s cost and physical characteristics? d) What are the costs of using various channels? e) What amounts of technical assistance do customers need? f) What size of product and parts inventory is needed in local markets?

Physical distribution decisions regarding transport, storage and inventory control are especially important for business marketers. a) Some raw materials and other industrial products may require special handling. b) The continuity of business buyer-seller relationships depends on the seller having the right products available when and where the customer needs them.

279 8.

C.

Many business purchasers are moving away from traditional marketing exchange relationships – in which the buyer purchases primarily on price from multiple suppliers – to more tightly knit, relational exchanges. a) Such relationships are more long-lasting and less price driven. b) Just-in-time inventory management systems are providing the rationale underlying these new types of relationships.

Promotion 1. Business marketers rely heavily on personal selling – the task of informing and persuading customers to purchase through personal communication – to a much greater extent than do consumer product marketers. a) Business sellers often have fewer customers, making personal contact more feasible than in consumer product marketing. Key account management is important in many business markets, enabling companies to focus on their most important customers and clients. b) Technical features may be too numerous or complex to explain through nonpersonal forms of promotion. c) Business buyers may need reinforcement from sales personnel as to the suitability and availability of products that have high value and specificity. d) Sales personnel are needed for follow-up, to ensure that products work properly and to encourage repeat sales. e) Personal selling is often supported with advertising activity and telemarketing. f) Sellers must have a highly trained salesforce that is knowledgeable not only about its own company‘s products but also about competitors‘ offerings. g) Since business purchases involve great expense, it is important for salespeople to continue to provide information and to be patient and avoid pressuring clients as they make important and complex decisions.

2. Because of the escalating costs of advertising and personal selling, a growing number of business companies are using telemarketing.

3. Business sales personnel can be grouped into one or a combination of the following categories: technical, missionary, trade and inside order taker (see Chapter 19).

4. Differences between business selling and consumer sales efforts a) Business sellers are more likely to need – and have – technical backgrounds. b) Business buyers and sellers are more likely to develop a strong interdependence. c) Business sellers market products aggressively but almost never use ‗hard sell‘ tactics because of their role as technical consultants and the interdependence between buyers and sellers.

5. Advertising a) Advertising tends to be emphasized less in business sales than in consumer transactions but can be used to supplement personal selling efforts. b) Benefits of advertising (1) Advertising that pre-sells a product can help sales personnel perform more efficiently and effectively.

(2) It can make business customers aware of new products and brands.

(3) It can inform buyers about general product features, representatives and organizations.

(4) It can isolate promising prospects by providing enquiry forms or the addresses and telephone numbers of company representatives.

(5) It can stimulate consumer demand, through which demand for certain business products is derived.

280 c)

6.

7.

D.

II.

Business marketers use primarily print media, such as trade publications and direct mail, although the internet has quickly become another option.

(1) Print media reach precise groups of business customers and avoid wasted circulation.

(2) Print media are better suited than most other types of media for presenting details and complex product information. d) The content of business advertisements is apt to contain more detail and be less persuasive than consumer product advertisements.

Sales promotion activities used by business marketers include catalogues, trade shows, merchandise allowances, buy back allowances, displays, sales contests, and publicity and public relations.

PR and the Internet are utilized by business marketers in a similar way to those targeting non-business customers.

Price 1. Pricing decisions that business marketers make are much more constrained by legal and economic environmental forces than those that consumer marketers make. a) Elasticity of demand often requires companies to approximate competitors‘ prices, resulting in non-price competition and a considerable amount of price stability.

2. A sustainable differential advantage can be obtained by offering the customer superior value and product quality, even at a slightly higher price.

3. Price used to be the basis for differentiation in industrial markets, but price can be reduced only so far if companies are to remain viable. a) Most marketers have attempted to move away from a selling proposition based purely on low price.

(1) Although cost is still important, marketers have realized that value is not necessarily equal to a low price. b) Service, reliability, payment terms, image and design are some factors in addition to price that influence many sales.

4. There are three common approaches used in determining the pricing of business products: a) With administered pricing, the seller determines the price for a product and the customer pays that specified price. b) With bid pricing, prices are determined through sealed or open bids submitted by the seller to the buyer. c) With negotiated pricing, stated prices are lowered by negotiations between the seller and the buyer.

E. People 1. The role of personal selling is particularly important in business markets, particularly those in which the purchase is deemed risky because of its size, value or complexity.

2. The development of long-term relationships – regular, ongoing contacts – is increasingly a driving factor in the development of marketing mixes for businesses supplying other businesses. a) Relationships are seen as a means of maintaining contact with customers, ensuring reorders and enabling a supplying business to differentiate itself through customer service rather than price alone.

3. More attention is being devoted to the effective recruitment, training and motivation of personnel who are often in regular contact with a business‘s immediate customers, typically other businesses in the marketing channel.

Amending the marketing mix for services

281 A.

B.

C.

The extended marketing mix for services 1. The standard marketing mix comprises the ‗4Ps‘: product, promotion, price and place (distribution/channels).

2. The 4Ps plus three additional elements – process, physical evidence (ambience) and people – form the extended marketing mix for services.

Product 1. Services cannot be defined in terms of their physical attributes because of their intangibility – their inability to be perceived by the senses or be stockpiled in advance of consumption.

2. There may also be tangibles, such as facilities, employees or communications, associated with a service. a) These tangibles help form a part of the product and are often the only aspects of a service that can be viewed prior to purchase.

3. The service product is often equated with the service provider – a person who offers a service, such as a bank clerk or a hair stylist. a) It is therefore imperative that service providers effectively select, train, motivate and control contact people.

4. The strength or weakness of the service provided often affects the consumer‘s perception of service product quality. a) Data indicate that companies having service dominant products must score high on service quality.

5. It is important to analyze a company‘s service products in terms of complexity and variability. a) In services marketing, complexity is the number of steps required to perform a service. b) Variability is the amount of diversity allowed in each step of service provision. c) In general, to decrease costs and widen the potential market and to better control quality, service providers seek to limit both complexity and variability.

Promotion (marketing communications) 1. As intangible dominant products, services are not easily promoted.

2. Service advertising should emphasize tangible cues that will help consumers understand and evaluate the services. a) The cues may be the physical facilities in which the service is performed or some relevant tangible object that symbolizes the service itself. b) Since differentiation between rival services is difficult, branding is helping to distinguish competing services and to provide a platform for promotional activity.

3. Personal selling is potentially powerful in services because this form of promotion lets consumers and salespeople interact. a) Contact personnel are critical to the perception of quality service. b) Because service industries are information driven, they can substitute knowledgeable, highly trained personnel for the capital assets used in more product-oriented businesses.

4. Sales promotions, such as contests, are feasible for some service providers, but not others. a) It is difficult to give away a sample of the service without giving away the whole service.

5. Service marketers appear to rely on publicity much more than goods marketers do. a) Customers are receptive to stories about good (or bad) service. b) Public relations is highly cost-effective.

282 6.

7.

D.

E.

F.

Consumers tend to value word-of-mouth communications more than company sponsored communications. a) Word-of-mouth can be stimulated through communications messages that feature a testimonial.

The promotional activities of most professional service providers, such as doctors, lawyers and accountants, are severely limited. a) In some countries, these professionals are still prohibited from advertising. b) Consumers are not used to seeing professionals advertise, and professionals who are unfamiliar with promotion do not always develop appropriate advertisements. c) The professions themselves exert pressure on their members to advertise or promote only in a limited way.

Price 1. Price plays both an economic and a psychological role in the service sector. a) The psychological role of price in respect to services is magnified, since consumers must rely on price as the sole indicator of quality when other quality indicators are absent. b) In its economic role, price determines revenue and influences profits.

2. Services may be bundled together and sold for a single price. a) This is a practical strategy because in many types of services there is a high ratio of fixed to variable costs and high-cost sharing amongst service offerings. b) Price bundling may help service marketers cross-sell to their current customers or acquire new customers.

3. Service intangibility may also complicate the setting of prices. a) It is often difficult to determine the cost of service provision and thus identify a minimum price. b) Price competition is severe in many service areas characterized by standardization.

4. Many services, especially professional services, are situation-specific. a) Neither the service provider nor the consumer knows the extent of the service prior to production and consumption. b) Because cost is not known beforehand, price is difficult to set.

5. Despite the difficulties in determining cost, many service providers use cost plus pricing, while others set prices according to the competition or market demand.

6. Pricing of services can also help smooth out fluctuations in demand. a) Given the perishability of service products, this is an important function. b) A higher price may be used to deter or off-set demand during peak periods, and a lower price may be used to stimulate demand during slack periods.

Place/distribution 1. In the service context, distribution is making services available to prospective users.

2. Most services industries are limited to direct channels of distribution. a) Many services are produced and consumed simultaneously. b) In high contact services, service providers and consumers cannot be separated. c) In low contact services, service providers may be separated from customers by intermediaries.

3. Some service industries are developing unique ways to distribute their services, such as electronic funds transfer systems and Internet banking services.

Process 1. The acts of purchasing and consumption are important in all markets, but the direct involvement of consumers in the production of most services and the perishability of these services places greater emphasis on the process of the transaction for services.

283 Friendliness of staff and flows of information affect the customer‘s perception of the service product offer. b) Appointment or queuing systems become part of the service. c) Ease or difficulty of payment can enhance or spoil the consumption of a service.

2. Operational issues directly affect customer perceptions and satisfaction and thus are important aspects of the marketing of services.

G. Physical evidence (ambience) 1. The environment in which a service is offered, and consumed, is central to the consumer‘s understanding of the service and to her or his enjoyment or satisfaction. a) Layout, decor, and upkeep; noise and aroma; general ease of access and use – all become part of the service product.

H. People 1. The nature of most services requires direct interaction between the consumer and personnel representing the service provider‘s organization.

2. The interaction between consumers and service providers must be given maximum attention if customers are to maximize their use of the service and, ultimately, their satisfaction.

3. Employee selection, training and motivation are central considerations.

Strategic adaptation of marketing mixes for international markets A. Product and promotion 1. There are five possible strategies for adapting product and promotion across national boundaries: a) Keep product and promotion the same worldwide.

(1) This strategy eliminates the expenses of marketing research and product redevelopment.

(2) It entails certain risks that stem from cultural differences in interpretation.

(3) It provides the efficiency of international standardization. b) Adapt promotion only.

(1) This approach may be necessary because of language, legal or cultural differences associated with the advertising copy.

(2) It is a low-cost modification compared with the costs of product redevelopment.

(3) It may enable a company to think globally and act locally.

(4) Promotion is modified to fit each market‘s needs, often using locally based advertising agencies. c) Adapt product only.

(1) This approach assumes that the product will serve the same function under different conditions of use.

(2) The product may require adjusting for legal reasons or to overcome technological, social or cultural biases. d) Adapt both product and promotion.

(1) This approach should be used when a product serves a new function or is used differently in a foreign market.

(2) It is costly but should be considered if the foreign market appears large enough and competitively attractive. e) Invent new products.

(1) This strategy is selected when existing products cannot meet the needs of a non-domestic market.

(2) It can be the most costly strategy, but the pay-off can be great.

B. Place/distribution and pricing a)

III.

284 1.

C.

A company must consider distribution both between countries and within the foreign country. a) The existence of retail institutions and wholesalers that can perform marketing functions between and within nations is a major factor. b) Marketers in Third World countries must be sensitive to ethnodomination, a situation in which an ethnic group occupies a majority position within a marketing channel. c) Control of the distribution process is desirable if a product requires service and information. d) International companies use independently owned marketing channels when they market in countries perceived to be highly dissimilar to their home markets. e) It is important to monitor the environment when engaging in international marketing since a country‘s political instability can jeopardize the distribution of goods. f) A significant impediment to international marketing is distribution, as it is not always easy to grasp how marketing channels operate in alien territory or which channels and members are the most suitable with which to do business.

2. The increased costs of transport, supplies, taxes, tariffs and other expenses necessary to adjust a company‘s operations to international marketing can result in different prices for foreign markets than for home markets. a) Many foreign governments have laws against dumping (the sale of products in non-domestic markets at lower prices than those charged in domestic markets) if that practice will damage domestic companies and workers. b) A cost plus approach to pricing is probably the most common pricing method in international marketing because of the compounding number of costs necessary to move products from their country of origin. c) Understanding consumer demand and the competitive environment is a necessary step in selecting a price. d) The price charged in other countries is also a function of foreign currency exchange rates. e) There are also pricing issues that stem from transfer pricing practices, the problems of parallel imports and the grey market.

(1) Transfer pricing is the price charged between profit centres, for example, between a manufacturing company and its foreign subsidy.

(2) Parallel imports are goods that are imported through ‗non-official‘ channels from low price to high price countries. f) Pricing, in any market, must reflect the brand positioning adopted.

People 1. In the context of international marketing, marketers trading across national boundaries must be aware of striking differences in the marketing environment. a) Cultural and social forces are the most varied and also the most difficult for marketers based in another country and culture to understand.

2. Having personnel who understand the nuances of an international market is a fundamental requirement for effective marketing.

3. Also necessary are personnel with the cultural and local knowledge to be able to implement the marketing mix, which may have to be modified to reflect the relevant marketing environment.

285

ANSWERS TO DISCUSSION AND REVIEW QUESTIONS 1.

How do B2B marketing mixes differ from those of consumer products?

Business marketing emphasizes services, both before and after sales, more than consumer marketing does. Many business marketers depend heavily on sizeable repeat purchases and a long-term relationship with customers. They understand that such services as installation of equipment, instruction in the proper use of equipment, maintenance and on-time delivery may be their only edge over competitors. Functional features of the product are more likely to be emphasized than styling.

Business marketing activities are likely to be heavily affected by legal and economic forces.

Prices are often discounted from a list price or negotiated through bidding.

Distribution channels for business products tend to be shorter than for many consumer products.

