Solution Manual for Marketing Management, 17th edition Philip Kotler Kevin Lane Keller Alexander Che

Instructor Manual

by Susan Leshnower

Marketing Management Seventeenth Edition

Kotler/Keller/Chernev

CHAPTER

1

LEARNING OBJECTIVES

DEFINING MARKETING FOR THE NEW REALITIES

After studying this chapter, you should be able to: 1.1 Define the scope of marketing.

1.2 Describe the new marketing realities.

1.3 Explain the role of marketing in an organization.

1.4 Illustrate how to organize and manage a modern marketing department.

CHAPTER SUMMARY 1. Marketing is an organizational function and a set of processes for creating, communicating, and delivering value to customers and for managing customer relationships in ways that benefit the organization and its stakeholders. Marketing management is the art and science of choosing target markets and getting, keeping, and growing customers through creating, delivering, and communicating superior customer value.

2. Companies aim to create value by marketing goods, services, events, experiences, persons, places, properties, organizations, information, and ideas. Firms must constantly move forward. At greatest risk are those companies that fail to continually improve their value offerings and marketing strategies.

3. Today’s marketplace is fundamentally different as a result of major societal forces that have resulted in many new consumer and company capabilities. In particular, technology, globalization, and social responsibility have created new opportunities and challenges and significantly changed marketing management.

Companies seek the right balance of tried-and-true methods with breakthrough new approaches to achieve marketing excellence.

4. The holistic marketing concept is based on the development, design, and implementation of marketing programs, processes, and activities that are grounded on breadth and interdependencies. Holistic marketing recognizes that everything matters in marketing and that a broad, integrated perspective is often necessary. The four components of holistic marketing are relationship marketing, integrated marketing, internal marketing, and performance marketing.

OPENING THOUGHT Good marketing is no accident. It is both an art and a science, and it results from careful planning and execution using state-of-the-art tools and techniques. Skillful marketers are continually updating classic practices and inventing new ones to find creative, practical ways to adapt to new marketing realities. In this chapter, we lay the foundation for sound marketing practices by reviewing important marketing concepts, tools, frameworks, and issues. Marketing applies to a variety of different areas and is increasingly involving many levels of the organization. Students who are not marketing majors may have some difficulty accepting the encompassing role that marketing has on the other functional disciplines within

a firm. For those students who have never been exposed to marketing and its components, the instructor’s challenge is to educate the students about the world of marketing.

TEACHING STRATEGY AND CLASS ORGANIZATION PROJECTS 1. Semester-Long Marketing Plan Project An effective way to help students learn about marketing management is through the actual creation of a marketing plan for a product or service. This project is designed to accomplish such a task.

Dividing the class into groups, have each group decide on a ―fictional‖ consumer product or service they wish to bring to market. During the course of the semester, each of the elements of the marketing plan, coordinating with the text chapter, will be due for the instructor’s review. The instructor is encouraged to review each submission and suggest areas for improvement, for more detailed study, or if acceptable, to allow the students to proceed to the next phase in development. Students can use a computer program in creating their proposals and submissions and in their final presentation(s). At the end of the semester, each group is to present their entire marketing plan to the class.

The following is an outline of this process: Chapter # 1

Title Defining Marketing for the New Realities

Element of the Marketing Plan Due None; group formation and begin the process of selecting the product or service.

2

Marketing Planning and Management

3

Analyzing Consumer Markets

4

Analyzing Business Markets

5

Conducting Marketing Research

6

Identifying Market Segments and Target Customers Crafting a Customer Value Proposition and Positioning

Formation of groups; first presentation of ―product‖ to instructor for approval.

Definitive data on the consumer for the product/service including all demographic and other pertinent information obtained and ready for instructor’s approval.

No report due for this chapter; allows students and instructor to ―catch up‖ on the project.

Initial marketing research parameters completed; demand forecasted and target market selections defined.

Specific market segmentation, targeting, and positioning statements by the students due.

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

7

8

Designing and Managing Products

9

Designing and Managing Services

10

Building Strong Brands

11

Managing Pricing and Sales Promotions

12

Managing Marketing Communications

13

Designing an Integrated Marketing Campaign in the Digital Age

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

At this point in the semester-long project, those students who have selected a ―service‖ idea for the marketing plan must submit their offering. Students whose project is a ―product-based‖ component do not have anything to submit for this chapter.

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

At this point in the semester-long project, students should be prepared to hand in their pricing strategy decisions for their fictional product/service. In reviewing this section, the instructor should make sure that the students have addressed all or most of the material concerning pricing covered in this chapter.

At this point in the semester-long project, students should have agreed upon their communication campaign that spans different media. The instructor is encouraged to evaluate the submissions vis-àvis the material presented in this chapter. In reviewing the submissions, the instructor should evaluate the continuity of the message across all possible communication media. (Students will tend to concentrate their media on television or on the internet and exclude other forms such as personal selling and radio.)

At this point in the semester-long project, students should submit their advertising program including proposal for digital communications. The instructor is encouraged to evaluate the submissions vis-à-vis the material presented in this chapter.

14

Personal Selling and Direct Marketing

15

Designing and Managing Distribution Channels

16

Managing Retailing

17

Driving Growth in Competitive Markets

18

Developing New Market Offerings

19

Building Customer Loyalty

20

Tapping into Global

At this point in the semester-long project, students who have decided to market their product/service through direct market channels should submit their proposals. All other groups must decide at this point if they will use a direct sales force, and if so, to outline the specifics (including financials) for this option.

At this point in the semester-long project, students should present their channel decisions for getting their product or service to the consumer. In evaluating this section, the instructor should evaluate the completeness of the projects to the material contained in this chapter.

At this point in the semester-long project for the ―fictional‖ product or service, students should be directed to turn in their retailing, wholesaling, and logistical marketing plans. Those students who are acting in the role of providing a new ―service‖ should include here their plans for locations, hours of operations, and how their ―service‖ plans on managing demand and capacity issues.

At this point in the semester-long project, students should be prepared to present their competitive analysis. Who are the market leaders for their chosen product or service? What niche have they identified for their product/service? Is their product or service going to be a leader, follower, or challenger to wellestablished products or brands?

At this point in the semester-long project, in this section should be a brief write up by the students as to the consumer-adoption process for their new product. How will the consumer learn about their new product and how quickly will they adopt it? Will the product be targeted to the heavy users and early adopters first, then early and late majorities? What is their estimated time for full adoption?

Students should have completed their value proposition for the fictional product, defined how they will deliver satisfaction, and maintain customer loyalty.

If the project is to be exported to

Markets

21

Socially Responsible Marketing

another country, then students’ submissions regarding the cultural factors that need to be considered should be done here.

Second phase of the presentations of the project; students should ensure that their marketing plans contain a holistic view of the marketing process.

Under the projects heading for each chapter will be a reminder of the material due when that chapter is scheduled to be discussed in class.

ASSIGNMENTS In small groups, ask the students to review the annual report from Unilever. How do the missions discussed in the opening vignette translate into their current business practices? How are its marketing investments and initiatives affecting its profitability? What conclusions can you draw from Unilever’s progress?

Assign students the task of visiting a company’s websites to see if they feel that the company is responding to the changes in marketing today, namely, societal marketing. Suggestions include firms like Tom’s (shoes) and Ben and Jerry’s Ice Cream. Have the students comment on what they find on the sites that are of particular interest to them.

Students can choose a firm of their preference, interview key marketing management members, and ask the firm how they are reacting to the changes in marketing management for the new realities.

Have the students read: Mobile Advertising: https://www.tapjoy.com/lp/mobile-advertising-thatworks/?utm_feeditemid=&utm_device=c&utm_term=%2Bmobile%20%2Badvertising&utm _source=google&utm_medium=ppc&utm_campaign=&hsa_cam=6481850327&hsa_grp=1006 87649910&hsa_mt=b&hsa_src=g&hsa_ad=420956173110&hsa_acc=%7B155-3251239%7D&hsa_net=adwords&hsa_kw=%2Bmobile%20%2Badvertising&hsa_tgt=kwd20499154838&hsa_ver=3&utm_feeditemid=&utm_device=c&utm_term=%2Bmobile%20%2B advertising&utm_source=google&utm_medium=ppc&utm_campaign=TAP-NT++Mobile+Advertising&hsa_cam=6481850327&hsa_grp=100687649910&hsa_mt=b&hsa_sr c=g&hsa_ad=420956173110&hsa_acc=1553251239&hsa_net=adwords&hsa_kw=%2Bmobile %20%2Badvertising&hsa_tgt=kwd20499154838&hsa_ver=3&gclid=Cj0KCQiA962BBhCzARIsAIpWEL05LTgWFN7_ej6RM50qFjB OxcsLkYK7T4FYcB4oFAB7YkAVxRkZhT0aAr5NEALw_wcB Have the students reflect upon their favorite product and/or service. Then have the students collect marketing examples from each of these companies.

This information should be in the form of examples of printed advertising, copies of television commercials, internet advertising, or radio commercials. During class, have the students share what they have collected with others. Questions to ask during the class discussion should focus on why this particular example of advertising elicits a response from the students. What do students like/dislike about this marketing message? Does everyone in the class like/dislike this advertising?

END-OF-CHAPTER SUPPORT Marketing Spotlight: The Walt Disney Company

1. How does Disney create value for its customers?

Suggested answer: Disney has focused on the value-creation dynamic that sets it apart from its competitors. The Disney Difference, based on high standards of quality and recognition, stems from one of Walt Disney’s most recognizable quotes: ―Whatever you do, do it well. Do it so well that when people see you do it, they will want to come back and see you do it again and they will want to bring others and show them how well you do what you do.‖ Walt Disney lets customers visit a fairy kingdom, a pirateship, or a haunted house. Customized experiences include a week at a baseball camp. The Disney Difference also refers to its commitment to superlative customer service.

2. How is Disney a good marketer? What have been their keys to marketing success?

Suggested answer: Disney works hard to connect with its customers on a multitude of levels and through every single detail. For example, when visiting Disney world, employee ―cast members‖ are trained to be ―assertively friendly‖ and greet visitors by waving big Mickey Mouse hands, giving maps to adults and stickers to kids, and cleaning up the park so diligently that it’s difficult to find a piece of garbage anywhere. With so many brands characters, and businesses, Disney uses technology to ensure that a customer’s experience is consistent across every platform. The Disney Company expanded through a series of large acquisitions that gave it more world-class properties to propagate across its platforms.

3. How can the Walt Disney Company keep the Disney brand timely and timeless?

Suggested answer: Benefits: The company thought of creative new ways to target its core family-oriented consumers and expand into areas that would reach an older audience. Disney launched the Disney Channel, Touchstone Pictures, and Touchstone Television. Risks: One major risk for Disney is the effect of the COVID-19 pandemic, because travel to Disney parks was severely curtailed. This affected the business unit Parks, Experiences and Consumer Products, which brings Disney’s stories, characters, and franchises to life through parks and resorts, toys, apps, apparel, books, and stores. Disney’s greatest challenge today is keeping its 90-year-old brand relevant and current, while retaining its core audience and staying true to its heritage and fundamental brand values. With each acquisition, Disney extended the intellectual property into different contexts such as the TV series ―Cars on the Road.‖ Marketing Spotlight: Microsoft 1. What are the core strengths of the Microsoft brand?

Suggested answer: Three of Microsoft’s biggest brand strengths are empowerment, innovation, and ubiquity. For empowerment, the company’s mission is ―to empower every person and every organization on the planet to achieve more.‖ Throughout its history, its products have powered personal and professional productivity, from its early operating systems and its Office suite, through to its cloud computing and AI copilot offerings.

For innovation, Microsoft has popularized major successive waves of innovation. It played a key role in fueling adoption of the PC, office productivity software, the internet browser, console video games, tablet

computers, cloud computing and generative AI, though it largely missed out on the mobile phone revolution.

In terms of ubiquity, for decades Microsoft products have been so broadly adopted that new customers can have a high degree of confidence in them. When they buy a Microsoft product, customers knowing that they are joining a user base in the millions to hundreds of millions, depending on the product.

2. How is Microsoft a good marketer? What have been their keys to marketing success?

Suggested answer: Microsoft has a proven track record of identifying technology trends and capitalizing on them by building products with mass appeal. The company anticipated the rise of PCs and created the dominant software for that era. More recently Microsoft positioned itself at the forefront of each of the two major tech innovations of the past decade: Cloud computing and AI. In addition, it has continued to evolve its product portfolio to meet the evolving needs of its personal and professional customers. For example, as users transitioned to the cloud, Microsoft introduced cloud versions of its operating system and office suite. As of 2024, the Windows 365 cloud version surpassed $1 billion in annual revenue and the Office 365 cloud version had 400 million paying subscribers. Furthermore, it has carefully built Microsoft as a strong corporate brand, going back to its initial advertising that communicated the company’s range of products, from DOS to Excel and Windows, and unified them under the Microsoft brand. As part of Office 365, Microsoft developed a competitor to the successful team collaboration platform called Microsoft Teams, which grew to 320 million monthly active users by 2023.

3. What are Microsoft’s biggest challenges going forward? What steps should they take to address them?

Suggested answer: Student answers may vary and include one or more of the following challenges: intense competition, a complex regulatory environment, and future technology disruption. Each of these challenges has hurt Microsoft’s business in the past and poses significant threats for the future. Answers about the competitive challenge may include the importance of staying close to customers to understand their future needs, innovating new products to meet those needs, making strategic acquisitions to capture new opportunities or address gaps in the product portfolio, and leveraging Microsoft’s scale and brand familiarity to win business. Answers about the regulatory challenge can touch on the importance of learning from the past antitrust cases and being cautious about bundling its offerings. Answers for the technology disruption challenge may include the value of forming partnerships early in the lifecycle of a new technology, as the company has done with AI, and of making additional acquisitions.

Marketing Spotlight: Microsoft DETAILED CHAPTER OUTLINE

Opening vignette: Beleza Natural was created by two courageous women who ended up revolutionizing the Brazilian beauty market. Assis and Velez set out to find a solution that would bring out the beauty of textured hair. They realized that they were on the right track when women began stopping them on the streets to ask how they got their curls so well defined. Convinced that they had found a solution to an acute problem faced by many women. Over the next decades, Beleza Natural grew from a single store to a national chain of 33 institutes with over 4,000 employees serving 160,000 customers per month. Marketing is both an art and a science, and results from careful planning and execution using state-of-theart tools and techniques.

I. The Scope of Marketing A. What Is Marketing? i. Marketing is about identifying and meeting human and social needs. ii. Marketing is about meeting needs in a way that harmonizes with the goals of the organization. iii. When IKEA saw that people wanted good furnishings at lower prices, it created knockdown furniture. iv. The concept of value is central to marketing management. v. Social definition of marketing: Marketing is a societal process by which individuals fulfill their needs by creating and freely exchanging products and services of value with others. vi. The managerial definition of marketing describes marketing as the art and science of identifying, attracting, and retaining customers through creating, delivering, and communicating superior customer value vi. Selling is not the most important part of marketing; the aim of marketing is to know and understand the customer so well that the product or service fits perfectly and sells itself.

B. What Is Marketed? Marketing Permeates All Aspects of Society i. Ten main types of entities: goods, services, events, experiences, persons, places, properties, organizations, information, and ideas ii. Goods: physical goods include food products, cars, refrigerators, televisions, machines, and other mainstays of a modern economy iii. Services: represent approximately 2/3 of the U.S. economy, including airlines, hotels, maintenance and repair people, accountants, bankers, doctors, and management consultants iv. Events: time-based, global, and local events v. Experiences: marketers orchestrate several services and goods to create, stage, and market experiences vi. Persons: artists, musicians, CEOs, physicians, high-profile lawyers and financiers, and other professionals often get help from marketers, and each person has been advised to become a ―brand‖ vii. Places: cities, states, regions, and nations viii. Properties: intangible rights of ownership to either real property (real estate) or financial property (stocks and bonds) ix. Organizations: museums, performing arts organizations, corporations, and nonprofits that use marketing to boost their public images and compete for

audiences and funds x. Information: what books, schools, and universities produce, market, and distribute at a price to parents, students, and communities xi. Ideas: Every market offering includes a basic idea. Products and services are platforms for delivering some idea or benefit. xii. Financial success often depends on marketing ability. Marketing’s value extends to society as a whole. Successful marketing builds demand for products and services, which, in turn, creates jobs. By contributing to the bottom line, successful marketing also allows firms to more fully engage in socially responsible activities. xiii. Innovation in marketing is critical. Imaginative ideas on strategy exist in many places within a company.

II. The New Marketing Realities (See Fig. 1.1) A. The Four Major Market Forces i. The marketplace is dramatically different from even 10 years ago, with new marketing behaviors, opportunities, and challenges emerging. ii. Technology: Technological developments have given birth to new business models that take advantage of the new capabilities. Advances in data analytics, machine learning, and artificial intelligence have enabled companies to better understand their customers. a. Artificial Intelligence (AI) has revolutionized the marketing landscape by enabling step change improvements in personalization, efficiency and data analytics. b. The rapid development of AI is profoundly changing the business environment. AI-enabled marketing accounted for 45 percent of global advertising spending in 2022. In 2023, 62 percent of marketers said their companies used AI. iii. Globalization: Geographic and political barriers have been eroded as advanced telecommunication technologies and workflow platforms enable all types of computers to work together to create opportunities for communication, collaboration, and data mining. a. Globalization has made countries increasingly multicultural. b. Globalization changes innovation and product development as companies take ideas and lessons from one country and apply them to another. iv. The physical environment has changed during the past decade. Twparticularly far-ranging changes include climate change and changes in global health conditions. v Social responsibility: The private sector is taking some responsibility for improving living conditions, and firms all over the world have elevated the role of social responsibility. vi. Because marketing’s effects extend to society as a whole, marketers must consider the ethical, environmental, legal, and social context of their activities. vii. The organization’s task is thus to determine the needs, wants, and interests of target markets and satisfy them more effectively and efficiently than competitors, while preserving or enhancing consumers’ and society’s long-term well-being.

viii. Marketers must think holistically and craft creative win–win solutions to balance conflicting demands.

B. The Three Key Marketing Outcomes i. New Consumer Capabilities

a. Consumers can use online resources as a powerful information and purchasing aid. b. Consumers can search, communicate, and purchase on the move. c. Consumers can tap into social media to share opinions and express loyalty. d. Consumers can make better decisions. e. Consumers can actively interact with companies. f. Consumers can reject marketing they find inappropriate or annoying. g. Consumers can extract more value from what they already own. ii. New Company Capabilities a. Companies increasingly use the internet as their key online communication and distribution channel b. Companies can collect fuller and richer market information. c. Companies can reach customers more efficiently d. Companies can improve cost efficiency. iii. New Competitive Environment a. Deregulation. Many countries have deregulated industries to create greater competition and growth opportunities. In the United States, laws restricting financial services, telecommunications, and electric utilities have all been loosened in the spirit of greater competition. The belief is that competition is the driver of efficiency innovation and consumer welfare. b. Privatization. Many countries have converted public companies to private ownership and management to increase their efficiency. c. Retail transformation. Store-based retailers face competition from catalog houses; direct-mail firms; newspaper, magazine, and TV direct-to-customer ads; homeshopping TV networks; and e-commerce. The blend of entertainment and retail called ―retailment‖ marks a pivotal shift in competitive strategies. d. Disintermediation. Direct-to-consumer start-ups have altered the competitive landscape by cutting out intermediaries in the flow of goods and services. e. Private labels. Brand manufacturers are further buffeted by powerful retailers that market their own store brands, increasingly indistinguishable from any other type of brand. The rise of private labels represents a significant shift in the competitive dynamics of the retail industry. f. Mega-brands. Many strong brands have become mega-brands and extended into related product categories, including new opportunities at the intersection of two or more industries.

C. The Concept of Holistic Marketing (See Fig. 1.2) i. Holistic marketing recognizes and reconciles the scope and complexities of marketing activities and offers an integrated approach to managing strategy and tactics. Figure 1.2 shows how sellers and buyers are connected by four flows.

Sellers send goods and services and communications, such as ads and direct mail, to the market; in return, they receive money and information as data on customer attitudes and sales. ii. Marketing must be more holistic and less departmental. iii. Relationship Marketing: Aims to build mutually satisfying long-term relationships with key constituents in order to earn and retain their business. iv. Four key constituents for relationship marketing are customers, employees, marketing partners, and members of the financial community (shareholders, investors, analysts). v. The ultimate outcome of relationship marketing is a marketing network consisting of the company and its supporting stakeholders with whom it has

built mutually profitable business relationships. vi. Integrated Marketing coordinates all marketing activities and marketing programs and directs them toward creating, communicating, and delivering consistent value and a consistent message for consumers, such that ―the whole is greater than the sum of its parts.‖ vii. An integrated channel strategy should assess each channel option for its direct effect on product sales and brand equity, as well as its indirect effect on interactions with other channel options.

viii. Internal marketing, an element of holistic marketing, is the task of hiring, training, and motivating able employees who want to serve customers well. ix. Internal marketing requires vertical alignment with senior management and horizontal alignment with other departments so everyone understands, appreciates, and supports the marketing effort. x. Performance Marketing: Requires understanding the financial and nonfinancial returns to business and society from marketing activities and programs. xi. Top marketers are increasingly going beyond sales revenue to examine the marketing scorecard and interpret what is happening to market share, customer loss rate, customer satisfaction, product quality, and other measures. xii. They also consider the legal, ethical, social, and environmental effects of marketing activities and programs.

III. The Role of Marketing in the Organization A. Marketing as Value Creation. A key task for any business is defining the role that marketing will play in the organization. See Table 1. i. The Production Concept: Suggests consumers prefer products that are widely available and inexpensive. Management aims for high production efficiency, low costs, and mass distribution. ii. The Product Concept: Consumers favor products offering the most quality, performance, or innovative features. Managers may commit the ―better mousetrap‖ fallacy, believing a better product will by itself lead people to beat a path to their door. iii. The Selling Concept: Consumers and businesses, if left alone, won’t buy enough of the organization’s products. It is practiced most aggressively with unsought goods—goods buyers don’t normally think of buying, such as insurance and cemetery plots—and when firms with overcapacity aim to sell what they make, rather than make what the market wants. iv. The Marketing Concept:Find the right products for your customers. The marketing concept holds that the key to achieving organizational goals is being more effective than competitors in creating, delivering, and communicating superior customer value to your target markets. v. The market-value concept is a holistic approach, based on the development, design, and implementation of marketing programs, processes, and activities that recognize their breadth and interdependencies.

B. Building a Customer-Oriented Organization

i. Creating a superior customer experience has become a priority for companies in nearly every industry. ii. Managers who believe the customer is the company’s only true ―profit center‖ consider the traditional organization chart in Fig. 1.3(a)—a pyramid with the president at the top, management in the middle, and frontline people and customers at the bottom—to be obsolete. iii. Successful marketing companies transform the traditional organization-hierarchy

chart to look like the chart in Fig. 1.3(b). A company’s top priority is customers; next in importance are the frontline people who meet, serve, and satisfy these customers; then come service managers, whose job is to support the frontline people so they can serve customers well; and finally, there is the top management. iv. Although it’s necessary to be customer oriented, it’s not enough. The organization must also be creative. See Table 1.2.

C. Marketing Insight: The 10 Deadly Marketing Sins i. The company is not sufficiently market focused and customer driven. ii. The company does not fully understand its target customers. iii. The company needs to better define and monitor its competitors. iv. The company does not properly manage relationships with stakeholders. v. The company is not good at finding new opportunities. vi. The company’s marketing planning process is deficient. vii. Product and service policies need tightening. viii. The company’s brand-building and communication skills are weak. ix. The company is not organized for effective and efficient marketing. x. The company has not made maximum use of technology.

IV. Organizing and Managing the Marketing Department A. Organizing the Marketing Department i. Functional Organization. In the most common form of a marketing organization, functional specialists report to a chief marketing officer who coordinates their activities. See Fig. 1.4. ii. Geographic Organization. A company selling in a national market often organizes its sales force (and sometimes its marketing) along geographic lines. iii. Product or Brand Organization. Companies producing a variety of products and brands often establish a product- or brand-management organization. See Fig. 1.5. iv. Market Organization. Companies often develop diverse products and services to target distinct target markets. v. Matrix Organization. Companies that produce many products for many markets may adopt a matrix structure employing both product and market managers. The

rub is that this choice is costly and often creates conflicts. Another disadvantage is the potential lack of clear focus and accountability.

B. Managing the Marketing Department i. The Role of the CEO and CMO. Only a select group of companies have historically stood out as master marketers. These companies focus on the customer and are organized to respond effectively to changing needs. ii. Perhaps the most important role for any CMO is to infuse a customer perspective in business decisions affecting any customer touch point (where a customer directly or indirectly interacts with the company). iii. Relationships with Other Departments. The firm’s success depends not only on how well each department performs its work, but also on how well the company coordinates departmental activities to conduct core business processes. iv. Given the goal of providing positive customer experiences from start to finish, all areas of the organization need to work effectively together.

CHAPTER

2

MARKETING PLANNING AND MANAGEMENT

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

2.2 Describe the process of developing a market offering.

2.3 Explain the process of marketing planning.

2.4 Define the key components of an actionable marketing plan.

2.5 Outline how and when to modify the marketing plan.

CHAPTER SUMMARY 1. Market-oriented strategic planning is the managerial process of developing and maintaining a viable fit between the organization’s objectives, skills, and resources and its changing market opportunities. The aim of strategic planning is to shape the company’s businesses and products so that they yield target profits and growth.

Strategic planning takes place on three levels: corporate, business unit, and market offering 2. The corporate strategy establishes the framework within which the divisions and business units prepare their strategic plans. Setting a corporate strategy means defining the corporate mission, establishing strategic business units (SBUs), assigning resources to each, and assessing growth opportunities.

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

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

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

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

7. The strategy delineates the value created by the company in a particular market; it is defined by the company’s target market and its value proposition for this market.

The target market defines the offering’s target customers, collaborators, company, competitors, and context (the Five Cs). The value proposition specifies the value that an offering aims to create for the relevant market entities— target customers, the company, and its collaborators.

8. The tactics outline a set of specific activities employed to execute a given

strategy. The tactics define the key attributes of the company’s offering: product, service, brand, price, incentives, communication, and distribution. These seven tactics are the means that managers have at their disposal to carry out a company’s strategy.

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

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

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

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

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

TEACHING STRATEGY AND CLASS ORGANIZATION PROJECTS 1. For the semester-long project, with this chapter, we continue the formation of groups; first presentation of ―product‖ to instructor for approval; review of process; and calendar of ―due dates.‖ 2. As a group presentation project, have each group present their Pegasus Sports International marketing plan to the class. Non-presenting groups should be ready to evaluate the accuracy of the numbers presented, critique, refute, and/or debate the findings of the other groups. Each group presentation should be followed by a written presentation of their marketing plan.

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

4. Sonic PDA Marketing Plan. Every marketing plan must include the company mission, analysis of strengths, weaknesses, opportunities, and threats and state the marketing and financial objectives for the plan period. Sonic is a start-up company that will soon introduce a new multi-function personal digital assistant (PDA) to compete with established products

made by Palm, Hewlett Packard, Sony, and others. As an assistant to Jane Melody, Sonic’s chief marketing officer, you have been assigned to:   

Draft a mission statement for Sonic’s senior management to review.

Prepare a summary of strengths, weaknesses, opportunities, and threats (SWOTs).

List the marketing and financial objectives the company has for the new PDA being developed by Sonic.

As your instructor directs, enter Sonic’s mission statement, SWOTs, and financial and marketing objectives in a written marketing plan, or type them into the Mission, SWOT, and Objectives sections of Marketing Plan Pro.

ASSIGNMENTS Each student is in effect a ―product.‖ Like all products you (they) must be marketed for success.

Have each of your students’ write their own ―mission statement‖ about their career and a ―goal statement‖ of where they see themselves in 5 years, 10 years, and after 20 years.

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

Select a local firm or have the students select firms in which they are familiar (current employers or past employers, for example) and have them answer the questions posed by the Marketing Memo, Marketing Plan Criteria regarding the evaluation of a marketing plan. Make sure the students are specific in their answers.

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

END-OF-CHAPTER SUPPORT Marketing Spotlight: Google

1. Why has Google been so successful? What role has marketing played?

Suggested answer: Google succeeded in dominating the internet search market thanks to its superior search algorithm. Its search dominance enabled it to establish a leadership position in digital advertising and other search-related products like maps and internet browsers. By applying its computer science and design skills to new problems, Google helped users get things done more effectively. The company kept innovating, and through continuous internal development and a series of acquisitions, it rapidly expanded its product offerings. Its marketing prowess contributed to its ability to build an expansive product portfolio, most notably in identifying consumer and business needs and designing products to meet those needs more effectively. This marketing skill enabled the company to establish leadership positions across a broad spectrum of major technology categories including mobile phones,

connected home hardware, cloud computing, and generative AI.

2. What is Google’s core business? What are their core brand values? What are their challenges in managing a diverse portfolio of businesses?

Suggested answer: Search has been Google’s core business since the beginning. Today it still contributes more than half of the company’s revenue, primarily through search advertising. Google’s core brand values are reflected in its corporate mission statement: ―To organize the world’s information and make it universally accessible and useful.‖ Another key value for the brand is innovation, which it has continually pursued, and approachability, which its playful name reflects.

Google’s challenges in managing a diverse portfolio include competitive challenges, brand challenges, and regulatory challenges. The categories Google competes in are highly competitive, and the company must continually innovate across a broad spectrum of products to keep pace.

Google’s brand portfolio is diverse, with a mix of corporate branded products like Google Search and Google Cloud and standalone brands like YouTube and Android. It is complex to manage such a diverse array of brands, and the creation of the Alphabet parent company added yet another brand to the portfolio. Google, like other big, diversified tech companies, faces regulatory scrutiny and lawsuits worldwide over privacy issues, antitrust concerns, censorship questions, and concerns about responsible use of technology. In 2023 the Google faced three antitrust lawsuits in the U.S. and also lawsuits brought by the European Commission.

3. What’s next for Google? Where should the company focus its efforts and resources?

Suggested answer: Student answers may vary given the diversity of Google’s business. Answers may touch on the promise of artificial intelligence, since Google’s early investments have given it a strong position in AI. Answers may also speak to the opportunity for Google to further diversify its revenue streams by accelerating growth in cloud computing, video streaming, and hardware. In addition, students may discuss the importance for Google maintaining leadership in its core search business, which has already been disrupted by AI. Relatedly, answers may also mention the importance to Google of harnessing AI to enhance its advertising business. Google has had to continually navigate the complex regulatory environment, which some observers say contributed to risk aversion and innovation challenges.

Marketing Spotlight: Nike 1. How is Nike a good marketer? What have been their keys to marketing success?

Suggested answer: Nike has created one of the world’s most valuable brands with its innovative products and communication. From the start, it created affordable, high-quality running shoes designed for athletes by athletes. Nike pioneered a ―pyramid of influence‖ model, with the preferences of a small group of top athletes influencing the product and brand choices of consumers. One of Nike’s greatest successes with this model came in 1985 with the signing of rookie basketball player Michael Jordan as a spokesperson. In addition to associating itself with the best athletes, Nike also showed a talent for creating iconic advertising campaigns. Its famous ―Just Do It‖ slogan challenged a generation of

athletic enthusiasts to chase their goals. In 2018, it launched the ―Dream Crazy‖ campaign, which spotlighting athletes’ achievements beyond sports and kept Nike in a broader cultural conversation. By spotlighting athletes’ achievements beyond sports, Nike stays active in the broader cultural conversation.

The company is also adept at tailoring its products and campaigns to appeal to different customer segments. For example, as it expanded internationally, the company realized it needed to develop a strong presence in soccer. Furthermore, Nike quickly learned that its U.S.style ads were too aggressive for consumers in Europe, Asia, and South America, and adjusted its tone. In the 2010s, Nike launched new designs that catered to women’s different body shapes and generally smaller feet and began running advertising that showed how sports fit into women’s active lifestyles.

2. Does Nike need to change its marketing approach going forward? What should the roles of digital marketing and athlete endorsements be?

Suggested answer: There is a strong argument that Nike should continue to evolve its marketing approach to adapt to changing consumer tastes, while leveraging the core marketing strengths that have served it well for six decades. Nike’s historical strengths include its focus on innovation and relevance, its pyramid of influence model, and its creative storytelling. As consumers continue to embrace digital technologies, Nike can continue to build on its strengths in digital marketing and digital product innovation. Nike can capitalize on new fashion trends like sustainable fashion and new sports like pickleball by applying its innovation prowess to develop new products related to those trends, partnering with influencers and ambassadors in those areas, and telling creative stories that demonstrate its relevance for those trends. The company continues to invest in cutting-edge digital technologies. With influencer marketing continuing to rise in popularity, Nike should continue to pursue athlete endorsers across the spectrum from global icons to local grassroots influencers.

3. What’s next for Nike? Where should the company focus its efforts and resources?

Suggested answer: Student answers may vary. Answers may include the importance of charting the ideal path for digital innovation in its products and its advertising, especially with younger consumers that spend so much time online. Its creation of a virtual Nikeland in Roblox could be a template for other digital integrations. Students can touch on the need for Nike to continue to innovate in its core products to stay ahead of fierce competition, especially in the running shoe market where HOKA and On had both grown into billion-dollar brands.

Answers may also highlight the opportunity for Nike to optimize its ―One Nike Marketplace‖ omnichannel distribution, fine-tuning the mix between direct-to-consumer and wholesale distribution. As it continued into its sixth decade as a company, Nike remained the top athletic and apparel and footwear manufacturer in the world. .

DETAILED CHAPTER OUTLINE Opening vignette: Developing the right marketing strategies requires a blend of discipline and

flexibility. At the core of any successful marketing strategy is the development of an enduring value proposition. Marketers must prioritize strategic planning in three key areas: managing the company’s businesses as an investment portfolio, assessing the market’s growth rate and the company’s position, and developing a viable business model. One company that has developed a distinct offering designed to address an unmet need (weight loss) is Novo Nordisk. This company upended the weight loss market when it gained approval for two drugs–Ozempic and Wegovy.

I. Corporate and Business Unit Planning and Management (See Fig. 2.1) A. Defining the Corporate Mission and Culture i. The company must develop a game plan for achieving the long-run objectives of each business unit. ii. Marketing planning and management can occur on three different levels: corporate, business unit, and specific market offering. iii. A mission is a clear, concise, and enduring statement of the reasons for an organization’s existence. Often called its core purpose, a company’s mission is a long-term goal that provides company employees and

management with a shared sense of purpose, direction, and opportunity. iv. Good mission statements have five major characteristics. a. They focus on a limited number of specific goals. b. They stress the company’s major policies and values. c. They define the major markets that the company aims to serve. d. They take a long-term view. e. They are as short, memorable, and meaningful as possible.

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

C. Defining Strategic Business Units i. Established using three characteristics a. Single business or collection of related businesses that can be planned separately from the rest of the company b. Own set of competitors c. Manager responsible for strategic planning and profit performance and controls most factors affecting profit ii. A specialized portfolio involves SBUs with fairly narrow assortments consisting of one or a few product lines. iii. A diversified portfolio involves SBUs with fairly broad assortments containing multiple product lines. iv. The purpose of identifying the company’s strategic business units is to develop separate strategies and assign appropriate funding.

D. Allocating Resources across Business Units i. Once it has defined its SBUs, management decides how to allocate corporate resources to each unit. This is done by assessing each SBU’s competitive advantage and the attractiveness of the market in which it operates. ii. Portfolio management focuses on two types of factors: (1) opportunities presented by a particular industry or market and (2) the company’s

resources, which determine its ability to take advantage of the identified opportunities. iii. A key aspect in developing portfolio models involves identifying the metrics underlying the performance of a given business unit.

II. Developing Market Offerings i. Strategy involves choosing a well-defined market in which the company will compete and determining the value it intends to create in this market. ii. Tactics, also called the marketing mix, make the company’s strategy come alive iii. AI and Market Planning. AI can be harnessed by marketers to: inform strategy and decision making, enable personalization, boost performance of marketing programs, and drive innovation.

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

by Michael Porter ii. The Five Forces framework identifies industry competitiveness according to five factors: the bargaining power of suppliers, the bargaining power of buyers, the threat of new entrants, the threat of substitutes, and rivalry among existing competitors. iii. The 5-C framework, on the other hand, defines the market based on customer needs rather than on the industry in which the company competes.

iv. Developing a Value Proposition. A successful offering must create superior value not only for target customers but also for the company and its collaborators. See Fig. 2.3. a. Customer value is the worth of an offering to its customers and hinges on customers’ assessment of how well an offering fulfills their needs. b. Collaborator value is the worth of an offering to the company’s collaborators. c. Company value is the worth of the offering to the company. v. The term optimal value means that the value of the offering is connected across the three entities, to create value for target customers and collaborators to enables the company to achieve its strategic goals C. Designing the Marketing Tactics i. The market offering is the actual good that the company deploys in order to fulfill a particular customer need. ii. Marketing managers have seven tactics at their disposal to develop an offering that creates market value: product, service, brand, price, incentives, communication, and distribution. iii. Called the marketing mix, these attributes represent the combination of activities required to transform the market offering’s strategy into reality.

See Fig. 2.4.

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

D. The Seven Ts Replacing the Four Ps

i. Four decision areas are represented by the Four Ps: product, price, promotion, and place. Because it is simple, intuitive, and easy to remember, the 4-P framework enjoys wide popularity. ii. Because of that very simplicity, the 4-P framework has significantly limited relevance in the contemporary business environment.

iii. The 7-T marketing mix represents a more refined version of the 4-P framework, offering a more accurate and actionable approach to designing a company’s offering.

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

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

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

C. Developing the Strategy i. The strategy denotes the value that the company intends to create in a particular market and includes the company’s target market and its value proposition for this market.

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

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

IV. Developing a Marketing Plan A. The marketing plan serves three main functions: It describes the company’s goal and proposed course of action, informs the relevant stakeholders about the goal and action plan, and persuades the relevant decision makers of the viability of the goal and the proposed course of action. See Fig. 2.8.

i. Marketing plans typically start with an executive summary followed by a

situation overview. ii. The core of the marketing plan is contained in the key elements of the GSTIC framework that delineate the company’s goal and the course of action it proposes V. Modifying the Marketing Plan A. Updating the Marketing Plan i. The marketing plan requires updating when the company’s current course of action is altered. ii. A common reason for updating a company’s marketing plan is in response to changes in the target market. iii. The key to market success is not only to conceive a viable market plan but also to modify this plan to adapt to market changes.

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

CHAPTER

3

ANALYZING CONSUMER MARKETS

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

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

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

3.4 Identify the key stages of the buying decision process.

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

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

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

fulfilling their needs and wants.

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

4. Understanding consumer motivation begins with understanding the needs that consumers aim to fulfill with their actions. Some needs are biological and arise from physiological states of tension such as hunger, thirst, or discomfort. Other needs are psychological and arise from psychological states of tension such as the need for recognition, esteem, or belonging. A need becomes a motivation when it is aroused to a sufficient level of intensity to drive us to act. Motivation has both direction and intensity.

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

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

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

8. The typical buying process consists of the following sequence of events: problem recognition, information search, evaluation of alternatives, purchase decision, and postpurchase behavior.

Consumers will not necessarily go through the buying process in an orderly fashion: they may skip and reverse stages and alternate between shopping online and offline. The marketers’ job is to understand the buyer’s behavior at each stage.

9. Consumers are constructive decision makers and are subject to many contextual influences. They often exhibit low involvement in their decisions, using many heuristics as a result.

The attitudes of others and unanticipated situational factors may influence the decision to buy. A consumer’s decision to modify, postpone, or avoid a purchase decision is heavily influenced by one or more types of perceived risk.

10. Marketers must monitor customer satisfaction and the ways in which customers use the company’s offerings. Satisfaction is a function of the match between consumer expectations and the product’s perceived performance. Monitoring satisfaction is important because it reflects the value customers receive from the company’s offering. Examining customers’ postpurchase behavior aims to capture the use and disposal of the offering both to detect potential problems and to identify new market opportunities.

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

This chapter perhaps might be the most difficult of all for some to grasp as it delves into psychological theories surrounding our understanding of our own minds. It can be, however, an interesting one for class discussions as it opens up and fosters student participation (as consumers). This is a good chapter for such discussions on how students buy, what they buy, how they buy, and so forth.

Students new to marketing or new to psychology as a science need a full and comprehensive review of the theories and ideas expressed in this chapter.

The instructor is encouraged to spend a great deal of class time with the four main psychological processes outlined in this chapter: motivation, perception, learning, and memory. Repeated review of the key terms and definitions presented in this chapter is necessary for complete student understanding and knowledge of these concepts.

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

TEACHING STRATEGY AND CLASS ORGANIZATION PROJECTS 1.

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

2.

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

ASSIGNMENTS Students should be assigned to survey their local business environment (city, town, campus area) and collect examples of how local area businesses are trying to capture cultural market segments. For example, the students should collect information regarding the number of cultural restaurants in the area and then compare these numbers to the total amount of eating establishments and the percentage of the population that is of that ethnicity. How do the numbers compare, contrast, and what marketing strategies do they hint at?

Consumers often choose and use brands that have a brand personality consistent with their own actual self-concept, ideal self-concept, or others self-concept. Have the students review their recent purchases of a car, computer, furniture, or clothing and ask them to comment on why they purchased this product, who influenced their purchase, and what this purchase says about their own self-concept ideas. What is their definition of the ―brand personality‖ of this recent purchase—as compared to the definition stated in the chapter by Stanford’s Jennifer Aaker?

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

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

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

END-OF-CHAPTER SUPPORT Marketing Spotlight: Spotify 1. Why has Spotify been so successful? What important consumer insights helped them to build their business?

Suggested answer: By focusing on convenience, selection, personalization, and value, Spotify became the largest digital music streaming service by 2012 with 15 million monthly active users. Spotify successfully outcompeted other digital music services initially due to its freemium model and large library of tracks. The company had the key insight that a digital music service would only work if it were both better for consumers than piracy and it compensated the music industry. The freemium model combined with the large library were better for consumers, and the freemium model enabled Spotify to compensate artists via both a free ad-supported tier and a premium, paid subscription tier. The company also used the insight that music is inherently shareable to prioritize fueling word-of-mouth on social media early on, instead of traditional advertising.

Spotify continued to innovate with its product to enable consumers to enjoy more of the music they liked, for example by using AI early on to create personalized playlists. It rooted its advertising campaigns in the insight that consumers connect music to emotion, leading to popular campaigns like #ThatSongWhen. More recently, it expanded its products to deliver more of its customers’ content needs, adding podcasts, audiobooks, video, and education courses. By adding ongoing value for consumers, Spotify has maintained its position as the market leader in audio streaming.

2. What questions should Spotify ask its current and potential customers in order to improve their experiences with the service?

Suggested answer: Student answers may vary given the breadth in areas of inquiry. Some potential question territories:

    

Ask current customers to identify their favorite and least favorite aspects of the product. Ask potential customers the same about the competing product(s) they use.

Ask both current and potential customers which hypothetical features they would value the most Ask current customers what they would do to improve Spotify. Ask both current and potential customers to design their ideal experience.

Ask current and potential customers to share the experiences they most enjoy in other non-audio product categories Ask lapsed customers why they left Spotify, and what would bring them back

Another approach would be to observe current customers using Spotify and potential customers using competing services, to identify challenges and opportunities with Spotify’s current offering.

3. What opportunities and challenges does Spotify face in the future? What steps should they take to maximize their upside and minimize their downside?

Suggested answers: Student answers may vary. The company’s mission is ―to unlock the potential of human creativity—by giving a million creative artists the opportunity to live off their art and billions fans the opportunity to enjoy and be inspired by it.‖ Opportunities include further geographic expansion, deepening its footprint in other content types besides music – particularly video, incorporating AI further into the product to enable even more personalization, developing new campaigns to attract more free and paid subscribers, pursuing other revenue sources besides advertising and subscriptions. Challenges include fierce competition for consumers’ subscription dollars in digital music and across all categories, artists and labels demanding higher royalties, future changes in content consumption patterns, disruption from new technologies including AI, and potential flattening growth if it were to saturate its biggest markets.

Answers about maximizing upside and minimizing downside will depend on the challenges and opportunities students identify. In general, Spotify can maximize its upside by pursuing its vision ―to be the world’s largest audio company, spanning audiobooks, education, sports and news‖ in as many markets as possible. It can protect the potential competition downside by continuing to add value to its free and paid subscriptions and by innovating to make the experience even more personalized and intuitive. It can guard against the downside of paying higher royalties by developing plans to increase revenue, strengthening relationships with labels and artists, and creating novel ways to compensate long-tail artists.

Marketing Spotlight: LEGO 1. What role did consumer insights play in LEGO’s growth?

Suggested answer: Consumer insights were critical to LEGO’s growth. To revive the popularity of LEGO toys in the mid-2000s, the company’s new CEO Jorgen Knudstorp emphasized market and consumer research to drive

innovation. Knudstorp believed that in order to rekindle the emotional connection between customers and LEGO toys, LEGO had to deeply understand each customer’s desires and behavior. LEGO’s shift toward basing decisions on extensive research reduced complexity in production and ensured the success of its product releases. LEGO shifted toward research-driven innovation.

A great example of insight-based innovation came in 2011, when the company launched the LEGO Friends line after market research led to the insight that girls preferred to use their LEGO sets for role-play. The line caught on strongly in markets worldwide, including China, Germany, and the United States, to the point where LEGO had to hire more employees to keep up with unexpected demand for Friends. Overall, the company’s research-driven strategy helped the company quadruple its sales between 2005 and 2015.

In 2012, LEGO established the Future Lab, a secretive research and development team that is responsible for creating some of its most innovative and successful toy lines ever. LEGO also leverages its passionate fans to source ideas for new LEGO sets via a community called LEGO Ideas, whose 2.8 million members collectively have surfaced more than 135,000 new product concepts. In addition, LEGO incorporates insights from market research into many of its campaigns, including the ―Play Unstoppable‖ campaign that encouraged girls and their parents to ―empower playful exploration of all interests, passions and imagination.‖

2. How would someone use social media and conduct other types of research to better understand LEGO’s current and potential customers?

Suggested answer: Student answers may vary. LEGO built on its track record of success in video games to connect its brand with consumers in a new digital context. Answers may suggest that to better understand LEGO’s current and potential customers, the company should use social media on a global basis to conduct social listening for consumer sentiment and feedback (positive or negative) about LEGO products and competitor products, which will help identify what is resonating or not resonating in each market. Answers may also suggest using social listening to understand broader cultural trends that had implications for LEGO. In addition, students may recommend using social media to identify ―power users‖ to evaluate partnering with as product testers or micro influencers. Answers could also recommend using social media as a recruitment tool for online and in-person research sample.

Answers may also highlight other types of research LEGO could employ in key markets globally including consumer focus groups to get deep qualitative insights, observational studies to see how consumers played with new LEGO sets, longitudinal studies to understand consumer trends over time, and competitive research to understand competitive opportunities and threats. Students could recommend that LEGO do qualitative and quantitative research with buyers at the retailers that sell LEGOs to understand how we could strengthen our partnership.

3. Is LEGO’s competitive advantage sustainable? What challenges do they face in the future? What steps should they take to address them?

Suggested answer: Student answers may vary. Some will answer that LEGO’s competitive advantage is sustainable, citing its long track record as a leading toy brand, deep research-based understanding of consumers, its ability to thrive in the digital era so far, and the cognitive benefits of tactile play. They may argue that if LEGO continues to use market research and develops innovative products, it will sustain its competitive advantage.

Others will answer that the company’s advantage is not sustainable, pointing to the challenges it faces in the future. A key challenge for LEGO is its concentration on physical products in an increasingly digital world, and company studies have indicated that kids spend less and less time playing with physical toys every year. There’s a related threat of increased competition from digital ―brick-building‖ games like Minecraft and Roblox. There is also the potential for disruption from below. While it seems unlikely a company could succeed in outright copying LEGO, a new mode of play could emerge that becomes more popular than building with bricks.

To address these challenges, LEGO should continue to differentiate through insights and innovation. That approach was instrumental in enabling the company to thrive after nearly filing for bankruptcy in the early 2000s. By continuing to conduct market research, LEGO can understand how the nature of play evolves, how consumers tastes change, and how competitors adapt. Armed with these insights, LEGO will be able to create products in the future that resonate as strongly with consumers as its current products do.

DETAILED CHAPTER OUTLINE Opening vignette: Marketers must have a thorough understanding of how consumers think, feel, and act and must offer clear value to each and every target consumer. Understanding consumer needs is the key to designing a value proposition that creates value for each and every customer. With the emergence of Gen Z as a powerful buying force, marketers have been scrambling to design and execute marketing programs tailored to their particular needs and wants. Legacy clothing and accessories brand Coach has had to make some strategic pivots, guided by research conducted with Gen Z consumers. The brand’s positioning has evolved from its historical ―affordable luxury‖ position to be more about ―expressive luxury.‖ This chapter explores individual consumers’ buying dynamics.

I. The Model of Consumer Behavior?

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

II. Consumer Characteristics A. Cultural Factors. A consumer’s buying behavior is influenced by cultural, social, and personal factors. i. Of these, cultural factors exert the broadest and deepest influence. ii. Culture is the fundamental determinant of a person’s wants and behavior. iii. Through family and other key institutions, a child growing up in the United States is exposed to values such as achievement and success, activity, efficiency and practicality, progress, material comfort, individualism, freedom, external comfort, humanitarianism, and

youthfulness. iv. Marketers must closely attend to cultural values in every country to understand how to best market their existing products and find opportunities for new products. v. Each culture consists of smaller subcultures that provide more specific identification and socialization for their members. vi. Subcultures include nationalities, religions, racial groups, and geographic regions. vii. When subcultures grow large and affluent enough, companies often design specialized marketing programs to serve them.

B. Virtually all human societies exhibit social stratification, most often in the form of social classes, relatively homogeneous and enduring divisions in a society, hierarchically ordered and with members who share similar values, interests, and behavior.

i. The United States has lower, middle, and upper classes. ii. Social class members show distinct product and brand preferences in many areas.

C. Social Factors. In addition to cultural factors, social factors such as reference groups, family, and social roles and statuses affect our buying behavior. i. A person’s reference groups are all the groups that have a direct (face-to-face) or indirect influence on their attitudes or behavior such as family, friends, neighbors

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

D. Personal Factors i. Personality and Self-concept. Characteristics that influence buyers’ decisions include their age and stage in the life cycle, occupation and economic circumstances, personality and self-concept, and lifestyle and values. ii. Consumption is shaped by the family life cycle and the number, age, and gender of people in the household at any given time. iii. Psychological life-cycle stages may matter. Adults experience transformations as they go through life, causing their behavior to adapt. iv. Marketers should consider critical life events or transitions—marriage, childbirth, illness, divorce, career change, retirements—as giving rise to new needs.

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

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

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

B. Perception i. Perception is the process by which we select, organize, and interpret information inputs to create a meaningful picture of the world. ii. People emerge with different perceptions of the same object because of three perceptual processes: selective attention, selective distortion, and selective retention. a. Selective attention: marketers must work hard to attract the notice of consumers. b. Subliminal perception: marketers embed covert, subliminal messages in ads or packaging that consumers are not consciously aware of but that affect their behavior. c. Selective distortion is the tendency to interpret information to fit our preconceptions.

C. Emotions

i. Consumer response is not all cognitive and rational. Many responses may be emotional and

evoke different kinds of feelings. ii. Just as products and brands can elicit certain emotions, different emotional states can influence people’s judgments and decisions. iii. Seeing the emotions of others can also be used as a marketing tool.

D. Memory i. Cognitive psychologists distinguish between short-term memory—a temporary and limited repository of information—and long-term memory—a more permanent, potentially unlimited repository. ii. All the information and experiences we encode as we go through life can end up in our long-term memory. iii. Researchers distinguish three types of long-term memory: episodic, semantic, and procedural. iv. Brand associations consist of all brand-related thoughts, feelings, perceptions, images, experiences, beliefs, and attitudes that become linked to the brand node.

v. Memory encoding describes how and where information gets into memory. Memory retrieval is the way we reclaim information from memory. vi. Because of selective retention, we’re likely to remember only the positive aspects of a product we like, forgetting its negative aspects and the good points about competing products.

IV. The Buying Decision Process A. Key consumer behavior questions marketers should ask:

a. b. c. d. e. f. g. h. i.

Who buys our product or service?

Who makes the decision to buy the product or service?

Who assumes what role in the decision process?

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

What wants are fulfilled?

What benefits do they seek?

Why do customers buy a particular brand?

Do social factors influence the purchase decision?

Do customers’ lifestyles influence their decisions? Where do they go or look to buy the product or service? Online/and/or offline? j. When do they buy? Any seasonality factors? Any time of day/week/month? k. How is our product or service perceived by customers? l. How positive or negative are customers’ attitudes toward our product or service? m. How is the purchase decision made? n. How do personal, demographic, or economic factors influence the purchase decision? i. The buying decision process includes all the experiences in learning, choosing, using, and even disposing of a product. ii. The consumer typically passes through five stages: problem recognition, information search, evaluation of alternatives, purchase decision, and postpurchase behavior. iii. Consumers don’t always pass through all five stages—they may skip or reverse some.

iv. The model in Figure 3.3 captures the considerations that arise when a consumer contemplates a new purchase or a high-involvement product that entails functional, psychological, or monetary risk. v. AI and Marketing Consumer Behavior:

a. By understanding how consumer behavior is changing because of AI, marketers can help their organizations deliver value with AI in their products, experiences, and marketing program. b. Consumers have started using AI to assist them in each stage of the buying decision process.

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

C. Information Search i. A mild search state is called heightened attention (the consumer becomes more receptive to information about a product). See Fig. 3.4. ii. Active information search includes: looking for reading material, phoning friends, going online, and visiting stores to learn about the product. iii. Major information sources to which consumers will turn fall into four groups: a. Personal: Family, friends, neighbors, acquaintances b. Commercial: Advertising, websites, emails, salespersons, dealers, packaging, displays c. Public: Mass media, social media, consumer-rating organizations iv. The greatest quantity of information is received from commercial sources. v. The most effective information often comes from personal or experiential sources or public sources that are independent authorities. vi. Only the consideration set will meet initial buying criteria.

D. Evaluation of Alternatives i. The consumer is trying to satisfy a need. ii. The consumer is looking for certain benefits from the product solution. iii. The consumer sees each product as a bundle of attributes with varying abilities to deliver the benefits. The attributes of interest to buyers vary by product. iv.

Consumers will pay the most attention to attributes that deliver the sought-after benefits. v. Through experience and learning, people acquire beliefs and attitudes that influence buying behavior. a. A belief is a descriptive thought that a person holds about something.

b. Attitude is a person’s enduring favorable or unfavorable evaluations, emotional feelings, and action tendencies toward some object or idea. c. Attitudes economize on energy and thought so they can be very difficult to change. d. Information processing. The most current models see the consumer forming judgments largely on a conscious and rational basis. e Consumers will pay the most attention to attributes that deliver the sought-after benefits.

f. Consumers will expend brainpower, time, and effort only in proportion to the importance of the decision task.

vi. The Expectancy-Value Model of attitude formation posits that consumers evaluate products and services by combining their brand beliefs—both positive and negative— according to importance. vii. Strategies to improve attitudes under the Expectancy-Value Model (See Table 3.1) a. Redesign by changing functional attributes, modifying its form, and improving service.

b. Alter consumers’ beliefs by better communicating benefits. c. Alter beliefs about competitors’ offerings by communicating its drawbacks. d. Alter consumers’ beliefs about product attributes by persuading buyers to weigh the attributes in which the brand excels.

Purchase Decision i. Decision heuristics. A consumer may make as many as five subdecisions: brand (brand A), dealer (dealer 2), quantity (one computer), timing (weekend), and payment method card). ii.

Non-compensatory models of consumer choice, positive and negative attribute considerations, don’t necessarily net out. Evaluating attributes in isolation facilitates decision making for consumers, but it also increases the likelihood that they would have made a different choice if they had deliberated in greater detail.

E.

iii. Rather than calculating the perceived importance of every attribute across products in a consideration set, consumers often take ―mental shortcuts,‖ called heuristics or rules of thumb, in the decision process. a. Marketing Insight: Behavioral economists have identified many scenarios in which consumers make irrational choices. Some decisions issues fall into two categories: heuristics and biases and framing effects. iv. The elaboration likelihood model, an influential model of attitude formation and change, describes how consumers make evaluations in both low- and highinvolvement circumstances. v. The Level of Consumer Involvement: the elaboration likelihood model a. The central route: attitude formation or change stimulates much thought and is based on the consumer’s diligent, rational consideration of the most important product information. b. The peripheral route: attitude formation or change provokes much less thought and results from the consumer’s association of a brand with either positive or negative peripheral cues. c. Consumers follow the central route only if they possess sufficient motivation, ability, and opportunity. d. We buy many products under conditions of low involvement and without significant brand differences. e. Evidence suggests we have low involvement with most low-cost, frequently purchased products. vi. Marketers use four techniques to try to convert a low-involvement product into one that encourages higher involvement. Four techniques to try to convert a low-involvement product into one of higher involvement: a. They can link the product to an engaging issue;

b. They can link the product to a personal situation; c. They might design advertising to trigger strong emotions related to personal values or ego defense; d. They might add an important feature. vii.

Intervening Factors: Attitudes of others can intervene in the purchase process if the other person’s negative attitude toward our preferred alternative is intense and our motivation viii. The second intervening factor involves the situational considerations that may erupt to

change the purchase intention. ix. A consumer’s decision to modify, postpone, or avoid a purchase decision is heavily influenced by one or more types of perceived risk. a. Functional risk—The product does not perform to expectations. b. Physical risk—The product poses a threat to the physical well-being or health of the user or others. c. Financial risk—The product is not worth the price paid. d. Social risk—The product results in embarrassment in front of others. e. Psychological risk—The product affects the mental well-being of the user. f. Time risk—The failure of the product results in an opportunity cost of finding another satisfactory product.

F. Postpurchase Behavior i. Postpurchase satisfaction is a function of the closeness between expectations and the product’s perceived performance. a. Some consumers magnify the gap when the product isn’t perfect and are highly dissatisfied; others minimize it and are less dissatisfied. b. A satisfied consumer is more likely to purchase the product again and will also tend to say good things about the brand to others. c. Dissatisfied consumers may abandon or return the product. They may seek information that confirms its high value. d. They may take public action by complaining to the company, going to a lawyer, or complaining directly to other groups (such as business, private, or government agencies) or to many others online. e. Private actions include deciding to stop buying the product (exit option) or warning friends (voice option ii. Postpurchase communications to buyers have been shown to result in fewer product returns and order cancellations. iii. Marketers should also monitor how buyers use and dispose of the product.

CHAPTER

4

LEARNING OBJECTIVES

ANALYZING BUSINESS MARKETS

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

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

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

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

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

CHAPTER SUMMARY

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

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

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

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

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

6. Business-to-business marketers are using a variety of marketing tools to attract and retain customers. They are strengthening their brands and using technology and other

communication tools to develop effective marketing programs. They are also using systems selling and are adding services to provide customers added value.

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

8. The institutional market consists of schools, hospitals, retirement communities, nursing homes, prisons, and other institutions that provide goods and services to people in their care. Buyers for government organizations tend to require a great deal of paperwork from their vendors and to favor open bidding and domestic companies. Suppliers must be prepared to adapt their offers to the special needs and procedures found in institutional and government markets.

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

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

also good resources to have as guest speakers when covering this chapter.

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

TEACHING STRATEGY AND CLASS ORGANIZATION PROJECTS 2. At this point in the semester-long marketing project, no presentations are necessary unless the instructor has approved a business-to-business product or service.

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

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

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

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

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

To improve effectiveness and efficiency, business suppliers and customers are exploring different ways to manage their relationships. Have the students visit each of the company’s websites mentioned throughout the chapter. Which ones do the students feel most effectively and efficiently address the needs of the corporate buyer? Which websites do not? Why and what in their opinion is missing from the least effective websites? How can the firm do better in its execution?

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

Small businesses have been described as the ―lifeblood‖ of the economy.

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

END-OF-CHAPTER SUPPORT

Marketing Spotlight: Accenture 1. Why is Accenture considered to be such an effective marketer?

Suggested answer: Accenture has invested in building a globally recognizable brand, starting with its well-designed rebranding from Andersen Consulting to Accenture in 2000. The rebranding led to dramatic increases in the awareness of breadth and depth of services and overall brand image, as well as in the number of firms inquiring about the company’s services. In addition, Accenture developed a unique differentiator in its ability both to provide innovative ideas—ideas grounded in business processes as well as IT—and to execute them. It communicated this ―strategy plus execution‖ differentiator through a series of creative campaigns, including ―High Performance. Delivered.‖ Accenture also grew to be one of the leading global providers of marketing services by acquiring over 40 marketing, communications and consulting companies. As a marketing services provider, it ―practices what it preaches‖ by developing effective marketing for Accenture, as evidenced by its ―Let There Be Change‖ campaign and a new brand purpose based on input from 28,000 of the company’s 500,000+ employee base: ―To deliver on the promise of technology and human ingenuity.‖

2. What lessons can other business-to-business marketers take away from Accenture?

Suggested answer: Accenture’s success shows the importance in businessto-business (B2B) marketing of building a strong brand. From the time it separated from Arthur Andersen, Accenture has invested in building its brand, which has contributed to its business success. As part of building a strong brand, it is important for B2B companies to build key differentiators, ones that buyers care about because they create value for the buyer. Accenture did this by building the dual capabilities of developing strategy and executing it. Companies should then center their communications on the key differentiators, as Accenture did with its ―High Performance. Delivered‖ campaign. Finally, Accenture shows the value in B2B of being consistent over time. The company started as an IT

consultancy helping companies bring digital technologies into their businesses. Today, Accenture helps companies strengthen their ―digital core‖ and generates approximately 70 percent of its revenue in digital.

Being consistent over time helps B2B brands build and maintain credibility and trust with their buyers. Accenture should carefully select its spokespersons as seen in the Tiger Woods situation. Consumers were more focused on the scandal than on the products. Woods was replaced.

3. What advice would you give Accenture going forward?

Suggested answer: Student answers may vary. Answers may advise Accenture to continue positioning itself as being their clients’ partner in embracing change. The pace of change in business is fast, so there is great value for businesses to find partners that can help them benefit from change. Answers may also note that Accenture has already invested billions in equipping itself to help clients develop cloud and AI solutions. Students may encourage Accenture to invest at the forefront of digital innovation to maintain a leadership position in the digital arena. Because its strong brand has contributed significantly to its growth, students may advise Accenture to find the next big global brand platform from which to launch creative advertising campaigns.

Marketing Spotlight: Salesforce 1. Why has Salesforce been so successful?

Suggested answer: Salesforce’s success stems from the major innovation of ―on-demand CRM‖ it brought to the software market in 1999.

Salesforce’s ―on-demand CRM‖ cloud computing platform addressed many of the issues of the traditional practice of purchasing software licenses.

Customers no longer had to invest in expensive IT employees and the upfront cost of hardware infrastructure to use CRM applications.

Salesforce attracted companies of all sizes because of its intuitive and functional user interfaces. Within only four years after launching, Salesforce had become the world’s largest CRM software provider.

Along with its innovative on-demand CRM, Salesforce pioneered the software-as-a-service (SaaS) subscription model. This gave Salesforce an ongoing revenue stream, while also giving customers financial flexibility. If at any time customers found the application no longer useful, they could just cancel their monthly plan. The company also maintained its position as the market leader by adding innovative software that gave it a competitive edge. For example, Salesforce launched applications such as Salesforce Platform (originally called force.com), which allows businesses to create a CRM environment tailored specifically to their needs in partnership with third-party developers.

The first issue is that CRM software was expensive. The second issue was that integrating CRM into a customer’s business was time consuming.

Furthermore, Salesforce also invested heavily in sales and marketing, with expenses that far exceeded those of peers such as Adobe, SAP or Microsoft. It made a series of acquisitions including Slack, MuleSoft, and Tableau, which enabled it to expand its footprint into other complementary product categories. It also built a strong community of

employees, customers and partners, with its annual star-studded Dreamforce event, its Trailblazers community and Trailhead online training platform. Finally, some credit for the company’s success certainly goes to its charismatic long-time CEO, Marc Benioff. With a mixture of ―sizzle and substance,‖ he skillfully promotes the company’s capabilities to help companies and also serve a higher social purpose.

2. What other products and services might Salesforce expand into next? Why? Suggested answer: Answers may vary, and students can offer their ideas about new products and services Salesforce could expand into. Innovation is essential for Salesforce to remain competitive in the marketplace.

Answers may discuss the opportunity Salesforce has to infuse AI everywhere in its products and services. It has started to do this by building Salesforce Customer 360 powered by AI and committing to invest $500 million in generative AI startups, serving in a role as a ―trusted custodian and guide to make AI useful and safe for clients.‖ As chatbot ―agents‖ capable of accomplishing tasks for users become more viable, Salesforce can introduce these agents into products where they make sense, like Slack which already is centered on messaging.

Other new product and service ideas that students may share include expanding its marketing cloud offerings to further complement its sales cloud offerings, acquiring other companies to help customers get more out of their data in concert with MuleSoft and Tableau, and incorporating Trailhead online training into Salesforce’s products to make it easier for users to learn while doing.

3. What are some of the challenges Salesforce faces moving forward? What steps should they take to address them?

Suggested answer: Student answers may vary. Answers may include the challenge of anticipating the impact of AI on its business, especially the potential for disruption from competitors using AI to automate or replace different parts of Salesforce’s function. Salesforce has already been investing heavily in AI and incorporating it into its products, so it should continue to invest to stay on the forefront as AI technology evolves. Answers may also include the challenge of keeping the Salesforce community engaged now that it is very large. Salesforce can continue to build engagement by mixing online and in-person community events, as it has done, and by finding new ways to connect community members to each other. Another challenge that answers may highlight is the brand risk that comes from the future retirement of co-founder and CEO Marc Benioff, who has been a highly visible and effective promoter of the company. Salesforce should carefully manage the succession to ensure the next CEO can be as effective in promoting the company.

1. DETAILED CHAPTER OUTLINE Opening vignette: Caterpillar ranks number one or number two in every industry it serves. Its products have a reputation for high quality and reliability, and the company has maintained a strong focus on innovation while expanding its product portfolio. Its distinctive yellow machines are found all over the globe and have helped make the brand an American icon.

Today, Caterpillar ranks number one or number two in every industry it serves. Some of the world’s most valuable brands, such as Caterpillar, belong to business marketers. Many

principles of basic marketing also apply to business marketers. They need to embrace holistic marketing principles, such as building strong loyalty relationships with their customers, just like consumer marketers. But they also face some unique challenges in selling to other businesses. In this chapter, we will highlight some of the crucial similarities and differences for marketing in business markets.

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

B. Understanding Business Markets i. The business market consists of all the organizations that acquire goods and services used in the production of other products or services that are sold, rented, or supplied to others.

ii. Some of the major industries making up the business market are aerospace; agriculture, forestry, and fisheries; chemical; computer; construction; defense; energy; mining; manufacturing; transportation; communication; public utilities; banking, finance, and insurance; distribution; and services. iii. business buyers than to iv.

More dollars and items change hands in sales to consumers.

The biggest enemy to business-to-business

marketers is commoditization.

a. Commoditization eats away margins and weakens customer loyalty. b. Commoditization can be overcome only if target customers are convinced that meaningful differences exist in the marketplace and that the unique benefits of the firm’s offerings are worth the added expense. v. to create and

A critical step in business-to-business marketing is communicate relevant differentiation from

competitors. vi.

Business marketers face many of the same

challenges as consumer marketers, especially understanding their customers and what they vii.

value.

The three biggest hurdles for B2B marketing are:

a. building stronger interfaces between marketing and sales b. building stronger innovation-marketing interfaces c.

extracting and leveraging more granular

customer and market knowledge viii. Four additional imperatives are: a. demonstrating marketing’s contribution to business performance b. engaging more deeply with customers and customers’ customers c. finding the right mix of centralized versus decentralized marketing activities d. finding and grooming marketing talent and competencies ix. Business marketers contrast sharply with consumer markets in some

ways, however. They have: a. fewer, larger buyers b. close supplier–customer relationships c. professional purchasing d. multiple buying influences e. multiple sales calls f. derived demand g. inelastic demand h. fluctuating demand i. geographically concentrated buyers j. direct purchasing C. Types of Buying Decisions i. The number of decisions faced by a business buyer depends on the complexity of the problem being solved, newness of the buying requirement, number of people involved, and time required. ii. Three types of buying situations are the straight rebuy, modified rebuy, and new task. a. Straight rebuy: The purchasing department reorders items like office supplies and bulk chemicals on a routine basis and chooses from suppliers on an approved list. b. Modified rebuy: The buyer in a modified rebuy wants to change product specifications, prices, delivery requirements, or other terms. This usually requires additional participants on both sides. c. New buy: A new-buy purchaser buys a product or service for the first time (an office building, a new security system). The greater the cost or risk, the larger the number of participants, and the greater their information gathering—the longer the time to a decision.

The business buyer makes the fewest decisions in the straight rebuy situation and the most in the new-task situation. iii. The buying process passes through several stages: awareness, interest, evaluation, trial, and adoption. a. Mass media can be most important during the initial awareness stage. b. Salespeople often have their greatest impact at the interest stage. c. Technical sources can be most important during evaluation. d. Online selling efforts may be useful at all stages. iv. In the new-buy situation, the buyer must determine product specifications, price limits, delivery terms and times, service terms, payment terms, order quantities, acceptable suppliers, and the selected supplier. a. Many companies use a missionary sales force consisting of their most effective salespeople. b. The marketer also tries to reach as many key participants as possible with information and assistance. c. In-suppliers are continually seeking ways to add value to their market offer to facilitate rebuys.

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

a. Purchasing agents are influential in straightrebuy and modified-rebuy situations, whereas other employees are more influential in new-buy situations. b. Engineers are usually influential in selecting product components, and purchasing agents dominate in selecting suppliers.

B. The Buying Center. i. The buying center is the decision-making unit of a buying organization. It consists of ―all those individuals and groups who participate in the purchasing decision-making process, who share some common goals and the risks arising from the decisions.‖ a. Initiators: Users or others in the organization who request that something be purchased. b. Users: Those who will use the product or service c. Influencers: People who influence the buying decision, often by helping define specifications and providing information for evaluating alternatives. d. Deciders: People who decide on product requirements or on suppliers. e. Approvers: People who authorize the proposed actions of deciders or buyers. f. Buyers: People who have formal authority to select the supplier and arrange the purchase terms.

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

C. The Role of the Buying Center in the Organization

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

D.

Buying Center Dynamics i. Participants have differing interests, authority, status, susceptibility to persuasion, and sometimes very different decision criteria. ii. Business buyers also have personal motivations, perceptions, and preferences influenced by their age, income, education, job position, personality, attitudes toward risk, and culture. iii. Individuals, not organizations, make purchasing decisions. iv. Businesspeople are buying solutions to two

problems: the organization’s economic and strategic problem and their own personal need for achievement and reward. v. Marketing Insight: Managing emotions in business marketing. a. It is assumed that B2B buyers are hyperrational decision makers, prioritizing cost, performance, reliability, and convenience. b. Research shows that emotional considerations play a pivotal role in those decisions. c. Firms understand the importance of blending rational and emotional appeals.

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

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

iii. Once it has identified the type of businesses on which to focus marketing efforts, the firm must then decide how best to sell to them. iv. Whatever information the business salesperson can obtain about personalities and interpersonal factors is useful. v. Small sellers concentrate on reaching the key buying influencers. vi. Larger sellers go for multilevel, in-depth selling. vii Companies must rely more heavily on their communications programs to reach hidden buying influences and keep current customers informed.

III. Understanding the Buying Process (See Fig. 4.1) A. Problem Recognition and Need Description i. Triggered by internal or external stimuli ii. Business marketers can stimulate B. General Need Description C. Product Specification and Supplier Search

i. Product value analysis is an approach to cost reduction that studies whether components can be redesigned, standardized, or made by cheaper methods of production without adversely affecting product performance D. Supplier Search i. Includes electronic marketplaces like catalog sites, vertical markets, auction sites, spot markets, private exchanges, barter markets, buying alliances. ii. Online business buying saves transaction costs for both buyers and suppliers, reduces time between order and delivery, consolidates

purchasing systems, and forges more direct relationships between partners and buyers. iii. For disadvantages, it may help to erode supplier–buyer loyalty and create potential security problems. iv. E-procurement: websites are organized around two types of e-hubs and used in a variety of ways a. Vertical hubs centered on industries (plastics, steel, chemicals, paper) b. Functional hubs (logistics, media buying, advertising, energy management) E. Proposal Solicitation and Supplier Selection: The buyer next invites qualified suppliers to submit written proposals and invites a few suppliers to make a formal presentation.

F. Supplier Selection

i. Business buyers seek the highest benefit package (economic, technical, service, and social) in relationship to a market offering’s costs. ii. The strength of their incentive to purchase is a function of the difference between perceived benefits and perceived costs. iii. The attributes that buyers commonly use to evaluate vendors include price, reputation, reliability, and agility. iv. Before selecting a supplier, the buying center will specify and rank desired supplier attributes, often using a supplier-evaluation model to rate suppliers based on their performance on the attributes valued by the buyer. v. Companies are increasingly reducing the number of their suppliers.

G. Contract Negotiation and Performance Review

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

H. Performance Review i. Periodic reviews of the performance of the chosen supplier(s) using one of three methods: a. Contact end users and ask for their evaluations b. Rate the supplier on several criteria using a weighted-score method c. Aggregate the cost of poor performance to come up with adjusted costs of purchase, including price IV. Developing Effective Business Marketing Programs

A. Business-to-business marketers are using every marketing tool at their disposal to attract and retain customers.

i. They are embracing systems selling, adding valuable services to their product offerings, employing customer reference programs, and utilizing a wide variety of online and offline communication and branding activities B. Transitioning from Products to Solutions i. Systems buying originated with government purchases of major weapons and communications systems. ii. Sellers have increasingly recognized that buyers like to purchase in this way, and many have adopted systems selling as a marketing tool. iii. One variant of systems selling is systems contracting, in which a single supplier provides the buyer with its entire requirement of MRO supplies. a. Customer benefits from reduced procurement and management costs. b. Seller achieves lower operating costs thanks to steady demand and reduced paperwork.

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

D. Building Business-to-Business Brands

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

E. Overcoming Price Pressures

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

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

V. supplier

Managing Business-to-Business Relationships A. Loyalty is driven in part by supply chain management,

involvement, and purchasing alliances. i. Business-to-business marketers are honing in on their targets and developing one-to-one marketing approaches.

B. Understanding the Buyer-Supplier Relationship

i. Much research has advocated greater vertical coordination between buying partners and sellers so that they can transcend merely transacting and instead create more value for both parties. ii. Another study suggests that greater vertical coordination between buyer and seller through information exchange and planning is usually necessary only when high environmental uncertainty exists and specific investments (described below) are modest. iii. Four relevant ways to develop a relationship include: availability of alternatives, importance of supply, complexity of supply, and supply market dynamism. iv. Closest relationships between customers and suppliers arose when supply was important to the customer and there were procurement obstacles, such as complex purchase requirements and few alternate suppliers.

C. Managing Corporate Trust, Credibility, and Reputation i. Building trust is one prerequisite to enjoying healthy long-term relationships.

ii. Trust is a firm’s willingness to rely on a business partner. iii. Building trust can be especially tricky in online settings, and firms often impose more stringent requirements on their online business partners than on others. iv. Corporate credibility is the extent to which customers believe a firm can design and deliver products and services that satisfy their needs and wants.

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

E. Managing Institutional Markets

i. The institutional market consists of schools, hospitals, nursing homes, prisons, and other institutions that must provide goods and services to people in their care. ii. Many of these organizations are characterized by low budgets and captive clienteles. iii. In most countries, government organizations are a major buyer of goods and services. iv. Different types of agencies—defense, civilian, intelligence— have different needs, priorities, purchasing styles, and time frames. v. The federal government has been trying to simplify the contracting procedure and make bidding more attractive.

CHAPTER

5 5

CONDUCTING MARKETING RESEARCH

LEARNING OBJECTIVES

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

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

5.3 Explain how to measure and forecast market demand.

5.4 Define the different approaches to measuring marketing productivity.

CHAPTER SUMMARY 1.

Marketing research is all about generating insights. Marketing insights provide diagnostic information about how and why we observe certain effects in the marketplace and what that means to marketers.

Good marketing research is characterized by the scientific method, creativity, multiple research methods, accurate model building, cost–benefit analysis, healthy skepticism, and an ethical focus.

2. The marketing research process consists of defining the problem, developing the research plan, collecting information, analyzing the information, and making the decision. In conducting research, firms must decide whether to collect their own (primary) data or use data that already exist (secondary data). They must also choose a research approach (observational, ethnographic, focus group, survey, or behavioral) and research instruments (questionnaires, qualitative measures, or technological devices).

In addition, they must decide on a sampling plan, contact methods (online, in person, mail or e-mail, or telephone), and data-mining strategies.

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

procedures are essential to all types of demand and sales forecasting.

4. Marketing research must assess the efficiency and effectiveness of marketing activities. Marketers employ a wide variety of measures to assess marketing effects. Marketing metrics is the set of measures that help marketers quantify, compare, and interpret their performance. Marketing dashboards provide all the up-to-date information necessary to run the business operations for a company—such as actual sales versus forecast, distribution channel effectiveness, brand-equity evolution, and the development of human capital.

Company input to the marketing dashboard should include two key market-based scoreboards that reflect performance and provide early warning signals.

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

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

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

TEACHING STRATEGY AND CLASS ORGANIZATION PROJECTS 4. At this point in the semester-long marketing plan project, the students’ initial marketing research parameters should be completed, demand forecasted, and target market selections defined.

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

ASSIGNMENTS Ask students to contact a local marketing research firm in the area for the purpose of an interview regarding research techniques, methods, and the difficulties in conducting research. Pre-approve the set of questions prepared by the students prior to the appointment. Ensure that the students will be able to collect information from the research company regarding how information is collected. Once it is collected, what are some of the difficulties faced by the researcher in presenting this information to the client?

The American Airlines case shows the power of conducting marketing research before offering a service.

In small groups for an in-class discussion, have the students comment on the case in light of the marketing research process examined in the chapter.

Have students watch this video on the concept of ―neuromarketing‖ and comment on whether such brain

research is ethical, as it may lead to more marketing manipulation: https://www.youtube.com/watch?v=LpJvuPOG40M. See also http://www.businessweek.com/articles/2013-1010/will-companies-one-day-use-brainwaves-to-find-ideal-prices Carolyn Yoon, Angela H. Gutchess, Fred Feinberg, and Thad A. Polk, ―A Functional Magnetic Resonance Imaging Study of Neural Dissociations Between Brand and Person Judgments,‖ Journal of Consumer Research, 33 (June 2006), pp. 31-40; Samuel M. McClure, Jian Li, Damon Tomlin, Kim S. Cypert, Latané M. Montague, and P. Read Montague, ―Neural Correlates of Behavioral Preference for Culturally Familiar Drinks,‖ Neuron, 44 (October 14, 2004), pp. 379387.

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

Suggested answer: IDEO successfully built a leading company design consultancy by pioneering and popularizing ―design thinking.‖ Every aspect of the company—from the organizational structure and physical spaces to the hiring, training, and managing of employees—reflects a set of seven core values that IDEO articulated with the goal of fostering a creative and collaborative community within the company Because design thinking prioritizes the needs of people as the central driver for creating products, services, and experiences, it ―can transform the way organizations develop products, services, processes, and strategy.‖ With its design thinking approach, IDEO gains insights through a variety of human-centered research methods. This has led the company to design a broad range of breakthrough products and services such as Apple’s first computer mouse; a network of world-class, affordable schools in Peru; and an inclusive and accessible voting system for Los Angeles County. IDEO has applied human-centered design to a multitude of fields, including financial services, nonprofit organizations, brand building, health care, learning and education, and consumer goods.

IDEO also set itself apart from other design firms through its multidisciplinary approach. As IDEO grew, the company took on a greater array of projects and employed people with a much wider breadth of skills. It sought the perspectives of marketers, anthropologists, doctors, teachers, architects, and experts in other fields. In IDEO offices, the desks of partners and senior leaders are interwoven with the desks of junior designers to create the conditions for collaboration across all levels. Open, flexible spaces allow employees to showcase their prototypes and host brainstorming sessions.

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

Suggested answer: A difficult challenge IDEO faces with its research is that consumers often do not know what they want or need, especially when it comes to new products and services that have not been invented yet. IDEO researchers have to probe deeply or extrapolate into the future in order to develop insights that can be used to create consumer-friendly solutions. Another challenge is that when IDEO is observing research subjects, it may be hard for people to behave completely naturally when they know they’re being observed.

A difficult challenge with designing new products and services is managing global complexity. People in different markets can have different needs, different expectations, and different behaviors. IDEO must not only understand those differences, but also account for them in developing new products. An additional challenge is getting meaningful feedback from consumers on prototypes that may be unfinished or limited in functionality. Because IDEO’s design thinking approach involves rapid prototyping, sometimes even in the form of a sketch, it must carefully interpret feedback on prototypes knowing the feedback is being given on a product or service that may be incomplete. Another challenge IDEO has is that demand for its services was impacted by companies building in-house design teams, in part because of IDEO’s success and its own education initiative called IDEO U.

3. Should IDEO try to create a stronger brand for itself? Why or why not?

Suggested answer: Yes, IDEO should try and create a stronger brand for itself. The primary reason for this recommendation is that the company has been facing reduced demand for its services in the face of economic headwinds and the growth of in-house design teams. Naturally, as a design services company IDEO rightly wants to ensure its clients get the main spotlight for the new product innovations it helps them with. Yet by also building a stronger brand for itself, IDEO can generate more demand and more customer loyalty. Furthermore, as design thinking’s pervasiveness has yielded increased competition, a stronger brand can better communicate to prospective buyers why IDEO is the best partner. IDEO’s brand-building could focus on its design thought leadership, its track record of success, and its embrace of new technologies like AI.

Marketing Spotlight: Intuit 1. What value does Intuit create for its customers?

Suggested answer: Intuit creates value for small businesses and individual consumers by empowering them with simple, intuitive products that help them manage their finances and, in the case of small business, grow their businesses. Intuit’s original products did something for individuals and small businesses that more complicated accounting packages didn’t: They solved finance and tax problems in a simple, easy-to-use manner. For example, what made the original version of Quicken stand out is that it was well designed and had an intuitive interface: Instead of looking like a spreadsheet, it displayed the familiar images of a check register and individual checks. As a result, Quicken instantly became the market leader in personal finance software, even though it offered only one-third the features of many competing products. Although not mentioned in the Spotlight, Intuit sold Quicken in 2016. Nevertheless, its phenomenal rise is a tribute to the value Intuit created for its customers. As Intuit expands globally and into new aspects of the customer’s financial journey, it is employing its finely-honed research and innovation competencies to develop new products and better address ever-evolving needs.

Over time, Intuit expanded the value it creates for both small business and individual consumers via acquisition. It acquired Credit Karma, the consumer fintech platform that helps its more than 110 million members understand and monitor their credit and take control of their finances with personalized recommendations for credit cards, bank accounts, loans, and auto and home financing. Intuit understood that building credit and selecting the right financial products are essential to consumers’ financial journey, and by offering solutions in these areas, the company could further its mission of powering prosperity. In 2022, Intuit acquired Mailchimp, a world-class, global customer engagement and marketing platform, to help address the biggest problem for small businesses: getting new customers. Then in 2023, the company debuted a GenAI financial assistant, called Intuit Assist, which it embedded across its suite of products.

Intuit Assist was designed to deliver personalized insights and recommendations, as well as execute some of the work itself.

2. What types of questions should Intuit ask its current and potential future customers in order to improve its current offerings and design new ones?

Suggested answer: Student answers may vary given the breadth of possible areas of inquiry. Some potential question territories include:



   

Ask current customers (both small businesses and individual consumers) to identify their favorite and least favorite aspects of Intuit’s products. Ask potential customers the same about the competing product(s) they use.

Ask both current and potential customers which hypothetical features they would value the most Ask current customers what they would do to improve Intuit’s products Ask current and potential customers what other financial products they get value from and why Ask lapsed customers why they left, and what would bring them back

In addition to asking questions, Intuit already does extensive observational research. Intuit researchers visit users’ homes or offices to observe exactly how their products are used, what works well, what frustrates consumers, and how the products could be improved. Intuit also invites consumers to one of its research labs to test out and experiment with the company’s new products and ideas.

3. What challenges will Intuit face in the future? What steps should they take to address them?

Suggested answer: Student answers may vary. One challenge that the answers may identify is increased competition. Intuit now helps consumers find new financial products with Credit Karma, and helps companies generate demand with Mailchimp. Consumer financial services and marketing services are both very crowded and competitive spaces, with many companies vying for a piece of the market. Intuit also continues to face fierce competition in its core tax preparation and business accounting products. In addition, answers may note that Intuit faces the ongoing challenge of making tax preparation, a highly complex endeavor, as user friendly as possible.

Answers may recommend that to address these challenges, Intuit should continue harnessing its strength of deeply understanding its customers and their needs. The company can continue to apply its market research capabilities to generate new innovations with its ―Customer Driven Innovation (CDI) and Design for Delight (D4D)‖ competencies. In addition, answers may suggest that Intuit continue to focus on further simplifying its customers’ financial lives, which could necessitate introducing additional easy-to-use, but powerful products and service that would reward consumers and save them time and money.

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

I.

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

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

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

B. Importance of Marketing Insights i.

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

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

Marketing Insight: guidance on how to leverage what customers think, feel, and do to generate new ideas for marketing.

C. Who Does Marketing Research? i.

Most companies use a combination of resources to study their industries competitors, audiences, and channel strategies. Large companies have their own marketing research departments, which often play crucial roles within the organization. ii.

Smaller companies use everyone to carry out marketing research, including customers,

II.

and they hire research firms or use affordable methods like: a. Government sources b. Using the internet c. Observing competitors d. Buying mailing lists e. Tapping into employee creativity and wisdom f. Libraries, universities, chambers of commerce iii.

Marketing research firms fall into three categories: a. Syndicated-service research firms b. Custom marketing research firms c. Specialty-line marketing research firms iv. AI and Marketing Research: AI is a valuable tool for marketing research.

The Marketing Research Process (See Fig. 5.1) A. Defining the Problem i. Do not define the problem too broadly or too narrowly. ii. Some research is exploratory—the goal is to identify the problem and to suggest possible solutions. iii. Some research is descriptive—it seeks to quantify demand. iv. Some research is causal—it tests a cause-and-effect relationship.

B. Developing the Research Plan i.

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

Discover what it will cost to execute the plan. iii.

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

Consider research approaches. a. Observational research b. Ethnographic research c. Focus group research d. Survey research e. Behavioral research v.

Research instruments include: a. Questionnaires (See Table 5.1)

o Closed-end questions specify all the possible answers, and the responses are easier to interpret and tabulate. o Open-end questions allow respondents to answer in their own words. b.

Qualitative measures

o o o o o c.

Word association Projective techniques Visualization Brand personification Laddering

Measurement devices

o Technology enables marketers to use skin sensors, brain wave scanners, and full-body scanners to get consumer responses.

C. Collecting the Information i. Most expensive and error-prone phase ii. Need to achieve consistency is one of the biggest obstacles iii. Choose a sampling plan a. Sampling unit: Whom should we survey? b. Sample size: How many people should we survey? c. Sampling procedure: How should we choose the respondents? iv. Contact methods a. Mail contacts b. Telephone contacts c. In-person contacts d. Online contacts

e. d.