Manufacturers‘ agents and/or industrial distributors are widely used.

Business marketers rely on personal selling much more than consumer products marketers do.

Advertising is used to complement personal selling efforts, and packaging is much more functionally oriented.

2.

What are the major advantages and disadvantages of using distributors for business marketing?

The advantages include: a.

Business distributors can perform needed selling activities in local markets at relatively low cost to a manufacturer.

b.

Business distributors can reduce producers‘ financial burdens by providing credit services to their customers.

c.

Business distributors usually maintain a close relationship with their customers; they are aware of local needs and can pass on market information to producers.

d.

By holding adequate inventories in their local markets, business distributors reduce producers‘ capital requirements.

The disadvantages include:

3.

a.

Business distributors may be difficult to control because they are independent companies.

b.

Business distributors frequently stock competing brands, so a business seller cannot depend on them to sell a specific brand aggressively.

c.

Because business distributors maintain inventories, they are less likely to handle items that are bulky, are slow sellers relative to profit margin, need specialized facilities or require extraordinary selling efforts.

d.

In some cases, business distributors lack the technical knowledge necessary to sell and service certain business products.

Why do business marketers rely on personal selling more than consumer products‟ marketers?

Because of the nature of business products, business buyers are more likely to need extensive, detailed information about prices, terms, technological product specifications and technical assistance. In addition, business markets are usually easier to reach through personal contacts

286 because often there are only a few buyers of a specific product; reaching them through nonpersonal means could be more expensive.

4.

Why would a business marketer spend resources on advertising aimed at stimulating consumer demand?

Because the demand for most business products is derived demand, marketers can sometimes stimulate demand for their products by stimulating consumer demand. Thus, a business marketer occasionally sponsors an advertisement that promotes products sold by that marketer‘s customers.

5.

Compare three methods of determining the price of business products.

Three methods of determining the price of business products are administered pricing, bid pricing and negotiated pricing.

With administered pricing, the seller determines the price (or a series of prices) for a product, and the customer pays that specified price. Marketers using this approach may employ a one price policy in which all buyers pay the same price, or they may set a series of prices that are determined by one or more discounts.

With bid pricing, prices are determined through sealed bids or open bids. When a buyer uses sealed bids, sellers are notified that they are to submit their bids by a certain date. The bids are opened and made public at a designated time. Usually, the lowest bidder is awarded the contract, providing that the buyer believes the company is capable of supplying the specified products when and where needed.

For certain types of business markets, a seller‘s pricing component may have to allow for negotiated pricing; that is, even when there are stated list prices and discount structures, negotiations may determine the actual price paid by a business consumer. Negotiated pricing can benefit seller and buyer because price negotiations frequently lead to discussions of product specifications, applications and perhaps product substitutions.

6.

Why must a competitive advantage be based on more than just low prices?

Marketing is concerned with satisfying customers through all aspects of the marketing mix. Price is important, but perceived value is more so. Low price is a difficult position to defend, particularly against competition with better scale economies of production. Worse, customers rarely are happy to see prices eventually rise. Price per se is not a good basis on which to compete.

7.

Discuss the role of promotion (marcomms) in services marketing.

Advertisements for a service should emphasize the tangible cues that will help consumers understand and evaluate the service. The cues may be the physical facilities in which the service is performed or some relevant tangible object that symbolizes the service itself. Customer contact personnel are an important secondary audience for service advertising. Because consumers often associate the service with the service provider, advertising can have a positive effect on customer contact personnel. Personal selling is potentially powerful in services because this form of promotion allows consumers and salespeople to interact. Sales promotions such as contests are more difficult to implement, because it is difficult to give away a sample of the service without giving away the whole service. Service marketers appear to rely on publicity much more than goods marketers do.

8.

Why are social media and consumer-to-consumer communications (C2C) so important in the success of services?

287 Of course, they matter for all products and services in just about every market, but reputation and being recommended for good service delivery are so important because the lack of a tangible product creates so many headaches for marketers striving to stand out and be consistently good.

Therefore, negative C2C comment is particularly damaging for services.

9.

What additional elements must be included in the marketing mix for services? Why? There are three additional components of the marketing mix for services: (1) process – the ease of transactions; (2) physical evidence (ambience) – the environment in which the service is offered, which is integral to the consumer‘s experience and often to the consumption of the service product; and (3) people – who both deliver and receive most services!

10. Why is it difficult to create and maintain a differential advantage in many service businesses?

It is difficult to maintain a differential advantage primarily because of the basic characteristics of services, notably the intangibility of the product. There is little to patent or trademark except maybe a logo or trade name, and a good service can often be quickly copied by rivals. Personnel are usually integral to a service and ‗good‘ people can only be spread so thinly before they lose effectiveness or are recruited by rivals. Their skills can often be quickly copied by competitors.

11. Why do the marketers of services place so much emphasis on the people ingredient of the marketing mix?

To the customer in a bank or a restaurant, the ‗product‘ may be a money transfer or meal, but the personnel providing the service are the very real face of the business and often are the most noticeable physical cue to the service experience. Personnel are arguably the most important ingredient of the services marketers‘ armoury: they must be ‗right‘ and able to offer good customer service.

12. What are the principal choices a company can make when manipulating the marketing mix for international markets?

The whole marketing mix can be manipulated. People with local knowledge will prove invaluable, either as direct employees or through agents and local representatives. In terms of product and promotion, there are basically five options: (1) keep product and promotion the same worldwide; (2) adapt promotion only; (3) adapt product only; (4) adapt both product and promotion; and (5) invent new products. For pricing and place/distribution, there are five options: (1) make no changes; (2) offer the same price with no direct control over distribution; (3) modify pricing to reflect local markets, still with no direct control over distribution; (4) establish new channels but with existing pricing policies; and (5) develop new channels and also change pricing policies.

With each option, there are pros and cons, as detailed in the chapter.

13. How and why can the place/distribution ingredient of the marketing mix cause problems for international marketers?

Distribution can prove particularly problematical as ownership of retail outlets or dealerships can be costly and not economically viable outside a company‘s country of origin. Distribution is a significant impediment to international marketing, as it is not always easy to grasp how marketing channels operate in alien territory or which channels and members are the most suitable with which to do business. Marketers in Third World countries must be sensitive to ethnodomination, a situation in which an ethnic group occupies a majority position within a marketing channel. It is

288 important to monitor the environment when engaging in international marketing since a country‘s political instability can jeopardize the distribution of goods. Each country has its own nuances (for example, even US companies such as Kellogg‘s get caught out by the power of national retail chains in the UK). Forming the right alliance, as detailed in Chapter 3, is no easy matter.

14. What additional factors determine a company‟s pricing policy in foreign markets?

In its ‗home‘ (domestic) market, a company‘s reputation and brand positioning may enable it to add a premium to its prices. Away from its domestic market, the options may be more restricted.

In addition to the problems of understanding customer needs and their brand perceptions – which are increased in non-domestic markets – marketers must recognize the dim view of dumping taken by many governments, and the difficulties of transfer pricing and parallel imports. There are often legal implications of pricing that must be comprehended.

COMMENTS ON THE WEB TASK AND CASES WEB TASK Private customers are offered health insurance, critical illness cover, life cover, travel policies and other insurance schemes. There are also medical facilities covering surgery, cosmetic surgery, dental care, physiotherapy, etc. Business clients are offered 360-degree risk assessment, company cash plans, health assessments, international cover for employees overseas, occupational health, travel cover and even childcare provision.

The website information aimed at private customers reflects that they will be paying their own premiums for insurance policies, so ‗peace of mind‘ benefits are stressed. For non-insured customers, the message is simple: that cost-effective treatment is available at BUPA facilities. For business users, the message is partly tailored to individuals who will use the organization‘s health services, and partly geared to the corporate paymasters purchasing through a formal buying centre health care and insurance cover on behalf of many employees. Medics are also targeted.

The site‘s messages reflect the intangible nature of the service product and the importance in services marketing of both strong branding and the role of people within the product proposition.

APPLIED MINI-CASE Marketers of trucks used to have to understand the attributes and capacities of their vehicles, and the diverse needs of customers involved in haulage and distribution. For most major truck producers, the intense nature of competition has reduced profit margins. Added value services in the after-market and with financing packages at the point of vehicle purchase are more profitable than the retailing of the vehicle. However, in order to sell financing packages, marketers must be familiar with a very different set of products, regulations and customer needs than when marketing vehicles. Residual values, leasing terms, part purchase/part finance, third party ownership/leasing, credit terms, interest rates, staggered payments and trade-ins, are all important issues for marketers striving to provide compelling financing propositions to customers.

CASE STUDY: TATA’S NANO EVOLVING TO AN ELECTRIC VEHICLE? Tata in India re-wrote the rules of the market when it brought out its £2,000 Nano car. However, stiff competition has emerged and the market has moved on, with customers – even at the budget end of the

289 car market – seeking more value for money and better specifications. Environmental, safety and regulatory pressures from the marketing environment also are influencing developments.

Question 1 Tata had to re-think in order to address consumer expectations, cost-of-living pressures and to compete effectively against global rivals. Tata focused on its budget range, to consider the introduction of an EV Nano. The answer lies in declining sales, with pending regulations forcing the existing range into oblivion, plus a belief that as India‘s premier car producer Tata should seek to combat the growing number of rival manufacturers competing for the ever-growing demand to put vehicles on India‘s roads.

Question 2 asks about the competition. There are several domestic players rivalling Tata for sales, but the sheer size and immaturity of the market in India – lots of growth potential – has attracted most of the industry‘s global players to set up operations in India, create joint ventures, or set up importing franchises. Tata could opt out of this part of the market and focus, as it does with its Land Rover and Jaguar brands, on higher-end segments, but it believes in developing a full portfolio of brands and car models to cater for the many segments in this growing marketplace.

Question 3 considers aspects of the marketing environment other than competition, notably the Government‘s growing concerns with traffic management and safety, emissions and pollution, production practices and consumer rights. As a well-run business, Tata is correct in responding to these pressures in its corporate strategy and marketing plans.

CHAPTER 22

Marketing planning and forecasting sales potential

OBJECTIVES •

To understand the marketing planning process.

•

To gain an overview of the marketing plan.

•

To examine the relationship between marketing analysis, marketing strategy and marketing programmes in marketing planning.

•

To examine the role of the SWOT analysis in marketing planning.

•

To become familiar with market and sales potential, and sales forecasting methods.

•

To analyze the major components of a marketing audit.

•

To appreciate how organizations operationalize a marketing strategy.

PURPOSE AND PERSPECTIVE This chapter addresses three topics essential to the implementation of marketing in many marketing-led organizations: marketing planning, forecasting and the marketing audit. These are all facets of marketing management. Marketing planning is a process culminating in the marketing plan document

290 or blueprint – a detailed set of tactical marketing programmes designed to facilitate implementation of the determined target market strategy. The process of marketing planning involves up-dating marketing analyses, revising marketing strategy and recommending marketing mix programmes and controls to action the adopted strategy. The chapter outlines this process – including an examination of the popular SWOT – and explains the structure of a ‗typical‘ marketing plan document. The second topic discussed in this chapter is forecasting in marketing: market and sales potential, developing sales forecasts and using multiple forecasting methods. Finally, the marketing audit – a systematic examination of the marketing function‘s objectives, strategies, organization and performance – is examined.

291

LECTURE OUTLINE IV. Marketing planning A. Marketing planning is a systematic process of assessing marketing opportunities and resources, determining marketing objectives and developing a plan for implementation and control.

B. Research shows that good quality marketing planning can lead to a positive impact on business performance.

1. A core output of marketing planning is the marketing plan, a document or blueprint that details requirements for a company‘s marketing activity.

2. The marketing planning process involves analyzing the marketplace, modifying the recommended marketing strategy accordingly and developing detailed marketing mix programmes designed to implement the specified marketing strategy.

3. The marketing planning cycle is a circular process that runs in two directions, with planning running one way and feedback the other. a) Feedback is used to coordinate and synchronize all the stages of the planning cycle. b) Once an organization has gone through the demanding, intensive and resourcehungry process of developing a marketing plan for the first time, subsequent annual revisions are much less taxing.

C. Marketing plans vary in duration.

1. Short range plans cover a period of one year or less.

2. Medium range plans usually cover two to five years.

3. Long range plans extend beyond five years.

D. The benefit of marketing planning is stated as being to provide the basis for an organization: 1. Serving the ‗best‘ target customers 2. Beating the competition 3. Keeping abreast of market developments 4. Maximizing returns for the organization 5. Using resources to best advantage 6. Minimizing threats 7. Recognizing the organization‘s strengths and weaknesses E. Malcom McDonald, a leading authority on marketing planning, argues that marketing planning facilitates: 1. Coordination of the activities of many individuals whose actions are interrelated over time 2. Identification of expected developments 3. Preparedness to meet changes when they occur 4. Minimization of non-rational responses to the unexpected 5. Better communication among executives 6. Minimization of conflict among individuals that would result in a subordination of the goals of the company to those of the individual F. Marketing academic Philip Kotler summed up the role of marketing planning as follows: ‗one of the most important outputs of the marketing planning process is the marketing plan‘ G. Marketing plans should do the following: 1. Execute the agreed marketing strategy by detailing appropriate marketing programmes.

292 2.

H.

Specify expected results so that the organization can anticipate what its situation will be at the end of the current planning period.

3. Identify the resources needed to carry out the planned activities so that a budget can be developed.

4. Describe in sufficient detail the activities that are to take place so that responsibilities for implementation can be assigned and schedules determined.

5. Provide for the monitoring of activities and results so that control can be exerted.

6. Reflect customer needs and market developments.

7. Emphasize any differential advantage or business strength over rivals.

8. Provide clarity of purpose within an organization There is a logical and relatively straightforward approach to the process of marketing planning: 1. Analysis of markets, the marketing environment, customer expectations, competitors and trends 2. Analysis of current performance, successes and failures and the under-lying reasons 3. Identification and selection of opportunities to pursue and existing business to support 4.