Online research pros: inexpensive, expansive, fast, honest responses, versatile Online research cons: samples small, skewed, technological problems, screened out by spam filters, often ignored by consumers v. Data Mining: Through data mining, marketing statisticians can

extract from the mass of data useful information about individuals, trends, and segments. vi. Companies use data mining to: a. Identify prospects b. Decide which customers should receive a particular offer c. Deepen customer loyalty d. Reactivate customer purchases e. Avoid serious customer mistakes

D. Analyzing the Information and Making the Decision i. Extract findings by tabulating the data and developing summary measures. ii. Test hypotheses and theories, applying sensitivity analysis to test assumptions/strength of conclusions.

III. Measuring Market Demand

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

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

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

b. Survey of buyers’ intentions c. Composite of sales force opinions d. Expert opinion e. Past sales analysis f. Market-test method IV. Measuring Marketing Productivity A. Marketers employ a wide variety of measures to assess marketing effects.

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

a. Website analytics detail site navigation and online interaction. b. Social media presence shows demographic and geographic responses to social media channels across different markets. c. Permission marketing statistics measure interactions and engagement with consumers from automated e-mails. iii, Firms can split evaluation of marketing performance into two parts: shortterm results and long-term impact. iv. Companies also monitor an extensive set of internal metrics, such as innovation.

C. Marketing Dashboards

i. Management can assemble a summary set of relevant internal and external measures in a marketing dashboard for synthesis and interpretation: marketing dashboards are a ―concise set of interconnected performance drivers to be viewed in common throughout the organization.‖

ii. Company input to the marketing dashboard should include two key marketbased scorecards: one that reflects performance and one that provides possible early warning signals. iii. An effective dashboard will focus thinking, improve internal communications, and reveal where marketing investments are paying off and where they aren’t. iv. Common types of metrics included in marketing dashboards:

a. Customer metrics b. Unit metrics c. Cash-flow metrics d. Brand metrics v. Metrics can be reduced to a few key drivers, making it easier to track the performance of the company’s offerings. vi. Focusing on the wrong metrics can lead to overlooking opportunities and threats. vii. The choice of performance metrics must be an integral component of strategic planning.

CHAPTER

6

IDENTIFYING MARKET SEGMENTS AND TARGET CUSTOMERS

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

6.2 Define the key principles of strategic targeting.

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

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

6.5 Describe how to segment consumer markets.

6.6 Describe how to segment business markets.

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

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

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

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

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

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

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

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

OPENING THOUGHT The first challenges presented in this chapter are the concepts of market segmentation and the segmentation processes used by marketing firms.

Students may have difficulty understanding the various steps of the segmentation process as well as differentiating between target markets and

market positioning. The instructor is urged to use personal examples of target markets—the differences between the instructor’s age cohort or their parents’ cohort and that of his/her students—as examples in illustrating the different markets.

Second, the concepts of consumer characteristics and responses may be new to many students as it applies across different age groups and different consumers. Students who have little contact with other people outside their sphere of influence may have a hard time realizing that other consumers hold differing views and have different usages for products and services.

Some students will reject the notion that all consumers can be categorized.

If this idea arises, it would be a good opportunity to talk about microsegments and real-time marketing based on behavior/predictive analytics.

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

TEACHING STRATEGY AND CLASS ORGANIZATION PROJECTS 6. Students should turn in the market segmentation semester-long new product or service report.

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

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

about this target market and should draw a connection between what the information says and what is the potential for marketers. Hispanics will be the largest ethnic minority, comprising an estimated 29 percent of the population in 2050.

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

The firm Claritas, Inc. has developed a geoclustering system called PRIZM®.

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

Are there major differences? If major differences exist, what impact does this have on marketers’ developing marketing plans?

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

Effective segmentation criteria are necessary for target market identification.

Market segments must be measurable, substantial, accessible, differentiable, and actionable. However, not all segmentation schemes are useful. Students are to provide three examples of those products or services in which segmentation criteria are not necessary, and three examples where segmentation criteria are an absolute necessity.

Students are to exchange their findings and explain these differences.

END-OF-CHAPTER SUPPORT Marketing Spotlight: L’Oréal 1. Review L’Oréal’s brand portfolio. What are the different customer needs targeted by these brands?

Suggested answer: L’Oréal has a richly endowed portfolio of global brands that address the diverse needs of consumers the world over. Its brands are grouped into four divisions based on the profile of its target customers. Consumer Products produces about a third of sales and offers a wide range of competitively priced, mass-marketed haircare, makeup, and skin-care products made for consumers’ everyday beauty and hair needs. L’Oréal Luxe makes up about a third of sales and offers products to meet consumers’ perfume needs and upscale cosmetic and skin-

care needs. Dermatological Beauty contributes about 15 percent of sales and produces dermocosmetics developed and endorsed by health professionals that meet the skin care needs of normal to blemish-prone consumers. Professional Products, responsible for about 10 percent of sales, are primarily designed to meet the needs of hairdressers and skin-care professionals for use with their customers, although consumers are able to buy most of these products too. L’Oréal is the leader in beauty products around the world.

2. What is the key to L’Oréal’s new product launch successes?

Suggested answer: L’Oréal’s commitment to research & development-led innovation is one key to its new product launch success. L’Oréal invests over €1 billion annually in R&D. An example of research-driven innovation is its Metal Detox line of hair products, which the company developed after spending seven years conducting research with hairdressers all over the world to identify the cause of metal deposit buildup in hair, which oxidizes during hair coloring, leading to less reliable color. The company’s tests found that the new product enabled colorists to achieve a 100 percent reliable color result.

In addition, L’Oréal’s transition to being a ―digital-first‖ company has helped its new products succeed. One example is the company’s virtual hair and makeup try-ons, which use augmented reality to let consumers try different shades of lipstick or hair coloring using their phone camera. This technology can help consumers discover and assess new products to find the right one for them. More than 1 billion virtual try-ons have been completed by consumers. In addition, by 2020, more than 60 percent of the company’s media investment was digital. L’Oréal believes that target marketing is key to its success.

Influencer marketing was a key digital channel for the company that helped its new products succeed. Recognizing that beauty influencers held considerable sway and achieved significant reach with L’Oréal’s target consumers, the company built relationships with both major global influencers and local micro-influencers. The company empowers each of its brands to select influencer partners and executions that fit with the brand and target audience, which can vary by customer segment or country.

3. What’s next for L’Oréal? If you were its CEO, how would you sustain the company’s leadership position?

Suggested answer: Student answers may vary. Answers may recommend that to sustain its position as the leading beauty company, L’Oréal should continue to grow its considerable investments in R&D, technology and advertising. These investments enable it to introduce market-leading products and experiences, and to keep its portfolio of brands top-ofmind for consumers. Answers may also suggest the company continue to refine its brand portfolio to ensure it has broad and deep coverage of all the key consumer segments, identifying new segments as they emerge.

Finally, answers may highlight the importance of acquiring up-and-coming cosmetics businesses and incorporating them into the L’Oréal portfolio.

Marketing Spotlight: Toyota

1. Toyota has built a huge manufacturing company that can produce millions of cars each year for a wide variety of consumers. How has its manufacturing prowess helped it attract millions of customers?

Suggested answer: Toyota’s manufacturing prowess has enabled the company to become the world’s largest car manufacturer, known for quality, reliability and affordability. With its Toyota Production System (TPS), the firm is a master of lean manufacturing and continuous improvement, known as kaizen in Japan. Its plants can make as many as eight different models at the same time, affecting huge increases in productivity and market responsiveness.

Toyota has integrated its assembly plants around the world into a single giant network. The plants customize cars for local markets and shift production quickly to satisfy any surges in demand from markets worldwide. Its efficient and flexible manufacturing means the company can fill market niches as they emerge without building entirely new assembly operations. Toyota understood that each country defines perfection differently. The U.S. defines perfection as comfort and size.

In Europe perfection means attention to detail and brand heritage.

2. Has Toyota done the right thing by building a car brand for everyone? Why or why not?

Suggested answer: Yes, building a car brand for everyone was a key driver of Toyota becoming the world’s biggest car maker. The company’s long-term strategy of offering consumers choice with a broad range of models helped propel its growth. Toyota offers a ―full line in every market,‖ from family sedans and sport utility vehicles to trucks and minivans. In each of its vehicle categories, Toyota produces a broad range of models at many different price points, which enables it to appeal to the largest possible audience. To give customers even more choice, Toyota planned to ―significantly increase hybrid production and sales,‖ for example introducing a hybrid version of the Tacoma and making the 2025 Camry hybrid-only. It also planned to significantly increase its full EV lineup, with a goal to offer about 30 EV models by 2026.

3. What should the company do to maintain its position as the world’s largest car manufacturer over the next decade?

Suggested answer: Student answers may vary. Some answers may recommend that to maintain its leadership position, Toyota should use market research to stay close to how drivers’ needs and preferences evolve in the coming years, especially if they differ across countries and markets globally. This will help it align its vehicle portfolio with where consumer demand is heading. Answers may also suggest that Toyota continue to offer a broad range of options across gas-powered, hybrid and electric vehicles, to maintain its appeal to the broadest audience.

Students may also recommend that the company invest in R&D on the frontier of automotive technology, such as autonomous cars, to ensure it gets ahead of the next big innovations.

DETAILED CHAPTER OUTLINE Companies need to identify the market segments they can serve effectively.

To attract younger and high-end consumers, Gilette launched two new lines of products. To compete more effectively many companies embrace target marketing. Effective target marketing requires that marketers: 1. Identify and profile distinct groups of buyers who differ in their needs and wants (market segmentation).

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

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

I

Identifying Target Customers

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

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

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

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

B. Target Compatibility i. Target compatibility is a reflection of the company’s ability to outdo the competition in fulfilling the needs of target customers—in other words, to create superior customer value. ii. Essential resources for the success of a company’s targeting strategy include factors such as: a. Business infrastructure b. Access to scarce resources c. Skilled employees d. Technological expertise

e. Strong brands f. Collaborator networks iii. A core competency has three characteristics:

a. It is a source of competitive advantage and makes a significant contribution to perceived customer benefits. b. It has applications in a wide variety of markets. c. It is difficult for competitors to imitate.

C. Target Attractiveness i. Target attractiveness reflects the ability of a market segment to create

superior value for the company. ii. Monetary value consists of the capability of customers to engender profits for the company. Monetary value includes both the revenues a particular customer segment generates and the costs of serving these customers. iii. Strategic value refers to nonmonetary benefits that customers bring to the company. The three main types of strategic value are social value, scale value, and information value.

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

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

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

D. Bringing Target Segments to Life with Personas i. Personas are detailed profiles of one, or perhaps a few, hypothetical target consumers, imagined in terms of demographic, psychographic, geographic, or other descriptive attitudinal or behavioral information. ii. Characterizing the target segment with a representative individual makes it easier to visualize the company’s target customers and better understand how likely they are to respond to the company’s offering. iii. AI and Marketing: Segmentation and targeting describes how marketers are approaching this vitally important activity.

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

B. Targeting Multiple Segments

i. As markets become more fragmented, an increasing number of companies develop offerings targeting a greater number of smaller customer segments. ii. With product specialization, the firm sells a certain product to several different market segments. iii. With market specialization, on the other hand, the firm concentrates on assortment of products only to university laboratories. iv. Some companies make the mistake of not aligning the attributes of their offerings with the distinct value sought by target customers in each segment. v. Marketing Insight: Chasing the Long Tail describes some issues with multisegment targeting.

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

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

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

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

VI. Segmenting the Business Market A. Business markets are segmented with some of the same variables used in consumer markets: geography, benefits sought, and usage rate. i. Business marketers also use other variables: a. Demographic factors

b. Operating variables c. Purchasing approaches d. Situational factors e. Personal characteristics ii. Finding the sectors with the greatest growth prospects, most profitable customers, and most promising opportunities for the firm is crucial.

CHAPTER

7

LEARNING OBJECTIVES

CRAFTING A CUSTOMER VALUE PROPOSITION AND POSITIONING BRAND POSITIONING

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

7.2 Describe how a company chooses a frame of reference.

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

7.4 Convey how a company crafts a brand mantra.

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

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

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

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

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

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

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

7. Once marketers have designed an offering’s positioning strategy, they can craft a brand mantra in the form of a short three-to-five-word phrase to communicate this positioning to everyone in the organization and ensure that it guides their market actions.

8. Brand narratives complement a competitive brand positioning by providing stories and other accounts that can help consumers better understand and appreciate the positioning and full measure of the brand.

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

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

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

TEACHING STRATEGY AND CLASS ORGANIZATION PROJECTS 8. At this point in the semester, student projects should be completed to include their fictional product or service’s brand positioning. In relationship to the material contained in the chapter, students should have delineated and designed a differentiated brand positioning for their project.

9. Students are to devise a positioning and differentiation strategy for their own local PBS system (radio or television). Students should arrange to meet with local PBS management to elicit information on what challenges their local station/s is/are having in increasing their viewership/listeners. In what stage of the product’s life cycle (PBS is

the product) does your local station fall? What level of competitive advantage, if any, commensurate with the position in the life cycle, does your local PBS station(s) command? What can be done to reverse or continue these trends?

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

Most campus communities have their own radio and/or television broadcasting station. If one is present on your campus, students are to define the college or university’s station in terms of positioning and differentiation strategy. What stage in the product’s life cycle is the station? What can be done to reposition the station to attract more viewership? What is the competitive advantage present in their operations?

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

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

Points of difference and points of parity are two important concepts of brand development and are driven by two differing strategies—inclusion and differentiation. Students should devise a list of at least five other products/services that they believe demonstrate points of difference and points of parity in their brand positioning. Students must include their reasoning behind the inclusion of these products/services into a category.

Good responses will present ―proof‖ of the correct selection by including advertising copy supporting the product or service’s POD or POP. Styles, fashions, and fads fall into special categories when talking about product life cycles. Some may have a product life cycle measured in weeks, others in months, and yet others in years. Ask the students to list the current fads, fashions, and styles prevalent around campus today. Do any of these fashions, styles, or fads meet or satisfy a strong need? If so, can they predict the length of the life cycle of the ones that satisfy a strong need? Which of the fashions, styles, or fads do the students predict will have longevity? Why or why not?

END-OF-CHAPTER SUPPORT Marketing Spotlight: LinkedIn 1. How has LinkedIn’s positioning evolved through the years? How can the company sustain a distinctive positioning as it expands beyond 1 billion members?

Suggested answer: While LinkedIn has always been positioned at its core as a platform for professionals, the positioning of what it can do for professionals has evolved significantly over the years. LinkedIn started as an almost purely networking site, where members could put their professional identity online and build their professional network. To drive ongoing engagement, the company sought to also position itself as a source of highquality professional content, not merely a networking site.

Before long, the LinkedIn feed featured a wealth of original content, and by 2015, the company exceeded one million members publishing articles on LinkedIn. The company expanded its professional positioning by building paid products for individuals and business buyers. Its LinkedIn Premium offering helped individual members get more out of the platform. The company built a suite of paid products to create value for business buyers, including marketers, sales professionals, and talent development teams. Then as LinkedIn approached its third decade as a company, it continued to expand the definition of ―professional‖ to appeal to an even broader set of members. In 2022, it launched a campaign called ―Welcome Professionals‖ centered on the fact that ―what it means to be professional is being redefined.‖ To sustain a distinctive positioning as it expands beyond 1 billion members, LinkedIn should focus on preserving its identity as the largest professional platform. Its professional focus is LinkedIn’s biggest differentiator from other social platforms. As it broadens the definition of professional, and introduces experiences like in-feed puzzle games to its product, it introduces the risk of diluting this key differentiator. LinkedIn should also further reinforce its distinctive positioning with business customers by building additional ways for them to get value from the platform. For example, the company could share data with customers in new ways, give them new tools to reach members, or add new products targeting new buyer personas.

2. Why have so many members and business customers embraced LinkedIn? What brand attributes do they value?

Suggested answer: Initially, members embraced LinkedIn primarily because it gave them a place to publish their professional identity online and build their professional network. Today, an active member could publish their own thought leadership content, start a newsletter, record and share original videos directly from their phone, read news digests on the day’s top stories, take online courses to build their skills, follow influential business leaders, or attend a livestreaming event. Business customers turned to LinkedIn to help accomplish a broad spectrum of their core business needs, using the platform to hire, learn, sell and advertise. LinkedIn increased the number and breadth of

job listings it featured.

Both members and business customers value the fact that LinkedIn is the world’s largest professional network, with over 1 billion members in more than 200 countries. Both audiences value the following attributes of LinkedIn: its professional context—which ensures quality content and discourse; the professional opportunities it enables for its members; and its global scale.

Premium members can use AI tools to help them polish their profile, get advice, and draft messages.

3. What are the advantages and limitations of LinkedIn’s focus on positioning itself as a professional platform? Should the company expand that focus, or maintain it?

Suggested answer: There is a strong argument for LinkedIn to maintain its focus as a professional platform. This positioning is a key differentiator compared with other social networks where people spend time. While LinkedIn can and should continue to evolve how it defines ―professional,‖ it risks diluting that essential differentiator if it expands too far beyond its professional positioning. One challenge LinkedIn had was getting members to stay engaged on the platform when they weren’t actively job searching or networking.

In addition to differentiation, other advantages to LinkedIn of its professional positioning are enabling focus in its strategy and investments, helping it avoid the toxic or polarizing discourse that other platforms have experienced, and supporting price premiums for its paid products to members and business customer.

Limitations of the professional positioning include the fact that it limits the total size of LinkedIn’s membership; has historically led to lower frequency and depth of engagement compared with other social platforms; limits the amount of B2C advertising budgets LinkedIn can attract; and constrains the universe of product expansions to drive engagement. Even with these limitations, the advantages are significant enough that LinkedIn should maintain its focus as a professional platform.

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

Suggested answer: Warby Parker’s founders believed that there was significant opportunity to sell designer-quality glasses via the internet at a much lower prices. The value proposition consists of the whole cluster of benefits the company promises to deliver.

The benefits Warby Parker delivers include designer glasses with appealing styles at an affordable price, tech-enabled virtual try-ons and fittings, easy online ordering and free shipping, athome trial of up to five pairs of glasses at no additional cost, a generous 30-day return policy, and its ―buy a pair, give a

pair‖ social program. More recently, the company added other benefits including retail stores for in-person product shopping and fitting, and eye exams at select stores and affordable contact lenses to address even more of its customer eye care needs.

This value proposition will likely be challenging to sustain in a differentiated way. Today, Warby Parker is unique in offering the combined set of benefits of its value proposition. However, the world’s largest vision company, EssilorLuxottica, is a vertically integrated giant whose various portfolio companies collectively offer many of the same benefits. For example, with its EyeBuyDirect brand, it already emulates much of Warby Parker’s business model of selling affordable designer glasses online. If EssilorLuxottica wished to create a new brand to even more closely mirror Warby Parker’s model, it could probably do so.

2. What is Warby Parker’s positioning relative to its competitors?

Suggested answer: Warby Parker was able to set low prices by vertically integrating company operations. Today, Warby Parker’s core positioning of affordable designer glasses offered online and via retail is unique relative to competitors. Other online eyewear companies like Zenni and EyeBuyDirect have started to build points of parity with Warby Parker by adding affordable designer styles to their historical inventory of bargain-priced eyewear. Compared with these companies, Warby Parker’s points of difference are its retail stores, eye exams, and its social responsibility programs.

Compared with optical shops, Warby Parker has started to build the point of parity of having retail locations and offering eye exams. Warby Parker’s points of difference are offering comparable designer styles that are much more affordable, the selection and convenience of e-commerce, as well as its social responsibility programs.

3. What role does direct-to-consumer distribution play in Warby Parker’s business model? What are the pros and cons of Warby Parker opening eyewear retail stores?

Suggested answer: Direct-to-consumer distribution is integral to Warby Parker’s business model. By removing the middleman and vertically integrating, the company’s direct-to-consumer approach enables it to offer designer glasses at very affordable prices starting at $95, compared with the $500 designer glasses can cost at a traditional optical shop. In addition, the direct-toconsumer model enables Warby Parker to own the relationship with the customer and control the experience end-to-end, whether the customer buys online or at a Warby Parker store. The company’s use of pre-made lenses, instead of ―surfaced‖ lenses that needed to be customer crafted for each order, reduced costs dramatically.

The pros of having retail stores include the ability to be a onestop shop for customers under one roof for eye exams, glasses purchases and fittings, and contact lenses. Being a one-stop shop gives Warby Parker opportunities to expand its relationships with customers. The stores also ―serve as billboards and act as efficient customer acquisition vehicles,‖ as co-founder and coCEO Dave Gilboa noted. In fact, Warby Parker has found that when it opens a new store, online sales in the area ―roughly triple.‖ The cons of having retail stores include exposure to the cyclical economic nature of retail and challenges with urban retail in the wake of the pandemic; added costs to lease, operate and staff retail locations; and added complexity to Warby Parker’s business. Since the company has more than 200 retail stores and has long-term plans for up to 900 stores in the US, it has clearly decided that the pros outweigh the cons. Warby Parker has also demonstrated that for-profit companies can sustainably address social challenges while creating a successful business.

DETAILED CHAPTER OUTLINE

Opening vignette: The strategic investment in developing customer-centric offerings, the competitive positioning of its brand, and the merger with Sprint, enabled T-Mobile to become the third largest wireless carrier in the United States, with over 118 million customers. As the success of T-Mobile demonstrates, a company can reap the benefits of carving out a unique position in the marketplace. The company continues to push forward with the integration of Mint Mobile, a discount wireless phone service, and the continued rollout of 5G features and applications, the latest generation of mobile wireless technology. Creating a compelling, well-differentiated brand position requires a keen understanding of consumer needs and wants, company capabilities, and competitive actions. It also requires disciplined but creative thinking. In this chapter, we outline a process by which marketers can discover the most powerful brand positioning.

I. Develop a Value Proposition and Positioning A. Developing a Value Proposition i. Depending on the needs of customers, an offering can create value across three domains: functional, psychological, and monetary. ii. Customer value analysis suggests that the seller must assess the total customer benefit and total customer cost associated with each competitor’s offer in order to know how its own offer rates in the buyer’s mind. The customer value proposition is based on the difference between benefits a customer gets and the costs for different choices. iii. Often, managers conduct a customer value analysis to reveal the company’s strengths and weaknesses relative to those of various competitors.

The steps in this analysis are: a. Identify the relevant attributes and benefits that customers value. b. Assess the relative importance of these attributes and benefits.

c. Assess the company’s and competitors’ performance on the key attributes/benefits. d. Monitor customer value over time.

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

C. Crafting a Positioning Statement i. A positioning statement clearly articulates the offering’s target customers and the key benefit that will provide customers with a reason to choose the company’s offering.

ii. An important question in developing a positioning statement is deciding whether to promote the specific attributes describing a company’s offering or to focus on the ultimate benefits delivered by these attributes. iii. Multiple attributes may support a certain benefit, and they may change over time.

II. Choosing a Frame of Reference A. A frame of reference can serve as a benchmark against which customers can evaluate the benefits of a company’s offering. i. A good starting point in defining a competitive frame of reference for brand positioning is category membership—the products or sets of products with which a brand competes and that function as close substitutes. ii. Actual and potential competitors may not be obvious, and broad competitive frames can result in advantageous comparisons.

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

C. Aligning the Frame of Reference, Points of Parity, and Points of Difference

i. It is not uncommon for a brand to identify more than one actual or potential competitive frame of reference if competition widens or the firm plans to expand into new categories. ii. If competition is too diverse, however, it may be necessary to prioritize competitors and then choose the most important set of competitors to serve as the competitive frame. iii. Straddle positions allow brands to expand their market coverage and potential customer base.

iv. Often a good positioning will have several PODs and POPs. v. Perceptual maps are visual representations of consumer perceptions and preferences. They provide quantitative pictures of market situations and the way consumers view different products, services, and brands along various dimensions.

vi. By overlaying consumer preferences with brand perceptions, marketers can reveal ―holes‖ or ―openings‖ that suggest unmet consumer needs and marketing opportunities.

IV.

Crafting a Brand Mantra (See Fig. 7.1)

A. A brand mantra is a three-to-five word articulation of the heart and soul of the brand. i. The purpose is to guide the actions of all employees within the organization, and of all external marketing partners, by ensuring that they understand what the brand should represent to consumers. ii. Brand mantras are powerful devices. iii. Brand mantras are designed with internal purposes in mind. iv. Brand mantras should inspire.

.

V.

Communicating the Offer’s Positioning

A. Marketers need to communicate the brand positioning it internally to employees and key marketing partners and externally to consumers and other constituents. i. Marketing Insight: Constructing a Brand Positioning Bullseye gives an example of a schematic that provides a concise summary of the positioning strategy that can be a helpful communication tool.

B. Communicating Category Membership i. Sometimes consumers may know the category membership but not be convinced that the brand is a valid member of the category.

ii. The typical approach to positioning is to inform consumers of a brand’s membership before stating its point of difference. iii. Three main ways to convey a brand’s category membership are: a. Announcing category benefits b. Comparing to exemplars c. Relying on the product descriptor C. Communicating Conflicting Benefits i. One common challenge in positioning is that many of the benefits that make up points of parity and points of difference are negatively correlated. ii. Individual attributes and benefits often have positive and negative aspects (e.g., La-Z-Boy recliners’ brand heritage could suggest experience, wisdom, and expertise or it could also imply being old-fashioned). iii. The challenge is that consumers typically want to maximize both of the

negatively correlated attributes or benefits.

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

CHAPTER

8

LEARNING OBJECTIVES

DESIGNING AND MANAGING PRODUCTS SSTRATEGY

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

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

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

8.4 Describe the key decisions involved in managing product packaging.

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

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

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

3. Product design—the way a product looks, feels, and functions—offers a potent way to differentiate and position a company’s products and services. Design is not just a phase in creating a product, service, or application. It’s a way of thinking that permeates all aspects of the marketing program so that all design aspects work together. Design offers

functional and aesthetic benefits and influences both the rational and emotional aspects of consumers’ decision making.

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

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

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

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

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

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

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

OPENING THOUGHT Students will be familiar with the ―idea‖ of a tangible product—the physical manifestation—a cell phone or a pair of favorite jeans or shoes.

However, students may have trouble understanding the ―totality‖ of the product physically demonstrated—the core benefit, the basic product, expected product, augmented, and potential product. The instructor is encouraged to use the class period to allow the students to try to uncover or explore these additional components of the ―product‖ concept so that the students will begin to understand these dimensions better.

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

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

Finally, the labeling of a product includes both advertising copy and governmental regulations. This will be new material for many students.

TEACHING STRATEGY AND CLASS ORGANIZATION PROJECTS 10.

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

11.

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

ASSIGNMENTS Convenience items and capital good items can be seen as two ends of the ―product continuum.‖ Convenience items are purchased frequently, immediately, and with minimum effort. Capital goods are those items that last a long period of time and are purchased infrequently by consumers.

Students should select a convenience good and a capital good of their choice and compare and contrast the consumers’ value hierarchy and users’ total consumption system for each item using the concepts presented in this chapter.

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

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

Product differentiation is essential to the branding process. In choosing to differentiate a product, a marketer has the choice of form, features, performance quality, conformance quality, durability, reliability, repairability, and style. Collect examples of currently produced products that have been differentiated and branded for each of these design parameters.

END-OF-CHAPTER SUPPORT

Marketing Spotlight: Apple

1. What are the key factors contributing to Apple’s phenomenal growth?

Suggested answer: Apple’s phenomenal growth has been driven primarily by its exceptional research and development capabilities combined with its world-class branding and advertising. These factors together fueled demand for its products and supported its price premium, enabling it to become the largest consumer technology company in the world.

Apple has always invested in research and development to create innovative new products. Apple spent over $25 billion on research and development in 2022. The company’s first major success—the Apple II personal computer, launched in 1977—revolutionized the computer industry with the introduction of the first-ever color graphics. In 1984 it released the Macintosh personal computer, which was one of the first mass-produced computers to use a graphical user interface (GUI). Apple subsequently has transformed the way people listen to music, play video games, connect with each other, and interact with their devices. Apple’s revolutionary product innovations, which include the iPod, iMac, iPhone, iPad, and Apple Watch, are the reason why the company topped Fortune magazine’s World’s Most Admired Companies list for many years.

Apple has also always paired its innovative products with strong branding and advertising. Its product launch events are high-production affairs that draw significant interest from analysts, journalists, developers and consumers. Its highly creative campaigns use a mix of online media, like online video and paid social, and offline media, including high profile billboards, print ads in top magazine titles, and TV ad buys alongside premium content. By combining its product innovation and branding prowess, Apple has earned the distinction of being consistently ranked the world's most valuable brand. Creating, producing, and launching new products is a top priority for Apple.

2. What does the Apple brand stand for today? What are its key associations? What product and service meaning does it have?

Suggested answer: Today, the Apple brand’s key associations include innovation, creativity, premium quality, and intuitive design. In addition to these associations, consumers also associate Apple with devices that work seamlessly together, and many also probably think of the company’s products as expensive. The iPhone, Apple’s biggest-selling product for years, is the product people most associate with the brand, and effectively all the company’s products have meaning that reflects and supports these key associations.

As an example, the Vision Pro mixed reality headset that launched in 2024 has a product meaning aligned to the associations of innovation, creativity, premium quality, and intuitive design. Reviewers applauded the headset for technical innovations like ―passthrough‖ mode, which enables an immersive experience on the screen while still rendering the room a user is in so they can move about it. But many reviewers wondered if the $3,500 price point would be too great a barrier to adoption. To help generate more predictable recurring revenue, Apple diversified its revenue streams with services, many of which could be sold via a subscription model.

Apple has a diverse range of services, including cloud storage, content streaming subscriptions, video games, App store fees, device support, advertising, so the service meaning depends on the category. Many of the services, for example Apple News+ and Cloud Storage, do not carry prominently the associations of innovation, creativity and premium quality, though they are designed to work seamlessly with Apple devices.

It will be interesting to see over time what brand effect Apple’s Services businesses have on the overall Apple brand.

3. How important were the iPod and iPhone in shaping Apple’s success? Discuss the significance of the iPad and Apple Watch launches to Apple’s new product development strategy.

Suggested answer: iPod and iPhone were instrumental in shaping Apple’s success. The iPod revolutionized the portable music category. Not only did the iPod become a cultural phenomenon, but it also introduced many consumers to Apple and initiated a series of monumental product innovations. The iPod exemplified Apple’s leading-edge design skills and looked, felt, and operated like no other device. To the delight of Apple (and the chagrin of competitor Sony), the iPod became ―the Walkman of the 21st century.‖ Apple’s success with the iPod helped the company to develop its next category-defining product, the iPhone. The iPhone set a completely new standard for the smartphone category with its touch-screen interface, virtual keyboard, iOS operating system, plus internet, e-mail and music player capabilities. The company has sold more than 2.3 billion iPhones, generating more than a trillion dollars in revenue and hundreds of billions in profit. The success of the iPhone is credited for adding trillions of dollars to the company's market capitalization. One analyst stated in 2019, ―Unquestionably, it’s the most impactful consumer tech product over the past decade.‖ The iPad and Apple Watch didn’t match the iPhone in terms of popularity, but they were still massive sellers. In addition, they demonstrated that Apple could build on its innovation and bring the technology underlying its smartphone to more categories. The iPad combined the look and feel of the iPhone with the power of a MacBook and gave consumers access to music, books, movies, pictures, video games, documents, and hundreds of thousands of applications at the touch of a finger, without a mouse or keyboard. Apple has sold more than 500 million iPads since launch, totaling more than $300 billion in sales. The Apple Watch ultimately became one of Apple’s fastest growing product categories, selling over 30 million units in 2019. The iPad and Apple Watch show why creating, producing, and launching new products remains a top priority for Apple.

Apple spent over $25 billion on research and development in 2022 and continues to increase its R&D budget in order to stay ahead of the competition.

Marketing Spotlight: Cisco 1. How did Cisco's management of its product portfolio contribute to its success?

Suggested answer: Over four decades, Cisco has shaped and expanded its product portfolio to build one of the world’s biggest technology companies. In its first decade, the company grew exponentially, building

a suite of routers, switches, platforms, and modems that significantly contributed to the backbone of the Internet. During the 1990s, Cisco acquired and successfully integrated 49 companies into its core business, growing its market capitalization faster than that of any company in history—from $1 billion in 1991 to $300 billion in 1999.

After refocusing on its B2B businesses in the 2010s, Cisco continued to expand its product portfolio beyond its original core networking hardware lineup of routers and switches. It deepened its collaboration offerings and made a significant push with products and services to securely connect the ―Internet of Things‖ and the digitizing and interconnecting the billions of physical objects in the world, like appliances, warehouse inventory, vehicles, or medical devices.

The company also expanded its product portfolio through acquisition. In the ten years between 2013 and 2023, the company acquired 80 companies.

The numerous acquisitions enabled Cisco to offer more value to customers via a broader and deeper product portfolio, which helped maintain its differentiation from competitors.

In 2021, Cisco redefined its product categories to ―align its categories more closely with customer needs.‖ The company shifted from grouping its products into three categories—infrastructure platforms, applications and security—to six that better reflected the breadth of its portfolio.

The company has consistently been able to drive demand for its wide range of products, and revenues topped $57 billion in 2023. Cisco acquired Splunk in 2024, a data analytics and cybersecurity company that leverages AI to generate predictive insights and enable non-technical people to use the product.

2. Why was Cisco's expansion into consumer products unsuccessful?

Suggested answer: In 2003, Cisco expanded beyond its core networking solutions for businesses and entered the consumer segment with the acquisition of Linksys, a home and small-office network gear maker.

Within a year, Cisco offered several home entertainment solutions, including wireless capabilities for music, printing, and video. After about a decade, however, Cisco exited the consumer market to focus on its core B2B businesses, which had higher revenues and higher margins.

Analysts reasoned Cisco's exit from the consumer market may have also been due to challenging nature of the consumer electronics business, which is driven by trends and subject to rapid shifts in consumer tastes. The consumer exit may also have been due to the challenge of expanding the brand to appeal to both consumers and business audiences.

Cisco launched a rebranding campaign in 2006 called ―The Human Network‖ that tried to reposition the technology giant as more than just a supplier of switches and routers. The campaign targeted everyone from consumers to IT professionals. Those audiences have very different technology needs, which makes it difficult to target them with a unified message.

3. How could Cisco expand its product portfolio over the next five years to deliver more growth?

Suggested answer: Student answers may vary. Answers may highlight the opportunity for Cisco to expand on its current AI footprint to develop a

leadership position in AI, creating networking solutions for AI systems and potentially even AI chips. Answers may also note that Cisco can further expand its position as a leader in data security, given the continued importance of security for business buyers. Answers can also touch on opportunities to further expand into cloud computing and to develop more products to enable virtual collaboration. Cisco’s strong position in 2023 is summed up in the letter to the shareholders: ―Our long-established leadership in networking, the breadth of our portfolio, the trust we’ve build with our customers and partners and our collective commitment to innovation and to our purpose give great confidence in our future and our ability to capture the many opportunities ahead

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

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

I. Product Differentiation A. To successfully compete in the market, products must be differentiated. i. Attributes on the basis of which to differentiate include: a. Core functionality b. Features c. Performance quality d. Conformance quality e. Durability f. Reliability g. Form h. Style i. Customization II. Product Design A. Design is the totality of features that affect the way consumers perceive a product’s look, feel, and function. i. Design offers functional and aesthetic benefits and appeals to both our rational and emotional sides.

B. Power of Design i. In a visually oriented culture, transmitting brand meaning and positioning through design is critical. ii. Design can shift consumer perception to make brand experiences more rewarding.

C. Approaches to Design. A well-designed product is easy to manufacture and distribute.

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

ideation, and implementation.

III. Product Portfolios and Product Lines A. Product Portfolio Design i. A product portfolio encompasses all products offered by a company, including various product categories and product lines. ii. A company’s product portfolio has a certain width, length, depth, and consistency. See Fig. 8.1.

B. Product Line Analysis i. A product line is a group of related products sold by the same company. ii. Companies develop a basic platform and modules that can be added to meet different customer requirements and lower production costs. iii. A company’s product line typically contains product that appeal to different layers of customer needs.

iv. Marketing Insight: When Less is More. Increasingly, consumers are growing weary of dense product lines, overextended brands, and feature-laden products.

C. Product Line Length i. Company objectives influence product line length—the total number of items in the product line. ii. A company lengthens its product line in two ways: line stretching and line filling. iii. Line Stretching occurs when a company lengthens its product line beyond its current range, whether down-market, up-market, or both ways. a. Down-Market Stretch: A company positioned in the middle market may want to introduce a lower-priced line for any of three reasons: o The company may notice strong growth opportunities. o The company may wish to tie up lower-end competitors who might otherwise try to move up-market. o The company may find the middle market stagnating or declining. b. Marketers face a number of naming choices in deciding to move a brand downmarket. o Use the parent brand name on all its offerings. o Introduce lower-priced offerings using a sub-brand name. o Introduce the lower-priced offerings under a different name (expensive to implement and means brand equity will have to be built from scratch, but the equity of the parent brand name is protected). c. Risks associated with down-market stretching: o Not pricing low enough o Cannibalizing sales o Consumers not understanding how different offerings are compartmentalized, differences between them d. Up-market stretch: enter the high end of the market to achieve more growth, realize higher margins, or simply position themselves as full-line manufacturers. o Some companies use their own names o Some companies create new names o Some brands have used modifiers to signal a quality improvement e. Two-way stretch: companies serving the middle market might stretch their line in both directions. iv. Line filling: lengthening the product line by adding more items within the present range; overdone if it results in cannibalization and confusion.

IV. Managing Packaging and Labeling

A. Packaging i. Includes all the activities of designing and producing the container for a product. ii. Packaging is important because it is the buyer’s first encounter with the product. a. Draws the consumer in and encourages product choice b. Acts as a “five-second commercial” for the product c. Affects consumers’ later product experiences when they open it and use what’s inside d. Packaging may be an important part of a brand’s equity iii. Several factors contribute to the growing use of packaging as a marketing tool. a.

b.

Self-service (more choices; less explanation) Consumer affluence (increases willingness to pay for the convenience, appearance, dependability,

and prestige of better packages) c. Company and brand image (recognition of the company or brand) d. Innovation opportunity (make products more convenient and easier to use) iv. Packaging must achieve a number of objectives. a. Identify the brand. b. Convey descriptive and persuasive information. c. Facilitate product transportation and protection. d. Assist at-home storage. e. Aid product consumption. v. Packaging color is important because color carries different meanings in different cultures and market segments. vi. Packaging updates and redesigns can occur frequently to keep the brand contemporary, relevant, or practical. vii. After the company designs its packaging, it must test it. viii. Addressing growing environmental concerns has become an important element in developing effective packaging.

B. Labeling i. A label performs several functions. ii. It identifies the product or brand. iii. The label might describe the product: who made it, where and when, what it contains, how it is to be used, and how to use it safely. iv. The label might promote the product through attractive graphics. v. In 1914, the Federal Trade Commission Act held that false, misleading, or deceptive labels or packages constitute unfair competition. vi. The Fair Packaging and Labeling Act, passed by Congress in 1967, set mandatory labeling requirements, encouraged voluntary industry packaging standards, and allowed federal agencies to set packaging regulations in specific industries. vii. The Food and Drug Administration (FDA) has required processed-food producers to include nutritional labeling that clearly states the amounts of protein, fat, carbohydrates, and calories contained in products, as well as vitamin and mineral content as a percentage of the recommended daily allowance. viii. The FDA has also taken action against potentially misleading uses of such descriptions as “light,” and “low fat.”

V. Managing Guarantees and Warranties A. A guarantee ensures that if a product fails to function as promised by the company or as customers expect, the company will provide some type of compensation to

the purchaser.

i. Many sellers offer either general or specific guarantees. ii. A company can provide customers with an overall satisfaction guarantee that applies to any facet of the product experience, whether it involves the actual quality of the product or the customer’s assessment of product quality.

iii. A company might provide a specific attribute guarantee that applies to a particular aspect of the product, such as performance, reliability, or durability.

B. Warranties provide customers and the company with much the same benefits as guarantees do. i. Warranties and guarantees differ on two key dimensions. a. Warranties usually cover the repair or replacement of the purchased item. b. Warranties usually do not allow the customer to return the product for a refund, which is the case with guarantees. c. Guarantees are free of charge. ii. Extended warranties and service contracts can be extremely lucrative for manufacturers and retailers . iii. Effective product guarantees and warranties should have three traits:

a. Relevant b. Easily understood c. Easy for the customer to invoke

CHAPTER

9

DESIGNING AND MANAGING SERVICES

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

9.2 Explain the new realities that service firms face.

9.3 Identify the key strategies to achieve service excellence.

9.4 Explain how service firms can manage quality effectively.

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

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

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

4. The marketing of services faces new realities in the 21st century because of customer empowerment, customer coproduction, and the need to satisfy employees as well as

customers. The digital era has clearly altered customer relationships. Customers do not merely purchase and use a service; they play an active role in its delivery.

5. Achieving excellence in service marketing calls not only for external marketing, but also for internal marketing. External marketing is the normal work of preparing, pricing, distributing, and promoting the service to customers. Internal marketing consists of training and motivating employees to serve customers well.

6. Well-managed service companies that achieve marketing excellence have in common a focus on customercentricity, a commitment to service quality, and the aim of catering to high-value customers, and the implementation of strategies for managing customer complaints.

7. Service differentiation through primary and secondary service features and continual motivation is a crucial component of a company’s marketing success. The main service differentiators are ease of ordering; speed and timing of delivery; installation, training, and consulting; maintenance and repair; and returns.

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

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

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

Students may have some difficulty in conceptualizing the service dimensions of reliability, responsiveness, assurance, empathy, and tangibles as part of the service marketing dimensions. The instructor is encouraged to use multiple examples of excellent service companies, guest speakers, and personal or student real-life examples to illustrate the challenges facing the marketing of services to the public.

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

TEACHING STRATEGY AND CLASS ORGANIZATION PROJECTS 12.

At this point in the semester-long project, those students who have selected a ―service‖ idea for the marketing plan must submit their offering. Students whose project is a ―product-based‖ component do not have anything to submit for this chapter.

13.

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

ASSIGNMENTS The Mayo Clinic has been built as one of the most powerful services brands on its firmly held belief in and focus on the experience of the patient. As one staff member explained, ―People don’t come to the hospital alone.‖ In small groups, students should review their local hospitals (especially the one on campus) to see if their local hospital adheres to the tenants of a good service provider. A starting point is an examination of the hospital’s mission statement, beliefs, and patient rights policies (if available).

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

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

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

END-OF-CHAPTER SUPPORT

Marketing Spotlight: The Ritz-Carlton 1. How does Ritz-Carlton manage to sustain high levels of service over time? What are the key drivers of its success?

Suggested answer: Ritz-Carlton combines several factors including company culture, strategy, employee training and technology to maintain high levels of service over time. The customer service experience is defined by The Ritz-Carlton’s Gold Standards, which reflect the values and philosophy by which The Ritz-Carlton operates. The Gold Standards can best be described by the company credo, which begins: ―The RitzCarlton is a place where the genuine care and comfort of our guests is our highest mission.‖ In addition to the credo, the Gold Standards include the company motto, ―Ladies and gentlemen serving ladies and gentlemen.‖ The company provides extensive training to its team members, so they can always strive to anticipate customer needs and exceed expectations. New hires work with learning coaches who train and certify them in their first 21 days on the Gold Standards and everything else it takes to be successful in their jobs. Every new employee receives 250 hours of training in their first year, and is required to renew their certification annually, a process that involves another 100 hours of training coursework.

Employees are fully empowered to provide unique and personalized service. Employees are encouraged to make guests happy using any means, without having to consult a supervisor first. Every employee is allowed to spend up to $2,000 per day per guest to solve customer problems or make their experience memorable.

To constantly improve its customer-service practices, Ritz-Carlton gathers a massive amount of data on hotel operations, services, employee behavior, and general feedback, which it used to create a customer management system called CLASS (Customer Loyalty Anticipation Satisfaction System) that enables the ―The Ritz-Carlton Mystique.‖ These data on specific aspects of guest behavior enable Ritz-Carlton to craft personalized experiences prior to guests’ arrival at its locations across the globe. Employees take note of guests’ preferences such as temperature settings, food and drink choices, room arrangement, and amenity selection.

The unwavering dedication to perfecting the customer experience has made The Ritz-Carlton a symbol of customer-service excellence. In return, The Ritz-Carlton enjoys lasting customer loyalty, with the average Ritz customer spending more than $250,000 in the course of a lifetime. The company created The Ritz-Carlton Leadership Center, an advisory, consulting, and executive education unit.

2. What are the benefits and costs of creating “Wow!” customer service experiences?

Suggested answer: The benefits of creating exceptional customer service experiences start with the fact that they surprise and delight the guests, who are then even more likely to reward Ritz-Carlton with their loyalty. Delighted guests are also likely to share their experience with friends, generating positive word-of-mouth. As these stories are shared broadly, they add to the brand’s reputation and contribute to new

customers booking with Ritz-Carlton. In addition, stories of ―Wow!‖ customer service experiences, together with the employee allowance to spend up to $2,000 per day per guest, illustrate to Ritz-Carlton employees that each of them has the power to ―wow‖ a guest.

The costs of creating ―Wow!‖ customer service experiences are significant. First, there is the $2,000 per day per guest allowance.

There’s also the ongoing employee training costs and the technology costs of maintaining its customer management system. Ritz-Carlton has determined that the benefits outweigh the costs, and its exceptional customer loyalty and financial performance support this decision. When a guest had ripped his pants at the airport and had to attend a business meeting, the agent at The Ritz-Carleton, Shanghai headed to a shopping area and found and purchased a pair of pants that matched the original pair almost exactly.

3. What is the biggest challenge going forward for Ritz-Carlton?

Suggested answer: Student answers may vary. Answers may reason that perhaps the biggest challenge for Ritz-Carlton is competition from luxury hotel brands with comparable customer service. There are many established and newer luxury hotel groups, many of which focus on delivering exceptional customer service. Answers may note that RitzCarlton responded to competition from boutique luxury hotels by creating the Ritz-Carlton Reserve sub-brand. Reserve offers seven smaller, more intimate hotels designed to reflect the unique character of the local community where they're located. The company also developed the RitzCarlton Yacht collection as a seaborne way to experience the brand's legendary combination of luxury and service. Answers may note that so far, Ritz-Carlton's customer loyalty and revenue growth reflect strong demand for the brand and its exceptional levels of service. Still, students may highlight that travelers have a plethora of choices in the luxury hotel segment, making competition the biggest challenge for RitzCarlton.

Marketing Spotlight: Mayo Clinic 1. What makes Mayo Clinic exceptional at serving patients? What value does Mayo Clinic create for patients?

Suggested answer: One of the main reasons Mayo Clinic is exceptional at serving patients is because it takes a different approach from many clinics and hospitals and places unwavering focus on the patient experience. This focus is reflected in Mayo’s primary institutional value: ―The needs of the patient come first.‖ The three shields of Mayo Clinic's logo represent the three dimensions of its unique patientcentered model: clinical practice, research and education. These three dimensions align to Mayo Clinic's purpose: ―Heal the sick, advance the science, share the knowledge.‖ Every aspect of the patient’s experience is considered at Mayo Clinic’s three campuses. From the moment patients walk into one of Mayo Clinic’s facilities, they experience an entirely different model of care. It all starts with Mayo Clinic’s greeters, who welcome new patients into the

building and walk them through the administrative process. Returning patients are greeted warmly by name. The buildings and facilities themselves are designed and built with the needs of patients in mind. To come up with innovative healthcare ideas, Mayo Clinic observes patients, interviews families, conducts research, and tests and models possible solutions.

The other significant difference in serving patients is Mayo Clinic’s core value of teamwork, defined by the organization as ―blending the skills of individual staff members in unsurpassed collaboration.‖ At the time of arrival, the patient’s team is assembled; it can be composed of any blend of medical professionals, including the primary physician, surgeons, oncologists, radiologists, nurses, residents, or other specialists with the appropriate skill, experience, and knowledge. Teams of medical professionals work together to diagnose each patient’s medical problems. This process can involve extensive analysis and debate of test results in order to determine the most accurate diagnosis and most effective treatments. Throughout the process, patients are encouraged to take part in the discussion.

Mayo Clinic’s approach creates value for patients, including helping them be comfortable; giving them accurate diagnoses, individualized care plans, and outstanding performance; and enabling them to feel heard through the process.

2. How is Mayo Clinic positioned compared with other hospitals and medical facilities?

How can Mayo Clinic sustain this positioning in the future?

Suggested answer: Mayo Clinic positions itself as a medical group where the patients’ needs come first and they receive unsurpassed care. The organization’s patient-centered model had three dimensions: clinical practice, research and education. This positioning is unique compared with many other hospital groups and clinics. While some leading teaching hospitals were also patient-centered, delivered top quality care, and had the same three dimensions —clinical practice, research, and education— few could match the degree to which Mayo Clinic prioritized patients’ needs for as long as it has. This helps explain why Mayo Clinic consistently ranks at the top of U.S. News & World Report’s Best Hospitals list.

Student answers may vary regarding how Mayo Clinic can sustain this positioning in the future. Answers may recommend Mayo Clinic continue to devote itself to putting patients’ needs first. That approach has served it well for over 100 years and will continue to differentiate it into the future. Answers may also suggest that the organization sustain this positioning by continuing to invest in the pursuit of medical breakthroughs and in the latest technology to advance the quality of care it provides. In addition, students may suggest Mayo Clinic continue to reinforce this positioning with its advertising. By prioritizing doing ―the right thing for the patient,‖ as it always has done, Mayo Clinic can sustain its positioning by responding quickly to a patient’s need for an appointment and/or treatment. Asking patients to wait for weeks or even months for treatment puts undue stress on the patient.

Mayo Clinic doctor’s understand that those who seek their care want action as soon as possible.

3. What other service categories could Mayo Clinic expand into? What would some of the tradeoffs be?

Suggested answer: Student answers may vary. Answers may identify one or more of the following service categories that Mayo Clinic could expand into leveraging its strength of putting patients first:

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Assisted Living – this category would be a natural extension for Mayo Clinic, combining its patient focus with its ability to deliver exceptional care and design exceptional experiences.

Medical Insurance – Mayo Clinic could create an integrated health insurer and healthcare organization, as Kaiser Permanente has done starting in California. This would combine the Mayo Clinic’s data savvy, its leading medical care, and its patient focus.

Medical Practice Management Software – Mayo Clinic has developed many innovative ideas about how to run a medical practice. It also has considerable experience in developing and implementing leading technologies. It could combine these strengths to create software that helps other medical practices operate more effectively.

Medical Spas – Mayo Clinic could extend its range of services to include more dermatology offerings in a luxury spa setting, to gain a bigger share of elective medical spending.

Students may note that perhaps the main negative tradeoff with each of these expansions is that they would draw attention and resources away from Mayo Clinic’s core focus areas: clinical practice, research and education. Answers may identify a related negative tradeoff of the potential for Mayo Clinic to dilute its strong and enduring brand by moving into categories that are adjacent to but not entirely devoted to medical care. Answers may highlight positive tradeoffs of enabling the organization to tap new revenue streams and expanding the number of people who could experience the Mayo Clinic brand.

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

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

ii. Service industries are everywhere. a. The government sector, with its courts, employment services, hospitals, loan agencies, military services, police and fire departments, postal service, regulatory agencies, and schools, is in the service business. b. The private nonprofit sector—museums, charities, churches, colleges, foundations, and hospitals—is in the service business. c. A good part of the business sector, with its airlines, banks, hotels, insurance companies, law firms, management consulting firms, medical practices, motion picture companies, plumbing companies, and real estate firms, is in the service business. iii. Many workers in the manufacturing sector, such as computer operators, accountants, and legal staff, are really service providers.

A. The Service Aspect of an Offering i. A pure tangible good, such as soap, toothpaste, or salt, with no accompanying services ii. A tangible good with accompanying services (typically, the more technologically advanced the product, the greater the need for high-quality supporting services) iii. A hybrid offering of equal parts goods and services iv. A major service with accompanying minor goods and services v. A pure service, primarily an intangible service vi. Because services are generally high in experience and credence qualities, there is more risk in their purchase, with several consequences. a. Service consumers generally rely on word of mouth rather than advertising. b. They rely heavily on price, provider, and physical cues to judge quality. c. They are highly loyal to service providers who satisfy them. d. Because switching costs are high, consumer inertia can make it challenging to entice business away from a competitor.

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

the customer’s point of view. See Fig. 9.1. d. Monitor customer satisfaction. viii. Perishability: services cannot be stored, so their perishability can be a problem when demand fluctuates. ix. Demand or yield management means that the right services must be available to the right customers at the right places at the right times and right prices to maximize profitability. x. On the demand (customer) side: a. Differential pricing will shift some demand from peak to off-peak periods. b. Nonpeak demand can be cultivated. c. Complementary services can provide alternatives to waiting customers. d. Reservation systems are a way to manage the demand level. xi. On the supply side: a. Part-time employees can serve peak demand. b. Peak-time efficiency routines can allow employees to perform only essential tasks during peak periods. c. Increased consumer participation frees service providers’ time. d. Shared services can improve offerings. e. Facilities for future expansion can be a good investment.

II. The New Services Realities A. Increasing Role of Technology

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

B.

Customer Empowerment i. Customers are becoming more sophisticated about buying product-support services, are pressing for ―unbundled services‖ and the right to select the elements they want, and can give feedback with a mouse click.

ii. The reality is that customers do not merely purchase and use a service; they play an active role in its delivery. iii. Solving a customer’s problem quickly and easily goes a long way toward winning long-term loyal customers. iv. Social media have empowered customers by letting them send their comments around the world with a mouse click.

C.

Customer Coproduction i. Customers do not merely purchase and use a service; they play an active role in its delivery. ii. Their words and actions affect the quality of their service experiences and those of others, as well as the productivity of frontline employees. iii.

Customers often feel they derive more value, and feel a stronger connection to the service provider, if they are actively engaged in the service process.

iv.

To avoid service failures:

a. Redesign processes and redefine customer roles to simplify service encounters. b. Incorporate the right technology to aid employees and customers. c. Create high-performance customers by enhancing their role clarity, motivation, and ability. d. Encourage ―customer citizenship‖ so customers help each other. At golf courses, players can not only follow the rules by playing and behaving appropriately, they can encourage others to do so.

D. Satisfying Employees as Well as Customers i. Excellent service companies know that positive employee attitudes will strengthen customer loyalty. ii. Employees thrive in customer-contact positions when they have an internal drive to:

a. delight customers b. accurately read their needs c. develop a personal relationship with them d. deliver high-quality service to solve customers’ problems iii. Companies must audit employee job satisfaction regularly.

III. Achieving Serving Excellence i. Marketing excellence in services requires excellence in three broad areas: a. External marketing describes the normal work of preparing, pricing, distributing, and promoting the service to customers. b. Internal marketing describes training and motivating employees to serve customers well. c. The most important contribution the marketing department can make is to be ―exceptionally clever in getting everyone else in the organization to practice marketing.‖ A. Best Practices of Top Service Companies i. Well-managed companies that achieve marketing excellence share a focus on customer-centricity, a commitment to service quality, an understanding of the need to cater to high-value customers, and the implementation of strategies for managing customer complaints. ii. Customer-centricity means seeing the world in general, and a company’s services in particular, from the customer’s point of view. a. AI and Marketing: Customer Service. Artificial intelligence is having a major impact on how companies are providing better customer service experiences. iii. The best service providers set high quality standards. iv. Top firms audit their own service performance, as well as that of competitors. v. Firms coddle big spenders to retain their patronage. Customers in highprofit tiers get special discounts, promotional offers, and lots of special services; those in lower-profit tiers who barely pay their way may get more fees, stripped-down service, and voice messages to process their inquiries. vi. Managing Customer Complaints. On average, 40 percent of customers who suffer through a bad service experience with a company stop doing business with it. vii. Customers evaluate complaint incidents in terms of the outcomes they receive, the procedures used to arrive at those outcomes, and the nature

of interpersonal treatment during the process.

B. Differentiating Services i. The main service differentiators are ease of ordering; speed and timing of delivery; installation, training, and consulting; maintenance and repair; and returns. ii. When the physical product cannot easily be differentiated, the key to competitive success may lie in adding valued services and constantly improving their quality. iii. Ease of Ordering. Ordering ease reflects how simple it is for the customer to place an order with the company. iv. As markets become increasingly competitive, many companies focus on making the ordering process as convenient as possible. v. Striving to simplify the ordering process is not limited to consumer markets. It plays a major role in business markets as well. vi. Speed and Timing of Delivery. Delivery entails how well the product or service is brought to the customer, including the speed, accuracy, and care that characterizes the process. vii. Installation, Training, and Consulting. Ease of installation is a true selling point for technology novices and for buyers of complex products like heavy equipment. viii. Maintenance and Repair. Maintenance and repair programs help customers keep purchased products in good working order. These services are critical in business-to-business settings. ix. Returns. A nuisance to customers, manufacturers, retailers, and distributors alike, product returns are also an unavoidable reality of doing business, especially for online purchases.

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

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

d. Gap between service delivery and external communications e. Gap between perceived and expected service .

C. Managing Service Quality. Based on these five factors, researchers developed the 21-item SERVQUAL scale. i. They noted the presence of a zone of tolerance—a range in which a service will be deemed satisfactory, anchored at one end by the minimum level of service that consumers are willing to accept and, at the other end, by the level they believe can and should be delivered.

ii. Five determinants of service quality, in descending order of importance (See Fig. 9.2): a. Reliability—the ability to perform the promised service dependably and accurately b. Responsiveness—the willingness to help customers and provide prompt service c. Assurance—the knowledge and courtesy of employees and their ability to convey trust and confidence d. Empathy—the provision of caring, individualized attention to customers e. Tangibles—the appearance of physical facilities, equipment, staff, and communication materials iv. Tests of the dynamic process model reveal that the two different types of expectations have opposite effects on perceptions of service quality. a. Increasing customer expectations of what the firm will deliver can lead to improved perceptions of overall service quality. b. Decreasing customer expectations of what the firm should deliver can also lead to improved perceptions of overall service quality.

D. Managing Self-Service i. Incorporating Self-Service Technologies (SSTs) provides convenience. ii. Every company needs to think about improving its service using SSTs. iii. Customers must have a clear sense of their roles in the self-service process, must see the benefit, and must feel they can actually use the technology. iv. Self-service technology is not for everyone. Although some automated voices are popular with customers, many can provide frustration and rage at being unable to speak with an actual person.

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

vii. Over time, manufacturers switch more maintenance and repair service to authorized distributors and dealers. viii. Customer-service choices are increasing rapidly, however, and equipment manufacturers increasingly must figure out how to make money on their equipment, independent of service contracts.

CHAPTER

10 00

BUILDING STRONG BRANDS

LEARNING OBJECTIVES

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

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

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

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

10.5 Describe the key aspects of luxury branding.

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

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

3. The value created by a brand is captured by the concepts brand equity. Brand equity reflects the degree to which the brand influences the way consumers think, feel, and act with respect to the brand. Customer-based brand equity is thus the differential effect that brand knowledge has on consumer response to the marketing of that product of service.

4. The financial value of a brand reflects the premium that is placed on a company’s valuation because of its ownership of the brand. Brand valuation encompasses the net present value of the total financial returns that the brand will generate over its lifetime.

5. Brand elements are devices that identify and differentiate the brand. Common brand elements include brand names, logos, symbols, slogans or mottos, packaging, and labels.

Effective brand elements are memorable, meaningful, likable, transferable, adaptable, and protectable.

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

7. Brand architecture reflects a company’s branding strategy and which brand elements are to be applied across new and existing products and services sold by the firm. Brand architecture defines how a company’s brands are related to a company’s products and services, as well as to one another.

8. A brand portfolio is the set of all brands and brand lines that a particular firm offers for sale in a particular category or market segment. The hallmark of an optimal brand portfolio is the

ability of each brand to maximize equity in combination with all the other brands in the portfolio. Three general brand-portfolio strategies are house-of-brands, branded house, and sub-branding strategies.

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

10. Companies often grow through brand extensions, using an established brand to introduce a new product in a different category or price tier. There are pros and cons to employing brand extensions, but if designed and executed thoughtfully, they help to create new market opportunities while strengthening the original parent brand.

11. Brands evolve over time. Sometimes brands need to be revitalized to reverse fading fortunes.

If the problem lies more in execution, marketers can employ a ―back to basics strategy, when the problem lies more with the actual strategy, a repositioning is often required. If the brand faces a full-blown crisis, then it must act swiftly and sincerely.

12. Brands play a key role in designing luxury offerings, because the brand and its image are often key competitive advantages that create significant value for both the company and its customers. All marketing decisions associated with luxury brands—product, service, pricing, sales incentives, communication, and distribution—must be aligned to ensure that purchase and consumption experiences are consistent with the image of the brand.

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

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

TEACHING STRATEGY AND CLASS ORGANIZATION PROJECTS 14.

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

15.

In small groups (five students suggested as the maximum), have them list their favorite branded product or service (Google, Nike, or others). Based upon the information contained in this chapter, the students are to collect information, via on-campus research, on the brand’s brand equity based upon the Brand Asset Valuator, developed by Young and Rubicam.

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

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

In Seth Godin’s book, Permission Marketing: Turning Strangers into Friends, and Friends into Customers, New York: Simon & Schuster, 1999, he lists five steps in developing effective permission marketing. After reading Mr. Godin’s book, comment on whether or not you believe that ―permission marketing‖ will work for all products and services in the future.

Specifically, explore whether or not the proliferation of ―permission marketing‖ will wear out its effectiveness, similar to the experiences of spam, ―pop-ups,‖ and other forms of customer specific marketing techniques.

From a reading of Scott Bedbury’s book, A New Brand World, Viking Press, 2002, students are to comment on the appropriateness of his eight branding principles to the future of marketing. Specifically, are Mr. Bedbury’s principles ―on target,‖ and therefore applicable to all brands? Or just to emerging brands? If you were asked to implement Mr. Bedbury’s principles to the ―branding‖ of an existing product (say your school or university), how and what would you change in order to follow these principles?

END-OF-CHAPTER SUPPORT

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

Suggested answer: Key elements of the Louis Vuitton brand include its nearly two centuries of heritage; the skill and craftsmanship reflected in its products; the aura of exclusivity supported by its limited availability, selective distribution and premium prices; its celebrity partnerships; and its iconic design elements like the LV monogram and the Damier canvas. Louis Vuitton has combined these elements to build the world’s most valuable luxury brand, and the eighth most valuable brand overall.

Louis Vuitton creates value for consumers by producing artisan-crafted

leather goods, high-fashion clothing and accessories, and designer home goods. The products themselves have a use value, but even more, they create value by signaling that their owners possess taste and the means to acquire exclusive premium fashion products. Louis Vuitton actively promotes this exclusivity by maintaining high prices, limiting distribution, and producing limited quantities of each collection, where ―the idea is always to make slightly less than demand‖ It further supports its exclusive nature by creating limited-edition items, often in collaboration with other iconic brands such as Nike and the FIFA World Cup, and with creative luminaries like artist Takashi Murakami and photographer Cindy Sherman. Louis Vuitton also reinforces its exclusivity by avoiding television for mass advertising. Instead, it advertises on billboards and in fashion magazines featuring high-profile imagery displaying the prestige of owning an LV product. It generates significant press coverage for its seasonal collections with extravagant fashion shows, which are often hosted at iconic locations like the Louvre in Paris. By maintaining a fine balance of timeless design and fresh products, Louis Vuitton has continued offering products that are synonymous with luxury, wealth, and fashion. The company has expanded its store footprints to accommodate additional items, and in 2023 Louis Vuitton stores were 30 percent larger than in 2013.

2. What are the benefits and risks to Louis Vuitton of maintaining a luxury positioning?

Suggested answer: Benefits for Louis Vuitton maintaining a luxury positioning include: supporting the price premiums which fund its operations; preserving high demand by retaining current customers and staying aspirational for prospective customers; and attracting and retaining top design talent. All of these benefits enabled the company to become the world’s most valuable luxury brand and the first fashion brand to surpass €20 billion in annual sales.

One risk of maintaining a luxury positioning is the revenue risk from an economic downturn where luxury consumers tighten their budgets. This happened recently during the pandemic, though Louis Vuitton was able to recover quickly as luxury spending rebounded. Another risk is if Louis Vuitton’s particular flavor of luxury falls out of favor, which the company has avoided by continually refreshing its designs. A third risk is that because of the elevated perceptions of a luxury brand, a major misstep or scandal can incur outsized damage on the brand, or even lead to a boycott.

For Louis Vuitton as the most valuable luxury brand, the benefits of a luxury positioning clearly outweigh the risks. With a brand value of $124 billion, it was the eighth most valuable brand overall in the 2023 rankings, two places ahead of Coca-Cola.

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

Suggested answer: Student answers may vary. Answers may observe the need for Louis Vuitton to grow by finding new customers. It can find new customers in new geographies, with new cohorts of consumers like GenZ, and in new product categories where it isn’t a major player today. Answers may also note the opportunity to grow by selling more to existing customers, through personalization, cross-selling and up-selling, and relationship

marketing. The company has a proven ability to balance its timeless qualities with fresh designs, and to carefully preserve its exclusivity, so it should use these strengths to remain fresh and retain its cachet. The balance between tradition and fashion modernity is a very attractive position in the market for Vuitton.

Marketing Spotlight: BMW

1. What are the key elements of the BMW brand? How does it position itself?

Suggested answer: Key elements of the BMW brand include: its vehicles’ performance; its luxury finishes; its German engineering and the technology in its vehicles; its premium pricing; its slogans ―Sheer Driving Pleasure‖ and ―The Ultimate Driving Machine;‖ its product names (1 series, 2 series, X series, etc.); and the distinctive BMW logo.

These elements combined to help BMW become the best-selling luxury car manufacturer. It consistently ranks as one of the top 100 most-valuable brands in the world. BMW’s logo is one of the world’s most distinctive and globally recognized symbols.

BMW positions itself as combining luxury with performance. The company’s slogan in the U.S. and U.K., ―The Ultimate Driving Machine,‖ speaks to the duality of the brand, encompassing both luxury (ultimate) and performance (driving machine).

2. How does BMW segment its consumers? Why does this work for BMW? Suggested answer: BMW has expanded its product line over the past two decades to offer different value propositions to different consumer segments:

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    

BMW offers a full range of SUVs and crossovers, from X1 to X7. BMW refers to its SUVs and crossovers as sport activity vehicles in order to appeal even more to active consumers.

The lower-priced 1, 2 and 3 Series and X1 and X3 SUVs target mainstream drivers who appreciate performance and are more price-conscious.

The 5 and 7 Series target wealthy, traditional consumers. BMW ensured they included the latest luxury touches and electronic conveniences.

The 4 and 8 Series are effectively sportier siblings of the 3 and 7 Series, respectively.

The Z4 Roadster and M series convertibles and roadsters target high-income enthusiasts that seek cars with more performance and curb appeal.

The iSeries targets sustainability-oriented consumers, as well as drivers who seek to lower their fuel costs and take advantage of government ―The Ultimate Electric Driving Machine‖ to connect its EVs to its performance heritage.

This segmentation approach works for BMW because having a broad portfolio to target different consumer segments helps it attract a wide range of consumers. BMW can offer consumers a variety of design, size, price, and style choices. In addition to offering a broad selection of models, BMW also provides a choice of drivetrain technologies across its models, from fully electric, to plug-in hybrid, to efficient internal combustion. The broad portfolio of vehicles is designed to offer different value propositions and attract a wide range of consumers.

3. How can BMW maintain its leadership of the luxury car segment in the future?

Suggested answer: Student answers may vary. Answers may highlight the need for BMW to keep investing in building its two primary brand attributes: luxury and performance. These two attributes have been core to the brand for decades, so it is especially important to continue investing in them. Answers may also note the value of continuing to offer a broad portfolio, including a choice of drivetrain technologies across its models, from fully electric, to plug-in hybrid, to efficient internal combustion. Answers can also include the importance of investing in cutting-edge technology to incorporate in its vehicles and across the entire customer experience. In 2023, it was second only to Tesla in luxury EV sales. Additionally, answers may reinforce the value of burnishing BMW’s brand image through creative advertising and collaborations with artists, musicians, filmmakers and actors.

DETAILED CHAPTER OUTLINE Opening vignette: A strong brand commands intense consumer loyalty—and at its heart is a great product or service. Building a strong brand is a never-ending process, as the marketers of Barbie found out.

Barbie is more than a doll. She’s a lifestyle, a spirit, an attitude. Mattel wants fans of all ages to engage with the brand. Strategic brand management combines the design and implementation of marketing activities and programs to build, measure, and manage brands to maximize their value. It has four main steps:

1.

2.

3.

4.

Identifying and establishing brand positioning Planning and implementing brand marketing Measuring and interpreting brand performance Growing and sustaining brand value

I. How Does Branding Work?

A. A brand is ―a name, term, sign, symbol, or design, or any other feature that identifies one seller’s goods or service as distinct from those of other sellers.‖ .

B. The Essence of Branding i. A brand is thus a product or service whose dimensions differentiate it in some way from other products or services designed to satisfy the same need.

ii. Branding is the process of endowing products and services with the power of a brand. It’s all about creating differences between products. iii. For branding strategies to be successful and create brand value, consumers must be convinced that there are meaningful differences among brands in the product or service category. iv. Brand differences are often related to attributes or benefits.

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

C.

a. b. c. d. ii.

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

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

Brands simplify decision making.

Brands can also take on personal meaning to consumers and become an important part of their identity.

Brand’s role for firms:

a. It simplifies product handling by helping organize inventory and accounting records.

b.

Brand loyalty provides predictability and security of demand for the firm, and it creates barriers to entry that make it difficult for other firms to enter the market. c. Brand loyalty can translate into customer willingness to pay a higher price. d. Branding can be a powerful means to secure a competitive advantage. e. To firms, brands represent enormously valuable pieces of legal property that can influence consumer behavior, be bought and sold, and provide their owner the security of sustained future revenues.

D. Brand Equity and Brand Valuation i. The value of a brand is called brand equity and reflects the premium that is placed on a company’s valuation because of its ownership of the brand. ii. Understanding the concept of brand equity, managing its antecedents and consequences, and developing methodologies to assess brand equity are of the utmost importance for ensuring a company’s financial well-being. iii. Brand Equity a. Customer-based brand equity is the differential effect that brand knowledge has on consumer response to the marketing of a brand. b. Brands must create strong, favorable, and unique brand associations with customers. c. Strong brands earn greater revenue. d. The challenge for marketers is ensuring that customers have the right kinds of experiences with products, services, and marketing programs to create the desired thoughts, feelings, and brand knowledge. iv. Measuring Customer-Based Brand Equity. Several methods exist to gauge brand equity: a. An indirect approach assesses potential sources of brand power by identifying and tracking consumer brand knowledge. b. A direct approach assesses the actual impact of brand knowledge on consumer response to different aspects of the marketing. v. Marketers need to fully understand the sources of brand equity (brand audits) and

how these sources (brand tracking) and outcomes change. a. A brand audit is a focused series of procedures to assess the health of the brand, uncover its sources of brand equity, and suggest ways to improve. b. In brand tracking, the brand audit inputs quantitative data from consumers, providing information about how brands and marketing programs are performing. c. The brand value chain is a structured approach to assessing the sources and outcomes of customer-based brand equity and the way marketing activities create brand value. See Fig. 10.1. d. Brand equity can be viewed in terms of brand valuation. e. Brand equity is included in the accounting term goodwill, which is the monetary value of all intangible assets of a company. f. Several methods exist which emphasize different means of gauging brand equity or value: the cost approach, the market approach, and the financial approach.

II. Building Strong Brands A. The brand resonance model can help marketers as they design activities and programs to achieve goals. See Fig. 10.2. i. According to the model, enacting the four steps means establishing a pyramid of six ―brand building blocks.‖ ii. Marketing Insight: Building a Startup Brand describes some special considerations of a new brand achieving an astounding $1.4 billion valuation in a short period of time through creatively designed and executed marketing.

B. Choosing Brand Elements i. Choosing brand elements, or devices, which can be trademarked, identify ii. iii. equity as

and differentiate the brand.

Most strong brands employ multiple brand elements.

Marketers should choose brand elements to build as much brand

possible. iv. The test is what consumers would think or feel about the product if the brand element were all they knew. v. The first three brand element choice criteria are brand building.

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

a. Transferable b. Adaptable c. Protectable vii. Slogans, like brand names are an efficient means of building brand equity. viii. Brand characters represent a special type of brand symbol—one with human characteristics that both enhance likability and tag the brand as interesting and fun. ix. Because they are colorful and rich in imagery, brand characters break through marketplace clutter and communicate a key product benefit. x. Packaging is a cost-effective way to build brand equity. xi. The label is a highly visible and important element of packaging.

C. Developing Programs and Activities i. Marketers need to implement a variety of different marketing activities that consistently reinforce the brand promise. ii. To judge the quality of a marketing program, marketers consider: distinctiveness, relevance, integrated, value, and excellence D. Leveraging Secondary Associations i. To build strong brands, marketers link brands to other meaningful information in the memories of consumers. See Fig. 10.3. ii. These ―secondary‖ brand associations can link the brand to sources such as: a. The company itself (through branding strategies) b. Countries or other geographical regions (through identification of product origin) c. Channels of distribution (through channel strategy) d. Other brands (through ingredient or co-branding) e. Characters (through licensing) f. Spokespeople (through endorsements) g. Sporting or cultural events (through sponsorship)

h. Some other third-party sources (through awards or reviews) iii. A brand’s secondary associations must be aligned with the brand’s personality, the specific mix of human traits that we can attribute to a particular brand.

III. Brand Architecture i. Brand architecture provides guidelines about a company’s branding strategy and which brand elements to apply across new and existing products and services sold by the firm. ii. One important decision in defining brand architecture are brand portfolios and the set of different brands that a particular firm offers for sale to buyers in a particular category. .

A. Managing Brand Portfolios i. The brand portfolio is the set of all brands and brand lines that a particular firm offers for sale in a particular category or market segment. ii. The principle in designing a brand portfolio is to maximize coverage so target customers are not ignored but to minimize overlap so brands are not competing for customer approval. iii. Three general brand portfolio strategies are popular: a. A house-of-brands strategy involves individual or separate family brand names. b. A branded-house strategy involves a corporate umbrella or company brand name. c. A sub-brand strategy combines two or more corporate, family, or individual product brand names. iv. With a branded house strategy, it is useful to have a well-defined flagship product, one that best represents or embodies the brand as a whole.

v. Many companies are introducing branded variants, which are specific brand lines supplied to specific retailers or distribution channels.

IV. Cobranding i. Marketers often combine their brands with brands from other companies to create superior market value. Cobranding—also called dual branding—involves two or more brands marketed together. ii. The Essence of Cobranding

a. Same-company cobranding b. Joint-venture cobranding c. Multiple-sponsor cobranding iii. Cobranding advantages: a. Product can be convincingly positioned by virtue of the multiple brands. b. Cobranding can generate greater sales from the existing market and open opportunities for new consumers and channels. c. It can also reduce the cost of product introduction because it combines two wellknown images and speeds adoption. d. Cobranding may be a valuable means to learn about consumers and how other companies approach them. iv. Cobranding disadvantages: a. There is a risk and lack of control in becoming aligned with another brand in consumers’ minds. b. Consumer expectations of cobrands are likely to be high, so unsatisfactory performance could have negative repercussions for both brands. c. If the other brand enters a number of cobranding arrangements, overexposure may dilute the transfer of any association. It may also result in a lack of focus on existing brands. v. For cobranding to succeed, the two brands must separately have brand

equity—adequate brand awareness and a sufficiently positive brand image. a. The most important requirement is a logical fit between the two brands, to maximize the advantages of each while minimizing disadvantages. b. Consumers are more apt to perceive cobrands favorably if they are complementary and offer unique quality, rather than being overly similar and redundant. c. Managers must enter cobranding ventures carefully, looking for the right fit in values, capabilities, and goals and an appropriate balance of brand equity. d. There must be detailed plans to legalize contracts, make financial arrangements, and coordinate marketing programs. vi. Ingredient branding: special case of cobranding that creates brand equity for materials, components, or parts that are necessarily contained within other branded products. a. For host products whose brands are not that strong, ingredient brands can provide differentiation and important signals of quality. b. An interesting take on ingredient branding is self-branded ingredients that companies advertise and even trademark. c. Ingredient brands try to create enough awareness and preference for their product so consumers will not buy a host product that doesn’t contain it. d. Many manufacturers make components or materials that enter final branded products but lose their individual identity. e. For successful ingredient branding, consumers must believe the ingredient matters to the performance of the end product. f. Consumers must be convinced that the ingredient is superior. g. A distinctive symbol or logo must clearly signal that the host product contains the ingredient.

B. Brand Extensions i. When a firm uses an established brand to introduce a new product in a different category or price tier, the resulting offering is called a brand extension. ii. When marketers combine a new brand with an existing brand, the brand extension can also be called a sub-brand. iii. In a line extension, the parent brand covers a new product within a product category it currently serves, such as with new flavors, forms, colors, ingredients, and package sizes. iv. Most new products are in fact brand extensions.

v. When to Extend a Brand? Marketers must judge each potential brand extension by how effectively it leverages existing brand equity from the parent brand, as well as by how effectively it contributes to the parent brand’s equity. vi. Marketers should ask these questions when weighing the success of an extension: a. Does the parent brand have strong equity? b. Is there a strong basis of fit? c. Will the extension have the optimal points-of-parity and points-of-difference? d. How can marketing programs enhance extension equity? vii. Key research insights on brand extensions: a. Successful brand extensions occur when the parent brand is seen as having favorable associations and there is a perception of fit between the parent brand and the extension product. b. A brand that is seen as prototypical of a product category can be difficult to extend outside the c.

category.

Vertical extensions require sub-branding strategies to prevent negative brand associations and brand dilution and product cannibalization.

viii. Advantages of Brand Extension a. Setting up positive expectations reduces risk. b. Extensions can reduce launch costs. c. Positive feedback benefit d. A successful category extension may open up a new market or category. ix. Disadvantages of Brand Extensions a. Brand dilution occurs when consumers no longer associate a brand with a specific or highly similar set of products and start thinking less of the brand. b. If a firm launches extensions consumers deem inappropriate, they may question the integrity of the brand or become confused or even frustrated. c. Cannibalizing the parent brand d. Firm forgoes the chance to create a new brand with its own unique image and equity.

e. The program multiplier determines the marketing program’s ability to affect the customer mind-set and is a function of the quality of the program investment.

V. Brand Dynamics A. Brand Revitalization i. A number of brands have managed to make impressive comebacks in recent years. ii. The first thing to do in revitalized a brand is to understand what the sources of brand equity were to begin with.

iii. Sometimes the marketing program is the source of the problem because it fails to deliver on the brand promise. Then a ―back to basics‖ strategy may make sense. iv. In other cases, the old positioning is just no longer viable, and a reinvention strategy is necessary.

v. The challenge is often to change enough to attract some new customers, but not so much as to alienate old ones.

B. Managing a Brand Crisis

i. Marketing managers must assume a brand crisis will someday arise. ii. The stronger the brand and corporate image—especially for credibility and trustworthiness—the more likely the firm can weather the storm. iii. Careful preparation and a well-managed crisis management program are critical. iv. The longer the firm takes to respond, the more likely consumers are to form negative impressions from unfavorable media coverage or word of mouth. v. The more sincere the firm’s response, the less likely it is that consumers will form negative attributions. vi. External crises such as economic recessions, natural disasters, and major geopolitical events can threaten the brand and require an appropriate brand response. vii. The COVID-19 pandemic forced all brands to rethink what and how they were selling. viii. Four guidelines help firms manage a brand through a crisis: a. Empathy: Get even closer to consumers and customers. b. Value: Put forth the most compelling value proposition. c. Strategy: Be authentic and true to the brand promise. d. Innovation: Engage in ―Stop, Start, and Continue (But Improve)‖ exercises and activities.

VI. Luxury Branding A. Characteristics of Luxury Brands i. Higher priced, they are often about social status and who a customer was—or perhaps wanted to be. ii. Luxury for many has become more about style and substance, combining personal pleasure and self-expression.

iii. Common denominators of luxury brands are quality and uniqueness. iv. The winning formula for many is craftsmanship, heritage, authenticity, and history, often critical to justifying an extravagant price.

B. Managing Luxury Brands

i. Globalization, new technologies, financial crises, shifting consumer cultures, and other forces require luxury brand marketers to be skillful and adept at brand stewardship to succeed. ii. Key principles of luxury brand management: a. All marketing decisions associated with luxury brands—product, service, pricing, sales incentives, communication, and distribution—must be aligned to ensure that purchase and consumption experiences are consistent with the image of the brand. b. Luxury branding typically includes the creation of a premium, aspirational image. c. Luxury brands frequently span categories, and as a result, their competitors are often defined broadly. d. Luxury brands must protect their identity and aggressively combat trademark infringement and counterfeits. e. All attributes of luxury brands must be aligned with the image of the brand. This includes brand identifiers such as names, logos, symbols, and packaging, as well as brand associations such as personalities, events, countries, and other entities. iii. The trend for luxury brands is to wrap personal experiences around the products. iv. Some luxury marketers have struggled to find the appropriate online selling and communication strategies for their brand. v. Success depends on getting the right balance of classic and contemporary imagery, and continuity and change in marketing programs and activities.

CH A P T E R

11

LEARNING OBJECTIVES

MANAGING PRICING AND SALES PROMOTIONS

After studying this chapter, you should be able to:

11.1 Describe the role that pricing plays in marketing management.

11.2 Identify the key psychological factors that influence how consumers perceive prices.

11.3 Explain the factors that a manager must consider when setting prices.

11.4 Discuss how to respond to competitive prices cuts.

11.5 Explain how to design and manage incentives.

CHAPTER SUMMARY 1. Price is the only marketing element that produces revenue; the others produce costs.

Pricing decisions have become more challenging in a changing economic and technological environment.

2. Purchase decisions are based on how consumers perceive prices, rather than just on the offering’s stated price. Understanding how consumers arrive at their perceptions of prices—and, specifically, the role of reference prices, price–quality inferences, and price endings—can help the company set the optimal market price.

3. In setting pricing policy, a company follows a six-step procedure. It selects its pricing objective. It estimates the demand curve, the probable quantities it will sell at each

possible price. It estimates how its costs vary at different levels of output, at different levels of accumulated production experience, and for differentiated marketing offers.

It examines competitors’ costs, prices, and offers. It selects a pricing method, and it sets the final price.

4. When setting a price, a company can pursue different objectives: current profit, market penetration, market skimming, and leadership in product quality. The clearer a firm’s objectives, the easier it is to set price.

5. The demand curve shows the market’s probable purchase quantity at alternative prices, summing the reactions of many individuals with different price sensitivities.

Marketers need to know how responsive, or elastic, demand is to a change in price.

6. Price setting is driven by three major considerations: costs, competitors, and customers. Costs set a floor for the price. Competitors’ prices and the price of substitutes provide an orienting point. Customers’ assessment of unique features establishes the price ceiling. Common price-setting methods include markup pricing, target-rate-of-return pricing, economic-value-to-customer pricing, competitive pricing, and auction pricing.

7. Marketers must modify their price-setting logic when the product is part of a product mix and the company’s goal is to maximize the profits on the total mix. Common scenarios for product-mix pricing include loss-leader pricing, optional-feature pricing, captive- product pricing, two-part pricing, by-product pricing, and product bundling.

8. To gain market position and grow profits, companies often take aggressive pricing actions, either lowering their prices, typically to lure competitors’ customers, or raising prices to capture greater value from its current customers. Companies must anticipate competitor price changes and prepare contingent responses, which may include maintaining or changing price or quality.

9. The firm facing a competitor’s price change must try to understand the competitor’s intent and the probable duration of the change. A market leader attacked by lower-priced competitors can seek to better differentiate itself, to introduce its own low-cost competitor, or to transform itself completely.

10. Incentives consist of a collection of incentive tools, mostly short-term, designed to stimulate quicker or greater purchase of particular products or services by consumers or the trade. In using incentives, a company must establish its objectives, select the tools, develop the program, implement and control it, and evaluate the results.

11. In designing incentives, a firm must decide how much effort to devote to push strategies and to pull strategies. A push strategy uses the manufacturer’s sales force, trade promotion money, or other means to induce intermediaries to carry, promote, and sell the product to end users. In a pull strategy, the manufacturer uses advertising and incentives to persuade consumers to demand the product from intermediaries, thus inducing the intermediaries to order it. Selecting the right mix of push and pull strategies is an important ingredient in securing trade support.

OPENING THOUGHT Students should have a good understanding of ―price‖ in their role as consumers. The instructor is encouraged to expand the students’ definition of ―a price‖ by using examples of different pricing structures (cell phone plans, for example), promotional pricing, geographical pricing, and price discrimination.

An area for some misunderstanding for students new to marketing is how the firm reviews competitor’s reactions to price changes. Students will have some degree of difficulty in assuming the ―role‖ of a competitor and

formulating defensive and/or offensive plans to price changes. Sufficient classroom time should be spent in clarifying these roles.

Discriminatory pricing is also an area that students new to marketing can have some difficulty understanding for the first time.

Although discriminatory pricing is not illegal, per se, the distinctions are sometimes porous between the two.

TEACHING STRATEGY AND CLASS ORGANIZATION PROJECTS 16.

At this point in the semester-long marketing plan project, students should be prepared to hand in their pricing strategy decisions for their fictional product/service. In reviewing this section, the instructor should make sure that the students have addressed all or most of the material concerning pricing covered in this chapter.

17.

Consumer perceptions of prices are also affected by alternative pricing strategies. Marriott Hotels, for example, has different brands for differing price points. Building upon the Marriott example, students are to scan the environment to find examples of a company whose pricing strategy is closely tied to its branding strategy. Caution: students may want to list just the different price points in the same company, such as Ford automobiles. What this project is designed to accomplish is that students should note that the Lincoln line of cars are priced at a premium to the Ford and Mercury divisions. Good projects will also include the actual percentage difference between the three divisions.

ASSIGNMENTS Marketers recognize that consumers often actively process price information, interpreting prices in terms of their knowledge from prior purchasing experience, formal communications, informal communications, points-of-purchase, or online resources. Purchase decisions are based on how consumers perceive prices and what they consider to be the current actual price—not the marketer’s stated price. In small groups, ask the students to choose a service good, such as education, legal advice, tax advice, or other such services, and have them map out their perception of prices and what they consider to be the current actual price. Finally, students should compare and contrast their perceptions with the stated or published prices for these services. In completing this assignment, students should explain the differences between perception and stated prices in terms of consumer buying behavior models from Chapter 6 of this text.

Many consumers use price as an indicator or quality. As a group assignment, students should choose a product produced by a firm. Subsequently, the students should conduct a small research project (utilizing the material learned from Chapter 4) and either confirm or deny this relationship for the chosen product. For example, do more women or men rely on price as an indicator of quality for product X? If there is a difference, what is the quantifiable difference in terms of marketing research data? Does this difference suggest that marketers must or can revise or revamp price clues to reach their target market?

Katherine Heires in Business Week 2.0, October 2006, wrote ―Why it Pays to Give Away the Store.‖ Either in small groups or individually, have the

students read Ms. Heires’ article and comment on the validity/invalidity of these nine suggestions as being applicable to key service companies.

Table 11.1 lists some possible consumer reference prices and students should comment on whether or not these consumer reference prices are applicable today. Is this list inclusive or are there new reference points caused by the increased use of such websites like eBay or Craigslist?