5.

V.

Determination of core target markets Identification of a basis for competing and a customer value proposition for each opportunity pursued 6. Statement of specific goals and desired product or service positioning 7. Development of marketing mixes to create marketing programmes to implement plans 8. Determination of required budgets 9. Specification of schedules and the allocation of marketing tasks to those responsible for their execution and control 10. Monitoring of performance and evolving market conditions, taking remedial action as is necessary to execute effectively the plan I. To succeed, a company must have a plan that is followed closely yet is flexible enough to allow for adjustments to reflect changes in the marketing environment.

The marketing plan A. The marketing plan is the written document or blueprint governing all of a business‘s marketing activities, including the implementation and control of those activities.

1. It serves as a ‗road map‘ for implementing the company‘s strategies and achieving objectives.

2. It assists in management control and monitoring of strategy implementation.

3. It informs new participants in the plan of their role and function.

4. It specifies resource allocation.

5. It stimulates thinking and makes better use of resources.

6. It assigns responsibilities, tasks and timing.

7. It makes participants aware of problems, opportunities and threats.

8. It keeps a business customer focused, aware of market developments and competitive movements, realistic in its expectations and prudent in its use of resources.

9. It enables marketers to be the ‗eyes and ears‘ for their organizations.

B. Many companies have separate marketing managers or teams addressing different product groups or market segments – each team would typically have its own marketing plan relevant to its marketplace.

1. The marketing director would produce an over-arching all-inclusive marketing plan summarizing the key aspects of each team‘s plan.

C. Management or executive summary

293 1.

D.

E.

F.

G.

H.

I.

The management summary or executive summary (often only one or two pages) should be a concise overview of the entire report, including key aims, overall strategies, fundamental conclusions and salient points regarding the suggested marketing mix programmes.

Marketing objectives 1. The objectives of the marketing plan are for the benefit of the readers, such as senior executives, to give perspective to the report.

2. Aims and objectives should be stated briefly but should include reference to the organization‘s mission statement (corporate goals), objectives and any fundamental desires for core product groups or brands.

3. A marketing objective is a statement of what is to be accomplished through marketing activities (see Chapter 2 of Marketing: Concepts and Strategies).

4. Objectives may be stated in terms of degree of product introduction or innovation, sales volume, profitability per unit, gains in market share or improvements in customer satisfaction or awareness of the company‘s products and brands.

5. Objectives must also be consistent with the company‘s overall organizational goals.

Product/market background 1. The product/market background is a necessary section of the marketing plan since not everyone will be fully familiar with the products and their markets. a) This section ‗scene sets‘, helping the readers to understand the marketing plan.

Marketing analysis 1. The analysis section is the heart of the marketing planning exercise.

2. It includes analysis of the current state of the marketing environment, market trends, customers and their needs, competitors and their activities, differential advantages and brand positionings.

3. As this lengthy list of subjects implies, effective marketing planning is much more than just being customer-focused – marketers therefore need to be careful to include all of these areas in their analyses.

4. The SWOT analysis determines a company‘s position by examining four factors: Strengths, Weaknesses, Opportunities and Threats. a) It first examines the company or product vis-à-vis customers, competitors, trends and resources and then examines opportunities and threats present in the operating environment. b) The result of the SWOT analysis should be a thorough understanding of the organization‘s status and its standing in its markets.

Marketing strategies 1. Strategies focus on defining (1) the opportunities to pursue (2) a target market, (3) a basis for competing and differential advantage, and (4) the desired product or brand positioning.

2. A marketing strategy must be consistent with consumer needs, perceptions and beliefs.

Expected results 1. Having highlighted the strategic thrust and intention, it is important to explain the expected results and sales volumes to show why the strategies should be followed.

Marketing programme recommendations 1. Marketing programme recommendations are the culmination of the various analyses and statements of strategies: exactly what needs to be done, how and why.

2. This section of the marketing plan is of paramount importance, as it gives the specific details of the marketing activity required to implement the marketing plan and to achieve the organization‘s strategic goals.

294 3.

Organizations must also be prepared to adapt their implementation plans if unexpected events arise that were not predicted by the plan. a) Research shows that in smaller businesses, marketing and business success are linked to how good they are at improvising if the unexpected happens.

J. Controls and evaluation 1. This section details how controls will be established along with measures to assess the ongoing implementation of the marketing plan.

2. Financial measures such as sales volumes, profitability and market share will be included.

3. ‗Softer‘ issues such as brand awareness and customer satisfaction should also be monitored.

K. Financial implications/required budgets 1. An indication of required resources and the financial implications must be given.

2. The financial projections and budgets section outlines the returns expected through implementation of the plan.

3. A budget must be prepared to allocate resources in order to accomplish marketing objectives.

L. Operational considerations 1. Operational considerations are the ramifications from those strategies and programmes for other areas of the business, such as other product groups, sectors or territories, research and development, engineering or production.

M. Appendices 1. The use of appendices – which support the strategies and marketing programmes being recommended with evidence and statistics that are fully cross-referenced in the main body of the report – helps to keep the report concise and well-focused.

VI. Conducting marketing planning A. Experienced marketers produce their own marketing plans with those in the organization who have knowledge of market trends and customer issues.

B. Most companies set a point in the year when each business unit is expected to submit a detailed marketing plan, with fully costed marketing programmes set against detailed sales expectations and market share targets.

C. In organizations embarking on marketing planning for the first time, there is often a significant learning curve to address, with the first round of marketing analyses requiring a long lead time and much resourcing 1. By year three, the marketing planning process has generally become part of the organization‘s fabric and the required analyses are being updated routinely through the year by marketers well versed in the planning process‘s requirements.

2. ‗Naïve‘ organizations will initially often seek the help of external experts and facilitators.

VII. Market and sales potential and sales forecasting A. Market and sales potential 1. Market potential is the total amount of a product that customers will purchase within a specified period at a specific level of industry-wide marketing activity. a) It can be stated in terms of currency or units. b) It can refer to a total market or to a market segment. c) When analyzing market potential, it is important to indicate a timeframe and the relevant level of industry marketing activities.

2. Sales potential is the maximum percentage of market potential that an individual company within an industry can expect to obtain for a specific product or service.

295 Factors that influence a company‘s sales potential include the size of the market sales potential, the magnitude of industry-wide marketing activities, and the intensity and effectiveness of the company‘s marketing activities relative to those of its competitors. b) There are two general approaches to measuring company sales potential: break down and build up.

(1) With the break-down approach, the marketing manager starts with broad, comprehensive forecasts of general economic activity, estimates market potential and then estimates the company‘s sales potential.

(2) With the build-up approach, the marketing manager obtains forecasts about the demand for a specific product within relatively small geographic units or market segments, adds these estimates to obtain the market sales potential and then calculates the company‘s sales potential on the basis of specific levels of marketing activities.

Developing sales forecasts 1. A sales forecast is the amount of a product that the company actually expects to sell during a specific period of time at a specified level of marketing activities. a) Businesses use the sales forecast for planning, organizing, implementing and controlling their activities, the success of which depends on the accuracy of this forecast.

2. Sales forecasts must be time-specific, ranging from short (one year or less) to medium (one to five years) to long (longer than five years). a) The length of the time chosen for the sales forecast depends on the purpose and uses of the forecast, the stability of the market, and the company‘s objectives and resources.

3. Sales forecasting techniques a) Executive judgement (1) A sales forecast based on executive judgement relies on the intuition of one or more executives.

(2) It is inexpensive and expedient, and works fairly well when the product demand is relatively stable.

(3) Because it is based solely on past experience, it is highly unscientific. b) Customer forecasting survey (1) In a customer forecasting survey, customers are questioned about the types and quantities of products that they intend to buy during a specific period of time.

(2) Customers must be willing and able to make accurate estimates of future product requirements.

(3) Customer surveys reflect buying intentions, not actual purchases.

(4) Customer surveys usually require large amounts of time and money. c) Salesforce forecasting survey (1) In a salesforce forecasting survey, members of the company‘s salesforce are asked to estimate the anticipated sales in their territories for a specified period of time.

(2) Salespeople are closer than other company personnel to customers and should know more about customers‘ future product needs.

(3) Forecasts can be prepared for single territories, divisions, regions or the total market.

(4) For the survey to be effective, salespeople must be accurate and consistent estimators. a)

B.

296 (5)

d)

e)

f)

g)

h)

The survey should be administered so that salespeople will believe they are making a definite contribution by helping to develop sales goals.

(6) Salespeople should be assured that their forecasts are not used to set their sales quotas.

The Delphi method (1) The Delphi method is a centralized forecasting method that takes into account the views of managers, sales personnel and individual participants, aggregates them and modifies them.

(2) The revised forecasts are returned to those involved, who can then amend their forecasts in the context of the consolidated picture.

(3) This method is useful for short, medium and long term forecasts, as well as for new product development, for which there is no historical information on which to base a forecast.

Expert forecasting survey (1) An expert forecasting survey is prepared by outside experts such as economists, management consultants, advertising executives or academics.

(2) Using experts is expedient and relatively inexpensive.

(3) However, outside experts may be less motivated than company personnel to do an effective job.

Time series analysis (1) In a time series analysis, the marketer analyses a company‘s historical sales data to discover a pattern or patterns in the company‘s sales over time.

(2) Trend analysis focuses on aggregate sales data from a period of several years to determine whether annual sales are generally rising, falling or constant.

(3) Cycle analysis is an examination of sales figures over a period of three to five years to ascertain whether sales fluctuate in a consistent, periodic manner.

(4) Seasonal analysis studies daily, weekly or monthly sales figures to evaluate the degree to which seasonal factors influence the company‘s sales.

(5) Random factor analysis attempts to attribute sales variations to random, non-recurrent events.

(6) Time series analysis is an effective forecasting method for products with reasonably stable demand, but it is not useful for products with highly erratic demand.

Correlation methods (1) The forecaster uses correlation methods to try to find a relationship between past sales and one or more variables such as population, per capita income or gross national product.

(2) This method can be used only when the available historical sales data are extensive and reliable, and therefore cannot be used to forecast the sales of new products or in markets where changes are frequent and extensive.

Market tests (1) A market test involves making a product available to buyers in one or more test areas and then measuring purchases and consumer responses to the product‘s distribution, promotion and price.

(2) Such tests provide information about consumers‘ actual purchases rather than about their intended purchases.

297 (3)

Because they do not require historical sales data, they can be effective in estimating sales of new products or of existing products in new geographic areas.

(4) They are often time consuming and expensive.

(5) A marketer cannot be sure that the consumer response during a market test represents the total market response or that such a response will continue in the future.

C. Using multiple forecasting methods 1. Although some businesses rely on a single sales forecasting method, most use several techniques.

2. A company may be forced to use several methods when it markets diverse product lines or when the product is sold in different market segments.

3. Sometimes a marketer verifies the results of one method by using one or several other methods and comparing results.

VIII. The marketing audit A. A marketing audit is a systematic examination of the marketing group‘s objectives, strategies, organization and performance.

1. Its primary purpose is to identify weaknesses in ongoing marketing operations and plan the necessary improvements to correct these weaknesses.

2. The marketing audit evaluates how effectively the marketing organization has performed its assigned functions.

B. To be most effective, a marketing audit should be conducted regularly.

C. The marketing audit is a useful precursor to undertaking marketing planning, providing an insight into the strengths of the company‘s marketing function and its activities.

D. The scope of a marketing audit may be specific or comprehensive.

1. The number and type of dimensions included in an audit depend on the costs involved, the target markets served, the structure of the marketing mix and environmental conditions.

E. The marketing audit should aid evaluation by doing the following: 1. Describing current activities and results to sales, costs, prices, profits and other performance feedback 2. Gathering information about customers, competition and environmental developments that may affect the marketing strategy and the effective implementation of marketing mix programmes 3. Exploring opportunities and alternatives for improving the marketing strategy 4. Providing an overall database to be used in evaluating the attainment of organizational goals and marketing objectives 5. Diagnosing reasons for the successes and failures experienced by a company‘s marketers and their analyses, strategies and tactical marketing mix programmes F. Marketing audits can be performed by people within or outside the company.

1. Although more expensive, an audit by outside consultants is usually more effective because external auditors are more objective, can devote more time to the audit and have greater experience.

G. There are four general guidelines to consider when performing a marketing audit: 1. Questionnaires should be developed carefully to ensure that the audit focuses on the right issues.

2. To ensure that the audit is systematic, the auditors should develop and follow a stepby-step plan.

3. The auditors should strive to talk with a diverse group of people from many parts of the company.

298 4.

H.

I.

The results of the audit should be set forth in a comprehensive written statement that includes recommendations that will increase marketing productivity and determine the company‘s general direction.

Potential problems with a marketing audit 1. Marketing audits can be expensive in time and money.

2. Objective, qualified auditors may not be available.

3. Marketing audits can disrupt a company‘s activities because employees sometimes fear comprehensive evaluations.

Many companies do not deploy a marketing audit – it is not necessary to deploy a marketing audit in order to have a marketing orientation.

1. However, many organizations benefit significantly from routine auditing of their marketing practices, identifying good practices to replicate and share, or poor practices on which to take remedial action.

2. As a precursor for marketing planning, a marketing audit can help rectify deficiencies and poor practices in the marketing function, so enhancing the likelihood of effective deployment of a more meaningful marketing plan.

ANSWERS TO DISCUSSION AND REVIEW QUESTIONS 1.

What is marketing planning? How does it help companies address their market places better?

Marketing planning is a systematic process that involves assessing marketing opportunities and resources, determining marketing objectives and developing a plan for implementation and control. Through the core steps of analysis, strategy development and determination of programmes for implementation, all aspects of the marketplace are thoroughly examined and optimum target markets identified and better understood.

2.