Table 11.3 lists nine factors that the authors contend leads to less price sensitivity in consumers. Choose a product that is available online and in stores (books or tires, for example) and ask the students to research the various pricings choices available online. After collecting this data, ask the students to comment on whether the variety of price points found lowers their price sensitivity.

For many firms, pricing is the domain of the financial disciplines in the company. Using accepted accounting and financial processes, some companies’ price strictly according to these models. Assign students the assumed role of ―defenders‖ of this practice and others as ―innovators,‖ challenging these models and supporting some of the newer pricing models such as ―perceived‖ and ―value‖ pricing for products. Have the students come prepared to defend their positions using the concepts developed in this chapter.

Paul W. Farris and David J. Reibstein, in their article, ―How Prices, Expenditures, and Profits Are Linked,‖ Harvard Business Review (November – December 1979), pp. 173–184, found a relationship between relative price, relative quality, and relative advertising (their findings are summarized in the chapter). Students should read the full report, and then be prepared to discuss the validity of this study in light of the consumer information explosion that has occurred due to the emergence of the internet. Are these relationships still valid today? If not, why or what has caused them to change?

END-OF-CHAPTER SUPPORT Marketing Spotlight: Priceline

1. How important was the “Name Your Own Price” approach to Priceline’s market success?

Suggested answer: The ―Name Your Own Price‖ approach was critically important to Priceline’s market success in the early years, then became less important as the business matured. The Name Your Own Price model caught on immediately with consumers, and within a year of its founding Priceline had sold tickets to over 1 million individuals. Shortly after, big-name air carriers such as United, American, and Delta joined as partners.

Priceline’s model of online bookings proved valuable to airlines, because the carrier was anonymous throughout the buying process and didn't have to dilute its brand by openly selling tickets at large discounts. The model was also attractive to budget-conscious travelers because, on average, customers found lower prices than they otherwise would have through their own online searches. Priceline eventually expanded its Name Your Own Price system to sell automobiles, hotel rooms, home financing, and even groceries.

In 2004, the company started to expand its travel operations beyond the Name Your Own Price model, adding full-priced booking options in order

to be a ―one-stop shop‖ where customers could ―compare all options to book the trips that best fit their budget and preferences.‖ As its business matured, Priceline gradually phased out the Name Your Own Price model, discontinuing it for flights in 2016, rental cars in 2018, and hotels in 2020. It focused on other deal structures to reinforce its low-price position, including Express Deals for flights, hotels, and rental cars where Priceline shows travelers a collection of steeply discounted options for their dates of travel. Much of Priceline’s success can be attributed to the company’s focus on businesses in the most profitable segments of online travel.

2. What other brand associations are important for Priceline in addition to low price? How does it build those associations?

Suggested answer: Priceline has several other important associations in addition to low prices. One related association is value, because on Priceline travelers can find options that best fit their budget and needs, which may not always be the lowest-price option. Additional associations include its broad selection, convenience, and personality in terms of its light-hearted humor.

In 2023, Priceline introduced its first new brand campaign since 2019, with the title ―Go to Your Happy Price‖ highlighting the breadth of its selection which reinforcing its low-price positioning.

Value is further reinforced by the range of deal structures the company introduced like Express Deal and Price Breakers, as well as its Priceline VIP loyalty program. The broad selection is reinforced by the continuous availability of a vast array of booking options for each trip. Convenience is built by Priceline’s long track record of enabling easy online booking, and more recently with its app and the addition of Tonight-Only deals for last minute travelers. Fun and humor have been central to its campaigns for decades with William Shatner and now Kaley Cuoco.

3. What other pricing approaches could Priceline take to enhance its low-price offerings?

Suggested answer: Student answers may vary. Some potential approaches for Priceline to enhance its low-price offerings include:



 





Make dynamic pricing more transparent to consumers. This would help consumers understand before they booked which itineraries, dates, and purchase times were optimal for savings.

Promote bundling of airfare, hotels and rental cars more aggressively by offering additional savings for bundles.

Create a ―volume discount‖ program for hotel bookings, airfares and car rentals where savings increased the more nights a traveler booked, the more seats on a plane they bought, or the more days of a car rental they booked.

Introduce auction pricing, where consumers bid against each other for airfares, hotel bookings, or rental cars. The providers could set floor prices to ensure they earned enough.

Develop the Priceline VIP loyalty program enabling frequent travelers to accumulate discounts and perks.

Marketing Spotlight: Uber 1. What were the key factors that contributed to Uber’s phenomenal market success?

What role did Uber’s pricing strategy play in its ability to attract riders?

Suggested answer: Keys to Uber’s success include its ease of use, its broad availability, and its affordability. Uber is easy to get started with and use. Riders simply need to download the app, create an account, and enter their payment information. The app displays available drivers nearby. Within minutes of being matched with a driver, the customer can be on his or her way. Even as it has added ride options and other services like Uber Eats, the app and its core ride-sharing service remains easy to use. Uber advertised expanded selection with a global campaign in 2023 titled ―Get Almost, Almost Anything.‖ Uber expanded aggressively to accelerate its availability and become the leading rideshare company, to the point where, in many instances, its aggressive growth tactics created issues with regulators. The aggressive pursuit of growth paid off, however, and as of 2023, Uber operated in over 70 countries and more than 10,000 cities. It has achieved a dominant position in the U.S., where by 2024 it had 76 percent market share compared with 24 percent for Lyft. Outside the U.S., by some estimates, Uber had over 50 percent market share in each major region where it operated. In building its dominant ride-sharing business, Uber created a valuable logistics network that subsequently enabled it to transform ―from a ride-sharing company to a logistics platform that can deliver people, food, and things.‖ Its affordability, powered by a tiered pricing strategy, enabled Uber to attract millions of customers. The first service was Uber Black, as the black car service came to be known, which was priced lower than private limousines, but higher than a typical cab ride. The next service tier it introduced was UberX, which was priced at around 10 percent less than the cost of a traditional taxi. In 2014, it rolled out its Uber Pool service (later rebranded UberX Share), which paired riders who were going in the same direction so they could share a ride. Uber’s version of carpooling saved customers around 50 percent of the cost of a taxi ride.

Over time, Uber introduced more ride sharing options at different price points. In addition to Uber Black, Uber X and Uber X Share, its options in the U.S. include UberXL and Uber Black XL for SUVs and minivans, Lime scooters and bikes, Uber Comfort for new cars with extra legroom, Uber Green for EVs and hybrids, Uber WAV for wheelchair-accessible vehicles, and Uber Pet for animal-friendly rides. The company also introduced the Uber One subscription service, a $9.99 membership for both Uber and Uber Eats that included free delivery, member pricing and top-rated drivers on rides, discounts and special promotions. As of 2023, Uber operated in over 70 countries and more than 10,000 cities. By 2023 Uber Freight was earning $5.2 billion annually.

2. Is surge pricing fair? What alternative strategies could Uber use to balance supply and demand?

Suggested answer: Answers may vary, with students arguing either side.

Those who argue it is fair may say it is necessary to balance supply and demand by attracting drivers to specific locations during times of high demand, and it therefore ensures riders can always get rides. They might also point to the airline industry, where it is standard to set fares higher on flights with more demand and use dynamic pricing to increase fares based on different variables.

Those who argue it is unfair may say it is a form of price gouging, it takes advantage of riders during periods of peak demand when they have few viable alternatives, that licenses taxis aren’t allowed to have surge pricing, and that given Uber’s considerable market power it could abuse surge pricing.

Answers may highlight one or more of the following alternatives to balance supply and demand by getting more drivers on the road at peak times: Giving incentives to get more drivers to participate in food delivery, so they’re on the road for the lunch rush and evening commute; Helping riders avoid surge prices by steering them to make advanced bookings, which leads to more predictable demand for drivers; Creating a driver loyalty program where drivers earned accelerated rewards for driving during period of high demand.

3. How would you evolve the Uber brand from here? Would you expand or reduce the breadth of its offerings?

Suggested answer: Student answers may vary, with some recommending expansion and others reduction.

Answers in favor of expansion may argue that Uber’s range of rideshare offerings enables it to offer choice to a broad audience, and that it has successfully proven it can monetize its logistics network with adjacent offerings like Uber Eats, Uber Freight and Uber for Business.

Given its success to date and its leadership position, it could keep expanding its logistics network into new categories.

Answers in favor or reduction may point to the fact that Uber’s business is significantly more complex now. They may argue that the number of ride options it offers can be overwhelming, and that Uber should simplify the customer experience by reducing the options down to the set of most popular choices. They may similarly suggest Uber trim its business lines to the biggest ones—core ridesharing, Uber Eats, Uber Freight, and Uber for Business—to maximize their growth.

Other answers may argue that a third option would be to maintain the current breadth of offerings and focus on expanding to more countries and cities. Then the company can see which of the newer bets like aviation and autonomous vehicles develop the most potential and invest more in those to expand.

DETAILED CHAPTER OUTLINE Opening vignette: Wendy’s CEO announced that the company would test dynamic pricing.

Formally, dynamic pricing refers to price changed according to factors affecting differences in supply or demand. Many consumers, however, interpreted the announcement as ―surge pricing‖—where prices only change upward—and expressed anger and outrage. Price is all relative to value. Price is the one element of the marketing mix that produces revenue; the

other elements produce costs. Price also communicates the company’s intended value positioning of its product or brand. A well-designed and marketed product can still command a price premium and reap big profits. But new economic realities have caused many consumers to reevaluate what they are willing to pay for products and services, and companies have had to carefully review their pricing strategies as a result. As evidenced by the Wendy’s episode, violating pricing norms can make consumers feel they have been treated unfairly.

Pricing decisions are complex and must take into account many factors—the company, the customers, the competition, and the marketing environment. Holistic marketers know their pricing decisions must also be consistent with the firm’s marketing strategy and its target markets and brand positions.

I. Understanding Pricing A. Price also has many components. i. Price has operated as a major determinant of buyer choice. ii. Consumers and purchasing agents who have access to price information and price discounters put pressure on retailers to lower their prices. iii. Retailers put pressure on manufacturers to lower their prices. iv. The result can be a marketplace characterized by heavy discounting and sales promotion. v. For over 25 years, the internet has been changing the way buyers and sellers interact. vi. The internet has enabled buyers to make instant price comparisons from thousands of vendors. vii. The internet also enables sellers to optimize their pricing. viii. In many small companies, the owner sets prices. In large companies, division and product line managers do. ix. For any organization, effectively designing and implementing pricing strategies require a thorough understanding of buyers’ pricing psychology and a systematic approach to setting, adapting, and changing prices.

II. Consumer Psychology and Pricing A. Marketers recognize that consumers often actively process price information. i. Consumers often actively process price information, interpreting it from the context of prior purchasing experience, formal communications (advertising, sales calls, and brochures), informal communications (friends, colleagues, or family members), point-of-purchase or online resources, and other factors. ii. Purchase decisions are based on how consumers perceive prices and what they consider the current actual price to be—not on the marketer’s stated price. iii. Understanding how consumers arrive at their perceptions of prices is an important marketing priority.

B. Reference Prices i. Few consumers can accurately recall specific prices. ii. Consumers often employ reference prices, comparing an observed price to an internal reference price they remember or an external frame of reference such as a posted “regular retail price.” Possible reference prices include: a. “Fair price” (what consumers feel the product should cost) b. Typical price c. Last price paid d. Upper-bound price (reservation price or the maximum most consumers

would pay) e. Lower-bound price (lower threshold price or the minimum most consumers would pay) f. Expected future price g. Usual discounted price iii. Sellers often attempt to manipulate reference prices. iv. Many consumers use price as an indicator of quality. v. Image pricing is especially effective with ego-sensitive products such as perfumes, expensive cars, and designer clothing. a. When information about true quality is available, price becomes a less significant indicator of quality. b. Exclusivity and scarcity can also affect quality inferences and justify premium pricing. vi. Pricing cues are also important in the psychology of pricing. Many sellers believe prices should end in an odd number.

a. Consumers tend to process prices “left to right” rather than by rounding. b. Another explanation for the popularity of “9” endings is that they suggest a discount or bargain, so if a company wants a high-price image, it should probably avoid the odd-ending tactic. c. Prices that end with 0 and 5 are also popular and are thought to be easier for consumers to process and retrieve from memory. d. Total category sales are highest when some, but not all, items in a category have sale signs; past a certain point, sale signs may cause total category sales to fall. e. Pricing cues such as sale signs and prices that end in 9 are more influential when consumers’ price knowledge is poor, when they purchase the item infrequently or are new to the category, and when product designs vary over time, prices vary seasonally, or quality or sizes vary across stores.

III. Setting the Price i. The firm must decide where to position its product on quality and price. ii. Having a range of price points allows a firm to cover more of the market and to give any one consumer more choices. iii. The pricing process involves six main steps: defining the pricing objective; determining demand; estimating costs; analyzing competitors’ costs, prices, and offers; selecting a pricing method; and setting the final price.

A. Defining the Pricing Objective i.

Short-term Profit. Many companies try to set a price that will maximize current profits. ii.

Market Penetration. Companies that choose penetration pricing want to maximize their market share. Conditions: the market is highly price sensitive, and a low price stimulates market growth; production and distribution costs fall with accumulated production experience; and a low price discourages actual and potential competition. iii. Market Skimming. Companies unveiling a new technology favor setting high prices to maximize market skimming—setting a relatively high price in an attempt to make the offering affordable only to customers with the highest willingness to pay. iv. Quality Leadership. A company might aim to be the quality leader in the market. v. Nonprofit and public organizations may have other pricing objectives.

B. Determining Demand i. Each price will lead to a different level of demand and have a different impact

on a company’s marketing objectives. ii. The normally inverse relationship between price and demand is captured in a demand curve: the higher the price, the lower the demand. iii. Marketers need to know how responsive, or elastic, demand is to a change in price. iv. Price elasticity of demand reflects the degree to which a change in price leads to a change in quantity sold. v. The lower the price elasticity, the less sensitive consumers are to price increases and the more likely it is that raising the price can increase sales revenues. See Fig. 11.1. vi. The higher the elasticity, the greater the volume growth resulting from a 1 percent price reduction. vii. Price elasticity of demand depends on the magnitude and direction of the contemplated price change. viii. There may be a price indifference band within which price changes have little or no effect. ix. Generally speaking, price elasticity is low when: a. the product is distinctive and there are few or no substitutes or competitors. b. consumers do not readily notice the higher price. c. consumers are slow to change their buying habits. d. consumers think the higher prices are justified by factors such as the cost of creating the product, product scarcity, and government taxation. e. the expenditure is a smaller part of the buyer’s total income or of the total cost of the end product. f. part or all of the cost is borne by another party.

C. Estimating Costs i. Demand sets a ceiling on the price the company can charge for its product. Costs set the floor. ii. Fixed, Variable, and Total Costs. A company’s costs take two forms, fixed and variable. a. Fixed costs, or overhead, are costs that do not vary with production level or sales revenue. b. Variable costs vary directly with the level of production. c. Total costs consist of the sum of the fixed and variable costs for any given level of production. d. Average cost is the cost per unit at that level of production; it equals total costs divided by production. iii. Experience Curve Effects. As a company gains experience, its methods improve. The decline in the average cost with accumulated production experience is called the experience curve.

iv. Experience-curve pricing nevertheless carries major risks. v. Aggressive pricing might give the product a cheap image or assume competitors are weak followers. vi. The company builds more plants to meet demand, but a competitor may innovate with a lower-cost technology.

D. Analyzing Competitors’ Prices i. If the competitor’s offer contains some features not offered by the firm, the firm should subtract their value from its own price. ii. Companies offering the powerful combination of low price and high quality are capturing the hearts and wallets of consumers all over the world. iii. One idea is that companies should set up their own low-cost operations to compete with value-priced competitors only if:

a. their existing businesses will become more competitive. b. the new business will derive some advantages it would not have gained if independent.

E. Selecting a Pricing Method i. Costs set a floor to the price. ii. Competitors’ prices and the price of substitutes provide an orienting point. iii. Customers’ assessment of unique features establishes the price ceiling. iv. Price-setting methods: a. Markup pricing: add a standard markup to the product’s cost b. Target-rate-of return pricing: sets a price that will yield the desired rate of return.

See Fig. 11.2. c. Economic-value-to-customer pricing takes into account inputs, such as the buyer’s image of the product d. Competitive pricing (or going-rate pricing) the firm bases its price largely on competitors’ prices e. Auction pricing or the setting of prices through competitive bidding is growing more popular, especially with scores of electronic marketplaces selling everything, as firms dispose of excess inventories or used goods F. Setting the Final Price i. Companies develop a pricing structure that reflects variations in geographical demand and costs, market-segment requirements, purchase timing, order levels, delivery frequency, guarantees, service contracts, and other factors. ii. As a result of discounts, allowances, and promotional support, a company rarely realizes the same profit from each unit of a product that it sells. iii. The phenomenon of offering different pricing schedules to different consumers and dynamically adjusting prices is exploding. iv. Price discrimination occurs when a company sells a product or service at two or more prices that do not reflect a proportional difference in costs. a. In first-degree price discrimination, the seller charges a separate price to each customer depending on the intensity of his or her demand. b. In second-degree price discrimination, the seller charges less to buyers of larger volumes. c. In third-degree price discrimination, the seller charges different amounts to different classes of buyers. o Customer-segment pricing: Different customer segments pay different prices for the same product or service. o Product-form pricing: Different versions of the product are priced differently, but not in proportion to their costs. o Channel pricing: Coca-Cola carries a different price depending on whether the consumer purchases it from a fine restaurant, a fast-food restaurant, or a vending machine. o Location pricing: The same product is priced differently at different locations, even though the cost of offering it is the same at all locations. o Time pricing: Prices vary by season, day, or hour. o Yield pricing: Offers discounted but limited early purchases, higher-priced late purchases, and the lowest rates on unsold inventory just before it expires. v. Constant price variation can be tricky where consumer relationships are concerned. vi. ―Marketing Insight: Ethical Issues in Prescription Drug Pricing.‖ Pricing prescription drugs raises the ethical quest ion of how much pharmaceutical companies should charge for their products. Pricing prescription drugs can have a direct impact on social welfare.

G. Product-Mix Pricing i. In product-mix pricing, the firm searches for a set of prices that maximize profits on the total mix. ii. Six main situations calling for product-mix pricing: a. Loss-leader pricing. A company can set the price of a specific product or service in a way that b. c. d. e.

maximizes the profitability of its entire product line. Supermarkets often drop the price on wellknown brands to stimulate additional store traffic.

Optional-feature pricing. Many companies offer optional products, features, and services with their main product.

Captive pricing. Some products require the use of ancillary or captive products. Manufacturers of razors often price them low and set high markups on razor blades.

Two-part pricing. Service firms engage in two-part pricing, consisting of a fixed fee plus a variable usage fee.

By-product pricing. The production of certain goods—meats, petroleum products, and other chemicals—often yields by-products that should be priced on their value.

f. Product-bundling pricing. Sellers often bundle products and features. Pure bundling occurs when a firm offers its products only as a bundle.

IV.

Initiating and Responding to Price Changes

A. Initiating Price Cuts i. One is excess plant capacity. The firm needs additional business and cannot generate it through increased sales effort, product improvement, or other measures. ii. Companies sometimes initiate price cuts in a drive to dominate the market through lower costs. iii. Either the company starts with lower costs than its competitors, or it initiates price cuts in the hope of gaining market share and lower costs. iv. A price-cutting strategy can lead to drawbacks: a. Consumers assume quality is low. b. A low price buys market share but not market loyalty. The same customers will shift to any lower-priced firm that comes along. c. Competitors match the lower prices but have longer staying power because of deeper cash reserves. d. Competitors respond by lowering their prices even more, triggering a price war.

B. Initiating Price Increases i. A successful price increase can raise profits considerably. ii. Cost inflation and over demand can provoke price increases. iii. Companies often raise their prices by more than the cost increase in anticipation of further inflation or government price controls, a practice called anticipatory pricing.

iv. In passing price increases on to consumers, the company must avoid looking like a price gouger. v. Several techniques help avoid sticker shock and a hostile consumer reaction when prices rise.

a. b. c. d.

Maintain a sense of fairness by giving consumers advance notice.

Explain sharp price increases in understandable terms.

Make low-visibility price moves first.

Eliminate discounts, increase minimum order sizes, and curtail production of lowmargin products. e. Use escalator clauses based on factors such as increases in national price indexes.

C.

Responding to Competitors’ Price Changes

i. The competitors, distributors, suppliers, and even government ii. Competitors are most likely to react when the number of firms in the category is

low, the product is homogeneous, and buyers are highly informed. iii. How a firm responds to a competitor’s price cut depends on the situation. A firm needs to consider:

a. Why did the competitor change the price? To steal the market, to utilize excess capacity, to meet changing cost conditions, or to lead an industry-wide price change? b. Does the competitor plan to make the price change temporary or permanent? c. What will happen to the company’s market share and profits if it does not respond? Are other companies going to respond? d. What are the competitors’ and other firms’ likely responses to each possible reaction? iv. Three possible responses to low-cost competitors are: a. Further differentiate the product or service b. Introduce a low-cost venture c. Reinvent as a low-cost player v. An extended analysis of alternatives may not always be feasible when the attack occurs.

V. Managing Incentives A. Incentives as a Marketing Device i. Incentives are sales promotion tools, mostly short-term, designed to stimulate quicker or greater purchase of particular products or services by consumers or the trade. ii. The fastest-growing area of sales promotion includes digital coupons and discounts, redeemed via smartphone or downloaded to a consumer’s printer. iii. Sales promotions can produce a high sales response in the short run but little permanent gain over the longer term. iv. Sales promotions prompt consumers to engage in stockpiling—purchasing earlier than usual or buying extra quantities. As a result, after the initial peak, sales hit a postpromotion dip. v. Not all sales promotions are detrimental to the company’s brand image. Some sales promotion tools are consumer franchise building. vi. A net price analysis shows at the ―real price‖ of the offering—affected not only by discounts but also by other expenses that reduce the realized price.

B. Major Incentive Decisions i. Establishing the Objectives of Incentives. The objectives of incentives derive from basic marketing objectives for the offering. a. For consumer incentives, objectives include encouraging more frequent purchases. b. For retailer incentives, objectives include persuading the retailer or wholesaler to carry the brand. ii. Defining the Size and Approach for Incentives. In deciding to use a particular incentive, marketers must first determine its size. a. The incentive must be meaningful to target customers if the promotion is to succeed. b. The marketing manager must establish conditions for participation. Incentives might be offered to everyone or to select groups. c. The marketer must decide on the duration of the promotion. d. The marketer must choose a distribution vehicle. iii.

A push strategy uses the manufacturer’s sales force, trade promotion money, or other means to induce intermediaries to carry, promote, and sell the product to end users. iv. A pull strategy uses advertising, promotion, and other forms of communication to persuade consumers to demand the product from intermediaries, thus inducing the intermediaries to order it.

v. Selecting Consumer Incentives. The sales promotion planner should take into account the

type of market, the sales promotion objectives, competitive conditions, and each tool’s cost-effectiveness. vi. The main consumer incentives include: a. Price reductions are temporary price discounts that aim to foster sales. b. Coupons and promo codes are certificates entitling the bearer to stated savings on the purchase of a specific product. c. Cash refunds provide a price reduction after purchase rather than at the retailer. d. Price packs offer savings off the regular price of a product. e. Premiums (bonus offerings) are merchandise offered at a relatively low cost or free as an incentive to purchase a particular product. f. Frequency programs provide rewards related to the consumer’s frequency of purchase. g. Prizes are offers of the chance to win cash, trips, or merchandise. h. Tie-in promotions involve a scenario in which two or more brands or companies team up on coupons, refunds, and contests to increase pulling power. i. Seasonal discounts are price reductions for those who buy merchandise or services out of season. j. Financing involves providing favorable financing terms. vii. Selecting Trade Incentives. Manufacturers award trade incentives to increase the attractiveness of the offering for the members of the distribution channel. a. Allowances are extra payments offered in return for the retailer’s performing certain functions. b. Free goods are free merchandise to intermediaries who buy a certain quantity or who feature a certain flavor or size. c. Price-off is a straight discount off the list price on each case purchased during a stated time period. d. A payment discount is a price reduction to buyers who pay bills promptly. viii. The growing power of large retailers has increased their ability to demand trade promotions.

ix. Forward buying is buying a greater quantity during the deal period than can immediately be sold x. Manufacturers handle forward buying and diverting by limiting the amount they sell at a discount or producing and delivering less than the full order to smooth production. xi. Selecting Sales Force Incentives. Companies spend billions of dollars on sales force promotion tools to gather leads, impress and reward customers, and motivate the sales force. xii. Sales force incentives aim to encourage the sales force to support a new product or model, boosting prospecting and stimulating off-season sales.

CHAPTER

12

MANAGING MARKETING COMMUNICATIONS

LEARNING OBJECTIVES After studying this chapter, you should be able to: 12.1 Explain the role of marketing communications.

12.2 Define meaningful communication objectives.

12.3 Describe how a company should identify target customers and craft communication messages.

12.4 Explain how a company should decide on the communication media mix and develop a media plan.

12.5 Describe the creative strategies involved in developing an effective communication campaign.

12.6 Identify actionable metrics for measuring communication effectiveness.

CHAPTER SUMMARY 1. Modern marketing calls for more than developing a good product, pricing it attractively, and making it accessible to target customers. Companies must also communicate with current and potential stakeholders and with the general public.

2.

The communication process consists of nine elements: sender, receiver, message, media, encoding, decoding, response, feedback, and noise. To get their messages through, marketers must take into account how the target audience usually decodes messages. They must also transmit the message through efficient media that reach the target audience and develop feedback channels to monitor responses to the message.

3. Although other methods exist, the objective-and-task method of setting the communication budget, which calls on marketers to develop their budgets by defining specific objectives, is typically the most effective.

4. In choosing the marketing communication mix, marketers must examine the distinct advantages and costs of each communication tool and the company‖s market rank. They must also consider the type of market in which they are selling, how ready consumers are to make a purchase, and the offering‖s stage in the company, brand, and product life cycle.

5.

6.

Developing effective communication requires eight steps: (1) identify the target audience, (2) choose the communication objectives, (3) design the communication, (4) select the communication channels, (5) set the total communication budget, (6) choose the communication mix, (7) measure the communication results, and (8) manage the integrated marketing communication process.

In identifying the target audience, the marketer needs to close any gap that exists between current public perception and the image sought. Communication objectives can be to create a need for the category, to increase brand awareness, to improve attitude toward the brand, or to boost intension to purchase the brand.

7. Designing effective communication requires making three key decisions: what to say (message strategy), how to say it (creative strategy), and who should say it (message source). Communication channels can be personal (advocate, expert, and social channels) or nonpersonal (media, atmosphere, and events).

8.

The marketing communication mix consists of eight major modes of communication: advertising, online and social media, mobile communication, direct marketing, events and experiences, word of mouth, publicity and public relations, and personal selling.

9. Measuring the effectiveness of the marketing communication mix requires asking members of the target audience whether they recognize or recall the communication, how many times they saw it, what points they recall, how they felt about the communication, what their previous attitudes toward the company, brand, and product were, and what those attitudes are now.

OPENING THOUGHT Perhaps the most challenging aspect of this chapter is the section on the nine elements of the communications process: sender, receiver, message, media, encoding, decoding, response, feedback, and noise. Students not previously exposed to these concepts in other marketing or communications‖ courses will find these concepts somewhat difficult to fully understand and

perceive without good use of examples and trial. The instructor is encouraged to use examples gleaned from advertisers‖ websites, television or print commercials to demonstrate via dissection these concepts, especially encoding and decoding.

The remainder of the chapter covers material previously reviewed such as identifying the target market and designing the marketing message. What is different in this chapter is the integration of the ―mix,‖ or elements of communicating to the target audience in a consistent and effective manner.

Finally, the coordination and integration of all the elements of the communication mix and their effect on the total message (evaluation of their effectiveness) remains a challenge to prove. The fact is that the concept of the combined effectiveness of the integration of all marketing communications is difficult to prove in the real business world.

Instructors are encouraged to use examples of non-effective communication(s) to highlight what the ―possibilities‖ could be with an integrated marketing communications process.

TEACHING STRATEGY AND CLASS ORGANIZATION PROJECTS 18.

At this point in the semester-long marketing plan project, students should have agreed upon their integrated marketing communications matrix. The instructor is encouraged to evaluate the submissions vis-àvis the material presented in this chapter. In reviewing the submissions, the instructor should evaluate the continuity of the message across all possible communication media. (Students will tend to concentrate their media to television or the internet and exclude other forms such as personal selling and radio.)

19.

With the instructor‖s guidance and attendance, set up a field trip to a local advertising agency in the community to gather from management the agency‖s views on the topic of integrated marketing communications.

Especially, what services have their clients requested that the ad agency performs to build an integrated marketing communications program?

Today, many progressive ad agencies are including among their services print, marketing intelligence, personal selling training, and strategy development in their portfolios.

ASSIGNMENTS Have the students read the following articles: Tim Nudd, ―Inside Oreo‖s Adorable Triple Play for Father‖s Day,‖ Adweek, June 10, 2013; Jennifer Rooney, ―Behind the Scenes of Oreo‖s Real-Time Super Bowl Slam Dunk,‖ Forbes, February 4, 2013; T. L. Stanley, ―Brand Genius: Lisa Mann, VP Cookies, Mondelēz International,‖ Adweek, October 29, 2012; Stuart Elliott, ―For Oreo Campaign Finale, a Twist on Collaboration,‖ New York Times, September 24, 2012; Rohit Nautiyal, ―Cookie Time,‖ The Financial Express, June 28, 2011. After reading, have the students share their impressions on the effectiveness of its communications with the target market.

This chapter states that the marketing communication mix consists of six major modes of communication and that every brand contact delivers an impression that can strengthen or weaken a customer‖s view of the company.

In small groups, have the students select a company and see if its messages are consistent across all major modes of media: advertising, sales

promotion, events and experiences, public relations, direct marketing, and personal selling.

The starting point in planning marketing communications is an audit of all the potential interactions that customers in the target market may have with the brand and the company. Students should select a brand of their choosing and in their papers ―map‖ out or create an audit of all the potential interactions that customers in the target market have with the brand and company. Students should, for the purpose of this assignment, assume that they are a member of the target market.

DVR usage: https://www.hawthornedirect.com/wp-content/uploads/2020/01/DVRUsage-Trends-Over-Time-and-Implications-for-Advertisers-Using-Linear-TV.pdf Have the students read the following articles: ―Don‖t Touch That Remote.‖: Merrill Barr, ―In a World of DVR Monsters, Do Time Slots Still Matter?,‖ Forbes, November 1, 2013; ―Over Half of Multi-Channel Video Households Have a DVR,‖ www.leichtmanresearch.com, November 30, 2012; Andrew O‖Connell, ―Advertisers: Learn to Love the DVR,‖ Harvard Business Review, April 2010, p. 22; Erik du Plesis, ―Digital Video Recorders and Inadvertent Advertising Exposure,‖ Journal of Advertising Research 49 (June 2009); S. Adam Brasel and James Gips, ―Breaking Through Fast-Forwarding: Brand Information and Visual Attention,‖ Journal of Marketing 72 (November 2008), pp. 31–4; Kenneth C. Wilbur, ―How Digital Video Recorder Changes Traditional Television Advertising,‖ Journal of Advertising 37 (Summer 2008), pp. 143– 49. After reading the articles, ask them to write a memo that summarizes how DVRs are affecting the way marketers should engage consumers, including at least three specific recommendations. They should write the memo from the perspective of a brand management team member for a consumer packaged goods brand (of their choice) that uses television advertising.

Have the students read the following articles: ―Playing Tricks to Build a Brand,‖ Will Burns, ―Samsung ―Stare Down‖ the Latest Great Reality Prank,‖ Forbes, May 31, 2013; Will Burns, ―LG Ultra HDTV: A Product Demo for the Ages,‖ Forbes, September 5, 2013; Salvador Rodriguez, ―LG Hidden-Camera Prank Ad for Its Ultra HD TV Goes Viral,‖ Los Angeles Times, September 7, 2013. After reading these articles, ask the students to take a position: for or against using tricks to build a brand.

END-OF-CHAPTER SUPPORT Marketing Spotlight: Red Bull 1. What are Red Bull”s greatest competitive strengths in the competitive energy drink category? What are the competitive risks for Red Bull?

Suggested answer: Some of Red Bull‖s greatest competitive strengths include its brand, its broad positioning, and its integrated marketing communication approach. As the originator of the energy drinks category, Red Bull has built an exceptionally strong brand over nearly four decades. The company distinguished itself from the start with premium packaging and pricing. Its slender silver-and-blue 250 ml can cost up to 300 percent more per ounce than traditional soft drinks. It has spent billions through the years to market the brand, which no single competitor can match.

Regarding its broad positioning, Red Bull‖s tagline ―Vitalizes body and mind,‖ which it still uses today, was meant to target consumers of all ages whenever they needed a lift. This broad positioning did not limit Red Bull to certain occasions or activities. Red Bull could market to a

large spectrum of consumers like students, athletes, businesspeople, and drivers, who might seek different benefits like increasing concentration, enhancing athletic performance, and alleviating fatigue.

The company has fueled growth and maintained high awareness through its integrated marketing communication. The company has been very consistent in ―speaking with the same tone of voice‖ with its mass advertising, centered on its iconic ―adult cartoon‖ ads with the tagline ―Red Bull gives you wings.‖ Red Bull also built an extensive sports marketing strategy through sponsorship of events, athletes and sports teams.

Sponsorship spend became Red Bull‖s largest marketing expense, exceeding €1 billion for the first time in 2022. In addition to sports marketing, Red Bull has invested heavily in content marketing to promote the drink and its associated lifestyle. Red Bull established the Red Bull Media House, a collection of media companies that create content in films and television, video games, social media, music, magazines and books.

Competitive risks for Red Bull include disruption from new entrants like Celsius, as well as changing consumer tastes that may reduce the demand for energy drinks broadly or Red Bull specifically. In addition, societal health concerns related to energy drink consumption—especially among children—also present a risk. As the market leader, Red Bull may be a more visible target for legal action by consumer advocacy groups.

2. Discuss the effectiveness of Red Bull”s narrow product line. Should the company alter the product line to drive more growth, and if so, how?

Suggested answer: It‖s notable that Red Bull‖s original offering has stayed more or less the same throughout the years—with one size, one form factor, and a handful of flavors. Red Bull keeping its product line narrow has contributed to its global success, and it enables the company to invest as much as possible in marketing to grow the brand. The company has selectively expanded the product line to respond effectively to category and competitive dynamics. The company launched Red Bull Sugarfree in the early 2000s in direct response to the consumer trends toward lower-calorie drinks. The introduction of Editions fruit flavors was a response to the popularity of fruit flavors in other energy drinks and helped Red Bull regain the number one position in the U.S. from Monster Energy. In 2023, Red Bull made 10 billion euros from selling over 12 billion cans of Red Bull.

Answers may vary regarding whether Red Bull should alter its product line to drive more growth. Answers in favor of altering the product line may highlight the fact that some competitors have more products in their lineup. Those in favor of altering might point out that adding products to appeal to different segments would help Red Bull grow its customer base. For example, given the popularity of hard seltzer and Red Bull‖s usage as a mixer for cocktails, adding a line of pre-mixed alcoholic drinks could yield growth.

Answers against altering the Red Bull product line might observe that the company‖s narrow lineup has worked very well for decades, so it should keep it the same. Answers against altering might argue that having a narrow lineup enables the company to focus its marketing resources for maximum effectiveness, and that expanding the lineup risks diluting the brand and distracting from the core. Answers against

altering may suggest, however, that it would be important for Red Bull to monitor consumer tastes and adjust its product line if necessary. Red Bull‖s nontraditional approach to marketing has made the company one of the world‖s most recognized and valuable brands, ranking 60th on Interbrand‖s Best Global Brands 2023 ranking of brand value.

3. Discuss the pros and cons of Red Bull”s nontraditional marketing tactics. Should Red Bull do more traditional advertising? Why or why not?

Suggested answer: There are a number of pros to Red Bull‖s nontraditional marketing. Nontraditional marketing fits the independent spirit of the Red Bull brand well. Its sports marketing has helped it successfully associate its product with an authentic, adventurous lifestyle. In addition, Red Bull‖s sponsorship of athletes and sporting events helped make Red Bull a global brand. Nontraditional marketing also enables Red Bull to tell a richer story with more depth and breadth than it could with traditional media. Red Bull Media House‖s content has further pushed awareness of its brand to greater heights by generating significant earned media value. With over 16 million YouTube subscribers and 22 million Instagram followers, Red Bull publishes thousands of featurettes on Red Bull athletes and sporting events.

There are some cons, though. The nontraditional approach carries some inefficiency, because it involves more channels and requires more customization compared with Red Bull‖s cartoon-based TV ads which can be easily translated into any language. Nontraditional marketing introduces more risk, because there are more variables Red Bull doesn‖t directly control, such as the behavior of its sponsored athletes and the competitors in its sponsored events.

Student answers may vary on the question of whether Red Bull should do more traditional advertising, depending on how they decide the Pros and Cons net out.

Marketing Spotlight: Levi”s 1. How has Levi”s maintained its relevance for more than 170 years?

Suggested answer: Levi‖s has maintained its relevance through the decades by strategically adapting its product and marketing communications as consumer tastes evolved. For example, in the early 1980s, in response to competition from designer jeans brands like Calvin Klein, Jordache and Gloria Vanderbilt, Levi‖s launched the ―501 Blues‖ advertising campaign. The goal was to remind existing customers of the uniqueness of 501 jeans and how comfortably they fit into their everyday lives, both in a physical and social sense, as well as introduce the company‖s flagship product to a new generation of adults. The awardwinning campaign helped 501 sales double in 1985, even though overall U.S. denim sales for the year declined.

More recently, the company introduced the ―Live in Levi‖s‖ campaign, which strove to expand Levi‖s relevance to more consumers by showing that ―Levi‖s are for everybody.‖ The ads embraced inclusivity by featuring a multi-generational mix of actors and models who were cast to look like everyday people. With the help of the ―Live in Levi‖s‖ campaign, accompanied by an expanded product offering with more tops and

women‖s apparel, Levi Strauss & Co. revenues grew to more than $5.7 billion in 2019. In 2023, Levi‖s had a record number of store openings, with 105 new stores. By 2024 Direct-To-Customer (DTC) accounted for nearly half of Levi‖s revenues, well on the way to the target the company had set of 55 percent of revenues by 2027.

2. What additional online and offline marketing communication elements could Levi”s add to further strengthen its brand going forward?

Suggested answer: Student answers may vary. Answers may recommend Levi‖s strengthen its brand with online marketing by producing more short form video content to align with Millennial and GenZ media preference. A specific idea for the videos would be to create a video ―look book‖ clips of many of different real Levi‖s customers to convey how Levi‖s are for everybody. Answers may also recommend Levi‖s forge additional influencer partnerships, both with global celebrities and local microinfluencers. Students may recommend that Levi‖s produce online fashion shows to showcase its breadth of styles and generate interest in its new offerings each season.

For offline marketing elements, answers may suggest Levi‖s produce more in-person events, such as pop ups in high-traffic areas to introduce new styles and encourage try-ons. Answers may also recommend Levi‖s increase its sponsorships, for example sponsoring the world tour of a famous musician like Taylor Swift to complement its 49ers stadium sponsorship.

Other ideas that answers might contain include investing more in product placement in TV shows and movies popular with Millennials and GenZ, and producing offline fashion shows at Fashion Weeks in different cities globally.

3. What are the biggest challenges Levi”s faces going forward? How can they address them?

Suggested answer: Student answers may vary, as Levi‖s faces a number of major challenges. These challenges include changing consumer tastes as people continue to embrace athleisure and comfort. The company also continues to face fierce competition in fashion, which is always a dynamic category. In addition, physical retail has experienced long-term secular headwinds and continues to face challenges in the wake of the pandemic.

To address the challenges of changing consumer tastes and competition, Levi‖s can continue to do what‖s served them well for 170 years by continuing to adapt its product and marketing communications strategy as consumer tastes evolve. It has a long history of blending the timeless elements of its brand with contemporary styles. To combat the challenges of competition and physical retail headwinds, Levi‖s can continue to accelerate its direct-to-consumer model. Going direct gives it control over the customer experience, enables it to build a direct relationship with its customers, and reduces its exposure to the struggles of traditional retailers.

DETAILED CHAPTER OUTLINE

Modern marketing calls for more than developing a good product, pricing it attractively, and making it accessible. Companies must also communicate with present and potential stakeholders and the general public. For most marketers, therefore, the question is not whether to communicate but rather what to say, how and when to say it, to whom, and how often. To achieve their strategic goals, holistic marketers must craft communication campaigns that can break through the clutter and reach customers on a personal level.

Consider Unilever‖s experience in positioning its Dove brand and developing the ―Campaign for Real Beauty.‖ Rather than feeding on women‖s insecurities and encouraging them to strive to be more attractive, Dove took the opposite approach, encouraging women to look beyond the skin-deep beauty offered by most cosmetic products to the attributes that have already made them beautiful.

I. The Role of Marketing Communications i. Marketing communications are the means by which firms attempt to inform, persuade, and remind consumers—directly or indirectly—about the products and brands they sell. ii. They represent the voice of the company and its brands; they are a means by which the firm can establish a dialogue and build relationships with consumers. iii. By strengthening customer loyalty, they can contribute to customer lifetime value. iv. Marketing communications also work by showing consumers how and why a product is used, by whom, where, and when. v. Consumers can learn who makes the product and what the company and brand stand for, and they can become motivated to try or use it. vi. Marketing communications allow companies to link their brands to other people. vii. They can contribute to brand equity—by establishing the brand in memory and creating a brand image—as well as drive sales and even affect shareholder value.

A. The Communications Process i. To achieve their strategic goals, holistic marketers must craft communication campaigns that can break through the clutter and reach customers on a personal level. ii. The macromodel of marketing communication articulates the interaction between the sender (company) and the recipient (consumer) of the communication message. Fig. 12.1 shows nine key factors of communication. a. Two represent the major parties—sender and receiver. b. Two represent the major tools—message and media. c. Four represent major communication functions—encoding, decoding response, and feedback. d. The last element in the system is noise—random and competing messages that may interfere with the intended communication. iii. Micromodel of Marketing Communication. A micromodel of marketing communication concentrates on consumers‖ specific responses to communications. iv. Several steps are involved in generating a consumer response. a. Awareness. To take any kind of action, customers must be aware of the existence of the company‖s offering. b. Knowledge. The target audience might have awareness but not know much more about the offering. c. Liking. Members of the target audience may know the brand, but how do they feel about it?

d. Preference. The communicator must try to build consumer preference by comparing the product‖s quality, value, performance, and other features to those of competitors. e. Conviction. The target audience might prefer a particular product but not develop a conviction about buying it.

f. Purchase. The communicator must lead these consumers to take the final step, perhaps by offering the product at a low price, offering a premium, or letting them try it out.

B. Developing an Effective Communication Program i. Basics: identifying the target audience, setting the communication objectives, designing the communications, selecting the communication channels, and establishing the total marketing communications budget (See Fig. 12.2.) ii. The ultimate success of a company‖s communication campaign depends on the viability of the overall strategy and tactics for managing the company‖s offering, which serve as a basis for developing a communication plan.

II. Setting the Communication Objectives A. Setting the objectives of a communication campaign involves three key decisions: defining the focus of company communications, setting communication benchmarks, and determining the communication budget.

B. Defining the Focus of Company Communications i. A communication objective is a specific task and achievement level to be accomplished with a specific audience in a specific period of time. ii. Communication objectives are classified according to whether they create awareness by informing and persuading the target audience of the benefits of the offering, or inciting action that benefits the company and its offering. a. Creating awareness provides a foundation for brand equity. b. Building preferences involves communicating an offering‖s ability to meet a currently relevant consumer need. c. Inciting action involves motivating consumers to decide to purchase the brand or take purchase-related action. iii. Communication objectives for the company‖s offering also depend on the current consumer state of awareness. See Fig. 12.3.

C. Setting the Communication Benchmarks i. Without such well-articulated benchmarks, a company will find it challenging to design an effective communication campaign aligned with strategic goals. ii. Broadly speaking, there are two types of communication benchmarks: quantitative and temporal. iii. Defining quantitative and temporal benchmarks is important, because without knowing what outcome needs to be achieved and the timeframe for achieving it, a company will find it difficult to design an effective communication program.

D. Determining the Communication Budget i. Objective-and-task budgeting calls for marketers to develop a communication budget by defining specific objectives, identifying the tasks to be performed, and estimating costs. ii. The main factors to consider when setting the communication budget follow. a. Stage in the product life cycle. New products merit large communication budgets to build awareness. Established brands have lower budgets. b. Product differentiation. Offerings in less differentiated categories (beer, soft drinks) require more advertising to establish a unique image. c. Market share. High-market-share brands require less advertising.

Building share by increasing market size requires larger expenditures. d. Message complexity. The number of repetitions needed to get the company‖s message across impacts the communication budget. e. Reach. A company‖s ability to reach consumers in an effective and costefficient manner. Communications to customers who are difficult to

reach require a larger budget. f. Competitive communication. In markets with many competitors, a brand must advertise more heavily. g. Available resources. The communication budget is limited by the company‖s resources. iii. In competitive-parity budgeting, companies set their communication budgets at parity with competitors. iv. Some companies set communication expenditures at a specified percentage of current or anticipated sales revenues.

III. Identifying the Target Audience and Crafting the Communication Message A. Identifying the Target Audience i. Start with a clear target audience in mind: potential buyers of the company‖s products, current users, deciders, or influencers, as well as individuals, groups, particular publics, or the general public. ii. The target audience is a critical influence on the communicator‖s decisions about what to say, how, when, where, and to whom. iii. The target market and the target audience do not always fully overlap. The target audience can differ from the target market.

B. Crafting the Communication Message i. Marketers are always seeking the ―big idea‖ that resonates with consumers rationally and emotionally, distinguishes the brand from competitors, and is broad and flexible enough to translate into different media, markets, and time periods. ii. A creative brief is an elaboration of the positioning strategy, which includes considerations such as key message, target audience, communication objectives, key brand benefits, support for the brand promise, and media. iii. The more messages explored, the higher the probability of finding an excellent one. iv. Management searches for appeals, themes, or ideas that will tie into the brand positioning and help establish points of parity or points of difference.

IV. Deciding on the Communication Media i. Companies must allocate their marketing communication budget over eight major modes of communication.

A. Defining the Communication Media Mix i. Customers come to know a brand through a range of touch points, including online clubs and consumer communities, trade shows, event marketing, sponsorship, factory visits, public relations and press releases, and social cause marketing. ii. Key aspects of communication formats a. Advertising—Any paid form of nonpersonal presentation and promotion of ideas, goods, or services by an identified sponsor via print media (newspapers, magazines, brochures, books, leaflets, directories), broadcast media (radio and television), network media, and display media (billboards, signs, posters, outer packaging, packaging inserts, ad reprints, and point-of-purchase displays) b. Events and experiences—Company-sponsored activities and programs designed to create daily or special brand-related interactions with consumers, including sports, arts, entertainment, and cause events as well as less formal activities c. Publicity and public relations—A variety of programs directed internally to

employees of the company or externally to consumers, other firms, the government, and media to promote or protect a company‖s image or its individual product communications d. Online and social media communication. Activities and programs designed to engage customers or prospects and directly or indirectly raise awareness, improve image, or elicit sales of products and services e. Mobile communication—A special form of online marketing that places communications on consumer‖s cell phones, smart phones, or tablets f. Direct marketing—Use of mail, phone, e-mail, online messaging, or in-person interaction to communicate directly with, or solicit response or dialog from, specific customers and prospects g.

Word of mouth—The passing of information from person to person by oral communication.

Social media can be viewed as a specific instance of word of mouth, where personal communication occurs online and is observable by others.

h. Personal selling—Face-to-face interaction with one or more prospective purchasers for the purpose of making presentations, answering questions, and procuring orders. i. Packaging—The product‖s styling and price, the shape and color of the package, the salesperson‖s manner and dress, the store décor, and the company‖s stationery all communicate something to buyers. j. AI and Marketing: The Marketing Communications Mix. AI is playing a more prominent role in digital marketing, as well a many other areas of marketing communications.

B. Developing a Media Plan i. Media planners must consider factors such as audience size, composition, and media cost and then calculate the cost per thousand persons reached. a. First, consider audience quality. b. Second, consider audience-attention probability. c. Third is the medium‖s editorial quality, meaning its prestige and believability. d. Fourth, consider the value of ad placement policies and extra services, such as regional or occupational editions, and lead-time for magazines. ii. Determining the Media Reach, Frequency, and Impact. Media selection aims to find the most cost-effective media to deliver the desired number and type of exposures to the target audience. iii. The number of exposures needed to reach a certain level of audience awareness is contingent on the reach, frequency, and impact of the media chosen. a. Reach (R). The number of different persons or households exposed to a particular media schedule at least once during a specified time period b. Frequency (F). The number of times within the specified time period that an average person or household is exposed to the message c. Impact (I). The qualitative value of an exposure through a given medium (e.g., a food ad should have a higher impact in Bon Appetit than in Fortune magazine) iv. Selecting Media Timing and Allocation. When choosing media, the advertiser must make both a macroscheduling and a microscheduling decision. a. The macroscheduling decision is related to seasons and the business cycle. b. The microscheduling decision calls for allocating communication expenditures within a short period to obtain maximum impact. v. When launching a new product, the advertiser must choose among four strategies: continuity, concentration, flighting, and pulsing.

V. Developing the Creative Approach A. Determining the Message Appeal i. We can broadly classify creative strategies as either informational or transformational appeals. a. An informational appeal elaborates on product or service attributes or benefits, and assumes strictly rational processing of the communication; logic and reason rule. o Two-sided informational messages may be more appropriate than one-sided when negative associations must be overcome. o Two-sided messages are more effective with more educated audiences and those who are initially opposed. o In a one-sided message, presenting the strongest argument first arouses attention and interest, important in media where the audience often does not attend to the whole message. o For a two-sided message, if the audience is initially opposed, start with the other side‖s argument and conclude with your strongest argument. b. A transformational appeal elaborates on a nonproduct-related benefit or image and often attempts to stir up emotions that will motivate purchase. o Communicators use negative appeals such as fear, guilt, and shame to get people to do things or stop doing things. o Messages are most persuasive when they moderately disagree with audience beliefs. ii. Motivational or ―borrowed interest‖ devices are often employed to attract attention and raise involvement with an ad. iii. These techniques are thought necessary in the tough new media environment of low-involvement processing and competing messages. iv. Attention-getting tactics may also detract from comprehension, however, or wear out their welcome fast or overshadow the product.

B. Selecting the Message Source i. Research has shown that the source‖s credibility is crucial to a message‖s acceptance. ii. The three most often identified sources of credibility are expertise, trustworthiness, and likability. a. Expertise is the specialized knowledge the communicator possesses to back the claim. b. Trustworthiness describes how objective and honest the source is perceived to be. c. Likability describes the source‖s attractiveness, measured in terms of candor, humor, and naturalness. iii. The most credible source will score high on all three dimensions—expertise, trustworthiness, and likability. iv. The principle of congruity implies that communicators can use their good image to reduce some negative feelings toward a brand but that, in the process, they might lose some esteem with the audience. v. Marketing Insight: Celebrity Endorsements focuses on the use of testimonials in a communication campaign.

C. Developing the Creative Execution i. Creative output is given by the ADPLAN framework: a. Attention indicates whether an advertisement will garner interest from the target audience. b. Distinction assesses whether an advertisement uses themes, content, or creative devices that c.

distinguish it from other advertisements in the category or in general.

Positioning describes whether an advertisement situates the brand in the right category, provides a strong benefit, and anchors the benefit with a reason for customers to believe the message.

d. Linkage communicates whether the target audience will remember the creative execution. e. Amplification captures whether individuals‖ thoughts about an advertisement are positive or negative.

f. Net equity pertains to how an advertisement fits with a brand‖s heritage and established associations.

VI. Measuring Communication Effectiveness i. Communication effectiveness can be measured from two perspectives: supply side and demand side. a. On the supply side, measuring communication effectiveness aims to assess the media coverage. b. Although supply-side methods provide quantifiable measures, equating media coverage with advertising exposure ignores the content of the respective communications. c. On the demand side, measuring communication effectiveness aims to assess the effect a company‖s campaign has on the target audience. d. Members of the target audience are asked whether they recognize or recall the message, how many times they saw it, what points they recall, how they felt about the message, what their previous attitudes toward the product and the company were, and what their current attitudes are. ii. Companies often examine the effectiveness of their communication campaigns to determine whether they are overspending or underspending on advertising. See Figure 12.4. iii. A company‖s share of advertising expenditures produces a share of voice (proportion of company advertising of that product to all advertising of similar competitive products) that earns a share of consumers” minds and hearts and, ultimately, a share of market. iv. To increase the effectiveness of its communication campaign, marketers pretest their advertisements. v. Marketers might measure whether and how the communication campaign influences sales. a. The historical approach uses advanced statistical techniques to correlate past sales to past advertising expenditures. b. Experimental data measure advertising‖s sales impact. c. The sales effect of advertising expenditures is measured, instead of settling for measures of communication effect.

CHAPTER

13

DESIGNING AN INTEGRATED MARKETING CAMPAIGN IN THE DIGITAL AGE

LEARNING OBJECTIVES After studying this chapter, you should be able to:

13.1 Define the key principles in managing an integrated marketing campaign.

13.2 Define the key aspects of managing an effective advertising campaign.

13.3 Explain how to design and manage online communications.

13.4 Describe the key aspects of managing social media.

13.5 Explain how to manage mobile communication.

13.6 Explain how to design meaningful events and experiences.

13.7 Describe the role of word of mouth in marketing communications.

13.8 Summarize how to manage publicity and public relations.

CHAPTER SUMMARY 1. Managing and coordinating the entire communications process calls for integrated marketing communications. Effective marketing communications recognizes the added value of a comprehensive plan to evaluate the strategic roles of a variety of communication disciplines and combines these disciplines to provide clarity, consistency, and maximum impact through the seamless integration of discrete messages.

2. The development of an integrated communication campaign requires a clear understanding of the specifics of the alternative media formats in order to create a consistent consumer experience. The most popular communication formats are advertising; online, social media, and mobile communication; events and experiences; word of mouth; publicity and public relations.

3. Advertising is any paid form of nonpersonal presentation and promotion of ideas, goods, or services by an identified sponsor. Advertisers include not only business firms but also charitable, nonprofit, and government agencies. The advertiser typically purchases media time or space to convey the company’s message to its target audience. The most popular forms of advertising are television, print, radio, online, and place advertising.

4. An important form of online communication is a company’s owned media. There are two common approaches to drive traffic: (1) search engine optimization (SEO), which aims to boost the likelihood that a link to a company’s content will appear at the top of the organic (nonpaid) search results; and (2) search engine marketing (SEM), which involves paying search engine companies to feature one’s content in the results of a particular keyword search.

5. Social media have become an influential form of marketing communication. They come in many forms: online communities and forums, blogs, social networks, and customer reviews. Social media reinforce other communications and offer marketers the opportunity to have a public voice and presence online for their brands. Marketers can

build or tap into online communities, inviting participation from consumers and creating a long-term marketing asset in the process.

6. Mobile communications are an increasingly important form of interactive marketing by which marketers can use text messages, apps, and ads to connect with consumers via their smartphones, tablets, and wearable devices. A key appeal of this form of interactive marketing is that it enables marketers to personalize messages on the basis of demographics, geolocation, and behavior.

7. Events and experiences are a means to become part of special and more personally relevant moments in consumers’ lives. Events can broaden and deepen the sponsor’s relationship with its customers by connecting a company’s product or service with unique and engaging experiences.

8. Word-of-mouth marketing aims to engage customers to share with others their views and experiences about products, services, and brands. Positive word of mouth sometimes happens organically with little advertising, but it can also be managed and facilitated. Viral marketing relies on word of mouth that encourages consumers to pass along audio, video, or written information about company-developed products and services to others online.

9. Publicity aims to promote a company and its offerings. Unlike advertising, where the company pays for the media, publicity uses editorial space and does not incur media costs. Common forms of publicity include news stories, articles, and editorials. The primary goal of publicity is to attract attention to the company or its offerings.

10. Public relations (PR) aims to manage the overall reputation of the company and its offerings, while building relationships with the community. The main tools of PR are publications, events, sponsorships, news, speeches, public service activities, and identity media. PR departments perform several functions: fostering positive press coverage about the organization, managing internal and external corporate communications, and regulation.

OPENING THOUGHT To facilitate one-stop shopping for marketers, media companies and ad agencies have acquired promotion agencies, public relations firms, package-design consultancies, website developers, social media experts, and direct-mail houses. They are redefining themselves as communication companies that help clients improve their overall communication effectiveness by offering strategic and practical advice on many forms of communication. These expanded capabilities make it easier for marketers to assemble various media properties—as well as related marketing services—in an integrated communication program.

Marketers must go where the customers are, and increasingly that’s online. Of the total time U.S. consumers spend with all media, more than half is spent online. Customers define the rules of engagement, however, and insulate themselves with the help of agents and intermediaries if they so choose. They define what information they need, what offerings they’re interested in, and what they’re willing to pay. Students can share their online experiences regarding online shopping, information search, and their use of Facebook,

Twitter, Instagram, and other social media websites. Students can discuss how social media allows consumers to become engaged with a brand at perhaps a deeper and broader level than ever before.

TEACHING STRATEGY AND CLASS ORGANIZATION PROJECTS 1. At this point in the semester-long marketing plan project, students should have agreed upon their use of social media as part of the integrated marketing communications matrix.

The instructor is encouraged to evaluate the submissions vis-à-vis the material presented in this chapter. In reviewing the submissions, the instructor should evaluate the continuity of the message across all possible digital communication media.

2. With the instructor’s guidance and attendance, contact a local advertising agency that specializes in the use of social media to gather from the agency’s management, their (ad agency) views on the topic of integrated marketing communications. Especially, what digital services have their clients requested that the ad agency performs to build an integrated marketing communications program?

ASSIGNMENTS (a) Companies are adopting integrated marketing communications as an approach to designing, communicating, and delivering a message through multiple strategies that work together and reinforce one another. During the COVID-19 pandemic, as more consumers were baking and making breakfast at home, sales for the Quaker Oats Company soared.

With post-pandemic sales sliding, Quaker launched a new global campaign. Have students research the Quaker Oats company.

After reading the articles, ask them to write a memo that summarizes how social media affects the way marketers engage consumers and include suggestions on how to measure social media’s effect on financial returns.

END-OF-CHAPTER SUPPORT Marketing Spotlight: Coca-Cola

1. What does Coca-Cola stand for? Does it mean the same thing to everyone? Explain.

Suggested answer: Student answers may vary. Answers may note that CocaCola stands for many things. Examples of what it stands for include happiness, togetherness, enjoyment, positivity, and realness. Answers may also note that it stands for its iconic product, Coca-Cola the drink. In its 100-plus year history, the company has worked to build these various intrinsic and extrinsic associations. Students may also point out that to some critics, however, it stands for overly sweetened soda devoid of nutritional value. Answers will likely note that because it stands for so many things, people have different associations for Coca-Cola, depending on their experience and perceptions of the brand.

Coca-Cola ranked as the most valuable brand in the world, and still was in the top 10 on Kantar BrandZ’s 2023, with a brand value of $106 billion.

2. Do you think Coca-Cola has been successful in adapting its marketing for the digital era? Why or why not?

Suggested answer: Student answers may vary. One potential answer is that Coca-Cola was not initially successful in adapting its marketing to the digital era, though they have accelerated to catch up. Long after digital marketing had taken hold, Coca-Cola was still anchored in a traditional marketing approach. In 2019, digital represented less than 30 percent of the company’s media spend. By 2023, however, digital was 60 percent of spend, and included channels like social media, online video, influencer marketing, and interactive experiences. The other 40 percent was spent on traditional media like sponsorships, TV, out-ofhome, and print.

Another potential answer is that Coca-Cola has been successful in adapting its marketing to the digital era in recent years. In a modern update to the brand’s early distribution strategy of being ―within arm’s-length of desire,‖ CEO James Quincey suggested the company needed to ask itself ―Is everything we do within a click’s reach of desire?‖ Coca-Cola launched a new digital-first global brand platform called "Real Magic" in 2021. The company leveraged generative AI technology to create a variety of experiences for consumers as part of the Real Magic platform. In addition, the company implemented GenAI across the business "to improve access to insight, market data, research and trends.‖

3. How would you position the Coca-Cola brand for a future where consumption of sugared soda continues to decline?

Suggested answer: Student answers may vary. Answers may suggest focusing on Diet Coke to minimize associations with sugar. Answers may also recommend positioning Coca-Cola as a fun indulgence, to prevent demand from deteriorating too much. Answers may also suggest that the company add non-sugared-soda beverages under the Coca-Cola brand, to broaden its positioning to include alternatives to soda. Students may note the importance to the company of using extensive market research in order to better anticipate and respond to consumers’ evolving tastes with new Coca-Cola flavors.

Marketing Spotlight: McDonald’s 1. What are McDonald’s core brand values? Have these changed over the years?

Suggested answer: McDonald’s core brand values include Convenience, Consistency, Service, Quality, Value, and Family. These brand values have been remarkably consistent over the years, with some exceptions. In the early 2000s, the company posted its first-ever quarterly loss. This loss was interpreted as reflecting the fact that McDonald’s had not been as focused on delivering the values of Quality and Value. Jim Skinner, McDonald’s former chief executive, explained, ―We got distracted from the most important thing: hot, high-quality food at a great value at the

speed and convenience of McDonald’s.‖ McDonald’s was able to recover by implementing a strategic effort called ―The Plan to Win.‖ The plan refocused McDonald’s restaurants on offering a better, higher-quality consumer experience. The company’s revenues exceeded $25 billion in 2023.

A more recent change is that McDonald’s now arguably puts more emphasis on Convenience and Service than ever, with the help of digital technology. The company began putting touchscreen kiosks in its restaurants, where diners could place orders and customize them. In addition, it invested in delivery, which by 2019 exceeded $4 billion in sales globally. McDonald’s also added mobile ordering for in-restaurant or curbside pickup, digital drive thru menus that could be dynamically updated, and rolled out touchscreen kiosks more broadly. As one commentator noted, "Its adoption of mobile ordering, delivery platforms, and digital payments underscores the company’s commitment to aligning with the digital preferences of today’s consumers." The company scored a viral hit in 2023 when it launched a campaign to celebrate the 52nd birthday of its character Grimace with a purple-hued berry milkshake.

2. How has McDonald’s use of digital marketing grown its brand equity?

Suggested answer: McDonald’s greatly increased its investment in digital marketing starting in 2020, as part of its new growth strategy titled "Accelerating the Arches." This investment helped McDonald’s grow its brand equity and its business results. The Accelerating the Arches strategy placed a strong emphasis on threading digital through its marketing communications all the way to the customer experience. A key feature of the strategy was the launch of the McDonald’s Rewards loyalty program in 2021, available exclusively on the McDonald’s app. The rewards program was a massive success, gaining more than 150 million 90day active loyalty members by 2023, who generated more than $20 billion in sales that year. McDonald’s CEO Chris Kempczinski highlighted the loyalty program as the "single biggest driver of digital adoption‖ for the company. Furthermore, he noted, ―It has consistently driven more frequent visits and incremental sales in each of the markets as we’ve launched.‖ In addition, McDonald’s launched a series of "famous meals" where it partnered with a celebrity to create and market a signature selection of menu items. The famous meals campaign generated robust engagement on social media and drove incremental foot traffic and revenue. For example, the BTS famous meal helped restaurant visits increase 12 percent in the first seven days of the promotion compared with the previous week.

McDonald’s continued to develop digital-first campaigns that kept the brand top of mind with consumers. Its 2022 Super Bowl "Can I get uhhhhh …" spot riffed on the moment of indecision diners experience when asked for their order from McDonald’s extensive menu and spawned countless spoofs on social media. The company scored a viral hit TikTok hit in 2023 when content inspired by the #grimaceshake campaign racked up more than 1.7 billion views. In 2024, McDonald’s announced plans to invest hundreds of millions of dollars in digital marketing over the next several years via the establishment of a dedicated digital marketing fund, which had the potential to further grow brand equity.

3. What future digital investments would you recommend McDonald’s make?

Suggested answer: Student answers may vary. Answers may note that digital is already core to McDonald’s ―Accelerating the Arches‖ strategy. Answers could suggest that the company further accelerate digital investments, for example by expanding the membership of the loyalty program. The company plans to give customers the ability to place mobile orders without downloading the app, and in a similar move it could enable people to join the McDonald’s rewards loyalty program without downloading the app, thus expanding loyalty program membership.

Answers may recommend offering additional incentives and increase promotion to drive app installs, which would yield more opportunities to market to customers and drive more mobile orders. Students may suggest that McDonald’s invest more in its CRM system, to enable more sophisticated customer segmentation and personalization, in order to generate even better results from its digital marketing spend.

McDonald’s could reinvest the returns from this more effective spend to further increase digital marketing reach and frequency, to drive incremental traffic to McDonald’s restaurants.

DETAILED CHAPTER OUTLINE As the communication landscape becomes ever more complex, companies are faced with the growing challenge of coordinating communication activities to ensure that they deliver a consistent message across different channels—and do so in a way that enables them to achieve their strategic goals. As a result, companies are adopting integrated marketing communications as an approach to designing, communicating, and delivering a message through multiple strategies that work together and reinforce one another. During the COVID19 pandemic, as ore consumers were baking and making breakfast at home, sales for the Quaker Oats Company soared.

I. Managing Integrated Marketing Communications A. Integrated marketing communications (IMC) is an approach to managing a communication campaign through a coordinated use of different communication tools that reinforce one another to achieve strategic goals. i. IMC can occur on four distinct levels: horizontal, vertical, internal, and external. a. Horizontal integration involves coordinating all relevant marketing actions with the communication campaign to achieve maximum customer impact. b. Vertical integration involves aligning the communication objectives with the higher-level goals. c. d. Internal integration involves sharing the relevant information fro

different departments with the communication team to create an effective campaign. e. External integration coordinates a company’s communication activities with those of the external collaborators. ii. The following criteria ensure that communications are integrated. a. Coverage. Coverage is the proportion of the audience reached by each communication option employed, as well as the amount of overlap among those options. b. Contribution. Contribution is the ability of a marketing communication to elicit the desired response from consumers, and to exert communication effects on them, without exposure to any other communication option. c. Commonality. Commonality is the extent to which common associations are reinforced across communication options. d. Complementarity. Communication options are often more effective when used in tandem. Complementarity involves emphasizing different associations and linkages across communication options. e. Conformability. In any integrated communication program, the message will be new to some consumers and familiar to others. Conformability reflects the extent to which a marketing communication option works for both groups of consumers. f. Cost. Marketers must evaluate marketing communications on all these criteria against their cost to arrive at the most effective and most efficient communications program. iii. An integrated communication campaign requires an understanding of the specifics of alternative media formats which create a consistent experience for target customers.

II. Advertising i. Advertising consists of any presentation and promotion of ideas, goods, services, and brands by an identified sponsor using paid media. ii. AI and Marketing: Advertising outlines how artificial intelligence is affecting how both clients and agencies approach advertising.

A. Television Advertising

i. Television is generally acknowledged as the most powerful advertising medium and reaches a broad spectrum of consumers at low cost per exposure. ii. TV can vividly demonstrate product attributes and persuasively explain corresponding consumer benefits.

iii. TV can dramatically portray user and usage imagery, brand personality, and other intangibles. iv. Television has the opportunity to tap a captive audience during live programming at important events. v. Product-related messages and the brand itself can be overlooked. vi. High volume of nonprogramming material on television creates clutter that makes it easy for consumers to ignore or forget ads. vii. Another consideration is the relatively high cost of television advertising. viii. With online streaming, television programming has expanded to streaming to computers, laptops, tablets, and mobile phones.

B. Print Advertising i. Print media can provide detailed product information and effectively communicate user and usage imagery. ii. The static nature of the visual images in print media makes dynamic presentations or demonstrations difficult, and print media can be fairly passive. iii. Newspapers are timely and pervasive, magazines are typically more effective at building user and usage imagery. iv. Print advertising has steadily declined in recent years. v. Although advertisers have some flexibility in designing and placing newspaper ads, relatively poor reproduction quality and short shelf life can diminish the impact. vi. A print ad should be clear, consistent, and well branded.

C. Radio Advertising i. Radio’s main advantage is flexibility—stations are very targeted, ads are relatively inexpensive to produce and place, and short closings for scheduling them allow for quick response. ii. Radio can engage listeners through a combination of popular brands, local presence, and strong personalities. iii. It is a particularly effective medium in the morning; it can also let companies achieve a balance between broad and localized market coverage. iv. Radio advertising is benefiting from the growing popularity of podcasts. v. Radio’s obvious disadvantages are its lack of visual images and the relatively passive nature of the consumer processing that results.

D. Online Advertising i. Advantages of Online Marketing Communications a. The variety of online communication options means companies can offer or send tailored information or messages that engage consumers by reflecting their special interests and behavior. b. Marketers can easily trace their effects by noting how many unique visitors click on a page or ad, how long they spend with it, what they do on it, and where they go afterward. c. Contextual placement means marketers can buy ads on sites related to their own offerings or place advertising based on keywords customers type into search engines to reach people when they’ve actually started the buying process. ii. Disadvantages of Online Marketing Communications a. Consumers can effectively screen out most messages.

b. Marketers may think their ads are more effective than they really are if bogus clicks are generated by software-powered websites. c. Advertisers also lose some control over their online messages, which can be hacked or vandalized. iii. Native advertising involves materials resembling the publication’s editorial content but is intended to promote the advertiser’s product. iv. With its non-disruptive approach, native advertising has grown in popularity worldwide. v. Although it is utilized primarily in online communications, native advertising is also used in traditional media formats including print, television, and radio.

E. Place Advertising i. Place advertising includes creative and unexpected forms to grab consumers’ attention where they work, play, and shop. ii. Billboards use colorful, digitally produced graphics, backlighting, sounds, movement, and unusual—even 3D—images. iii. Public Spaces. Movie screens, airplane bodies, and fitness equipment, as well as in classrooms, sports arenas, office and hotel elevators, and other public places iv. As the effectiveness of traditional means of communication declines, advertisers use public spaces to create a memorable impression of the company and its offerings. v. Product Placement. Marketers pay hundreds of thousands of dollars for their products to make cameo appearances in movies and on television. vi. Point of Purchase. The appeal of point-of-purchase advertising is that consumers make many brand decisions in the store (e.g., shopping carts, cart straps, aisles, and shelves and in-store demonstrations, live sampling, and instant coupon machines).

III. Online Communication A. Customers are increasingly online. Of the total time U.S. consumers spend with all media, more than half is spent online.

B. Company Website i. Companies must design websites that embody or express their purpose, history, products, and vision and that are attractive on first viewing and interesting enough to encourage repeat visits.

ii.

Companies employ microsites, individual webpages or clusters of pages that function as supplements to a primary site.

C. Driving Online Traffic i. Search engine optimization (SEO) describes activities designed to improve the likelihood that a link for a brand ranks as high as possible in the order of all nonpaid links when consumers search for relevant terms. a. SEO is less costly to implement than search engine marketing. ii. Search engine marketing (SEM) describes activities whereby the company pays search engine companies to be featured in the results of particular keyword searches that serve as a proxy for the consumer’s product or consumption interests. a. Advertisers pay only if people click on the links, but marketers believe consumers who have expressed interest by engaging in search are prime prospects. b. The cost per click depends on how high the link is ranked on the page and the popularity of the keyword.

IV. Social Media i. Social media are a means for consumers to share text, images, audio, and video information with one another and with companies, and vice versa. a. Social media allow marketers to establish a public voice and presence online. b. They can cost-effectively reinforce other communication activities. c. Because of their day-to-day immediacy, they can also encourage companies to stay innovative and relevant. d. Marketers can build or tap into online communities, inviting participation from consumers and creating a long-term marketing asset in the process.

A. The Growth of Social Media i. Social media allow consumers to become engaged with a brand at a deeper and broader level. a. Research suggests that brands and products vary in how social they are online. b. Only some consumers want to engage with some brands online—and even then, only some of the time. ii. One challenge is the speed with which social media marketers are expected to react to relevant news and events. a. The internet permits scrutiny and criticism from consumers and organizations. iii. Firms can create a strong online presence and offer alternative points of view if negative

feedback occurs.

a. If the firm has a strong online community, members will defend the brand and play a policing role regarding inaccurate or characterizations.

B. Social Media Platforms include: i. online communities and forums ii. blogs (individual blogs and blog networks) iii. social networks (like Facebook, Twitter, and YouTube) iv. customer reviews a. Online Communities and Forums. Often created by consumers or groups of consumers with no commercial interests or company affiliations. b. Others are sponsored by companies whose members communicate with the company and with each other through postings, text messaging, and chat discussions about special interests related to the company’s products and brands. c. Online communities and forums can be a valuable resource for companies and fill multiple functions by both collecting and conveying key information. d. A key for success in online communities is to create individual and group activities that help form bonds among community members. e. Information flow in online communities and forums is two-way and can provide companies with useful, hard-to-get customer information and insights. ii. Blogs, regularly updated online journals or diaries, have become an important outlet for word of mouth. a. Blogs bring together people with common interests. b. Some consumers use blogs to get retribution for bad service or faulty products. iii. Social networks have become an important force in business-to-consumer and business-to-business marketing. a. Influencer marketing refers to the use of a popular online figure to promote a product, service, or brand within his or her social media feed. b. The high fees collected by influencers and the lack of accurate measures of their market impact have created a global marketplace for social media fraud. iv. Customer reviews can be especially influential in shaping customer preferences and buying decisions. v. Research has shown that social influence can lead to disproportionally positive online ratings, and subsequent raters are more likely to be influenced by previous positive ratings than negative ones. a. Consumers posting reviews are susceptible to conformity pressures and adopting norms of others. b. Positive online reviews or ratings are often not as influential or valued as much as negative ones. c. Marketing Insight: Influencer Marketing delves into the pros and cons of engaging with influencers.

V. Mobile Communication A. Characteristics of a Mobile Device i.

It is uniquely tied to one user. ii.

It is virtually always ―on‖ given it is typically carried everywhere.

iii. iv. v

It allows for immediate consumption because it is in effect a channel of distribution with a payment system.

It is highly interactive given it allows for geotracking and picture and video taking.

With the increased capabilities of smartphones, however, mobile ads can be more than just a display medium using static ―mini-billboards.‖

vi.

Interest has been generated in mobile apps adding convenience, social value, incentives, and entertainment, and making consumers’ lives a little or a lot better. a. Smart mobile devices are also conducive to boosting loyalty programs. b. The ability of mobile to make offers to consumers at the point of purchase (e.g., digital coupons) has interested marketers. c. Consumers are more engaged and attentive when using their smartphones than when they are online.

vii. A number of m-commerce companies are eliminating ads to allow consumers to make purchases with as few clicks as possible.

VI. Events and Experiences A. Managing Events i. Becoming part of a personally relevant moment in consumers’ lives through sponsored events and experiences can broaden and deepen a company’s or brand’s relationship with the target market. ii. Marketers report a number of reasons to sponsor events: a. To identify with a particular target market or lifestyle. Old Spice sponsors college sports. b. To increase the salience of a company or product name. Events offer sustained exposure to a brand, a necessary condition for reinforcing brand salience. c. To create or reinforce perceptions of key brand image associations. Events have associations that help to create or reinforce brand associations. d. To enhance corporate image. Sponsoring and organizing events can improve perceptions that the company is likable and prestigious. e. To create experiences and evoke feelings. The feelings engendered by an exciting or rewarding event may indirectly link to the brand. f. To express commitment to the community or on social issues. Cause-related events sponsor nonprofit organizations and charities.

g. To entertain key clients or reward key employees. Many events include lavish hospitality tents and other special services or activities for sponsors and their guests. h. To permit merchandising or promotional opportunities. Many marketers tie contests or sweepstakes, in-store merchandising, direct response, or other marketing activities to an event. iii. Despite these potential advantages, the result of an event can still be unpredictable and beyond the sponsor’s control.

B. Creating Experiences i. Experiential marketing not only communicates features and benefits but also connects a product or service with unique and interesting experiences. a. Experiential marketing aims to let customers experience how the company’s offering fits in their life. b. Many firms are creating their own events and experiences to create consumer and media interest and involvement. c. A popular form of experiential marketing involves event sponsorship. ii. Companies can even create a strong image by inviting prospects and customers to visit their headquarters and factories.

VII. Word of Mouth A. Consumers use word of mouth to talk about dozens of brands each day, from media and entertainment products such as movies, TV shows, and publications to food products, travel services, and retail stores. i. Companies are acutely aware of word-of-mouth power. ii. Viral marketing relies on word of mouth that encourages consumers to pass along audio, video, or written information about company-developed products and services to others online. a. Positive word of mouth sometimes happens organically with little advertising, but it can also be managed and facilitated. b. Without question, more advertisers now seek greater earned media— unsolicited professional commentary, personal blog entries, social network discussion—as a result of their paid media and owned media efforts. c. Products don’t have to be outrageous or edgy to generate word-of-mouth buzz. iii. Research has shown that consumers tend to generate positive word of mouth themselves and to share information about their own positive consumption

experiences.

VIII. Publicity and Public Relations A. Publicity involves securing editorial space—as opposed to paid space—in the media to promote a product, service, idea, place, person, or organization. i. Marketing managers are turning to publicity to build awareness and brand knowledge for both new and established products. ii. Publicity is effective in blanketing local communities and reaching specific groups, and it can be more cost-effective than advertising. iii. Publicity is free—though the advertiser might have to pay an agency to secure media coverage. iv. Because the source of the message is a third party, publicity is more credible and more likely to influence the target audience. v. The downside of publicity is that it cannot be directly controlled by the company. vi. Publicity plays an important role in a variety of tasks: a. Launching new products. The amazing one-time commercial success of toys such as Leap Frog owes a great deal to strong publicity. b. Repositioning mature products. In a classic case, New York City had extremely bad press in the 1970s until the ―I Love New York‖ campaign. c. Building interest in a product category. Companies and trade associations have used publicity to rebuild interest in declining commodities such as eggs. d. Defending products that have encountered public problems. Publicity professionals must be adept at managing crises. e. Building the corporate image in a way that reflects favorably on its products.

The late Steve Jobs’s heavily anticipated Macworld keynote speeches helped to create an innovative, iconoclastic image for Apple Corporation.

B. Public Relations i. Public relations (PR) includes a variety of programs to promote or protect a company’s image among the relevant stakeholders. ii. The wise company takes concrete steps to manage successful relationships with its key publics.

iii. Most have a PR department that monitors the attitudes of the firm’s publics and distributes information and communications to build goodwill. iv. Many companies have PR departments that perform three main functions. a. They provide press coverage by presenting news and information about the organization in the most positive light. b. They manage corporate communications by promoting understanding of the organization. c. PR departments engage in lobbying. v. Public relations can involve different media formats. a. Publications: Companies rely extensively on published materials to reach and influence their target markets. b. Events: Companies can draw attention to new products or other company activities by arranging and publicizing special events. c. News: One of the major tasks of PR professionals is to find or create favorable news about the company. d. Speeches: Company executives must field questions from the media or give talks at events. e. Public Service Activities: Companies can build goodwill by contributing money and time to good causes. f. Identity Media: Companies need a visual identity that the public immediately recognizes.

CHAPTER

14

PERSONAL SELLING AND DIRECT MARKETING

LEARNING OBJECTIVES After studying this chapter, you should be able to: 14.1 Define the key aspects of the selling process.

14.2 Explain how to design an effective sales force organization.

14.3 Explain how to manage a sales force.

14.4 Discuss the role of direct marketing, and identify the key direct marketing channels.

CHAPTER SUMMARY 1. Personal selling involves a direct interaction with one or more prospective purchasers for the purpose of making presentations, answering questions, and procuring orders.

Personal selling has three notable qualities: it is customized, relationship oriented, and response oriented.

2. There are several major steps in any effective sales process: prospecting, pre-approach, presentation, persuasion, closing, and servicing. Effective salespeople are trained in methods of analysis and customer management, as well as in the art of sales professionalism.

3. The sales force is a company’s link to its customers. The salesperson is the company to many of its customers, and it is the rep who brings back to the company much-needed information about the customer. Thoughtful design and management of the sales force is of utmost importance in maximizing the effectiveness and cost efficiency of a company’s sales efforts.

4. Designing the sales force requires choosing objectives, strategy, structure, size, and compensation. Objectives may include prospecting, targeting, communicating, selling, servicing, information gathering, and allocating. The strategy requires choosing the most effective mix of selling approaches. Structuring the sales force entails dividing territories by geography, product, or market (or some combination of these). To estimate how large the sales force needs to be, the firm estimates the total workload and how many sales hours (and hence salespeople) will be needed.

Compensating sales reps requires deciding what types of salaries, commissions, bonuses, expense accounts, and benefits to give and how much weight customer satisfaction should have in determining total compensation.

5. Managing the sales force involves five key components: (1) recruiting and selecting sales representatives; (2) training the representatives in sales techniques and in the company’s products, policies, and customersatisfaction orientation; (3) supervising the sales force and helping reps to use their time efficiently; (4) motivating the sales force and balancing quotas, monetary rewards, and supplementary motivators; and (5) evaluating individual and group sales performance.

6. Direct marketing is the use of consumer-direct channels to reach and deliver goods and services to customers without using marketing intermediaries. Direct marketers can use a number of channels to reach individual prospects and customers: direct mail, catalog marketing, telemarketing, kiosks, websites, and mobile devices. They often seek a measurable response, typically a customer order, through direct-order marketing.

7. Major direct marketing channels include direct mail, catalog marketing, telemarketing, and infomercials. These channels offer several benefits to companies. (1) They provide companies with the option not only to inform target customers about the benefits of the offering but also to generate a sale. (2) Relative to other forms of communication, they are less visible to competitors. And (3) they enable marketers to measure responses to their campaigns to decide which have been the most profitable.

OPENING THOUGHT Students should be very familiar with the marketing systems described in this chapter, especially internet shopping. The challenge to the instructor in this chapter is ensuring that the students understand that internet marketing (e-marketing) is just one of the many different avenues available to marketers trying to reach their target markets. Students may be predisposed to believe that ― all‖ marketing or the ― future‖ of marketing is via the electronic channels. The instructor should encourage in-class discussions on this position and he/she is encouraged to take the ― defensive‖ position to help the students understand the many levels of business and consumer marketing.

For those students who are not currently salespeople, or are not interested in a career in sales, their opinions and views of salesmanship (derived from personal experiences, TV, and other forms of communication) can be an interesting source of discussion. Some students will believe that ― all salesmen lie.‖ The section in this chapter concerning the sales force may present a challenge to the instructor in disproving or refuting these

common assumptions about salespeople long enough to communicate the material. The instructor is encouraged to spend sufficient time on this section to show/demonstrate to the students the role that the sales force plays in the overall marketing communications mix for many firms. Inviting sales managers and their salespeople to the class as guest speakers will help communicate the professionalism and difficulty of this profession.

TEACHING STRATEGY AND CLASS ORGANIZATION PROJECTS 20.

At this point in the semester-long project, students who have decided to market their product/service through direct market channels should submit their proposals. All other groups must decide at this point if they will use a direct sales force and if so to outline the specifics (including financials) for this option.

21.

Market demassification has resulted in an ever-increasing number of market niches and the use of direct marketing to reach these niches is growing. In small groups (five students maximum), have students collect as many direct marketing advertising pieces of information sent to them over the course of a month during the semester. After collecting the catalogs, credit card offers, e-mail notices, and other forms, students are to evaluate the effectiveness of these techniques in causing them to purchase. Which one(s) of these direct marketing techniques do they feel is the most successful (caused a purchase) or least effective (caused irritation to them), and why? What can astute marketers do to increase the effectiveness of their direct marketing?

ASSIGNMENTS The direct market offering, according to the text, consists of five elements—the product, offer, medium, distribution method, and creative strategy. Have the students collect direct marketing offerings (sent to them, their families, or close friends). On a scale of 1-5 (1 being does not work, 5 being works very well), rank each of these offerings in terms of these five elements. What is the group’s consensus as to which offers work the best (or not at all) and why?

Most managers agree that to increase the motivation of their salespeople they have to reinforce the intrinsic and extrinsic rewards offered.

However, this is not a universally accepted opinion. Many managers use one type of reward almost exclusively in their motivation techniques. Students should interview three sales managers and ask them if they emphasize intrinsic or extrinsic rewards in their salesperson’s motivation? Which method do they personally feel is the most effective and why? Which method do they wish they did a better job in and why? From this research, can the students form a casual relationship between the industry, competitive nature of the industry, and the motivation techniques used?

Dell® Computers has begun setting up kiosks demonstrating their products in regional malls across the country. They are also selling their computers in Walmart stores, Best Buy, and other U.S. retailers. Dell will soon be selling through retailers in China. Consumers are no longer directed to their website to place an order. Obviously, Dell has had to change its ― contact‖ with consumers. What effect do you believe this type of change in their direct marketing mantra is having on Dell’s business? Must other direct marketers make the change?

Students are to assume the role of a salesperson calling on Jones Inc.,

which is a firm employing 50 salespeople, but currently does not use any customer relationship software. Students are to ― sell‖ the ― buyer‖ on the advantages of ― NOW!‖ by demonstrating situation, problem, implication, and need-payoff questions. Students should reverse roles at appropriate time intervals so that each student has the opportunity to ― play‖ buyer and seller.

Questions for the class: How effective did you find the SPIN method to be in your ― selling situation?‖ How difficult is it to frame questions in terms of situation, problem, implication, and need-payoff? Do you believe that the SPIN method works?

Infomercials can be found selling almost everything possible! As a group, have the students videotape three different infomercials and critically evaluate the effectiveness of these commercials in light of the five elements of the direct market offering. Which one(s) do the students believe is the most (least) effective and why?

END-OF-CHAPTER SUPPORT Marketing Spotlight: Nordstrom

1. How important is the sales staff to Nordstrom’s brand positioning?

Suggested answer: Nordstrom’s passionate, empowered sales staff is a vital contributor to its positioning as an intensively customerfocused high-end retailer. Many customers choose to shop at Nordstrom, rather than at its competitors, because of its standing as the premier provider of customer service in retail. Nordstrom’s management philosophy focuses on empowering the managers and the instore sales force to make decisions that favor the customer, not the company. The company seeks to hire energetic individuals with an entrepreneurial spirit and warm demeanor who could be trained to sell, rather than seasoned salespeople who aren’t as friendly.

Stories of Nordstrom’s exceptional service abound. Its sales representatives send thank-you cards to customers who shop there, warm up their customers’ cars on cold days, and hand-deliver special orders to customers’ homes. Nordstrom’s sales associates have the freedom to sell merchandise in any department, giving them even more opportunities to develop tighter relationships with their customers.

To better personalize the shopping experience, Nordstrom installed a tool called Personal Book at its registers that enables salespeople to record and (later) review and recall customers’ specific preferences to better personalize their shopping experience. Service plays the same vital role both in-store and online. The company created tools for its stylists and salespeople that enable them to ― communicate with customers and curate looks for them‖ on the Nordstrom app, as well as to engage customers on social media. In 2024, Nordstrom launched a third-party marketplace on Nordstrom.com that enabled the company to offer customer a wider selection of brands, styles, and sizes without having to take on the financial risk of owning the inventory.

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

Suggested answer: Student answers may vary, given the range of possibilities to enhance customer service and increase loyalty.

Answers may highlight the opportunity for Nordstrom to augment its personal shopping program, which would both enhance service and increase loyalty. The company could more aggressively market the fact that every customer can book a free appointment in-store with a personal stylist at Nordstrom. They could also send personal shoppers to customers’ homes for wardrobe consultations and invest in virtual technology to enable remote experiences with personal stylists.