What is the difference between a marketing plan and a corporate plan?

A corporate plan is a bigger picture strategy document that presents to shareholders, directors and other key stakeholders a view of the company‘s overall strategy, markets, products, developments and investment plans, as well as key activities across all business functions. The marketing plan focuses on market opportunities, target markets, bases for competing and the required marketing mix activities, as owned by the company‘s marketers.

3.

What is the timespan for a marketing plan?

Most businesses focus the detail on the next 12-18 months, with headline plans for years two and three.

4.

What are the main tasks involved with producing a marketing plan?

Although the bulk of the finished plan is a detailed plan of action for how to engage with the agreed target markets, focusing on marketing mix activities, the time-consuming part of producing the plan typically is in updating the necessary marketing analyses – customers, competitors, marketing environment, performance and so forth – as fresh insights must steer the strategic choices which direct the plan‘s proposed activities. All three stages of the process require significant bandwidth: marketing analyses, marketing strategy decisions and producing the marketing programmes.

5.

Were you asked to direct the production of a marketing plan what would be your game plan and approach?

299 In light of the response to the previous question, much revolves around having colleagues with knowledge of the market involved, as well as ensuring senior colleagues input to the strategic choices and involving others in business functions needed to help execute the plan, too. Designing an appropriate process, mapping this out, sharing it and agreeing a sensible timeframe matter hugely. Project management skills need to be part of the approach.

6.

In what ways do marketing environment forces affect marketing planning? Give some examples.

Marketing planning analyses in its early stages the core aspects of the trading environment: the marketing environment, customers and competitors. As defined in Chapter 2, the marketing environment encompasses all aspects of the trading environment outside the company‘s direct control that might affect its ability to do business: political, regulatory and legal aspects; economic and competitive; technological; and societal, including the ever important ‗green movement‘. For any company or organization, certain aspects will play a role at any time (see Chapter 2 for detailed examples).

7.

What is a SWOT analysis? How does it lead to an understanding of realistic marketing opportunities?

The SWOT analysis examines internal strengths and weaknesses in a company and its marketing activity, evaluating areas for improvement and identifying those that are under maximum strain while simultaneously assessing core external factors – largely from the marketing environment – that are likely to pose a threat to the business or, subject to internal resources and strengths, present an opportunity. As such, it is a simple analysis to assist in assessing marketing opportunities.

8.

What issues must be thoroughly analyzed during marketing planning prior to the formulation of a marketing programme?

In addition to the SWOT and marketing opportunity analysis discussed in the previous question, companies must conduct an analysis of needs and perceptions, market segmentation and brand positioning; an analysis of the marketing environment and general market trends; and an analysis of competition and competitors‘ strategies.

9.

Why is it important to seek a differential advantage?

Marketing centres on satisfying customers, but with product differentiation to beat competitors. A differential advantage – or competitive edge – is something in the marketing mix desired by targeted customers but not readily offered by rival companies. It is important, therefore, to have a differential advantage in order to gain a lead over competitors. Note, though, that a differential advantage is rarely sustainable over the longer term, as rivals will copy it and seek to overtake it with their own differential advantages.

10. Why does it take three years before the use of marketing planning typically is routinized in a company?

Most marketing plans are revised annually with a detailed three year perspective. It often takes three years before all components on the plan have become absorbed into the day-to-day process of marketing decision making. Furthermore, when an organization first becomes involved in marketing planning activities, it may have to be realistic about how much of its market it can analyze in detail in each annual cycle, particularly if there has not previously been a culture of such analytical activities. Over time, the analyses of customers, competitors and the marketing environment on which the planning process is based, become instilled into its day-to-day operations.

300 11. In what ways does marketing planning help with establishing controls for a marketing function?

The result of a marketing planning process is a clarity in terms of what needs to be done (marketing mix activities and operational requirements), when, by whom, at what cost and to what purpose. The expected outcome is stated. Therefore, it is clear to management what should have been achieved at points in time when they undertake reviews. Any gaps can thereby be assessed and remedies put in place, either to put the plan back on track or to modify expectations. Without a marketing plan, such monitoring is difficult and performance will not be optimized.

12. Why is a marketer concerned about sales potential when trying to find a target market?

Sales potential is important to a marketer because the company incurs a certain cost in developing and maintaining a marketing mix. To achieve long-term survival, the company must be able to recover these costs and make at least a reasonable profit. By estimating the sales potential of possible target markets, a marketer is in a better position to achieve long-term survival. Estimates of sales potential are necessary to determine which market segments are substantial enough to justify the development of marketing mixes.

13. What is a sales forecast, and why is it important?

The sales forecast is the amount of a product that a company expects to sell over a period at a specified level of marketing activity. The development of a sales forecast is important because many operating units within the company use the forecast in planning, organizing, implementing and controlling their activities, and their success depends on its accuracy.

14. What is the Delphi method of forecasting? Why is it a popular tool?

Individual managers (field based and/or head office) make their own forecasts. These are collated, evaluated and modified centrally. The revised forecasts are returned to the individuals for comment and additional revision. This iterative process, which involves input from a large number of experienced managers, enables discussion and the chance to agree on revised figures in the ultimate forecast.

15. Why would a company use a marketing audit?

The marketing audit examines all aspects of a company‘s business and marketing: it is a feedback phase of an evaluation of the business. The audit is the intelligence system used to gather information to determine whether a strategy is working. Companies new to formal marketing planning often use a marketing audit as an initial fact finding orientation exercise.

COMMENTS ON THE WEB TASK AND CASES WEB TASK To be competitor-aware a marketer should identify the competitive set, from the targeted customers‘ perspective, and the relative merits of each competing proposition. However, knowledge of competitors‘ strengths and weaknesses is not sufficient. A marketer must also assess the apparent target market strategy of these rivals, their selected basis for competing and desired brand positioning.

Marketers should compare the details of their respective marketing mixes.

Websites are helpful for the last aspect: identifying the marketing mix for rivals. However, by comparing the content and messages across a range of rivals‘ websites, marketers are able to deduce rivals‘ strategies, competitive advantages, weaknesses and priority target segments.

301 This exercise quickly reveals the wealth of competitor information readily available if only marketers looked!

APPLIED MINI-CASE Now established, Alton Towers‘ marketers focus on developing campaigns and seasonal promotions. In the early days, though, the focus was on building up an appreciation of customers‘ requirements, the catchment profile and visitor travel times, and the competitive set deemed desirable by the theme park‘s visitors. New competitors emerge and customer requirements evolve, so the marketing planning should ensure these analyses are updated. It is important to clearly differentiate the park from rival attractions and maintain a positive brand image (particularly in the light of 2015‘s unfortunate accident). All stages of the marketing planning process are relevant, therefore, but the emphasis is likely to be on developing marketing programmes.

CASE STUDY: DELL HAS TO PLAN FOR A NEW FUTURE Once the ‗new kid on the block‘ challenging established computer giants such as IBM and HP, Dell became a dominant force in desktops and laptops, for consumers and business users. Broadband, smartphones, mobile use, Asian rivals and declining prices have made trading conditions tough for Dell. The company sought diversification into other technology markets, such as televisions and phones, but at the time of the emergence of smartphones, mobile broadband and the entrance of Apple and Samsung. Now Dell is back to focusing on computing, but in a hostile and crowded marketplace.

Question 1 asks to what extent should marketing planning have helped Dell to avoid the problems encountered when it first diversified into consumer electronics. A thorough marketing environment analysis would have revealed the emergence of mobile broadband, smartphones, tablets and evolving rival technologies. Competitor analysis would have signalled the arrival of new players in these markets, such as Apple and Samsung. Consumer research would have picked up changing usage behaviours and product aspirations. Marketing analyses are, for good reason, the building block of marketing strategy and marketing planning.

Question 2 explores the stage of the product life cycle for personal computers and the implications for marketing planning in Dell. While smartphones are in the growth stage and mobile on-the-go usage is also growing, tablets are in maturity, traditional computing use is declining with sales of desktops and laptops starting to shrink back year on year. A company can still be successful in such markets, but only if their products offer a compelling customer value proposition and their cost base enables much reduced retail prices which still deliver profitability. Dell‘s marketing planning, analyses, target market strategy and marketing programmes needed to reflect this situation.

Question 3 seeks to look at how marketing planning might underpin Dell‘s ongoing selection of opportunities and target markets. Having previously poorly evaluated consumer technology markets, hopefully when assessing new possibilities Dell now undertakes the analyses detailed in question 1, has a clear view of the necessary characteristics of a ‗good opportunity‘, and has metrics in place to monitor the ongoing roll-out and performance of new products.

CHAPTER 23

Implementing strategies, internal marketing relationships and measuring performance

302

OBJECTIVES •

To understand how marketing activities are organized within a company‘s structure.

•

To examine the marketing implementation process.

•

To learn about impediments to marketing implementation.

•

To grasp the importance of internal marketing.

•

To explore implementing and controlling marketing activities.

•

To learn how sales and marketing cost analysis can be used as methods of evaluating performance.

•

To describe marketing shareholder value analysis.

•

To discuss the popular criteria for measuring marketing performance.

PURPOSE AND PERSPECTIVE This chapter continues the discussion of marketing strategy and management issues. First, it considers the place of marketing in an organization because marketing influences the extent of a marketing manager‘s authority and the management style and methods. Then, it discusses the bases on which marketing units can be organized and overviews the marketing implementation process. Processes intended to help facilitate implementation, including the in-vogue topics of relationship marketing and internal marketing are examined. The discussion of implementation then focuses on the importance of motivating personnel who perform marketing activities, establishing effective communication within the marketing unit and with top management, and coordinating marketing activities. The analysis of the marketing control process deals with establishing performance standards, evaluating actual performance by comparing it with established standards, and reducing the differences between desired and actual performance. The chapter also looks at the problems that arise when attempting to control marketing activities. Finally, it explores methods of assessing and improving the effectiveness of a marketing strategy.

303

LECTURE OUTLINE IX. Organizing marketing activities A. Some companies do not have a free-standing specialist marketing function, but as long as the marketing process detailed in Chapter 1 is enacted, this approach to marketing may achieve adequate results.

1. In general, however, most companies do have specialist marketing personnel.

B. The place of marketing in an organization 1. Companies that adopt the marketing concept develop a distinct organizational culture based on a shared set of beliefs that makes the customers‘ needs the pivotal point of a company‘s decisions about strategy and operations. a) Instead of developing products in a vacuum and then trying to persuade consumers to buy them, companies using the marketing concept begin with an orientation towards their customers‘ needs and desires. b) If the marketing concept serves as a guiding philosophy, the marketing unit will be closely coordinated with other functional areas, such as production, finance and personnel.

2. A marketing-oriented organization concentrates on discovering what buyers want and providing it in a way that lets the company achieve its objectives. a) The marketing manager is at the same level as financial, production and personnel directors and takes part in top level decision-making. b) The marketing director is responsible for a variety of activities that would be under the jurisdiction of other functional managers in production or salesoriented organizations. c) To be successful, a company does not have to employ a marketing director, but the core activities of marketing must be undertaken and the forward thinking enabled by the marketing process must be deployed by someone. d) In addressing the core marketing analyses, marketers are well placed to warn a business about impending threats and guide their colleagues in aligning resources to emerging opportunities.

C. Centralization versus decentralization 1. A centralized organization is one in which the top-level managers delegate very little authority to lower levels of the organization.

2. In a decentralized organization, decision-making authority is delegated as far down the chain of command as possible.

3. The overall trend is for companies to decentralize, partly due to the need for organizations to remain very flexible, given the ever-changing marketing environment.

4. Companies whose need to adapt to changing customer desires is of critical importance use an extreme form of decentralization – empowerment. a) Empowerment gives front line employees the authority and responsibility to make marketing decisions without seeking the approval of their supervisors. b) In practice, for many organizations the solution is something of a hybrid: marketing activity is decentralized within business units that are responsible for individual market segments or product groups, but the marketing personnel in the organization also work collectively in order to manage tasks that cut across the

304

X.

activities of separate business units, such as brand development and communication. c) Empowerment works best when the corporate culture is guided by a sense of shared direction, thus ensuring that employees make the right decisions.

D. Major alternatives for organizing the marketing unit 1. The organizational structure of a marketing department establishes the authority relationships between marketing personnel and specifies who is responsible for making certain decisions and performing particular activities. a) Managers divide work to be done into specific activities and delegate responsibility and authority for the activities to people in various positions within the unit.

2. Organizing by functions a) When organizing by functions, marketing departments are grouped by marketing functions.

(1) Personnel directing marketing research, product development, distribution, sales, advertising and customer relations report to the top-level marketing executive. b) This is a fairly common way to structure internal marketing units because it works well for small businesses with centralized marketing operations whose products and customers are neither numerous nor diverse.

3. Organizing by products a) Organizing by products is appropriate for companies that produce and market diverse sets of products. b) This method gives a company flexibility to develop special marketing mixes for different products. c) In the product management system, the product manager takes full responsibility for marketing a product or product group. d) Category management takes this notion further, with marketers becoming responsible for categories of product lines or for categories of distributors.

4. Organizing by regions a) Organizing by regions works for companies that market products nationally or internationally. b) Each regional marketing manager reports to the executive marketing manager. c) This form of organization is especially effective for a business whose customers‘ characteristics and needs vary greatly from one region to another.

5. Organizing by type of customer a) Organizing by type of customer is suitable for companies that have several groups of customers with different needs and problems. b) The marketing manager for each group reports to the top-level marketing executive and directs most of the marketing activities for that group.

Marketing implementation A. Marketing implementation is the ‗how?‘ of marketing strategy – processes and activities deployed to action the marketing strategy or roll out the marketing plan.

1. If businesses fail to plan for this activity and do not adopt rigorous controls, the marketing strategy is unlikely to be properly actioned and is therefore unlikely to succeed.