Nordstrom could also give customers accelerated reward point earnings for engaging a personal stylist. Over 90 percent of its Icon tier Nordy Club members purchased something during the 2023 edition of the company’s annual Anniversary Sale.

Answers may also recommend that Nordstrom increase the perks and benefits of its loyalty program, for example by offering more instore exclusive shopping windows, additional free personal stylist appointments beyond the first one, and more exclusive events and webcasts, and deeper discounts on food at Nordstrom in-store restaurants. Answers may also recommend other service enhancements that could build loyalty, such as free same-day home delivery in addition to in-store pickup or a subscription program that offered unlimited personal stylist sessions and one free monthly clothing item below a certain amount.

3. How should Nordstrom address the increasing dominance of online shopping? Can it successfully compete with online-only retailers and direct-to-consumer brands?

Suggested answer: Student answers may vary. Answers may recommend that Nordstrom address the increasing dominance of online shopping— and compete with online-only retailers and DTC brands—by finding innovative ways to bring its intensive customer focus to its omnichannel operations. Answers may argue that the company can succeed if it remains strategically focused on customer service and adds new ways to deepen and develop its customer–salesperson relationship online and offline. Nordstrom has already embraced digital technology to enable customers to buy through the channel of their choice and to extend its customer service focus to online shopping. For example, it enabled its stylists and salespeople to engage with customers in the Nordstrom app or on social media. It also offers free shipping and its generous returns policy for online orders.

Answers may also recommend that Nordstrom leverage its store network in combination with its online operations, as it has done by offering in-store pickup of online orders within an hour. Online-only retailers and most DTC brands do not have a store network to leverage. In addition, answers may highlight the opportunity for the company to build on its existing moves to cater to the tastes of its ― digital native‖ Millennial and Gen Z customers, which included adding DTC brands, investing in its lower-priced Nordstrom Rack stores, and opening a third-party marketplace. As a result, one observer noted that ― Compared with its department store rivals, Nordstrom has had more success with younger shoppers.‖ Students may reason that if it finds new ways to bring its customer obsession to

its omnichannel operations, Nordstrom can stay competitive in an increasingly online world. Digital sales as a percentage of total sales rose steadily from 21 percent in 2015 to 38 percent in 2022.

Marketing Spotlight: Progressive Insurance

1. What has Progressive done well over the years to attract new insurance customers?

Suggested answer: Progressive’s phenomenal growth stems from its philosophy to approach auto insurance from the start ― like no other company had.‖ This philosophy led to the development of its innovative and affordable insurance policies, its effective direct marketing campaigns, and its enablement of independent agents.

An early key to Progressive’s success was its willingness to insure high-risk drivers that other insurance companies wouldn’t do business with. The company also looked at risk data differently than its competitors, segmenting drivers into more categories and corresponding insurance premium price levels than the industry norm, which enabled it to be more profitable. It also introduced a comparison insurance shopping service, enabling prospective customers to get a Progressive quote as well as comparison quotes from three competitors.

Progressive has also long been a leader in innovating to improve its service for policyholders. In the 1950s, it was the first auto insurance company to offer drive-thru claim service and reduced rates for low-risk drivers. It later introduced 24-hour claim service and was the first insurance company to introduce the Immediate Response Vehicle (IRV), which brings trained claims professionals to wherever customers need them, including the scene of an accident. It was the first auto insurer to launch a website and the first to enable the purchase of a policy online. More recent tech innovations include usage-based vehicle insurance, online claims reporting, and the Progressive app.

Progressive used extensive direct marketing to consumers, targeting drivers considering a new insurance policy or changing insurers. The company is best known for its iconic character Flo, first introduced in its advertising in 2008. Flo has helped differentiate Progressive in a competitive industry. Flo has become one of the most recognized advertising icons in marketing today and has made ― Progressive‖ a household name.

In addition to building its direct channel, Progressive also invests heavily in its agency channel by developing solutions to empower its network of independent agents nationwide. Progressive’s ― For Agents Only‖ (FAO) state-of-the-art portfolio-quoting platform contains multiple features designed to enhance the effectiveness and efficiency of independent insurance agents. The company is the number one writer of personal auto policies through independent agents in the U.S. Between 1996 and 2023, the company’s revenues grew from $3.4 billion to more than $60 billion.

2. Discuss Progressive’s direct marketing efforts, which primarily revolve around the campaign featuring the character Flo. Why does it resonate so well with consumers?

Suggested answer: Progressive’s direct marketing has been a key driver of growth for the business. As insurance buyers became more educated about the vehicle insurance category and increasingly costconscious, they became less likely to use an agent during the buying process. Consequently, Progressive focused on growing its Direct channel, and in 2018, the Direct channel surpassed the Agency channel in personal lines revenue. Progressive has grown from just being the 38th largest property and casualty insurer in the U.S. in 1990 to the third largest by 2018, where it remains today.

Since 2008, Progressive's direct marketing has focused on ads featuring the Flo character, a quirky, witty, earnest and expressive Progressive employee. The Flo commercials were initially set in an imaginary insurance superstore with blue and white boxes on the shelves that represent different insurance products. The company found that using a person in a store to represent Progressive insurance helps reframe the intangible nature of insurance into a tangible product in consumers’ minds. Consumers find Flo memorable and likable, and she also represents traditional service values, similar to what you would find in a diner where you are on a first name basis with the wait staff. She provides a human face for what might otherwise be a completely computer-mediated exchange. The ads feature a persistent direct response call-to-action to call 800PROGRESSIVE or visit Progressive.com.

To continue to keep the campaigns fresh, since 2014 Flo has been joined in the ads by a growing collection of sidekicks called ― The Squad,‖ who also play apron-clad Progressive employees. The Squad adds new dimensions to the campaign and helps further humanize Flo by showing her interacting with her ― coworkers.‖ Progressive’s marketing team is careful to keep Flo modern and relevant. She appears across all types of screens—including those on TVs, computers, mobile devices, smartphone apps, video games like Sims Social, and animated YouTube videos. She has her own Facebook page (along with millions of fans) and Twitter/X handle. Progressive has also introduced separate characters in two campaigns that don’t interact with Flo and her superstore Squad to promote different aspects of its business with different messages. In 2017, it introduced its Dr. Rick character in a campaign to promote its home and auto insurance bundle.

3. What else should Progressive be doing to ensure that it remains “ top of mind” and well-regarded with both consumers and agents in the competitive insurance industry?

Suggested answer: Student responses may vary. Answers may recommend Progressive continue to ensure Flo and its other characters stay modern and relevant. Answers may also identify the need for Progressive to maintain a high level of advertising spend, given how competitive the insurance market is. Students may discuss the importance of Progressive continuing to focus on digital marketing to connect with modern consumers. All the recommendations above would help Progressive stay top-of-mind with consumers and agents. Answers may also discuss the need for Progressive to keep adding digital innovations to the experience of purchasing and using Progressive’s insurance, and with the agent experience. For example, Progressive could add new ways to use its website, app and agent portal for

consumers and agents to configure insurance policies that are even more personalized to their needs, driving habits, and budgets.

DETAILED CHAPTER OUTLINE Opening vignette: Although mass and digital communications provide many benefits, there are times when personal communications are needed to be relevant and close a sale. A legendary direct marketer, L.L. Bean brings a personal touch to all its customer interactions. The company’s guarantee of 100 percent satisfaction is still at the core of business: ― Sell good merchandise at a reasonable profit, treat your customers like human beings, and they will always come back for more.‖ Today it is a $1.7 billion company, and although it sends 200 million of its famous catalogs annually, it has transitioned from a direct marketer to an omnichannel marketer. L.L Bean now sells online via -e-commerce in 150+ countries.

Personalizing communications and saying and doing the right thing for the right person at the right time are critical for marketing effectiveness. In this chapter, we consider how companies personalize their marketing communications to have more impact. We begin by evaluating personal selling and then move on to consider direct marketing.

I. Personal Selling A. Selling

i. Personal selling involves direct interaction with one or more prospective buyers for the purpose of making presentations, answering questions, and procuring orders (sales presentations, sales meetings, incentive programs, samples, and fair and trade shows). ii. Personal selling is the most effective tool at later stages of the buying process, particularly in influencing buyer preferences, conviction, and action. iii. Personal selling has three notable qualities: a. It is customized, meaning that the message can be designed to appeal to any individual. b. It is relationship oriented, meaning that personal-selling relationships can range from a matter-of-fact selling relationship to a deep personal friendship. c. It is response oriented, meaning that the buyer is often given personal choices and encouraged to respond directly. iv. Companies now spend hundreds of millions of dollars each year to train them in methods of analysis and customer management and to transform them from passive order-takers into active order-getters. v. AI and Marketing Sales. Artificial Intelligence is profoundly transforming personal selling and sales force management in many ways.

B. Personal Selling as a Process i. Most sales training programs agree on the major steps in any effective sales process. These steps are prospecting, pre-approach, presentation, persuasion, closing, and servicing. See Fig. 14.1.

a. Prospecting and Qualifying. The first step in selling is to identify and qualify prospects. BANT: budget, authority to buy, a compelling need for the product or service, and a timeline for delivery that aligns with what is possible. b. Pre-approach. The salesperson should learn as much as possible about the prospect company. c. Presentation and Demonstration. Features, advantages, benefits,

and value (FABV) approach.

d. Persuasion. Selling is an interactive process in which buyers pose objections, which stem from two sources: psychological resistance and logical resistance. e. Closing. Without closing, there is no sale.

f. Servicing. Follow-up and maintenance are necessary to ensure customer satisfaction and repeat business.

C. Managing the Sale

i. Many principles of personal selling and negotiation are transaction oriented in order to close a specific sale. ii. SPIN method builds long-term relationships by asking prospects several types of questions: a. Situation questions—these ask about facts or explore the buyer’s present situation. b. Problem questions—these deal with problems, difficulties, and dissatisfactions the buyer is

experiencing. c.

Implication questions—these ask about the consequences or effects of a buyer’s problems,

d.

difficulties, or dissatisfactions.

Need-payoff questions—these ask about the value or usefulness of a proposed solution.

II. Designing the Sales Force (See Fig. 14.2) A. Sales Force

i. The original and oldest form of direct marketing is the field sales call.

ii. To locate prospects, develop them into customers, and grow the business, companies rely on a professional sales force or hire manufacturers’ representatives. iii. Salespeople are the company’s personal link to its customers. iv. In designing the sales force, the company must develop sales force objectives, strategy, structure, size, and compensation.

B. Sales Force Objectives

i. Sales reps need to know how to diagnose a customer’s problem and propose a solution. ii. Salespeople complete one or more specific tasks: a. Information gathering. Conducting market research and doing intelligence work. b. Targeting. Deciding how to allocate their time among prospects and customers. c. Communicating. Communicating information about the company’s products and services. d. Selling. Approaching, presenting, answering questions, overcoming objections, and closing sales. e. Servicing. Providing various services to the customers—consulting on problems, rendering technical assistance, arranging financing, and expediting delivery. f. Allocating. Deciding which customers will get scarce products during product shortages. iii. Too often marketing and sales are in conflict: the sales force complains marketing isn’t generating enough leads, and marketers complain the sales force isn’t converting them.

iv. Improved collaboration and communication between these two can increase revenues and profits. v. Marketers believe sales forces are more effective in the long run if they understand and appreciate marketing as well as selling.

C.

Sales Force Strategy i. Once the company chooses its strategy, it can use a direct or a contractual sale force. See Fig. 14.3.

a. A direct (company) sales force consists of full- or part-time paid employees who work exclusively for the company. Inside sales people conduct business from the office and receive visits from prospective buyers, and field sales people travel and visit customers. b. A contractual sales force consists of manufacturers’ reps, sales agents, and brokers

who earn a commission based on sales.

D. Sales Force Structure i. A company that sells one product line to one end-using industry with customers in many locations would use a territorial structure. ii. A company that sells many products to many types of customers might need a product or market structure. iii. Four types of sales force:

a. A strategic market sales force assigned to major accounts b. A geographic sales force calling on customers in different territories c. A distributor sales force calling on and coaching distributors d. An inside sales force marketing and taking orders online and via phone iv. Companies must deploy sales forces strategically so that they call on the right customers at the right time in the right way, acting as ― account managers‖ who arrange fruitful contact between people in the buying and selling organizations. v. Selling increasingly calls for teamwork. vi. Marketing Insight: Major Account Management E. Sales Force Size i. Workload approach:

a. Group customers into size classes according to annual sales volume. b. Establish desirable call frequencies (number of calls on an account per year) for each customer class. c. Multiply the number of accounts in each size class by the corresponding call frequency to arrive at the total workload for the country, in sales calls per year. d. Determine the average number of calls a sales representative can make per year. e. Divide the total annual calls required by the average annual calls made by a sales representative to arrive at the number of sales representatives needed.

F. Sales Force Compensation i. To attract top-quality reps, the company must develop an attractive compensation package. ii.

Sales reps want income regularity, extra reward for aboveaverage performance, and fair pay for experience and longevity. iii.

Management wants control, economy, and simplicity. iv. Some of these objectives will conflict. v. Four components of sales force compensation:

a. The fixed amount, a salary, satisfies the need for income stability. Fixed compensation is common in jobs with a high ratio of non-selling to selling duties and jobs where the selling task is technically complex and requires teamwork. b. The variable amount, whether commissions, bonus, or profit sharing, serves to stimulate and reward effort. Variable compensation works best where sales are cyclical or depend on individual initiative. c. Expense allowances enable sales reps to meet the costs of travel and entertaining on the company’s behalf. d. Benefits, such as paid vacations, sickness or accident benefits, pensions, and health and life insurance, provide security and job satisfaction. vi. Fixed and variable compensation give rise to three basic types of compensation plans— straight salary, straight commission, and combination salary and commission.

a. Straight-salary plans provide a secure income, encourage reps to complete nonselling activities, and reduce incentive to overstock customers. For the firm, these plans deliver administrative simplicity and lower turnover. b. Straight-commission plans attract higher performers, provide more motivation, require less supervision, and control selling costs. On the negative side, they emphasize getting the sale over building the relationship.

c. Combination plans feature the benefits of both plans while limiting their disadvantages.

III. Managing the Sales Force

A. Various policies and procedures guide the firm’s activities directed at managing the sales force. See Fig. 14.4.

B. Recruiting the Sales Force i. It’s a great waste to hire the wrong people. ii. Sales force turnover leads to lost sales, the expense of finding and training replacements, and often pressure on existing salespeople to pick up the slack. iii. Effective predictors of high performance in sales are composite tests and assessment centers that simulate the working environment and assess applicants in an environment similar to the one in which they would work.

C. Training the Sales Force i. Today’s customers expect salespeople to have deep product knowledge, add ideas to improve operations, and be efficient and reliable, so companies are investing more in sales training. ii. Training time varies with the complexity of the selling task and the type of recruit. iii. Reps paid mostly on commission generally receive less supervision. iv. Those who are salaried and must cover definite accounts are likely to receive substantial supervision.

D. Managing Sales Force Productivity i. Companies often specify how much time reps should spend prospecting for new accounts. ii.

Some companies rely on a missionary sales force to create new interest and open new accounts. iii. In the course of a day, reps plan, travel, wait, sell, and perform administrative tasks (writing reports and billing, attending sales meetings, and talking to others in the company about production, delivery, billing, and sales performance). iv. The best sales reps manage their time efficiently.

v. Time-and-duty analysis and hour-by-hour breakdowns of activities help them understand how they spend their time and how they might increase their productivity. vi. To cut costs, reduce time demands on their outside sales force, and leverage technological innovations, many have increased the size and responsibilities of their inside sales force. vii. Inside selling is less expensive and growing faster than inperson selling. viii. Each contact made by an inside salesperson might cost $25 to $30, compare to $300 to $500 for a field staff person with travel expenses. . ix. Inside sellers don’t need to be in the office—a growing percentage work at home. x. The inside sales force frees outside reps to spend more time selling to major accounts, identifying and converting new major prospects and obtaining more blanket orders and systems contracts. xi. Inside salespeople spend more time checking inventory, following up orders, and phoning smaller accounts. xii. They typically earn a salary or salary-plus-bonus pay. xiii. Sales and inventory information transferred much more quickly, but specific computer-based decision support systems have been created for sales managers and sales representatives. xiv. Going online with a tablet or laptop, salespeople can prime themselves on backgrounds of clients, call up prewritten sales

letters, transmit orders and resolve customer service issues on the spot, and send samples, pamphlets, brochures, and other materials to clients. xv. One of the most valuable digital tools for the sales rep is the company website. a. Defines the firm’s relationships with individual accounts and identifies those whose business warrants a personal sales call b. Provides an introduction to self-identified potential customers and a way to contact the seller c. Might receive the initial order xvi. Social media is a valuable digital selling tool. a. Social networking is useful in ― front end‖ prospecting and lead qualification as well as in ― back end‖ relationship building and management.

E. Motivating the Sales Force i. The majority of sales representatives require encouragement and special incentives, especially those in the field who encounter daily challenges. ii. Most marketers believe that the higher the salesperson’s motivation, the greater the effort and the resulting performance, rewards, and satisfaction—all of which in turn further increase motivation. iii. Marketers reinforce monetary and nonmonetary rewards. iv. One research study found the employee reward with the highest value was pay, followed by promotion, personal growth, and sense of accomplishment. v. Least valued were liking and respect, security, and recognition. In other words, salespeople are highly motivated by pay and the chance to get ahead and satisfy their intrinsic needs, and they may be less motivated by compliments and security. vi. Compensation plans may even need to vary depending on the type of salespersons: stars, core or solid performers, and laggards. vii. Stars benefit from no ceiling or caps on commissions, overachievement commissions for exceeding quotas, and prize structures that allow multiple winners. viii. Core performers benefit from multi-tier targets that serve as stepping stones for achievement and sales contests with prizes that vary in nature and value. ix. Laggards respond to consistent quarterly bonuses and social pressure. x. Sales Quotas. Companies set annual sales quotas, developed from the annual marketing plan, for dollar sales, unit volume, margin, selling effort or activity, or product type. xi. Compensation is often tied to degree of quota fulfillment. xii. The company first prepares a sales forecast that becomes the basis for planning production, workforce size, and financial requirements. xiii. Management then establishes quotas for regions and territories, which typically add up to more than the sales forecast to encourage managers and salespeople to perform at their best. xiv. Even if they fail to make their quotas, the company nevertheless may reach its sales forecast. xv. Setting sales quotas can create problems. a. If the company underestimates and the sales reps easily achieve their quotas, it has overpaid them. b. If it overestimates sales potential, the salespeople will find it very hard to reach their quotas and be frustrated or quit. c. Quotas can drive reps to get as much business as possible—often ignoring the service side of the business, so the company gains short-term results at the cost of long-term customer satisfaction.

F. Evaluating the Sales Force i. Good feed-forward requires good feedback, which means getting regular information about reps to evaluate their performance. a. The most important source of information about reps is sales reports. b. Additional information comes through personal observation, salesperson self-reports, customer letters and complaints, customer surveys, and conversations with other reps. c. Many companies require representatives to develop an annual

territory-marketing plan in which they outline their program for developing new accounts and increasing business from existing accounts. d. Reports provide raw data from which sales managers can extract key indicators of sales performance—number of sales calls per salesperson per day.

IV. Direct Marketing A. The use of consumer-direct (CD) channels to reach and deliver goods and services to customers without using marketing middlemen. i. Advantages

a. By eliminating the intermediary, it often proves to be more cost-effective than traditional marketing. b. Directly connecting with customers also can provide the company with invaluable information about customers’ current and potential needs. c. Direct marketing shows the ways in which customers use the company’s offerings. d. Direct marketing shows what aspects of the company’s offerings they find particularly beneficial and what aspects need improvement. e. Having the ability to directly interact with customers enables the company to offer a superior service experience and build a stronger brand image. ii. Channels used to reach individual prospects and customers: direct mail, catalog marketing, telemarketing, interactive TV, kiosks, websites, and mobile devices. iii. Sales produced through traditional direct marketing channels (catalogs, direct mail, and telemarketing) have been growing rapidly, along with direct-mail sales, which include sales to the consumer market, B2B, and fundraising by charitable institutions.

B. Direct Marking Channels i. Direct Mail. Sending an offer, announcement, reminder, or other item to an individual consumer.

a. A popular medium because it permits target market selectivity, can be personalized, is flexible, and allows early testing and response measurement. b. Cost per thousand is higher than for mass media, but the people reached are much better prospects. c. Overuse leads some consumers to disregard the blizzard of solicitations they receive. ii. Direct mail can produce prospect leads, strengthen customer relationships, inform and educate customers, remind customers of offers, and reinforce recent customer purchase decisions. iii. Most direct marketers apply the RFM (recency, frequency, monetary amount) formula to select customers according to how much time has passed since their last purchase, how many times they have purchased, and how much they have spent since becoming a customer. iv. One of the great advantages of direct marketing is the ability to test, under real marketplace conditions, different elements of an offer strategy, such as products, product features, copy platform, mailer type, envelope, prices, or mailing lists. v. Response rates typically understate a campaign’s long-term impact. vi. To better estimate a promotion’s impact, some companies measure the impact of direct marketing on awareness, intention to buy, and word of mouth. vii. Direct mail can involve regular mail or e-mail.

a. E-mail allows marketers to inform and communicate with customers at a fraction of the cost of regular mail. E-mails can be very productive selling tools. b. The rate at which they prompt purchase has been estimated to be at least three times that of social media ads.

viii. Privacy concerns are growing—many consumers refuse to share any personal details with brands even if doing so would bring them better targeted offers and discounts.

C.

Catalog Marketing i. Companies send full-line merchandise catalogs, specialty consumer catalogs, and business catalogs, usually in print form but also as DVDs or online. ii. Successfully marketing a catalog business depends on managing customer lists carefully to avoid duplication or bad debts, controlling inventory, offering good-quality merchandise so returns are low, and projecting a distinctive image. iii. Putting their entire catalog online also provides business marketers with better access to global consumers than ever before, saving printing and mailing costs.

D. Telemarketing i. The use of the telephone and call centers to attract prospects, sell to existing customers, and provide service by taking orders and answering questions. ii. It helps companies increase revenue, reduce selling costs, and improve customer satisfaction. iii. Companies use call centers for inbound telemarketing—receiving calls from customers—and outbound telemarketing—initiating calls to prospects and customers. iv. Telemarketing has lost much of its effectiveness, although it is still heavily used in political campaigns.

v. Business-to-business telemarketing is increasing, however. This is partly due to the use of videoconferencing, which will increasingly replace field sales calls. vi. A popular form of telemarketing involves robo-calls that use a computer-based autodialer to deliver a prerecorded message. These calls are legal in the U.S. on if they deliver relevant information such as doctor appointment reminders or flight change notifications. Robo-calls to sell products and services are not deemed legal.

E. Infomercials i. Some companies prepare 30- and 60-minute infomercials to combine the selling power of television commercials with the draw of information and entertainment. ii. Infomercials promote products that are complicated or technologically advanced or that require a great deal of explanation.

F. The Future of Direct Marketing i. Consumers short on time and tired of traffic and parking headaches appreciate toll-free phone numbers, always-open websites, next-day delivery, and direct marketers’ commitment to customer service. ii. Many chain stores have dropped slower-moving specialty items, creating an opportunity for direct marketers to promote these to interested buyers instead. iii. Sellers can benefit from direct marketing as well.

iv. Direct marketers can buy a list containing the names of almost every group imaginable. v. Direct marketing can reach prospects at the moment when they want a solicitation. vi. Direct marketing also makes the company’s offer and strategy less visible to competitors. vii. Direct marketers can measure responses to their campaigns to decide which have been the most profitable. viii. Direct marketing must be integrated with other communications and channel activities.

ix. Direct marketers know enough about each customer to customize offers and messages and develop a plan for lifetime marketing to each customer.

CHAPTER

15

LEARNING OBJECTIVES

DESIGNING AND MANAGING DISTRIBUTION CHANNELS

After studying this chapter, you should be able to: 15.1 Define the roles of marketing channels.

15.2 Explain the key channel-management decisions.

15.3 Discuss how firms manage channel cooperation and conflict.

15.4 Discuss how firms manage market logistics.

CHAPTER SUMMARY 1. Most producers do not sell their goods directly to final users. Between producers and final users stands one or more marketing channels, with a host of marketing intermediaries performing a variety of functions. Distribution channels are sets of interdependent organizations participating in the process of making a product or service available for use or consumption.

2. Companies use intermediaries when they lack the financial resources to carry out direct marketing, when direct marketing is not feasible, and when they can earn more by doing so. Effective channel management calls for selecting intermediaries and training and motivating them. The goal is to build a long-term partnership that will be profitable for all channel members.

3. Members of the marketing channel perform a number of key functions. Some of these functions (storage and movement, title, and communications) constitute a forward flow of activity from the company to the customer; others (ordering and payment) constitute a backward flow from customers to the company; and some (information, negotiation, finance, and risk taking) occur in both directions.

4. Manufacturers have many alternatives for reaching a market. They can sell direct or use one-, two-, or multi-level channels. Deciding which type(s) of channel to use calls for analyzing customer needs, establishing channel objectives, and identifying and evaluating the major alternatives, including the types and numbers of intermediaries involved in the channel.

5. A growing number of companies employ multichannel distribution, using two or more marketing channels to reach customer segments in one market area. In addition, companies are increasingly employing digital distribution strategies, selling directly online to customers or through e-merchants who have their own websites.

Multichannel distribution calls for the development of an integrated distribution strategy where the activities involved in selling through one channel are aligned with the activities involved in selling through one or more other channels.

6. To design a marketing-channel system, marketers analyze customer needs and wants, establish channel objectives and constraints, and identify and evaluate major channel alternatives. Based on the number of intermediaries, there are three core distribution strategies: exclusive, selective, and intensive distribution. Following the choice of channel intermediaries, a company must select, train, motivate, and evaluate its channel partners.

7. An increasingly popular form of growing distribution channels is franchising. In a franchising system, individual franchisees are a tightly knit group of enterprises whose systematic operations are planned, directed, and controlled by the operation’s innovator, the franchisor. Franchisees benefit from buying into a business with a wellknown and accepted brand name. They find it easier to borrow money for their business from financial institutions, and they receive support in areas ranging from marketing and advertising to site selection and staffing.

8. A company needs to motivate its channel partners by identifying their needs and wants and tailoring its channel offering to provide them with superior value. An important factor here is channel power, which reflects the ability to alter channel members’ behavior so they take actions they would not have taken otherwise.

Based on the nature of the relationship between the members of the marketing

channel, there are three basic forms of channel coordination that can help motivate channel partners: conventional channels, vertical marketing systems, and horizontal marketing systems.

9. All marketing channels have the potential for conflict and competition resulting from goal incompatibility, poorly defined roles and rights, perceptual differences, and interdependent relationships. Companies can try to manage conflict through dual compensation, superordinate goals, employee exchange, co-optation, and other means.

10. Producers of physical products and services must decide on market logistics—the best way to store and move goods and services to market destinations and to coordinate the activities of suppliers, purchasing agents, manufacturers, marketers, channel members, and customers. Major gains in logistical efficiency have come from advances in information technology.

11. The supply-chain approach to managing market logistics can help a company identify superior suppliers and distributors, as well as help it improve productivity and reduce costs. The firm must make four major decisions about its market logistics: How should we handle orders (order processing)? Where should we locate our stock (warehousing)? How much stock should we hold (inventory)? and How should we ship goods (transportation)?

OPENING THOUGHT Most students are not familiar with channels of distribution, except, perhaps, from the retailer in which they have bought products. Therefore, the instructor has to ensure that they clarify the various channels of distribution during this chapter lecture. Examples of the various channels for products familiar to the students can help illustrate the complexity of the process.

Second, because marketing channel decisions are mostly hidden from the final consumer, the instructor should make every effort to diagram the decision-making process for each level of channel distribution. Starting with the retail price of the product, then subtracting each distribution level margins or markups shows the effects of distribution to or for the product.

Managing channels of distribution will be new to most students, as will the definitions of channel conflict and channel support. The instructor can best serve the student by fully diagramming a particular product from a channel of distribution perspective and talking about channel roles, conflicts, training, and motivation.

The students will probably be most interested in, or knowledgeable about, e-commerce and see e-commerce as the future of business. The instructor should caution the students about assuming that all business transactions (or a great majority of them) will flow to e-commerce by describing to the students the various consumer demographic groups, buying habits, and comfortableness with technology. An in-class discussion on the merits and demerits of e-commerce should provide for a lively cross-section of opinions.

TEACHING STRATEGY AND CLASS ORGANIZATION PROJECTS

22.

At this point in the semester-long project, students should present their channel decisions for getting their product or service to the consumer. In evaluating this section, the instructor should evaluate the completeness of the projects to the material contained in this chapter.

23.

Progressive companies have begun developing a value network system to get products in the hands of consumers. A value network includes a firm’s suppliers, its suppliers’ suppliers, its immediate customers, and their end customers. Students should identify a company that has successfully set up a value network, then compare and contrast the components of the value system to a competitor that does not have one.

Students should be able to identify the components of the value network that produced the augmented offering.

ASSIGNMENTS Ask the students to comment on the hybrid channel of distribution. The hybrid channel as defined in the chapter poses an interesting channel for future marketers. As students grow into consumers will they or won’t they rely on purchasing products exclusively through the internet? Or will they demand hybrid distribution choices like free shipment to store sites (like Walmart) or pick up at the store (like Best Buy)?

Today, some of the country’s more successful companies are using a hybrid channel system to increase its effectiveness of reaching the consumer. The text uses the examples of IBM, Charles Schwab, and others and notes that channel integration and its features are what the consumer prefers.

Students should choose or find one additional example of a firm using the hybrid system, and comment on how they see this system delivering value to the consumer. Student answers should be directed toward the three features of channel integration found in the textbook.

The article entitled, ―Transforming Your Go-to-Market Strategy: The Three Disciplines of Channel Management,‖ V. Kasturi Rangan Boston, MA: Harvard Business School Press, 2006 identifies new opportunities for marketing products through multiple channels by crafting a ―channel steward.‖ Ask the students to read this article and comment on its practicality in light of the changes posed by internet shopping.

Channel members add value to the consumer’s purchase of certain products and services. Table 15.1 details key channel member functions. Yet some firms have abandoned channel partners and tried to reach the consumer on a one-to-one basis. Selecting a product or firm that (a) is maintaining its channel members, and (b) a firm that has decided to sell directly to the consumer thus bypassing channel intermediaries. Comment on these two systems in terms of the information contained in the chapter.

END-OF-CHAPTER SUPPORT Marketing Spotlight: Best Buy

1. What were the keys to Best Buy’s success? How was it able to compete against both retail competitors like Walmart and Costco and online competitors like Amazon?

Suggested answer: Best Buy has been able to compete effectively against both traditional general merchandise retailers like Walmart and Costco and online retailers. It has successfully competed in a variety of ways, including by staying focused on consumer electronics and home appliances; matching the prices of Amazon and other online retailers;

embracing an omnichannel strategy that combines online and physical retail; and dramatically improving the customer experience of Best Buy. By 2024, Best Buy Health was being used by 8 of the top 20 health systems in the U.S. The company also expanded into hope furnishings and bathroom fixtures.

By focusing on consumer electronics and home appliances, Best Buy ensures a broader selection than other retailers, and more knowledgeable staff in-store. Although the company's price match guarantee was costly, it gave customers a key reason to purchase their products from Best Buy instead of from an online competitor.

In building its omnichannel strategy, management realized that because 70 percent of Americans live within 15 minutes of a Best Buy store, stores could serve as a mini warehouse from which products could be shipped or picked up. Consumers appreciated having a choice of delivery options, and 40 percent of the company’s online sales were picked up in the store in 2024. Best Buy also enhanced the customer experience with initiatives like building in its stores branded kiosks from leading brands like Apple and Samsung, retraining all its employees to improve customer engagement, making the Geek Squad available 24/7, and building out its loyalty program.

2. What are the challenges it faces in today’s retail environment? How can it continue to grow?

Suggested answer: Best Buy faces numerous challenges in today’s retail environment. It faces the continued growth of online-only retail, in particular the rise of low-cost ecommerce retailers like Ali Express and Temu. Best Buy also faces more competition from some of the major consumer electronics brands it sells, who have invested significantly in their own ecommerce operations. In addition, physical retail overall has struggled in the wake of the pandemic.

To continue to grow, Best Buy should continue to evolve its omnichannel strategy to appeal to its key target segments. For example, it is currently testing several different store concepts, including a ―virtual store,‖ and can invest more in the concepts that demonstrate the greatest profit potential. It should also concentrate on logistical efficiencies to lower overall costs and pass those cost savings on to the consumer in terms of lower prices. In addition, Best Buy can use the service differentiator of the Geek Squad to help consumers get the most out of emerging advanced technologies like mixed reality headsets and AI. In 2024, Best Buy’s diversified revenue mix was as follows: Approximately 42 percent of revenue came from computers and mobile phones, 30 percent from consumer electronics, 14 percent from appliances, 7 percent from entertainment, 6 percent from services, and 1 percent from other business including baby and outdoor living products.

3. How would you balance Best Buy’s physical retail presence with its online business going forward? Is one more important than the other?

Suggested answer: There is a strong argument for maintaining the omnichannel balance of both physical and online channels. The combination of the two channels differentiates Best Buy from most other competitors, as described in the answer to question #1 above. The

physical and online channels complement each other, for instance with 40 percent of online orders being picked up in-store. The company upgraded its online shopping experience in 2023 by adding Best Buy Drops, limited-quantity deals available only through the Best Buy app.

While both channels are essential, the online channel is arguably more important for Best Buy. While the physical channel makes up the majority of sales, the online channel is growing as a percentage of the total.

Approximately one-third of Best Buy’s revenue comes from digital sales, compared with approximately one-fifth in fiscal 2020. In addition, for the retail industry generally, ecommerce is growing while physical retail struggles in the wake of the pandemic. That being said, Best Buy enjoys competitive advantages from having both physical and online retail, so it needs to continue to maximize the value of both channels.

Marketing Spotlight: Costco

1. What are the keys to Costco’s success? How has it delivered consistent growth to become the world’s third-largest retailer?

Suggested answer: Costco’s success and steady growth has been materially aided by its consistent focus on a handful of key business principles: sell a limited number of items in large quantities, maintain high quality standards, keep costs down, pay workers well, mandate memberships, and target upscale consumers and small business owners.

Costco is driven by its mission ―to continually provide our members with quality goods and services at the lowest possible prices.‖ Costco’s focused selection of only 4,000 quality products per store, unlike a grocery store that carries 40,000 SKUs or a Walmart that can carry up to 150,000. By stocking a limited number of only the fastestselling SKUs, Costco earns money quickly through rapid inventory turnover and generates the highest revenue per square foot of any discount store, at $1800 per square foot, 3 times what Walmart generates. Because it buys high quantities of relatively fewer products, Costco negotiates low prices from suppliers and passes the savings on to its members. Its former CFO elaborated on the competitive advantages of its pricing strategy, saying ―For every dollar we can save, we want to give at least 80 or 90 cents back to the customer and nobody will catch us from a competitive standpoint.‖ With over 127 million card-carrying members and $238 billion in sales in 2023, it is the largest warehouse club chain in the United States and the third-largest in the world, after Walmart and Amazon.

It further keeps costs down by buying its merchandise directly from the manufacturer and owning its own distribution. At the store, shipments are often taken directly to the floor, unwrapped, and left on the pallet, ready to sell.

When the company raised its minimum wage to $16 per hour in the U.S. in 2021, its CEO at the time said, ―Paying employees good wages and providing affordable benefits makes sense for our business and constitutes a significant competitive advantage for us.‖ To shop its stores, customers need to buy a Costco membership, which starts at $60 per year for the ―Gold Star‖ basic tier. Costco’s members are loyal, with renewal rates of 93 percent in the U.S. and Canada in

2022. Not only are they loyal; many are affluent. Their average household income in the U.S. is $100,000, more than the $87,000 and $76,000 averages at Sam’s Club and Walmart, respectively. Its 28 Business Center stores in the U.S. cater to small businesses and have a different product assortment, selling items like restaurant equipment, janitorial supplies, and more bulk food items.

By focusing on these key business principles, Costco has delivered consistent growth. Between 1985—the year it went public—to 2022, Costco’s sales grew at a compound annual rate of 12 percent, and its share price grew at a 17 percent rate.

2. What is unique about Costco’s channel management? Which of its distribution practices can other retailers borrow?

Suggested answer: Costco has a very unique channel strategy. It buys its merchandise directly from the manufacturer. Products are shipped directly to Costco stores or to a Costco-owned distribution center, which reallocates the shipments to stores within 24 hours. This process eliminates several steps such as using a third-party distributor and other intermediaries, which avoids costs associated with storage, additional freight, and handling.

At its distribution centers, Costco uses what’s called ―cross-docking‖ to save time and money. With cross-docking, supplier trucks drive up to one side of the distribution center and the pallets inside are unloaded and moved directly into waiting Costco trucks on other side of the distribution center. For Costco, 92 percent of shipments to their distribution centers are cross-docked, versus 10 percent for Walmart.

Costco’s cost-saving tactics extend to the interiors of its stores around the world. The stores average approximately 147,000 square feet, with floor plans designed to optimize selling space, the handling of merchandise, and the control of inventory. The decor is simple: concrete floors, bare-bones signage, and product displays that consist of pallets right off the truck.

Other retailers could borrow a few of Costco’s distribution practices.

For instance, other retailers could adopt the practice of having a limited SKU count focused on a smaller selection of highest-selling items, which for Costco lowers costs and increases inventory yield.

Other retailers might also employ some of Costco’s cost-saving techniques, like using no-frills product displays and changing in-store lighting to decrease energy bills. Finally, other retailers may be able to drive even more customer loyalty by adopting Costco’s philosophy of passing as much savings as possible on to customers.

3. How can Costco improve? Should it offer more products? Expand its e-commerce business? Advertise more? Why or why not?

Suggested answer: There is a strong case to be made that Costco does not need to offer more products in its stores, because the focused SKU lineup is so central to its business model. It should, however, offer more products online to better compete with Amazon. It could be argued that Costco should expand its e-commerce business. It was a latecomer to e-commerce. It has not invested in it to the extent other big retailers

like Walmart or Target, and has not integrated it fully yet with its physical stores. By 2023, e-commerce only represented 6 percent of sales. Costco’s lack of progress in e-commerce is a significant vulnerability in an increasingly digital world. The case could be made that Costco does not need to advertise more for its physical stores, which already have loyal followings in each of the cities it operates in. Once its e-commerce business is enhanced, however, there would be value in marketing it, because the target audience for e-commerce is virtually every shopper in the countries it operates in. Costco’s approach has led to many achievements, including ranking number 11 in the 2024 Fortune 500 and number 6 on Fortune’s Most Admired list.

DETAILED CHAPTER OUTLINE Opening vignette: Successful value creation needs successful value delivery. Instead of limiting their focus to their immediate suppliers, distributors, and customers, holistic marketers are examining the whole supply chain as a value network, including their suppliers’ suppliers upstream and their distributors’ customers downstream. They are also looking at how technology is changing the way customers shop and retailers sell and finding new and different means to distribute and service their offerings. Skims found success selling initially online, before moving to sell through retail and own stores. The company took a more inclusive, body-positivity approach to shapewear, expanding product sizing and celebrating different shapes and skin colors.

The ―solution-based‖ company has been constantly innovating its products.

I. The Role of Distribution Channels A. Distribution Channels i. Intermediaries between producers and users constitute a marketing channel (also called a trade channel or distribution channel). a. Distribution channels are sets of interdependent organizations participating in the process of making a product or service available for use or consumption. b. They are the set of pathways a product or service follows after production, culminating in purchase and consumption by the final end user. c. Merchants buy, take title to, and resell the merchandise. d. Agents are brokers, manufacturers’ representatives, sales agents who search for customers and may negotiate on the producer’s behalf but do not take title to the goods. They are facilitators. ii. Marketing channels must not just serve markets, they must also make them; the channels chosen affect all other marketing decisions. a. Pricing depends on whether it uses online discounters or high-quality boutiques. b. Sales force and advertising decisions depend on how much training and motivation dealers need. iii. Holistic marketers ensure that marketing decisions in all these different areas are made to maximize value overall.

B. Distribution Channel Functions i. Members of the marketing channel perform a number of key functions: a. Gather information about potential and current customers, competitors, and other actors and forces in the marketing environment. b. Develop and disseminate persuasive communications to stimulate purchasing and foster brand loyalty.

c. Negotiate and reach agreements on price and other terms so that transfer of ownership or possession can be effected. d. Place orders with manufacturers. e. Acquire the funds to finance inventories at different levels in the marketing channel. f. Assume risks connected with carrying out channel work. g. Provide buyers with financing and facilitate payment. h. Provide for buyers’ payment of their bills through banks and other financial institutions. i. Oversee actual transfer of ownership of goods from one organization or person to another. ii. All channel functions have three characteristics: a. They use up scarce resources. b. They can often be performed better through specialization. c. They can be shifted among channel members. See Fig. 15.1. iii. Many channel functions involve bi-directional flows of goods and services. a. Some functions (storage and movement, title, and communications) constitute a forward flow of activity. b. Others (ordering and payment) constitute a backward flow from customers to the company. c. The question for marketers is who is to perform channel functions. iv. Changes in channel institutions reflect the discovery of more efficient ways to provide assortments of goods to target customers.

C. Channel Levels i. The number of intermediaries, also referred to as channel levels, define the a. length and breadth of the distribution channel. See Fig. 15.2. A zero-level channel, also called a direct marketing channel, consists of a manufacturer selling directly to the final customer.

b. A one-level channel contains one selling intermediary, such as a retailer. c. A dual-level channel contains two intermediaries, a wholesaler and a retailer, and a three-level channel contains three. ii. An industrial-goods manufacturer can use its sales force to sell directly to industrial customers, or it can sell to industrial distributors who sell to industrial customers, or it can sell through manufacturers’ representatives or its own sales branches directly to industrial customers or indirectly to industrial customers through industrial distributors. Zero-, one-, and two-level marketing channels are quite common. iii.

Reverse-flow intermediaries include manufacturers’ redemption centers, community groups, trash-collection specialists, recycling centers, trash-recycling brokers, and central processing warehousing.

D. Multichannel Distribution i. Using two or more marketing channels to reach customer segments in one market a. Each channel can target a different segment of buyers, or different need states for one buyer, to deliver the right products in the right places in the right way at the least cost. b. Research has shown that multichannel customers can be more valuable to

marketers. c. Companies need to think through their channel architecture and determine which channels should perform which functions.

Multichannel architecture optimizes coverage, customization, and control while minimizing cost and conflict. ii. Using a single channel is typically not very efficient. iii. Multiple distribution channels offer three important benefits. a. Increased market coverage b. Lower channel cost c. Ability to do more customized selling iv. New channels typically introduce conflict and problems with control and cooperation. v. Managing the online and offline channels is a priority for many firms using three strategies: a. Offering different brands or products online and offline b. Offering offline partners higher commissions to cushion the negative impact on sales c. Taking orders on the website but having retailers deliver and collect payment vi. Companies should use different sales channels for different-sized business customers. a. A direct sales force for large customers b. A digital strategy or telemarketing for midsize customers c. Distributors for small customers d. Should be alert for conflict over account ownership vii. Multichannel marketers also need to decide how much of their product to offer in each of the channels. viii. Marketing Insight: Understanding the Showrooming Phenomenon describes how ―showrooming‖ is affecting channel strategies.

II. Channel-Management Decisions A. Channel Management i. To design a marketing-channel system, marketers analyze customer needs and wants, establish channel objectives and constraints, and identify and evaluate major channel alternatives. ii. After a company has chosen a channel system, it must select, train, motivate, and evaluate intermediaries for each channel. iii. It must also modify channel design and arrangements over time, including the possibility of expansion into international markets.