2. Nowadays, a robust marketing plan is not deemed complete until the ‗how‘, ‗by whom‘, ‗when‘ and ‗how much‘ issues are addressed – in providing these details, marketers identify deficiencies and inadequacies in their capabilities and resources that they must address in order to implement their marketing plans effectively.

305 3.

B.

C.

D.

E.

Internal organizational barriers are likely to impede or restrict the implementation of marketing plans and marketing strategies and the internal market must be addressed in effectively pursuing the implementation of marketing strategies and the deployment of recommended marketing mix programmes.

4. The requisites for implementation include process, skill, leadership, empowerment, communication, timing, information, resource and participation decisions. a) The learning point is straightforward: appreciation of the checklist issues outlined in Figure 23.4 prior to embarking on marketing planning or the creation of a new marketing strategy will significantly enhance the likelihood of a successful outcome.

5. In essence, all organizations have two types of strategy: intended strategy and realized strategy. a) Intended strategy is the strategy that the organization decided on during the planning phase and wants to use. b) Realized strategy is the strategy that actually takes place, arising during the process of implementing the intended strategy. c) Effective implementation procedures can minimize the gap that can occur between a company‘s intended strategy and its realized strategy.

Problems in implementing marketing activities 1. Marketing strategies sometimes turn out differently than expected because managers fail to realize that marketing implementation is just as important as marketing strategy.

2. It is important for managers to keep in mind the following problems: a) Marketing strategy and implementation are interrelated. b) Marketing strategy and implementation are constantly evolving. c) The responsibilities for marketing strategy and implementation are separated.

Components of marketing implementation 1. The marketing implementation process has several components, all of which must mesh if the implementation is to succeed. a) These components include marketing strategy, leadership, people, resources, systems/communications, marketing structures and shared goals.

2. At the centre of marketing implementation are shared goals, which draw the entire organization together into a single, functioning unit. a) These ideas have also been embraced within the related concepts of internal marketing and relationship marketing, as discussed later in the chapter.

Motivating marketing personnel 1. People work to satisfy physical, psychological and social needs. To motivate marketing personnel managers must discover their employees‘ needs and then develop motivational methods that help them satisfy those needs. a) Companies need to find out what workers think, how they feel and what they want, perhaps through an employee attitudes survey. b) Then by tying rewards to organizational goals, the company encourages behaviour that meets organizational goals. c) By tying rewards to organizational goals, managers must motivate individuals by using different motivational tools, based on each individual‘s value system.

Communicating within the marketing unit 1. With good communication, marketing managers can motivate personnel and coordinate their efforts.

2. Marketing managers must be able to communicate with the company‘s high-level management to ensure that marketing activities are consistent with the company‘s overall goals

306 3.

Communication with top-level executives guides what the marketing unit is to do and how its activities are to be integrated with those of other departments.

4. To facilitate communication, marketing managers should establish an information system within the marketing unit. a) This should support a variety of activities, such as planning, budgeting, sales analyses etc. b) It should also expedite communications with other departments in the organization and minimize destructive competition between departments for organizational resources.

F. Coordinating marketing activities 1. Because of job specialization and differences related to marketing activities, marketing managers must synchronize individuals‘ actions to achieve marketing objectives, including those from other departments and outside the organization. a) Marketing managers can improve coordination by using internal marketing activities to make each employee aware of how his or her job relates to others, and how his or her actions contribute to the achievement of marketing plans.

XI. Concepts related to marketing implementation A. Relationship marketing 1. Relationship marketing focuses on the interaction between buyers and sellers and is concerned with winning and keeping customers by maintaining links between marketing, quality and customer service.

2. There has been a shift from transaction-based marketing to relationship marketing, in which selling organizations take a longer term view of customer relationships to ensure that those customers converted are also retained.

3. In addition to current customers, other audiences must also be addressed. a) As detailed in the five markets model of relationship marketing, those audiences include (1) referral markets, (2) suppliers, (3) employee recruitment markets (4) influencer markets and (5) internal markets.

4. In highlighting the internal market, relationship marketers acknowledge the damage that can be done if employees do not understand their role in ensuring that marketing recommendations are adequately actioned.

B. Internal marketing 1. Internal marketing is the application of marketing internally within the company, with programmes of communication and guidance targeted at internal audiences to develop responsiveness and a unified sense of purpose among employees. a) It has been shown that there is a relationship between satisfied employees, marketing orientation and organizational performance. b) It plays a vital role in developing a customer focused organization and helps ensure coherent relationship marketing. c) The concept requires that all members of staff work together, in tune with the organization‘s mission, strategy and goals. d) The aim is to ensure that all staff represent the business in the best possible way in all transactions they have with suppliers, customers and other staff.

2. Internal marketing requires: a) The creation of internal awareness b) Identification of internal ‗customers‘ and ‗suppliers‘ c) Determination of internal customers‘ expectations d) Communication of these expectations to internal suppliers e) Internal suppliers‘ modifications to their activities to reflect internal customers‘ views

307 f)

A measure of internal service quality and feedback to ensure a satisfactory exchange between internal customers and suppliers 3. Many companies use planning sessions, workshops, letters, formal reports and personal conversations as tools of internal distribution to ensure that employees understand the corporate mission, the organization‘s goals and the marketing strategy.

4. The ultimate result of internal marketing is more satisfied employees and improved customer relations.

5. The core requirements of internal marketing are: a) information sharing of marketing intelligence b) orientation sessions to familiarize staff with marketing strategies and marketing plans c) multi-functional team interaction d) formalized internal marketing communications campaigns e) debrief and feedback sessions f) incentivized staff motivation g) empowerment of line management to take ownership of problems h) the encouragement of ‗success stories‘ to champion C. Total quality management 1. Total quality management (TQM) is an increasingly popular process to coordinate efforts directed at improving all aspects of a business – from product and service quality to customer and employee satisfaction.

2. As a management philosophy, TQM relies heavily on the talents of employees to continually improve the quality of the organization‘s goods and services. a) It is founded on three basic principles: (1) empowered employees, (2) continuous quality improvement and (3) quality improvement teams.

3. Benchmarking, a primary tool of the continuous quality improvement process, compares the quality of a business‘s goods, services or processes with that of its best performing competitors.

4. Two factors are of special importance to the effectiveness of the internal marketing and TQM approaches: a) Top management must be totally committed to internal marketing or TQM and must make either one or both of the approaches their top priority. b) Management must coordinate the specific elements of these approaches to ensure that they work in harmony with each other.

D. Coordinating marketing activities 1. Because of job specialization and differences related to marketing activities, marketing managers must synchronize individuals‘ actions to achieve marketing objectives.

2. They must also work closely with managers in research, development, production, finance, accounting and personnel to see that marketing activities mesh with other functions of the company.

3. Marketing managers must coordinate the activities of marketing staff within the company and integrate those activities with marketing efforts of external organizations, such as advertising agencies, resellers, researchers and shippers.

4. Coordination is facilitated by making all individuals aware of how their jobs are related to others‘ jobs and how each person‘s actions contribute to the achievement of marketing plans.

XII. Controlling marketing activities A. To achieve marketing objectives as well as general organizational goals, marketing managers must effectively control marketing efforts, using corrective action, if necessary.

308 1.

B.

C.

D.

E.

F.

The marketing control process consists of establishing performance standards, evaluating actual performance and reducing the differences between desired and actual performance.

2. There are both formal and informal control systems in organizations. a) The formal marketing control process involves performance standards, evaluation of the actual performance and corrective action to remedy shortfalls. b) The informal marketing control process involves self-control, social or group control, and cultural control through acceptance of a company‘s value system. c) The choice of control system depends on the environmental context of the business.

3. Most well-run organizations monitor the roll-out of their marketing strategies and marketing plans, such as through review meetings.

Establishing performance standards 1. Planning and controlling are closely linked because plans include statements about what is to be accomplished that – for purposes of control – act as performance standards. a) A performance standard is an expected level of performance against which actual performance can be compared.

2. Performance standards can also be given in the form of budget accounts, can be related to product quality and should be tied to organizational goals.

Evaluating actual performance 1. To compare actual performance with performance standards, marketing managers must know what marketers within the company are doing.

2. They must also have information about the activities of external organizations that provide the business with marketing assistance. a) Most businesses obtain marketing assistance from one or more external individuals or organizations, such as advertising agencies, middlemen, marketing research organizations and consultants.

3. Records of actual performance are compared with performance standards to determine whether and how much of a discrepancy exists.

Taking corrective action 1. To reduce a discrepancy between established performance standards and actual performance, marketing managers can (1) take steps to improve actual performance, (2) reduce or totally change the performance standard or (3) do both. a) Changes in actual performance may require the marketing manager to use better methods of motivating marketing personnel or to find more effective techniques for coordinating marketing efforts.

Requirements for an effective control process 1. Effective control hinges on the quantity and quality of information available to the marketing manager and the speed at which it is received. a) The control process should be designed so that the flow of information is rapid enough to allow the marketing manager to detect differences between actual and planned levels of performance quickly.

2. Control procedures should be flexible enough to adjust to both varied activities and changes in the organization‘s situation.

3. Costs must be low relative to costs that would arise if controls were lacking.

4. The control process should be designed so that both managers and subordinates can understand it and its requirements.

Problems in controlling marketing activities 1. Necessary information is either unavailable or available but costly.

309 2.

The frequency, intensity and unpredictability of environmental changes hamper effective control.

3. The time lag between marketing activities and their effects limits a marketing manager‘s ability to measure the effectiveness of marketing activities.

4. Because marketing and other business activities overlap, the precise costs of marketing activities cannot be determined.

5. Marketing control may be difficult because it is very hard to develop exact performance standards for marketing personnel.

XIII. Methods of evaluating performance A. To assess and improve the effectiveness of a marketing strategy, a marketer should state, through plans and objectives, what a marketing strategy is to accomplish.

1. These statements should set forth the performance standards, usually stated in terms of profits, sales, market share, brand awareness, customer satisfaction levels or costs. a) Actual performance must be measured in similar terms so that comparisons are possible.

2. Sales analysis and marketing cost analysis are two general methods of evaluating the actual performance of marketing strategies. a) ‗Softer‘ measures such as brand awareness and customer satisfaction levels are also important and feature in the performance measures utilized by marketing led businesses.

B. Sales analysis 1. Sales analysis uses sales figures to evaluate a company‘s current performance. a) It is the most common method of evaluation because sales data partially reflect the target market‘s reactions to a marketing mix and are often readily available, at least in aggregate form. b) Marketers use current sales data to monitor the impact of current marketing efforts by comparing it with forecasted sales, industry sales, specific competitors‘ sales or the costs incurred to achieve the sales volume.

2. Types of sales measurements a) The sales transaction is the fundamental unit of sales measurements – data used to analyze performance, usually in terms of cash volume or market share.

(1) A sales transaction results in a customer order for a specified quantity of an organization‘s product sold under specified terms by a particular salesperson or sales group on a certain date. b) Companies frequently use cash volume sales analysis because currency is a common denominator of sales, costs and profits. c) A company‘s market share is the company‘s sales of a product stated as a percentage of industry sales of that product.

(1) Market share analysis allows a company to compare the performance of its marketing strategy with competitors‘ strategies.

(2) Market share analysis is used primarily to estimate whether sales changes resulted from the company‘s marketing strategy or from uncontrollable environmental forces.

(3) When attributing a sales decline to uncontrollable factors, a marketer must remember that such factors do not affect all companies in the industry equally.

3. Bases for sales analysis a) Whether it is based on sales volume or market share, sales analysis can be performed on aggregate sales figures or on disaggregated data.

310 (1)

C.

Aggregate sales analysis provides an overview of current sales; it gives a broad perspective.

(2) Aggregate sales analysis is often insufficient because it does not make the analyst aware of sales variations within the aggregate.

(3) To find such disparities, total sales figures are usually broken down by geographic unit, salesperson, product, customer type or a combination of these categories. b) Sales analysis by geographic unit (1) Sales data can be classified by city, county, district, state, country, region or any other geographic designations for which a marketer collects sales information.

(2) Actual sales in a geographic unit are usually compared with sales in a similar geographic unit, with last year‘s sales or with an estimated market potential for the area. c) Sales analysis by salesperson (1) This type of analysis is used to determine the contribution each salesperson makes.

(2) Performance standards for salespeople are often set in terms of sales quotas for a given time period.

(3) To evaluate a salesperson‘s actual performance, that individual‘s current sales are compared to a predetermined quota or some other standard, such as the previous period‘s sales. d) Sales analysis by product group or specific product item (1) Marketers break down their aggregate sales figures by product to determine the proportion that each product contributes to total sales.

(2) Sales analysis by product is needed to measure the degree to which sales volume and market share objectives are achieved for each product or product group.

(3) To gain an accurate picture of where sales of specific products are occurring, marketers sometimes combine sales analysis by product with sales analysis by geographic area or salesperson. e) Sales analysis by customer (1) This type of analysis is usually broken down by type of customers.

(2) Customers can be classified by the way they use a company‘s products, their distribution level, their size, the size of orders or other characteristics.

(3) Sales analysis by customer type lets a company ascertain whether its marketing resources are allocated in a way that achieves the greatest productivity.

4. In using sales analysis, a marketer must remember that a considerable amount of information is needed. a) The capability to develop useful sales analyses is determined largely by the effectiveness of the system used for collecting sales information.

Marketing cost analysis 1. Marketing cost analysis breaks down and classifies costs to determine which costs are associated with specific marketing activities. a) By comparing costs of previous marketing activities with results generated, a marketer can better allocate the business‘s marketing resources in the future. b) Marketing cost analysis lets a company evaluate the effectiveness of an ongoing or recent marketing strategy by comparing sales achieved and costs incurred.

311 (1)

2.

3.

This form of analysis can isolate profitable or unprofitable customer segments, products or geographic areas.

Determining marketing costs a) The first step is to examine accounting records.

(1) Most accounting systems classify costs into natural accounts that are based on how the money was actually spent; these accounts do not help explain what functions were performed through the expenditure of those funds.

(2) Marketing cost analysis usually requires that some of the costs in natural accounts be reclassified into marketing function accounts, which indicate the function performed – such as transport, storage, order processing, selling, advertising, sales promotion, marketing research and consumer credit – through the expenditure of funds. b) Three broad categories are used in marketing cost analysis: (1) Direct costs are directly attributable to the performance of marketing functions.

(2) Traceable common costs can be allocated indirectly, using one or more criteria, to the functions they support.

(3) Non-traceable common costs cannot be assigned according to any logical criteria and thus are assignable only on an arbitrary basis. c) How an analyst deals with these three categories depends on whether the analyst uses a full cost or a direct cost approach.

(1) The full cost approach includes direct costs, traceable common costs and non-traceable common costs.

(2) The direct cost approach includes only direct costs and traceable common costs.

Methods of marketing cost analysis a) Analysis of natural accounts (1) The precision of this method depends heavily on how detailed the company‘s accounts are.

(2) An analysis of natural accounts is more meaningful, and thus more useful, when current cost data can be compared with those of previous time periods or with average cost figures for the entire industry. b) Analysis of functional accounts (1) When the analysis of natural accounts sheds little light on the cost of marketing activities, natural accounts must be reclassified into marketing function accounts.

(2) Whether certain natural accounts are reclassified into functional accounts and what criteria are used to reclassify them will depend to some degree on whether the analyst is using direct costing or full costing.

(3) Once the costs of these marketing functions have been determined, the analyst can compare resulting figures with budgeted costs, sales analysis data, cost data from earlier operating periods or average industry cost figures, if available. c) Functional cost analysis by product, geographic area or customer (1) By allocating functional costs to specific product groups, geographic areas or customer groups, a marketer can ascertain more precisely which marketing entities are the most cost effective to serve.

(2) After determining marketing costs associated with various product categories, geographic areas or customer groups, the marketer can compare

312

D.

E.

them to sales to evaluate the effectiveness of the company‘s marketing strategy or strategies.

Marketing shareholder value analysis 1. Value based marketing is the inclusion of the value of a marketing strategy and programme in an organization‘s financial analysis of shareholder value.

2. To achieve this, marketing shareholder value analysis (MSVA) divides the estimation of the value to the business created by a marketing strategy into two components: a) the present value of cash flows during the strategizing and planning phases b) the continuing value following implementation of the strategy 3. MSVA provides a means of demonstrating the contribution of marketing to the organization‘s financial performance and enables marketers to communicate the expected results of their marketing strategies in terms comprehended by top management and investors. a) Marketing has struggled to quantify results in order to demonstrate its value but MSVA can help justify marketing actions in terms of their propensity to bring financial value to the business. b) MSVA offers marketing a greater theoretical base and encourages profitable marketing investment and also penalizes arbitrary cuts to the marketing budget.

Performance measures 1. Marketing performance is the assessment of the effectiveness of marketing programmes to implement recommended marketing strategies, fulfil corporate financial expectations and achieve the required levels of customer satisfaction. a) The evaluation of marketing performance is a necessary control mechanism in the marketing process. b) Marketers must agree marketing metrics and be judged by these.

2. Financial performance measures include profitability, return on investment, return on capital employed and, for retailers, sales per square metre of selling space, EBITDA. 3. Units produced and units sold are included as measures by most manufacturers, leading to an assessment of production capacity utilization.

4. Market share is a vital criterion for judging performance.

5. Increasingly, marketers have accepted the need to evaluate performance on additional, more customer-oriented measures. a) Since marketing aims to satisfy customers, it is sensible to monitor customer satisfaction, a qualitative measure of marketing performance that involves surveying customers over time. b) Brand awareness is a qualitative measure of marketing performance that determines whether a company‘s brands capture the attention of their target markets.

6. There are few objective solutions to determining the value of promotional spend to the business‘s overall fortunes. a) It is possible in public relations to use a clippings service, which counts the frequency of mentions of a specific brand or company in selected media. b) Sales promotions are perhaps the safest to measure as they generally require customers to redeem coupons and vouchers or submit competition applications, all of which may be counted. c) Hits on a website can be counted and click-through traffic assessed. Digital marketing has a host of metrics, as explored in Chapter 19.

313 d)

7.

Most problematic is the assessment of advertising effectiveness, as it is not possible to prove that exposure to a specific advertisement has led to a specific sale.

A company should adopt a balanced set of performance measures, mixing the shortterm view of profitability with the often longer-term perspective of market share gains. a) In addition to the financial performance measures, marketers should insist on being assessed on dimensions such as customer retention, customer satisfaction and brand awareness. b) If marketing programmes are effective, these three customer-oriented criteria should all show signs of improvements. c) Whatever the selected criteria for assessing marketing performance, it is essential that marketers incorporate performance monitoring within their control and management processes.

ANSWERS TO DISCUSSION AND REVIEW QUESTIONS 1.

What determines the place of marketing within an organization? Which type of organization is best suited to the marketing concept? Why? The place of marketing is determined by whether the company is production, sales or marketing oriented. The marketing-oriented company is best suited to practice the marketing concept because a number of the company‘s activities are coordinated through the marketing unit.

Marketing encompasses a large number of business functions when a company is marketingoriented.

2.

What marketing activities must be undertaken by an organization striving to establish the marketing concept at its heart?

These include customer analysis, competitor analysis, analysis of the wider marketing environment, marketing strategy development – including the identification of segments, targeting and brand positioning decisions, the development of the marketing mix – including product, price, promotion and distribution and implementation and control activities.

3.

What factors can be used to organize the internal aspects of a marketing unit? Discuss the benefits of each type of organization.

The factors that can be used for organizing a marketing unit‘s internal aspects include the following:

4.

a.

Function – This form of organization may be useful in large, centralized companies in which the products and types of customers are not numerous or diverse.

b.

Product – A business that produces diverse products sometimes organizes according to product group. This gives the company flexibility to develop special marketing mixes for different products. A company with this organization can hire specialists to market specific types of products.

c.

Region – This type of organization is effective for a company whose customers‘ characteristics and needs vary greatly from one region to another. This may help companies that try to penetrate a national market.

d.

Type of customer – This form of organization can work well for a company that has several groups of customers whose needs and problems are quite different.

Why might an organization use multiple bases for organizing its marketing unit?

314 Product features may dictate that the marketing unit be structured by products, and customer characteristics may require that the unit be organized by region or customer type. The use of multiple bases allows the company to acquire the benefits from several approaches. The primary benefit is flexibility.

5.

What are the implementation requisites for marketing strategies and plans?

These include process, skill, leadership, empowerment, communications, timing, information, resource and participation decisions.

6.

Why is motivation of marketing personnel important in implementing marketing plans?

Proper motivation helps personnel perform their activities effectively and in a manner that helps accomplish marketing plans. The degree to which a marketing manager can motivate marketing personnel strongly determines the ultimate success of the company‘s marketing efforts.

7.

How does communication help in implementing marketing plans?

Communication is necessary to motivate and coordinate personnel and their efforts. Further, communication with higher level management helps the marketing manager stay informed about other departments‘ activities, which helps the manager coordinate marketing activities with directors of other departments.

8.

What attributes distinguish relationship marketing from transaction-based marketing?

Some authors have argued that traditionally marketers concentrated on targeting and winning new customers. While this is debatable – after all, brand loyalty has been a long-standing tradition of marketing – relationship marketing also addresses the need to hang on to customers in mutually beneficial ongoing relationships through examining quality issues and customer satisfaction initiatives in a host of target audiences. It focuses on five markets in addition to the targeted customer: referrals, suppliers, employee recruitment, influencers and internal markets.

9.

What is internal marketing? Why is it important in implementing marketing strategies?

Internal marketing applies traditional marketing activities to employees within the organization to encourage them to carry out the company‘s marketing strategy. Internal marketing involves getting employees to understand the role of marketing in the organization and the specific role they play in implementing the marketing strategy. Marketing strategies do not exist in a vacuum.

People in the organization are necessary to communicate with customers and to carry out the many activities required to produce the desired products. An example of internal marketing would be to educate employees concerning the importance of customer service and then give them some freedom in customizing some dimension of service that would increase customer satisfaction.

10. TQM is a growing force in many businesses. What is TQM? How can it help to implement marketing strategies effectively?

Total quality management (TQM) is a very popular tool for coordinating efforts directed at improving all aspects of a business – from product and service quality to customer and employee satisfaction. As a management philosophy, TQM relies heavily on the talents of employees to continually improve the quality of the organization‘s goods and services. It is founded on three basic principles: empowered employees, continuous quality improvement and quality improvement teams.

11. What are the major steps of the marketing control process?

315 The major steps in the marketing control process are (a) establishing performance standards, (b) evaluating actual performance by comparing it with performance standards and (c) reducing the differences between desired and actual performance.

12. List and discuss the five requirements for an effective control process.

First, the process should be designed so that the flow of information is rapid enough to allow the marketing manager to detect quickly differences between actual and planned levels of performance. Second, a number of control procedures must be developed that accurately monitor different kinds of activities. Third, the control process must be economical so that its costs are lower than the costs associated with having no controls. Fourth, the control procedures should be flexible to accommodate changes. Fifth, the process should be designed so that the manager and those being controlled can understand the control process.

13. Discuss the major problems in controlling marketing activities.

In controlling marketing activities, several problems arise. Often the information needed to control the activities is not available or is too costly to obtain. In addition, marketing controls should be flexible because of the unpredictability of the environment, which hampers control.

Also, the time lag between the performance and the effects of marketing activities limits measurement of effectiveness and control. Marketing activities and costs overlap with other areas within the company, making it difficult to identify the cost of marketing activities and compare marketing activities on a performance basis. Finally, the development of performance standards may be difficult because of the multitude of uncontrollable factors associated with accomplishing marketing tasks.

14. What is a sales analysis? What makes it an effective control tool?

With sales analysis, sales figures are used to evaluate a company‘s current performance; the fundamental unit of measurement is the sales transaction. A company can analyze sales in terms of financial volume (£s) or market share. Current sales data alone are not enough. Such information must be compared with forecasted sales, industry sales, specific competitors‘ sales or the costs incurred to achieve the sales volume.

15. Identify and describe three cost analysis methods. Compare and contrast direct costing and full costing.

Three methods of cost analysis are analysis of natural accounts, analysis of functional accounts, and functional cost analysis by product, geographic area or customer. The precision of an analysis done by studying a company‘s accounting records depends on how detailed the company‘s accounts are. The analysis of natural accounts may shed little light on the cost of marketing activities. In such cases, natural accounts must be reclassified into marketing function accounts. A company may desire more precise cost analysis. By allocating the functional costs to specific product groups, geographic areas or customer groups, a marketer can ascertain more precisely which marketing activities are the most cost effective.

16. What is marketing shareholder value analysis? What are its strengths?

Marketing shareholder value analysis divides the estimation of the value to the organization created by a marketing strategy into two components: (1) the present value of cash flows during the strategizing and planning phases (2) the continuing value after implementation of the strategy.

MVSA provides a means of demonstrating the contribution of marketing to the company‘s financial performance. This enables marketing assets to be included in the shareholder value analysis. It also enables marketers to communicate the expected results of their marketing

316 strategies in terms understood by the key publics. The analysis also supports managers‘ requests for budgets.

17. What performance measures are favoured by marketers?

There should be a balanced mix: financial measures and marketing measures, short term and long term. Financial measures include turnover, profitability, return on investment, return on capital employed and sales per square metre in retailing. Marketing or customer-oriented measures include market share, brand awareness and customer satisfaction levels.

18. Why should more than one performance metric be adopted by an organization to assess its marketing outcomes?

Financial performance matters: marketing activities cost the organization and it needs to see payback in terms of key financial measures such as return on investment, sales volumes and profitability. However, market share within key target markets should be a priority concern for marketers, who also want to be assessed on ‗softer‘ measures directly linked to their activities, such as increasing awareness of their brands, improving customer satisfaction rates, referrals, customer retention rates and many more criteria.

COMMENTS ON THE WEB TASK AND CASES WEB TASK As explained in the section entitled Marketing Implementation in Chapter 23, communication within the marketing unit and coordinating marketing activities are essential requirements for implementing a marketing strategy. Internal marketing is a core facet of a marketing-oriented business.

Some businesses use the web purely to communicate with external audiences, but increasingly organizations use email, webinars and the intranet to support internal strategy launches, policy changes and operating practices, particularly with the growth of remote working since the pandemic. Most students have access to intranet sites for managing their degree programmes, module delivery and networking activities, so they should be able to evaluate the extent to which this e-comms provision controls, coordinates and shares.

Newsletters, noticeboards, seminars, events, notes in pigeon holes, etc. are long-standing studentfocused methods for communicating, all of which are still widely utilized for controlling personnel, coordinating activities and sharing information.

APPLIED MINI-CASE A new approach requires carefully planned internal marketing in order to persuade managers to alter their practices and adopt new remits. Champions of change (key managers) should be identified in order to facilitate some ‗quick wins‘. The inevitable personnel who will be resistant to change should be addressed head-on with demonstrations of the benefits of the new strategy and the evidence of the early business wins. Roles need to be specifically defined and everyone must understand their place within the new strategy, to whom they are accountable, how best to communicate and on what basis their own performance will be judged. Financial and people resources would need to be aligned around the new strategy and structure. The strategy would need to be communicated internally as well as externally.

CASE STUDY: TIMEX STANDS THE TEST OF TIME

317 Timex is an example of a company that has experienced considerable ups and downs in a dynamic industry. The purpose of this case is to look at a company that is rebounding through its use of effective marketing strategies and benchmarking of its performance.

Question 1 asks which marketing environment forces are likely to be of greatest interest to marketing managers at Timex. Primary environmental forces that marketing managers at Timex should be concerned with are economic, competitive and technological forces. For the last two decades these environmental forces have had significant effects on the success of Timex‘s marketing strategies. There is reason to believe that these forces will continue to have an impact on the success of Timex‘s products. For example, the arrival of sports watches, health monitoring linked to apps and of course smartwatches has radically altered the shape of the market, modified (some) consumers‘ expectations and brought a new wave of technology companies as competitors.

Question 2 asks students to identify the target markets towards which Timex is aiming its products.

Currently, Timex is aiming at the following market segments: dress watches, sports watches, boyfriend watches, vintage watches, technology watches and outdoor watches. For its adult watches, Timex is primarily using an end use basis for segmentation.

Question 3 considers why Timex must continuously assess its performance and the impact of its marketing. This is important so that the early signs of success or failure can be monitored and acted upon to allow marketing programmes to be regularly altered to enhance the impact of the company‘s new approach. This will help the company to remain attuned to the needs and wants of its target markets.

CHAPTER 24

Responsible marketing

OBJECTIVES •

To understand the concept of social responsibility and to consider the importance of marketers behaving responsibly.

•

To define and describe the importance of marketing ethics.

•

To become familiar with ways to improve ethical decisions in marketing.

•

To understand the role of social responsibility and ethics in improving marketing performance.

•

To revisit the concept of social marketing and consider how it is used.

•

To appreciate how the marketing discipline is evolving and understand the challenges facing marketers today.

PURPOSE AND PERSPECTIVE This chapter offers a discussion of the role of social responsibility and ethics in marketing decision making. It starts by defining social responsibility and exploring its dimensions, and then discusses various social responsibility issues, such as the natural environment and the marketer‘s role as a member of the community. Next, the definition and role of ethics in marketing decisions are explored.

318 Ethical issues in marketing, the ethical decision-making process and ways to improve ethical conduct in marketing are all considered. The chapter closes by exploring how social responsibility and ethics can be incorporated into marketing decisions.

319

LECTURE OUTLINE I.

Social responsibility A. The nature of social responsibility 1. In marketing, social responsibility refers to an organization‘s obligation to maximize its positive impact and minimize its negative impact on society. a) Irresponsible actions that anger customers, employees or competitors may not only jeopardize a marketer‘s financial standing but could have other repercussions as well. b) In contrast, socially responsible activities can generate positive publicity and boost sales.

2. Socially responsible efforts have a positive impact on local communities; at the same time, they indirectly help the sponsoring organization by attracting goodwill, publicity and potential customers and employees.

3. Thus, while social responsibility is certainly a positive concept in itself, most organizations embrace it in the expectation of indirect long-term benefits.

4. Research suggests that an organizational culture that is conducive to social responsibility engenders greater employee commitment and improved business performance.

B. The dimensions of social responsibility 1. Socially responsible organizations strive for marketing citizenship by adopting a strategic focus for fulfilling the economic, legal, ethical and philanthropic social responsibilities that their stakeholders expect of them.

2. Stakeholders include those constituents who have a ‗stake‘, or claim, in some aspect of the company‘s products, operations, markets, industry and outcomes.

3. Companies that consider the diverse perspectives of stakeholders in their daily operations and strategic planning are said to have a ‗stakeholder orientation‘, an important element of social responsibility.

C. Figure 24.1 shows the four phases of corporate social responsibility: 1. Economic – Be profitable. The foundation upon which all others rest. a) All companies have an economic responsibility to be profitable so that they can provide a return on investment to their owners and investors, create jobs for the community and contribute goods and services to the community. b) Marketers also have an economic responsibility to compete fairly.

2. Legal – Obey the law. Law is society‘s codification of right and wrong. Play by the rules of the game. a) Efforts to promote responsible corporate behaviour have resulted in laws and regulations designed to keep European companies‘ actions within the range of acceptable conduct. b) When customers, interest groups or businesses become outraged over what they perceive as irresponsibility on the part of a marketing organization, they may urge the government to draft new legislation to regulate the behaviour or engage in litigation.

3. Ethical – Be ethical. Obligation to do what is right, just and fair and to avoid harm. a) Marketing ethics are principles and standards that define acceptable marketing conduct as determined by various stakeholders, including the public, government

320

D.

E.

F.

regulators, private-interest groups, consumers, industry and the organization itself. b) Marketing ethics goes beyond legal issues – ethical marketing decisions foster trust, which helps build long-term marketing relationships.

4. Philanthropic – Be a good corporate citizen. Contribute resources to the community; improve quality of life. a) These responsibilities, which go beyond marketing ethics, are not required of a company, but they promote human welfare or goodwill, as do the economic, legal and ethical dimensions of social responsibility. b) More companies than ever are adopting a strategic approach to corporate philanthropy.

(1) Cause-related marketing is the practice of linking products to a particular social cause on an ongoing or short-term basis. (a) Marketers like the programmes because well designed ones increase sales and create feelings of respect and admiration for the companies involved.

(2) Strategic philanthropy is the synergistic use of organizational core competencies and resources to address key stakeholders‘ interests and achieve both organizational and social benefits.

Social responsibility issues 1. To be successful, a business must determine what customers, government regulators and competitors, as well as society in general, want or expect in terms of social responsibility.

The natural environment.

1. One of the more common ways marketers demonstrate social responsibility is through programmes designed to protect and preserve the natural environment. Sustainability is the potential for the long-term well-being of the natural environment. a) Many supermarkets, for example, provide on-site recycling for customers and encourage their suppliers to reduce wasteful packaging. b) Such efforts generate positive publicity and often increase sales for the companies involved.

2. Increasingly businesses are specifying their ESG policies and showing how they are accountable, offering benchmarks against others. ESG is their environmental, social and governance policy.

3. Most large companies now benchmark their ESG performance against the 17 sustainable development goals of the United Nations, known as the SDGs. These are detailed on page 725.

Green marketing 1. Green marketing refers to the specific development, pricing, promotion and distribution of products that do not harm the environment. a) The green movement is a movement of consumers committed to increasing environmental awareness and bringing about changes in production, marketing and consumption.

2. Some environmentalists believe companies should work to protect and preserve the natural environment by implementing the following goals: a) Eliminate the concept of waste – Recognizing that pollution and waste usually stem from inefficiency, the question is not what to do with waste but how to make things without waste. b) Reinvent the concept of a product – Products should be reduced to only three types and eventually just two.

321 (1)

Consumables, which are eaten or, when placed in the ground, turn into soil with few harmful side effects.

(2) Durable goods – such as cars and computers, which should be made, used and returned to the manufacturer within a closed-loop system and designed for disassembly and recycling.

(3) Un-saleables – includes such products as radioactive materials and toxins which should always belong to the original makers, who should be responsible for the products and their full life cycle effects.

(4) Reclassifying products in this way encourages manufacturers to design products more efficiently. c) Make prices reflect the cost – Every product should reflect, or at least approximate, its actual cost – not only the direct cost of its effect on production, but also the cost of its effect on air, water and soil. d) Make environmentalism profitable – Consumers are beginning to recognize that competition in the marketplace should not occur between companies harming the environment and those trying to save it.

3. Greenwash is where brands make green claims for little other reason than to be seen in a good light, yet today‘s cynical consumers are often alienated by such activities.

G.

II.

Consumerism is the efforts of independent individuals, groups and organizations to protect the rights of consumers.

1. Interest groups play an important role in helping to protect consumers‘ rights by taking action against companies they consider irresponsible, by lobbying government officials and agencies, engaging in letter-writing campaigns and boycotts, and making public service announcements. a) Consumer activism has resulted in legislation requiring various safety features in cars: seat belts, headrests and collapsible steering columns, for example. b) Activists‘ efforts have further strengthened the passage of several consumer protection laws, such as the Trade Descriptions Act 1968 2. The power of angry consumers should not be underestimated.

H. Community relations 1. Individual communities expect marketers to make philanthropic contributions to civic projects and institutions and to be ‗good corporate citizens‘.

2. A marketer can significantly improve its community‘s quality of life through employment opportunities, economic development and financial contributions to educational, health, cultural and recreational causes. a) These efforts also indirectly help the organizations in the form of goodwill, publicity and exposure to potential future customers.

3. The manner in which organizations deal with equality is also a key social responsibility issue and diversity in the work environment has focused attention on the need to integrate and utilise an increasingly diverse workforce. a) From a marketing perspective, the more closely the workforce matches the population, the better it understands consumer needs and wants.

The nature of marketing ethics A. Marketing ethics is a dimension of social responsibility involving principles and standards that define acceptable conduct in marketing – these are determined by various stakeholders and by an organization‘s ethical climate.

1. When marketing activities deviate from accepted standards, the exchange process can break down, resulting in customer dissatisfaction, lack of trust and legal action.

322 Marketing ethics goes beyond legal issues – marketing decisions based on ethical considerations foster mutual trust in marketing relationships. a) But marketers operate in an environment in which overlapping legal and ethical issues often colour decisions – the legal system therefore provides a formal venue for marketers to resolve ethical disputes as well as legal ones.

III. Ethical issues in marketing A. An ethical issue is an identifiable problem, situation or opportunity requiring an individual or organization to choose between actions that may be evaluated as right or wrong, ethical or unethical.

1. Any time an activity causes marketing managers or customers in their target market to feel manipulated or cheated, a marketing ethical issue exists, regardless of the legality of that issue.

2. Regardless of the reasons behind specific ethical issues, marketers must be able to identify these issues and decide how to resolve them – to do so requires familiarity with the many kinds of ethical issue that may arise in marketing (Table 25.2): a) Product issue – product information – covering up defects in products that could cause harm to a consumer; withholding critical performance information that could affect a purchase decision. b) Place/distribution issue – counterfeiting – counterfeit products are widespread, especially in the areas of computer software, clothing, and audio and video products; the Internet has facilitated the distribution of counterfeit products. c) People issue – customer service – promising or promoting aftermarket care with no intention of honouring the promise or warranty. d) Promotion issue – advertising – deceptive advertising or withholding important product information in a personal selling situation. e) Pricing issue – pricing – indicating that an advertised sale price is a reduction below the regular list price when, in fact, that is not the case.

(1) Price fixing, predatory pricing and failure to disclose the full price of a purchase.

IV. The ethical decision-making process A. Factors that determine ethical decisions in marketing 1. Individual factors a) People often base ethical decisions on their own values and principles of right and wrong. b) These are learnt through socialization by family members, social groups, religion and formal education and in the workplace research has shown that an organization‘s values often have more influence on marketing decisions than do a person‘s own values.

2. Organizational factors a) Ethical choices in marketing are often made jointly, in work groups and committees, and with co-workers and superiors. b) Decisions are based partly on what employees learn from others in the organization. c) Organizational culture and structure operate through organizational relationships to influence ethical decisions. d) Organizational (corporate) culture is a set of values, beliefs, goals, norms and rituals that members of an organization share.

(1) An organization‘s culture gives its members meaning and suggests rules for how to behave and deal with problems within the organization.

2.

323 (2)

Most experts agree that the chief executive, managing director or marketing director sets the ethical tone for the entire organization.

(3) Co-workers‘ influence on an individual‘s ethical choices depends on the person‘s exposure to unethical behaviour and organizational pressure also plays a key role in creating ethical issues.

(4) Nearly all marketers face difficult issues whose solutions are not obvious or that present conflicts between organizational objectives and personal ethics.

3. Opportunity is a favourable set of conditions that limit barriers or provide rewards. a) A marketing employee who takes advantage of an opportunity to act unethically and is rewarded or suffers no penalty may repeat such acts as other opportunities arise. b) Opportunity to engage in unethical conduct is often a better predictor of unethical activities than are personal values. c) Professional codes of conduct and ethics-related corporate policy also influence opportunity by prescribing what behaviours are acceptable.

V. Improving ethical conduct in marketing A. It is possible to improve ethical conduct in an organization by taking on ethical employees and eliminating unethical ones, and by improving the organization‘s ethical standards.

1. If senior management develops and enforces ethics and legal compliance programmes to encourage ethical decision-making, it becomes a force to help individuals make better decisions.

2. When marketers understand the policies and requirements for ethical conduct, they can more easily resolve ethical conflicts although they can never fully abdicate their personal ethical responsibility in making decisions.

B. Codes of conduct 1. Without compliance programmes, and uniform standards and policies regarding conduct, it is hard for employees to determine what conduct is acceptable within the company.

2. Codes of conduct are formalized rules and standards that describe what the company expects of its employees. a) They do not have to take every situation into account, but they should provide guidelines that enable employees to achieve organizational objectives in an ethical, acceptable manner.

C. Ethics officers are typically responsible for creating and distributing a code of conduct, enforcing the code, and meeting with organizational members to discuss or provide advice about ethical issues.

D. Implementing ethics and legal compliance programmes.

1. To nurture ethical conduct, open communication and coaching on ethical issues are essential: providing ethics training, clear channels of communication, and follow-up support throughout the organization.

2. Companies need to consistently enforce standards and impose penalties on those who violate codes of conduct.

3. To succeed, a compliance programme must be viewed as part of the overall marketing strategy implementation.

4. Codifying ethical standards into meaningful policies that spell out what is and what is not acceptable gives marketers an opportunity to reduce the probability of behaviour that could create legal problems.

VI. Incorporating social responsibility and ethics into marketing decisions A. Ethics relates to individual and group decisions: judgements about what is right or wrong in a particular decision-making situation.

324 B.

Social responsibility deals with the total effect of marketing decisions on society.

1. The two concepts are interrelated because a company that supports socially responsible decisions and adheres to a code of conduct is likely to have a positive effect on society.

2. Because ethics and social responsibility programmes can be profitable as well, an increasing number of companies are incorporating them into their overall marketing ethos.

C. Ethics is just one dimension of social responsibility, where being socially responsible relates to doing what is economically sound, legal, ethical and socially conscious.

1. One way to evaluate whether a specific activity is ethical and socially responsible is to ask other members of the organization, or members of external groups, such as consumer groups, if they approve of it.

2. A rule of thumb for resolving ethical and social responsibility issues is that if an issue can withstand open discussion that results in agreement or limited debate, an acceptable solution may exist.

D. Being socially responsible and ethical is not easy 1. To promote socially responsible and ethical behaviour while achieving organizational goals, marketers must monitor changes and trends in society‘s values. a) An organization‘s senior management must assume some responsibility for employees‘ conduct by establishing and enforcing policies that address society‘s desires.

2. After determining what society wants, marketers must attempt to predict the long-term effects of decisions pertaining to those wants.

3. Most of society‘s demands also impose costs and companies must therefore carefully balance the costs of providing low-priced products against the costs of manufacturing, packaging and distributing their products in an environmentally responsible manner (for example).

4. In trying to satisfy the desires of one group, marketers may dissatisfy others (such as in the smokers/non-smokers debate). a) Satisfying the demands of all members of society is difficult, if not impossible, and marketers must evaluate the extent to which members of society are willing to pay for what they want. b) Marketers who want to make socially responsible decisions may find the task a challenge because, ultimately, they must ensure their economic survival.

E. Social responsibility and ethics improve marketing performance 1. Research suggests that a relationship exists between a marketing orientation and an organizational climate that supports marketing ethics and social responsibility and implies that being ethically and socially concerned is consistent with meeting the demands of customers and other stakeholders.

2. Recognition is growing that the long-term value of conducting business in a socially responsible manner far outweighs short-term costs.

3. Companies that fail to develop strategies and programmes to incorporate ethics and social responsibility into their organizational culture may pay the price with poor marketing performance and the potential costs of legal violations, civil litigation and damaging publicity when questionable activities are made public.

4. While the concepts are undoubtedly controversial, it is possible, and desirable, to incorporate ethics into the planning process.

IX. Social marketing A. One of the biggest developments in marketing has been its extension into non-commercial settings, such as interventions to alter people‘s behaviours for improved wellbeing. These

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can include healthier eating, smoking cessation, sustainable living, personal debt management.

B. Social marketing requires an understanding of behaviours and environmental analysis, so as to identify target audiences most pliable to messaging and then the development of such propositions and engagement with targets in order to bring about behavioural changes.

Current hot topics in the marketing discipline A. Social marketing is one of the biggest developments in current marketing.

B. Other developments include digital marketing, big data, the increasing use of consumer-toconsumer communication and social media.

C. Other hot topics include privacy concerns, notably around data capture, use and sharing with third parties; a growing pressure from consumers, society and regulators for transparent and ethical behavior from brands; a growing environment of regulation and third-party monitoring; and, the rapidly increasing importance of sustainability.

D. Multi-channel management of customer experience is still taxing many brand teams.

E. The need for marketers to demonstrate their value and to show the financial contribution from their activities continue to be a key driver.

F. Digital and big data have brought a need for new skills and personnel, placing increased demand pressures on available personnel as companies seek to establish appropriate teams.

The parallel rise of social marketing and the recruitment of marketers by organizations previously disinterested in them has put further pressure on the recruitment of talent.

G. The recession, banking crisis and rise in personal debt have made marketers and brands question the legitimacy of encouraging increasing consumption for many products. They are having to work hard in the cost-of-living crisis to provide value-for-money offerings and to remain relevant to consumers.

H. Food insecurity has emerged as a major hot topic. Supply chain hold-ups caused by Brexit and war in the Ukraine, and by international trade wrangles are part of this. So, too, are the costof-living pressures forcing many households into food poverty.

I. Political fall-out from the UK‘s EU exit and Donald Trump‘s Presidency in the USA, and now war in the Ukraine also pose significant challenges to marketing teams, notably in terms of sourcing products, supply chain security and in executing international marketing strategies.

ANSWERS TO DISCUSSION AND REVIEW QUESTIONS 1.

What is social responsibility and why is it important?

Social responsibility refers to an organization‘s obligation to maximize its positive impact and minimize its negative impact on society. Ignoring society‘s demands for responsible marketing can destroy customers‘ trust, prompt government regulation or litigation, and jeopardize a marketer‘s financial standing. On the other hand, socially responsible activities can generate positive publicity and boost sales. Most organizations embrace the concept of social responsibility with the expectation of indirect long-term benefits.

2.

What are stakeholders? What role do they play in strategic marketing decisions?

Stakeholders include those constituents who have a ‗stake‘ or claim in some aspect of a company‘s products, operations, markets, industry and outcomes; these include customers, employees, investors and shareholders, suppliers, governments, communities and many others.

326 Because stakeholders interact with marketers, they affect and are affected by marketing strategy decisions. Their expectations also determine the economic, legal, ethical and social responsibilities marketers should fulfil.

3.

List four dimensions of social responsibility.

Social responsibility includes economic, legal, ethical, and philanthropic dimensions. Economic and legal responsibilities are the most basic levels of social responsibility; failure to consider them may mean that a marketer is not around long enough to engage in ethical or philanthropic activities. The most basic of marketing ethics principles have been codified as laws and regulations to encourage marketers to conform to society‘s expectations of conduct. Philanthropic efforts are not required of a company, but they promote human welfare and goodwill.

4.

What are some major social responsibility issues? Give an example of each.

One major social responsibility issue is the consumer movement, which includes the activities undertaken by independent individual groups and organizations to protect their rights as consumers. Community relations, another social responsibility issue, relates to marketers‘ attempts to contribute to the wellbeing of communities, including solving social problems and participating in community activities. Finally, green marketing is becoming a major social responsibility issue; it emphasizes not only the quality of life but also a healthful environment to enable us to maintain a high standard of living. Green marketing relates to issues such as conservation, water pollution, air pollution and land pollution.

5.

What is the difference between ethics and social responsibility?

Ethics relate to individual moral evaluations – judgements about what is right or wrong in a particular decision-making situation. Social responsibility is the obligation of an organization to maximize its positive impact and minimize its negative impact on society. Thus, social responsibility deals with the total effect of marketing decisions on society. These two concepts work together because a company that supports both socially acceptable moral philosophies and individuals who act ethically is likely to make decisions that will have a positive impact on society.

6.

Why are ethics an important consideration in marketing decisions?

Because of the many publicized incidents in marketing relating to manipulation, corruption and objectionable marketing activities, today‘s marketers have placed top priority on improving their ethics. It is important for marketers to go beyond legal issues and foster mutual trust among individuals and in marketing relationships. Consumers generally regard unethical marketing activities, such as deceptive advertising, misleading selling tactics, price collusion and marketing of harmful products, as unacceptable and often refuse to do business with companies that engage in such practices.

7.

How do the factors that influence ethical or unethical decisions interact?

Personal moral philosophies, organizational relationships and opportunity are the three factors that interact to determine ethical decisions in marketing. While one hopes individuals in organizations have personal moral philosophies that are socially acceptable, an employee assumes some measure of moral responsibility by agreeing to abide by the organization‘s rules and standard operating procedures. If an organization has limited ethical leadership and guidance, the individual may feel free to operate by his or her own standards. When opportunities are available, individuals may act according to their own best interests if the organization has provided limited direction.

327 8.

What ethical conflicts could arise if a company‟s employees chose to fly only on certain airlines in order to accrue personal frequent-flier miles?

Businesspeople often travel a great deal. Why shouldn‘t they benefit personally by building up Air Miles or frequent flier points on ‗their‘ airline‘s scheme? Some will believe this is wrong, while others will see no conflict. Is it the slippery slope to ‗corrupt‘ practices?

9.

Give an example of how each component of the marketing mix can be affected by ethical issues.

Answers for these will vary, but students should be able to cite appropriate examples.

Product: The brand name can be misleading. In the US a brand of fresh orange juice was changed due to the controversy over its being made from concentrate – not fresh orange juice. The product can be dangerous – General Motors mounted fuel tanks of some pickup trucks outside the frame, even though they were found to be involved in fiery crashes twice as often as other trucks.

Promotion: False or misleading advertising claims. Hoover‘s promotion offering free flights to customers fell into this category.

Pricing: Inflating prices during peak sales periods and/or manipulating the supply of the product.

Nintendo allegedly raised its prices by 20 to 30 per cent during the Christmas season and then limited the supply of the games.

Distribution: Distributing counterfeit products. Some record stores distribute bootleg recordings, and some computer software retailers are making unauthorized copies of software.

10. How can ethical decisions in marketing be improved?

The first step in improving ethical decision-making is for organizations to recognize that there are things they can do to improve the general environment for ethical decision-making. To maintain ethical behaviour, a company must work its policies, rules and standards into a control system.

Enforcement of standards is what makes codes of ethics effective. If codes are merely window dressing and do not relate to what is expected or what is rewarded in the corporate culture, the codes serve no purpose except to give an illusion of concern about ethical behaviour. Finally, ethical behaviour in marketing must be based on strong moral foundations, including personal moral development and elimination of opportunities that encourage or reward unethical behaviour. The pressures of competition must be understood and coped with to improve ethical behaviour. The idea that marketing ethics is learned at home, at school or in family relationships does not capture the impact of opportunity on ethical decision-making in the organization.

11. How can people with different personal values work together to make ethical decisions in organizations?

By sensitizing marketers to ethical issues and potential areas of conflict, it is possible to eliminate or defuse some of the ethical pressures that occur in daily marketing activities. Awareness and sensitivity towards ethical issues can eliminate the risk of making unethical decisions. Individuals must join together and establish standards or codes of ethics and agree on what the ethical issues are and how to resolve them. While individuals may define ethics differently and disagree about personal ethical standards, they should be able to agree on standards of acceptable behaviour to guide all marketing decisions within the organization.

12. What evidence exists that being socially responsible and ethical is worthwhile?

Research has shown that companies that do not develop strategies and programmes to incorporate ethics and social responsibility into their organizational cultures may suffer poor marketing performance and the potential costs of legal violations, civil litigation, and damaging publicity

328 when questionable activities are publicized. Companies that do incorporate ethics and social responsibility into their strategic plans experience improved marketing performance as a result of a more positive reputation among consumers, which may lead to increased sales.

13. What is social marketing and how does it use commercial marketing tools to change behaviour?

Social marketing involves using commercial marketing ideas and tools to change behaviours for the good of the individual or society, such as quitting smoking, eating more healthily and avoiding gambling. This requires analysis to understand the people involved, the development of segmentation or targeting strategies, messaging and stakeholder engagement. This is what commercial brands do, too.

13. In what ways has the emergence of social marketing broadened the scope of marketing?

Social marketing is practiced by third sector, non-profit, public sector and Government agencies to bring about behavioural changes for improved social-well-being and natural environment benefits, so has stretched the marketing toolkit and led to use of the marketing concept and process away from traditional commercial companies and brands.

14. What are some of the key challenges or „hot topics‟ facing marketing teams?

Big data and spotting the true insights from the huge volume of information flooding in.

Managing social media and consumer-to-consumer communication about brands. Data privacy concerns and growing regulations. Ethics and compliance. Sustainability and growing consumer concern along with alignment to the UN SDGs. Regulatory pressures on all of the above. Staff recruitment and retention. Managing customer experience of a brand across multiple marketing channels and locations. The measurement of marketing‘s performance and contribution to the organization. Whether continually encouraging product adoption and consumption is morally correct, linked to addressing the current cost-of-living crisis. Food insecurity. Managing the consequences of geopolitical challenges and decisions.

COMMENTS ON THE WEB TASK AND CASES WEB TASK The Institute‘s website poses the question, does business ethics pay? The answer is yes but achieving ethical behaviour and consistency amongst employees is not straightforward. So, the Institute, in addition to its code, provides training to companies and advice to individuals to set high standards of behaviour and share best practice. These initiatives are supported with publications and events.

The Institute believes that codes must be established, but then shared amongst employees and other stakeholders through internal marketing mechanisms. Practices must then be routinely audited or inspected. Without such ‗policing‘, rogue practices will emerge.

The Institute‘s website is easy to navigate and key points are well explored, so students should not have difficulty in addressing the final question.

APPLIED MINI-CASE Walmart could opt to behave purely legally and to focus on its economic goals (see Figure 24.1 on page 721). The company could decide to trade ethically, or even with a philanthropic strategy in order to be seen as a good corporate citizen. The company could opt to ignore any negative publicity or, as explained in Chapter 18, Walmart could proactively challenge such negative connotations and plan a series of activities designed to benefit the broader community and build a positive corporate brand

329 image. Clearly, Walmart depends on the goodwill of its suppliers and customers in order to continue its growth. In reality, Walmart does attempt to ‗put something back‘ into the broader community.

CASE STUDY: RECESSION PILES ON THE PRESSURE A successful customer service-led holiday travel agency facing declining sales and financial pressures cuts costs. In so doing, the expertise of sales staff is diminished and the resources to provide excellent service delivery are ravaged. Customers know none of this and are given the impression that staff are as fully informed about destinations and travel options as previously.

Question 1 asks what options were open to the company‘s leadership. The company could have focused on fewer niche markets, retaining expertise in only certain locations. It could have opted to retrench in terms of the diversity of its market segments served. If instead it opted to dumb-down its operation, it could have created a budget-oriented proposition clearly signalling this direction to customers.

Question 2 probes the consequences of ‗coming clean‘ to customers. No doubt some loyal customers would have remained loyal. Others would have sought alternative agents. A new value-led proposition could have proved attractive to new clients. The risks of alienating customers by not admitting to its new operating model were significant, particularly in an era of easy C2C communication by unhappy travellers feeling let down by their holiday experiences. Clients could easily have felt deceived and the company would have faced reputational damage.

Question 3 explores how best this company should have relaunched its new strategy, instead creating a new marketing plan openly focused on the all-new target market strategy necessary to properly support its cost-driven budget model. This is with no deception or claims to be operating as previously.