B. Establishing Channel Objectives i. Marketers should state their channel objectives in terms of the customers they aim to reach, the service output levels they want to provide, and the associated cost and support levels. ii. Consumers may choose the channels they prefer based on price, product assortment and convenience, and shopping goals (economic, social, or experiential). iii. Channel objectives vary with product characteristics.

iv. When entering new markets, firms often closely observe what other firms are doing and adapt channel objectives to the larger environment.

C. Selecting Channel Members i. Producers should determine what characteristics distinguish the better intermediaries—number of years in business, other lines carried, growth and profit record, financial strength, cooperativeness, and service reputation.

Major Channel Alternatives

ii. Identifying

a. Each channel—from sales forces to agents, distributors, dealers, direct mail, telemarketing, and the internet—has unique strengths and weaknesses. b. Sales forces can handle complex products and transactions, but they are expensive. c. Online retailing is inexpensive but may not be as effective for complex products. d. Distributors can create sales, but the company loses direct contact with customers. e. Several clients can share the cost of manufacturers’ reps, but the selling effort is less intense than company reps provide. iii. Three distribution strategies: a. Exclusive distribution severely limits the number of intermediaries. b. Selective distribution relies on only some of the intermediaries willing to carry a particular product. c. Intensive distribution places the goods or services in as many outlets as possible. iv. Franchising. Individual franchisees are enterprises whose operations are controlled by the franchisor.

v. In a franchise: a. The franchisor owns a trade or service mark and licenses it to franchisees in return for royalty payments. b. The franchisee pays for the right to be part of the system. c. The franchisor provides its franchisees with a system for doing business. vi. Franchising benefits both parties. a. The manufacturer-sponsored retailer franchise is the traditional system. b. Another system is the manufacturer-sponsored wholesaler franchise. c. The service-firm-sponsored retailer franchise is organized by a service firm to bring its service efficiently to consumers.

D. Motivating Channel Members i. Channel power is the ability to alter channel members’ behavior so they take actions they would not have taken otherwise. ii. Types of power to elicit cooperation: a. Coercive power. A manufacturer threatens to withdraw a resource or terminate a relationship if intermediaries fail to cooperate. b. Reward power. The manufacturer offers intermediaries an extra benefit for performing specific acts or functions. c. Legitimate power. The manufacturer requests a behavior that is warranted under the contract. d. Expert power. The manufacturer has special knowledge the intermediaries value. e. Referent power. The manufacturer is so highly respected that intermediaries are proud to be associated with it.

iii. Most producers see gaining intermediaries’ cooperation as a huge challenge. iv. In many cases, retailers hold the power. v. Channel Partnerships a. A conventional marketing channel consists of an independent producer, wholesaler(s), and retailer(s), each wanting to maximize its own profits. b. A vertical marketing system (VMS) includes the producer, wholesaler(s), and retailer(s) acting as a unified system. c. One channel member, the channel captain, called a channel steward, owns or franchises the others or has so much power that they all cooperate.

d. Stewards accomplish channel coordination without issuing commands or directives by persuading channel partners to act in the best interest of all,

e. Channel stewardship expands value for the steward’s customers creates a tightly woven channel, which rewards valuable members. vi. VMSs arose from strong channel members’ attempts to control channel behavior and eliminate conflict over independent members pursuing their own objectives. a. A corporate VMS combines successive stages of production and distribution under single ownership. b. An administered VMS coordinates successive stages of production and distribution through the size and power of one of the members. c. A contractual VMS consists of independent firms integrating their programs on a contractual basis to obtain economies or sales impact—wholesaler-sponsored voluntary chains, retailer cooperatives, and franchise organizations.

d. Horizontal marketing systems involve two or more unrelated companies putting together resources or programs to exploit marketing opportunities.

E. Evaluating Channel Members i. Producers must periodically evaluate intermediaries’ performance against such standards as sales-quota attainment, average inventory levels, customer delivery time, treatment of damaged and lost goods, and cooperation in promotional and training programs. ii. A producer will occasionally discover it is overpaying particular intermediaries for what they are actually doing. iii. A new firm typically starts as a local operation selling in a fairly circumscribed market, using a few existing intermediaries. iv. If the firm is successful, it might branch into new markets with different channels. v. Early buyers might be willing to pay for high-value-added channels, but later buyers will switch to lower-cost channels. vi. The channel system evolves as a function of local opportunities and conditions, emerging threats and opportunities, and company resources and capabilities. vii. A producer must periodically review and modify its channel design and arrangements.

III. Channel Cooperation and Conflict A. Conflict i.

Channel conflict is generated when one channel member’s actions prevent another channel from achieving its goal. a. What types of conflict arise in channels? b. What causes conflict? c. What can marketers do to resolve it?

B. The Nature of Channel Conflicts i. Types of Channel Conflict

a. Horizontal (same level) b. Vertical (different levels) c. Multichannel (two or more channels that sell to the same market) ii. Causes of Channel Conflict

a. b. c. d.

Goal incompatibility Differences in strategy and tactics Power imbalance Unclear roles and rights

C. Managing Channel Conflict i. Effective Conflict Management mechanisms

a. Strategic justification b. Dual compensation c. Superordinate goals d. Employee exchange e. Joint memberships f. Co-optation g. Diplomacy, mediation, or arbitration h. Legal recourse IV. Managing Market Logistics i. Market logistics includes planning the infrastructure to meet demand and then implementing and controlling the physical flows of materials and final goods from points of origin to points of use to meet customer requirements at a profit. ii. Physical distribution has now been expanded into the broader concept of supply chain management (SCM). iii. Supply chain management starts before physical distribution and includes strategically procuring the right inputs (raw materials, components, and capital equipment), converting them efficiently into finished products, and dispatching them to the final destinations. iv. Supply chain perspective can help a company identify superior suppliers and distributors and then help it improve productivity and reduce costs. v. Studying market logistics leads managers to find the most efficient way to deliver value.

A. Market-Logistics Objectives i. “Getting the right goods to the right places at the right time for the least cost.” ii. Because of trade-offs, managers must make decisions on a total-system basis. iii. The starting point is to study what customers require and what competitors are offering. a. Customers are interested in on-time delivery, help meeting emergency needs, careful handling of merchandise, and quick return and replacement of defective goods. b. The wholesaler must then research the relative importance of these service outputs. c. The company must also consider competitors’ service standards. d. The company ultimately must establish some promise it makes to the market.

B. Market-Logistic Decisions i. Decisions a. How should we handle orders (order processing)? b. Where should we locate our stock (warehousing)? c. How much stock should we hold (inventory)? d. How should we ship goods (transportation)? ii. Order Processing. Most companies are trying to shorten the order-to-payment cycle. iii. Warehousing. Most companies must store finished goods until they are sold because production and consumption cycles rarely match. iv. Inventory. Salespeople would like their companies to carry enough stock to fill orders immediately. Different strategies to control inventory costs include:

a. Keeping slow-moving items in a central location and fast-moving items in warehouses. b. Near-zero inventory and acquiring stock based on orders saves on warehousing costs; just-in-time inventory management helps cash flow.

v. Transportation. Transportation choices affect product pricing, on-time delivery performance, and the condition of the goods when they arrive, all of which affect customer satisfaction.

a. Containerization consists of putting the goods in boxes or trailers that are easy to transfer between two transportation modes. b. Piggyback describes the use of rail and trucks; fishyback, water and trucks; trainship, water and rail; and airtruck, air and trucks. c. Each coordinated mode offers specific advantages (e.g., piggyback is cheaper than trucking alone yet provides flexibility and convenience). vi. Some firms are putting items into shelf-ready packaging so they don’t have to unpack them from a box and place them individually on a shelf. vii. With logistics, every little detail must be reviewed to see how it might be changed to improve productivity and profitability.

CHAPTER

16

MANAGING RETAILING

LEARNING OBJECTIVES After reading this chapter, you should be able to: 16.1 Explain the key changes defining modern retailing.

16.2 Discuss the marketing decisions that retailers face.

16.3 Describe how a company manages omnichannel retailing.

16.4 Explain the key principles in building and managing private labels.

16.5 Describe the key aspects of wholesaling.

CHAPTER SUMMARY 1. Retailing includes all the activities involved in selling goods or services directly to final consumers for personal, nonbusiness use. Any organization selling to final consumers—whether it is a manufacturer, wholesaler, or retailer—is doing retailing, regardless of how and where the goods or services are sold.

2. The retail market is very dynamic, and a number of new types of competitors and competition have emerged in recent years. The important developments in retailing include the emergence of new retail forms and combinations; retailer consolidation; the growth of mobile, omnichannel, and fast retailing; the increasing role of technology in retailing; and the decline of middle-market retailers.

3. Key retailing decisions include identifying the target market, selecting the product assortment; developing procurement, determining the types and level of services to be offered, designing the store atmosphere and experiences, setting the prices, defining the incentives, and managing communication.

4. Based on the degree to which they have established a physical presence, we can distinguish among brick-and-mortar retailers, online retailers that engage in ecommerce without a physical retail location, and omnichannel companies that

have both a physical and an online presence. Managing both online and offline channels has become a priority for many retailers.

5. Private labels are brands developed and managed by retailers and wholesalers.

Private labels are typically (but not always) priced lower than national brands. Retailers sponsor their own brands because it enables them to differentiate themselves from competitors, while at the same time reaching price-sensitive consumers. Because of lower research and development, advertising, sales promotion, and physical distribution costs, private labels can also generate a higher profit margin.

6. Wholesaling includes all the activities involved in selling goods or services to those who buy for resale or business use. Wholesalers can perform functions like warehousing, transportation, financing, risk bearing, dissemination of market information, and provision of management services and consulting.

7. Like retailers, wholesalers must decide on target markets, product assortment and services, price, promotion, and place. The most successful are those that adapt their services to meet suppliers’ and target customers’ needs.

OPENING THOUGHT Most students are familiar with the retailer in which they have bought products. What is not so obvious to the students is that retailers, wholesalers, and distributors pass through stages of growth and decline.

Students, for the most part, will be familiar with some of the retailer concepts described in the chapter, but not all. Second, non-store retailing may not be a familiar concept to some students. Others might have some familiarity with non-store retailing as in summer or part-time jobs at the mall.

The increasing ―power‖ of retailers, especially mega-retailers, on their manufacturers and the channels of distribution will not be evident to the students. Wholesalers and distributors are generally ―unseen‖ by the public and thus the students will probably not have any previous information about how these channels work or even that they exist. Guest speakers from the wholesaling or distribution industry can give insights to the students about the services they perform and the ―value‖ that they add to the end consumer.

Students will be familiar with such industries as trucking and logistics firms but not about inventory management or control. The instructor is encouraged to spend some additional class time on the concepts of the market-logistic formula, order costs, set-up costs, processing costs, and inventory carrying costs. Accounting and financial textbooks would be a good source of additional information and explanations of how these costs affect the overall corporation.

TEACHING STRATEGY AND CLASS ORGANIZATION PROJECTS 24.

At this point in the semester-long project for the ―fictional‖ product or service, students should be directed to turn in their retailing, wholesaling, and logistical marketing plans. Those students who are acting in the role of providing a new ―service‖ should include here their plans for locations, hours of operations, and how their ―service‖ plans on managing demand and capacity issues.

25.

This chapter is an appropriate one for out-of-class assignments because many students will not have to be encouraged to ―go shopping.‖ The chapter identifies four levels of service in retailing—self-service, self-selection, limited service, and full-service. Students are to visit

at least one of each type of the described retailers. In their shopping trips, did students experience a dissonance between the service they received and their initial characterization of the store? In other words, did the student receive ―better‖ service than they initially expected to receive from a self or limited service retailer? Did the students experience a ―lack‖ of service from the store they perceived as ―full service‖? If either of these conditions occurred, ask the students to postulate a causal relationship for the occurrence.

ASSIGNMENTS Two models for department store success seem to be emerging—one with a strong retail brand approach and one as a showcase store. In small groups, students are to investigate these two differing approaches to department store retailing and comment on the future of these concepts using the concepts defined in this chapter (target market selection, product assortment decisions, etc.).

Atmospherics is an important component of store attractiveness. Every store has its own unique look, feel, and smell. Yet each consumer may react differently to each of these elements. In groups composed of male and female students, ask the students to visit three retailers of their own choosing and comment on how the store atmospherics affected them personally and then group the findings by sex. Why are there such differences? What can a store do to appeal to both sexes?

In his 2000 book entitled, ―Why We Buy: The Science of Shopping” Simon & Schuster, New York, 2000, Paco Underhill examines the shopping phenomena that consumers and retailers alike need to know. Students should be assigned to read this book and comment on the lessons learned.

New retail forms and combinations is one of the trends in retailing today.

Examples include supermarkets with banks, and bookstores featuring coffee shops. After reading the material in this chapter, ask the students to ―speculate‖ on potential new retail forms or retail combinations yet undeveloped. In their selection of a ―new‖ form of retailing or combination of retailers, ask the students to defend their choices using the ideas and concepts presented in this chapter.

Shop—that is, have students visit as many differing types of retailers (and non-store retailers) as they can over the course of a week. For each shopping occasion, ask the students to record their impressions of the store’s atmospherics, location, service levels, product selections, and others. Then rank their preferences from best to worst and be able to explain why they assigned the ranking to each store in terms of the material covered in this chapter.

Store brands, or private label brands, account for one of every five items sold in the United States today. Students should purchase differing store brands/private label items (ice cream is a favorite choice for this experiment and can be conducted in class) and the national branded product, and do a taste test comparing the store brand and the national brand. Does the store or private label item meet or exceed the taste and quality of the national brand? What are the implications for national branded products if store/private label items meet or exceed the national brand? What should or could marketers’ do to differentiate these products?

END-OF-CHAPTER SUPPORT

Marketing Spotlight: Amazon

1. What are key success factors for Amazon? Why has it been so successful?

Suggested answer: Amazon’s mission is to be ―Earth’s most customercentric company.‖ This mission has guided the company as it grew to be the world’s largest online retailer, with annual revenues of $575 billion in 2023. Breadth, convenience and value are some of the keys to the company’s success.

As the largest e-commerce company, Amazon sells an incredibly broad and deep assortment of products. The company started out selling books, then started to diversify the products it sold in the late 1990’s, first with DVDs and videos and then with consumer electronics, games, toys, software, video games, and gifts. The company greatly expanded the variety of goods it sold by enabling third-party merchants to sell items on the site starting in 2000. By 2024, more than 60 percent of sales on Amazon came from third-party sellers.

From its early days, the company focused on making online shopping convenient with features like its product recommendation engine and 1click shopping. The company has continued to invest in the latest technology to make shopping online faster and easier for its customers.

To give it more control over its deliveries and optimize them, Amazon invested in building its own delivery and logistics network, complete with air freight planes, long-haul semi-trucks, and ―last mile‖ delivery vans. In 2023 the company delivered a record 7 billion items on the same day or next day, all while reducing the cost to serve year over year.

The company has also sought ways to create significant value for its customers. A great example is its popular Amazon Prime program, launched in 2005. For the original price of $79 annually, Amazon Prime provided unlimited free two-day shipping for millions of items. Over time, Amazon continued to add more and more benefits to Prime, including free ondemand video and movie streaming, free downloadable books and magazines, free photo storage, free grocery delivery, and shopping discounts. Both Amazon Prime Video and Amazon Music added significant value to Amazon Prime, as Prime members had free access to thousands of shows and movies and millions of songs for free.

2. Does Amazon’s strong identification as the leading e-commerce retailer in the world limit its ability to expand into other areas?

Suggested answer: It could be argued that Amazon’s strong identification with e-commerce has had a mixed impact on its ability to expand into other areas. The company’s e-commerce identification certainly did not limit its ability to expand into entertainment, consumer electronics, or business services like AWS and advertising. It has successfully become one of the biggest audio and video streaming platforms, a leader in consumer electronics, the world’s largest cloud computing company, and a $47 billion advertising platform. Spending massively on content for its streaming services, its budget for producing or licensing content across TV, movies, and music reached nearly $19 billion in 2023.

Amazon’s forays into physical retail, however, generally have been more challenging. Between 2022 and 2023, the company closed its 4-Star, Books, and Style stores, and closed a number of Amazon Go locations. It

is possible that the company’s e-commerce identification made it harder to attract shoppers to its physical stores. Perhaps because shoppers so strongly associate the brand with online purchases, they are either consciously or subconsciously reluctant to visit Amazon physical retail stores. By 2023 Amazon had sold more than 500 million Alexa-enabled devices.

3. What’s next for Amazon? How can it continue to grow?

Suggested answer: Student answers may vary. Answers may highlight international expansion as a major growth opportunity for Amazon. With only about 20 percent of its revenue coming from international markets, it has a substantial runway for growth overseas. In 2023 Amazon delivered more parcels in the U.S. than UPS for the first time ever, after already surpassing FedEx. Students may observe that the playbook that led to its e-commerce leadership should be effective at growing international revenue. Answers may also note that cloud computing is an area where business customers will likely continue to invest heavily, and Amazon could leverage its leadership position in cloud to continue high growth in that market. Students may highlight the fact that AI is poised to be the next big technology wave, and Amazon could use its computing power and software prowess to generate growth with AI. Answers may further note that while Amazon’s advertising business is already massive, it is much smaller than Facebook’s or Google’s, which reflects a significant growth opportunity. In addition, students may argue that Amazon has substantial room to grow its consumer electronics business given the enormous total size of that market.

Marketing Spotlight: Zara

1. Who are Zara’s biggest competitors? What has Zara done to build, enhance, and sustain its competitive advantage?

Suggested answer: Zara’s biggest competitors are arguably other global ―fast fashion‖ retailers like H&M, Uniqlo, and Shein. Zara created the fast fashion category and grew to become the world’s largest apparel retailer, building strong competitive advantages over time. While many companies have tried to replicate Zara’s success, ―nobody has managed to do so.‖ A major extension was the introduction of Zara makeup in 2021, followed by a line of Zara hair care products in 2024.

Zara’s biggest advantages come from combining a deep understanding of its customers’ tastes with a highly efficient supply chain to create its global success. This supply-demand balance reflects founder Amancio Ortega’s philosophy that to be successful in fashion, ―You need to have five fingers touching the factory and five touching the customer.‖ Zara built a vertically integrated supply chain designed to move fresh designs in and out of stores incredibly rapidly. When a new style becomes popular, Zara can imitate it and release a new collection in less than two weeks. Other fashion companies can take as long as twelve to eighteen months to put out a new design in stores. Zara’s in-house production facilities allow the company to control processes such as dyeing, fabric cutting, and processing. Most Zara designs stay on shelves for only three to four weeks. The constant refreshing of styles on store shelves also incentivizes customers to visit Zara stores more

frequently.

It maintains its competitive advantage by continuously gathering and analyzing customer insights to adapt its clothes for different customer segments. Zara offers smaller-sized clothing in Japan, hijab headscarves and long dresses for women in Arab countries, and more breathable apparel for countries in South America. Understanding the varied needs of its customers allows Zara to release a wide variety of successful styles on a frequent basis. In 2023 the company rolled out a Zara preowned service, which give customers the option to repair, resell, or donate used Zara garments. It planned to expand the service to all major markets by 2025.

As one analyst noted, Zara’s fast fashion model ―works online as it works offline. People are drawn to the homepage of Zara because they offer newness, which most other fashion retailers are not able to offer because of long lead times.‖ By offering cutting-edge styles, Zara was able to command a price premium compared with other fast fashion retailers, which enabled it to offer key online retail services—like free delivery for orders above a minimum spend and seamless returns—more profitably.

2. Would Zara’s model work for non-fashion retailers? Why or why not?

Suggested answer: There is a strong argument to be made that Zara’s model could work for non-fashion retailers, but potentially in a limited number of categories. Zara famously views clothes as a ―perishable commodity,‖ something that should be enjoyed for a couple of weeks or months. Zara’s model could work for non-fashion retailers if they could adopt the same view of their products as a perishable commodity. For the model to work, the retailers would have to compete in categories that exhibit or have the potential exhibit frequent re-purchase of low-cost items that possess an element of design. There simply are not that many non-fashion categories that fit this description.

Certainly, grocery stores require frequent visits, but they already sell perishable commodities and operate accordingly. Home decor stores conceivably could adopt the perishable philosophy, especially if they included low-cost art and perishable plants. These retailers could stock low-cost decor, refresh their inventory rapidly, and convince customers to update their non-furniture decor multiple times a year. In fact, Zara does have a home decor brand called Zara Home, which shows the fastfashion model can work for home decor.

Other non-fashion retail categories that exhibit the consumer propensity or need for frequent repurchase of low-cost items with an element of design include:

   

Non-clothing baby products, because babies grow so rapidly Toys, because kids grow easily bored with the ones they have, and the category is subject to fads Kitchen wares, because they can wear or break quickly, and there is an element of design and fashion Jewelry stores, because people often own multiple pieces of jewelry that they pair with different outfits, though it is admittedly fashion-adjacent

Consumer electronics and sporting goods retailers do not currently exhibit the need for frequent repurchase of low-cost non-fashion items, but potentially could in the future. Pharmacies, home improvement and hardware stores, dollar stores, and auto parts suppliers involve frequent repurchase. Most of their products do not contain a design element, however, though they potentially could in the future.

3. What is the future of the fast fashion category? How can Zara ensure it remains the leading fashion retailer?

Suggested answer: There is a strong case to be made that fast fashion appears to have a solid future. On average, people will be drawn to spending less to wear the latest trends. The recent rise of ultra-lowcost fashion retailers like Shein support this view.

Student answers may vary regarding how Zara can ensure it remains the leading fashion retailer. Answers may argue that Zara can remain the leader by continuing to combine its consumer insights with its vertically integrated supply chain to rapidly identify trends and showcase them on its clothing racks. Answers may also note that the company could take its trend-oriented business model a step further by using its operational sophistication to enable even more customization and personalization, giving shoppers more opportunity to influence or even create the designs that they purchase.

Answers may also suggest Zara should continue to invest in sustainability to align with consumer preferences. For example, in 2023 the company began rolling out a Zara pre-owned service, which gives its customers the option to repair, resell or donate used Zara garments. It planned to expand the service to all major markets by 2025. It has much work to do to fulfill its pledge to have net zero carbon emissions in its operations by 2040.

DETAILED CHAPTER OUTLINE Opening vignette: In the preceding chapter, we examined marketing intermediaries primarily in their capacity as manufacturers that want to build and manage marketing channels. In this chapter, we view these intermediaries—retailers, wholesalers, and logistical organizations— as requiring and forging their own marketing strategies in a rapidly changing world.

Intermediaries also strive for marketing excellence and can reap the benefits like any other type of company. Consider the success of Tesco The UK retail giant reinvented itself as a consumer-friendly brand, selling groceries and general merchandise with brighter store, higher-quality products, affordable prices, and more locations. The company’s long-standing marketing campaign, ―Every Little Helps,‖ conveys the many different ways that Tesco improves shopping experiences by ―doing right by the customer.‖ The popular Clubcard frequent-shopper program, with over 20 million users, offers rewards based on spending, as well as discounts and special offers tailored to individual shoppers. The more successful companies such as Tesco use strategic planning, state-of-the-art technology, advanced information systems, and sophisticated marketing tools.

They improve their market targeting and positioning, and connect with their customers through memorable experiences, relevant and timely information, and, of course, the right products and services. In this chapter, we discuss marketing excellence in retailing.

I.

The Modern Retail Environment A. Retailing i. Retailing includes all the activities in selling goods or services directly to final consumers for personal, nonbusiness use. ii. A retailer or retail store is any business enterprise whose sales volume comes primarily from retailing. iii. Any organization selling to final consumers—whether it is a manufacturer, wholesaler, or retailer—is doing retailing. iv.

New types of competitors and competition have emerged v.

Increasing Role of Technology. with the advent of artificial intelligence, as described in ―AI and Marketing: Retail.‖

a. b. c. d. e. f.

New Retail Forms and Combinations Retailer Consolidation Growth of Mobile Retailing Growth of Omnichannel Retailing Growth of Fast Retailing Decline of Middle-market Retailers

II. Key Retailing Decisions A. Target Market

i. Until it defines and profiles the target market, the retailer cannot make consistent decisions about product assortment, store decor, advertising messages and media, price, and service levels. ii. Mistakes in choosing target markets can be costly. iii. To better hit their targets, retailers slice the market into ever-finer segments and introduce new lines of stores to exploit niche markets with more relevant offerings.

B.

Product Assortment and Procurement i. The retailer’s product assortment must match the target market’s shopping expectations in breadth and depth. ii. Identifying the right product assortment can be especially challenging in fast moving industries such as technology or fashion.

iii. Developing a product-differentiation strategy is a key challenge in defining the store’s product assortment. iv. After deciding on the product-assortment strategy, the retailer must establish merchandise sources, policies, and practices. v. Retailers are rapidly improving their skills in demand forecasting, merchandise selection, stock control, space allocation, and display. vi. Some stores are using radio frequency identification (RFID) systems made up of ―smart‖ tags—microchips attached to tiny radio antennas—and electronic readers to facilitate inventory control and product replenishment. vii. Stores are using direct product profitability to measure a product’s handling costs from the time it reaches the warehouse until a customer buys it in the retail store.

C. Services i. Another differentiator is unerringly reliable customer service, whether face to face, across phone lines, or via online chat. ii. Retailers encounter widely different consumer preferences for service levels and specific services. Specifically, they position themselves as offering one of

three levels of service: a. Self-service—Self-service is the cornerstone of all discount operations. Many customers are willing to carry out their own ―locate–compare–select‖ process to save money. b. Limited service—These retailers carry more shopping goods and offer services such as credit and merchandise-return privileges. Customers typically find their own goods, though they can ask for assistance. c. Full service—Salespeople are ready to assist in every phase of the ―locate– compare–select‖ process. Customers who like to be waited on prefer this type of store. The high staffing cost and many services, along with the higher proportion of specialty goods and slower-moving items, result in high-cost retailing. iii. Retailers must also decide on the services mix to offer customers. a. Prepurchase services include product information and enabling shoppers to try and experience products. b. Postpurchase services include shipping and delivery, gift wrapping, adjustments and returns, alterations.

D. Store Atmosphere

i. Retailers must consider all the senses in shaping the customer’s experience. ii. The growth of e-commerce has forced traditional brick-and-mortar retailers to respond. They provide a shopping experience as a strong differentiator. iii. The store atmosphere should match shoppers’ basic motivations. a. If customers are likely to be in a task-oriented and functional mind-set, then a simpler, more restrained in-store environment may be better. b. On the other hand, some retailers of experiential products are creating in-store entertainment to attract customers who want fun and excitement.

E. Pricing

i. Prices are a key positioning factor and must be set in relationship to the target market, product-and-service assortment mix, and competition. ii. Different formats of store retailers have different competitive and price dynamics. iii. Discount stores, for example, historically have competed much more directly with one another than with other formats, although that is changing. iv. Most retailers fall into the high-markup, lower-volume group (fine specialty stores) or the low-markup, higher-volume group (mass merchandisers and discount stores). v. When setting prices, retailers consider a variety of factors. a. Some retailers put low prices on some items to serve as traffic builders (or loss leaders) or to signal their pricing policies. b. Others plan mark-downs on slower-moving merchandise to free up inventory. vi. Retailers must also manage their price image, which reflects the overall perception that consumers have about the level of prices at a given retailer. vii. Marketing Insight: Managing the Price Image of a Retailer. When setting prices, retailers must take into account the impact of each individual price on their price image. See Fig. 16.1.

F. Incentives i. To make their offerings attractive, retailers use incentives such as price discounts, volume discounts (such as buy one–get one free), bonus offerings, and coupons. ii. Retailers vary in the degree to which they use incentives. Two extreme strategies stand out: everyday low pricing and high–low pricing.

a. A retailer using everyday low pricing (EDLP) charges a constant low price with little or no price promotion or special sales. b. In high–low pricing, the retailer charges higher prices on an everyday basis but runs frequent promotions featuring prices temporarily lower than prices at the EDLP level. iii. The most important reason why retailers adopt EDLP is that constant sales and promotions are costly and have eroded consumer confidence in everyday shelf prices. iv. While shopping in brick-and-mortar stores, consumers often use their smart phones to find deals or capitalize on promotions. v. Companies are trying to give customers more control over their shopping experiences by bringing digital technologies into the store via mobile apps. vi. Geofencing involves targeting customers with a mobile promotion when they are within a defined geographic space, near or in a store.

G. Communications i. Retailers use a wide range of communication tools to generate traffic and purchases: ads, special sales, coupons, e-mail promotions, reward programs, food sampling, and coupons at check-out points. ii. Retailers use interactive and social media to pass on information and create communities around their brands. iii. With 15 percent of a retailer’s most loyal customers accounting for half of its sales, reward programs are becoming increasingly sophisticated. iv. Where and how a product is displayed and sold can have a significant effect on sales. v. Retailers are using technology to influence customers as they shop.

III. Managing Omnichannel Retailing A. Omnichannel Retailing i. This increased reliance on multiple channels means that channels should be designed to work together effectively.

B. Brick-and-Mortar Retailers i.

Department stores such as JCPenney and Bloomingdale’s carry several product lines. ii.

Specialty stores such as The Limited, The Body Shop, and Sephora carry a single product line. iii.

Supermarkets such as Kroger are large, low-cost, low-margin, high-volume, selfservice stores designed to meet a family’s total needs. iv.

Convenience stores such as 7-Eleven are small stores in residential areas, often open 24/7. v.

Drugstores such as CVS Pharmacy and Walgreens carry prescription drugs, health and beauty aids, and other personal care items. vi.

Mass merchandisers such as Walmart are low-price, low-margin, high-volume stores that sell routinely purchased food and household items. vii.

Category killers such as The Home Depot carry a narrow but deep assortment in one category. viii.

Extreme value or hard-discount stores such as Dollar General carry a limited merchandise mix offered at heavily discounted prices. ix. Off-price retailers such as TJ Maxx offer leftover goods, overruns, and irregular merchandise sold at less than retail. x. Warehouse clubs such as Costco offer larger quantities at low prices.

xi.

Automatic vending offers a variety of merchandise, including impulse goods such as soft drinks. Vending machines are found in factories, offices, stores, gasoline stations, hotels, restaurants, etc. i. The three keys to retail success are ―location, location, and location.‖ Retailers can place their stores in any of the following locations. a. Central business districts. The oldest and most heavily trafficked city areas, often known as ―downtown.‖ b. Regional shopping centers. Large suburban malls containing 40 to 200 stores, typically featuring one or two nationally known anchor stores such as Macy’s and a number of smaller stores. c. Community shopping centers. Smaller malls with one anchor store and 20 to 40 smaller stores. d. Shopping strips. A cluster of stores, usually in one long building, serving a neighborhood’s needs. e. Store with a store. Smaller concession spaces taken by well-known retailers such as McDonald’s within larger stores, airports, or schools. f. Stand-alone stores. Some retailers, such as Kohl’s, favor free-standing storefronts.

C. Online Retailers i. Online retailers can predictably provide convenient, informative, and personalized experiences for vastly different types of consumers and businesses. ii. By saving the cost of retail floor space, staff, and inventory, they can profitably sell low-volume products to niche markets. iii. To drive traffic to a site, many firms employ affiliate marketing, paying online content providers to drive business to their brands’ sites. iv. Online retailers compete on multiple dimensions: product assortment, convenience, shopping experience, speed of delivery, return policies, and ability to address problems when they occur v. Business-to-business sites are changing the supplier–customer relationship in profound ways. vi. Business-to-business sites make markets efficient, giving buyers easy access to a great deal of information from a variety of sources, including: a. Supplier websites b. Infomediaries, third parties that add value by aggregating information about alternatives c. Market makers, third parties that link buyers and sellers d. Customer communities, where buyers can swap stories about suppliers’ products and services vii. Suppliers of superior products offset price transparency with value transparency; suppliers of undifferentiated products will drive down their costs in order to compete.

D. Omnichannel Retailing i. Most brick-and-mortar companies have added the internet after seeing how much business is generated online. ii. Omnichannel retailers include non-store retailers that have extended their a. reach to include online retailing in their portfolio. An example of multichannel retailing includes direct-mail marketing, catalog marketing, telemarketing, and infomercial direct-response marketing. b. Companies added e-commerce as another channel to connect with customers and generate sales. iii. The transition to omnichannel retailing was facilitated by the COVID pandemic, when brick-and-mortar-only retailers found their sales revenues evaporating.

IV. Managing Private Labels A. Private Labels i. A private-label brand (also called a reseller, store, or house brand) is a brand that retailers and wholesalers develop. ii. For many manufacturers, retailers are both collaborators and competitors. iii. Private labels are rapidly gaining ground in a way that has many manufacturers of name brands running scared.

a. Brands can be more profitable. b. Retailers can use manufacturers with excess capacity that will produce private-label goods at low cost. c. Other costs, such as research and development, advertising, sales promotion, and physical distribution, are also much lower, so private labels can generate a higher profit margin. d. Retailers develop exclusive store brands to differentiate themselves from competitors. e. Different from generics, which are unbranded, plainly packaged, less expensive versions of common products such as spaghetti and paper towels. iv. Retailers are building better quality into their store brands and emphasizing attractive, innovative packaging. v. Supermarket retailers are adding premium store-brand items.

vi. The growing power of store brands has benefited from the weakening of national brands. vii. Four strategic recommendations for manufacturers to compete against or collaborate with private labels: a. Fight selectively when manufacturers can win against private labels and add value for consumers, retailers, and shareholders.

b. Partner effectively by seeking win–win relationships with retailers through strategies that complement the retailer’s private labels.

c. Innovate brilliantly with new products to help beat private labels. d. Create winning value propositions by imbuing brands with symbolic imagery as well as functional quality that beats private labels.

viii. Creating strong consumer demand is crucial.

V. Wholesaling A. Wholesaling Activities i. Wholesaling includes all the activities in selling goods or services to those who buy for resale or business use.

B. The Business of Wholesaling i. Wholesalers differ from retailers in a number of ways.

a. Wholesalers pay less attention to promotion, atmosphere, and location because they are dealing with business customers rather than final consumers. b. Wholesale transactions are usually larger than retail transactions, and wholesalers usually cover a larger trade area than retailers. c. Wholesalers and retailers are subject to different legal regulations and taxes. ii. Wholesaler Types a. Merchant wholesalers b. Full-service wholesalers c. Limited-service wholesalers d. Cash and carry wholesalers e. Brokers and agents

iii. Wholesalers play a key role by serving as an intermediary between manufacturers and retailers.

C.

Key Functions Performed by Wholesalers

i. Functions

a. b. c. d. e. f. g. h. i.

Providing access to individual retailers Buying and assortment building Bulk breaking Warehousing Transportation Financing Risk bearing Market research Management services and consulting

ii. Wholesaler–distributors face mounting pressure from new sources of competition, including digital platforms demanding customers, new technologies, and more direct-buying. iii. Manufacturers’ major complaints against wholesalers:

a. They do not aggressively promote the manufacturer’s product line and act more like order takers. b. They do not carry enough inventory and therefore do not fill customers’ orders fast enough. c. They do not supply the manufacturer with up-to-date market, customer, and competitive information. d. They charge too much for their services. iv. Savvy wholesalers have rallied to the challenge and adapted services to meet their suppliers’ and target customers’ changing needs. v. They recognize that they must add value to the channel. vi.

Wholesalers have worked to increase asset productivity by better managing inventories and receivables.

a. They’re also reducing operating costs by investing in more advanced materialshandling technology, information systems, and the internet. b. They’re improving their strategic decisions about target markets, product assortment and services, price, communications, and distribution. vii. Wholesaling remains vulnerable to one of the most enduring trends—fierce resistance to price increases and removing suppliers based on cost and quality. viii. The trend toward vertical integration, in which manufacturers try to

control or own their intermediaries, is still strong.

CHAPTER

17

LEARNING OBJECTIVES

DRIVING GROWTH IN COMPETITIVE MARKETS

After reading this chapter, you should be able to: 17.1 Summarize how a company assesses its growth opportunities.

17.2 Explain how a company gains market position.

17.3 Summarize the strategies a company can use to defend its market position.

17.4 Discuss the key product life cycle marketing strategies.

CHAPTER SUMMARY 1.

2.

3.

4.

Assessing growth opportunities involves two main considerations: identifying the types of products and markets a company should focus on and managing the product–market growth strategy over time.

Market growth can be achieved by four core strategies that define market opportunities for a firm in terms of current and new products and markets. A firm can pursue one or more of the four product– market growth strategies: market penetration, market development, product development, and diversification.

A company can grow in two ways: by increasing output and enhancing revenues and profits internally—an approach commonly referred to as organic growth—or by relying on mergers and acquisitions. Market-penetration and market-development strategies typically follow the path of organic growth, whereas product development and diversification can involve organic growth as well as growth by mergers and acquisitions.

Firms with low shares of the total market can become highly profitable by targeting small markets of little or no interest to the larger firms. Targeting niche markets enables firms to know their target customers and meet their needs better than other firms by offering superior value.

5. While trying to expand total market size, a firm must also actively defend its current market position. The particular defensive strategy chosen depends on the needs of the company’s target customers, the company’s resources and goals, and its expectations about how competitors will react.

6. Products go through different stages over time, and at each stage they face different challenges and opportunities that require different marketing strategies and tactics. The four distinct stages of the product life cycle are introduction, growth, maturity, and decline. Most products today are in the maturity stage.

7. The introduction stage is marked by slow growth and minimal profits. If successful, the product enters a growth stage marked by rapid sales growth and increasing profits. In the maturity stage, sales growth slows and profits stabilize. Finally, the product enters a decline stage. The company’s task is then to identify truly weak products and phase them out with minimal impact on company profits, employees, and customers.

8. Not all products exhibit a bell-shaped product life cycle pattern. To gain and defend their market position, firms need to visualize a market’s evolutionary pat and the way it is likely to be influenced by new customer needs, competitors, technology, channels, and other developments.

OPENING THOUGHT This chapter adds the additional element of the complexity of marketing—competitive analysis.

Care should be taken not to overdramatize the importance of monitoring competition, however, many firms do not give competitors the attention they merit, so some emphasis is needed.

A key concept introduced in this chapter is that of market nicher—a specialist in small markets underserved by larger corporations. Many large firms today started out as ―nichers‖ and many large firms of tomorrow are our ―nichers‖ today. The concept of ―nichers‖ and the potential of growing them into larger firms can be exciting.

TEACHING STRATEGY AND CLASS ORGANIZATION PROJECTS

26. At this point in the semester-long project, students should be prepared to present their competitive analysis.

Who are the market leaders for their chosen product or service? What niche have they identified for their product/service? Is their product or service going to be a leader, follower, or challenger to well-established products or brands?

27. Michael Porter’s Five Forces model is as applicable today as it was when it was introduced. Have the students select a market or market segment (jeans, cell phones, etc.) and using Michael Porter’s model, completely define these five forces for the market or market segment. Who are the potential entrants, who are the suppliers (and how much power do they have), who are the buyers (and what sort of buying power do they have), what are the substitutes and how is the industry segmented (market share is a good indicator of segmentation for this project)? Students’ analysis and answers should be comprehensive.

ASSIGNMENTS Identify the major competitors in the blue jeans market. Who has the leading market share, whose shares have declined? What segmentation is occurring/has occurred in the blue jeans market and why? Did demographic changes affect the market (from Baby Boomers to Gen X or Gen Y)? What competitive signs, symbols, events, or occurrences did Levi-Strauss miss? What current shifts in competition and channel power is occurring and what can Levi-Strauss do to minimize the impact from these changes?

Have students read ―3 Tools to Help Leaders Steady Their Teams During a Transition‖ by Victoria M. Grady.

Retrieved on March 30, 2021 from: https://hbr.org/2021/03/3-tools-to-help-leaders-steady-their-teams-during-atransition. Also have them read Tarum Khanna and Krishna G. Palepu, ―Emerging Giants,‖ Harvard Business Review, October 2006, Vol. 84, Issue 10, pp. 60–69 and comment on the emerging competition from India and China on companies in the United States. Specifically, ask the students to comment on whether or not they believe that 1) this competition will increase in the future, and 2) how a U.S. company should respond to this threat.

For a market leader, increased sales must come from expanding the total market through adding new customers or increasing the usage of the product. Picking a market leader in an industry (Dell computers for example) explain how your market leader can expand the total market by adding new customers or increasing the usage of the product. Be as specific as possible.

In challenging a market leader, the challenger has a number of differing strategies to employ. Choosing the right one (or wrong one) could result in a larger market share and increased profits (or disaster) for the challenger. In choosing a specific attack strategy, the challenger must go beyond and develop specific strategies of price, lower price goods, value priced goods and services, and so on. Students should explore these strategies and come prepared to identify one company (or brand) that has chosen each of these strategies to implement and defend their selection(s).

Market nichers avoid large markets and try to be the leader in a small market or niche. Nichers have three tasks: creating niches, expanding niches, and protecting niches. Multiple niching is preferable to single niching.

Students should identify three ―nichers‖ (firms and/or brands) and explain why they have identified these as ―nichers‖ based upon the criteria in the chapter.

END-OF-CHAPTER SUPPORT Marketing Spotlight: Airbnb 1. What were the key factors that contributed to Airbnb’s market success? How was it able to disrupt the hospitality industry?

Suggested answer: Airbnb disrupted the hospitality industry by creating a new-to-the-world category of peer-to-peer hospitality. To create this category, the company launched a grassroots-style short-term rental model of matching guests seeking an affordable place to stay with hosts looking to earn some extra income from their house or apartment. Airbnb’s competitive pricing, broad global availability, and wide range of property types are some of the key factors that have made it an attractive alternative to traditional hotel rooms and vacation rentals.

When Airbnb started, its inventory was primarily shared rooms that were typically more affordable than

hotels. This novel cost-saving model began to catch on with hosts and guests, and the company began rapidly expanding to different cities across the globe, with availability in 89 countries three years after launching. Its ability to quickly achieve global scale made it a viable accommodation option for domestic and international travelers. By 2024, nearly 85 percent of hosts were outside the U.S. Another key to Airbnb’s success was its range of property types at many different price points, from luxury vacation homes to modest rooms in a shared apartment. Its broad range of properties enabled Airbnb to appeal to a large audience of consumers. The company reinforced its broad selection with a series of campaigns, including the early 2020s campaign called ―Categories‖ that showcased the unique collections of accommodation types one could browse and book, like castles, treehouses, or historical homes. In 2023, Airbnb released a campaign featuring its Rooms category, a rebranding of the company’s original offering of private rooms within a shared property. In 2024 it launched a campaign for its new Icons collection, which the company described as ―extraordinary experiences hosted by the greatest names in music, film, TV, art, sports and more.‖ In addition, the company benefitted from classic network effects. The more users Airbnb added, the more inclined people would be to list their own property for rental. Guests who had good experiences were also more likely to list their own property. These market movements created a positive feedback loop, which helped Airbnb grow the number of guests, hosts, and stays.

2. How did Airbnb create and sustain a competitive advantage? How has Airbnb positioned itself?

Suggested answer: Airbnb’s competitive advantage stems from several key factors. As discussed in the previous answer, Airbnb’s competitive pricing, broad global availability, and wide range of property types are some of the factors that have made it an attractive alternative to hotels and traditional vacation rentals.

In addition, Airbnb has also taken measures to remedy common concerns of both hosts and guests. For example, Airbnb began providing 24/7 customer support to both guests and hosts to quickly solve any issue that comes up. In 2021, Airbnb started taking the product improvements it made to address feedback from guests and hosts and bundling them into two big batches per year. Over the next two years, the company introduced more than 430 new features and upgrades as part of these semi-annual product releases.

Beginning in 2019, Airbnb materially changed its media strategy, decreasing spend on paid performance marketing like search ads and increasing its brand advertising and PR. Its PR efforts and high-profile brand campaigns like these helped Airbnb generate significant earned media, with more than 500,000 media mentions annually. By continually investing in improving its service and building its brand, Airbnb managed to continue its rapid growth despite intense competition.

In addition, Airbnb positions itself as a community-driven alternative to hotels. The company has highlighted its community aspect in various ways through the years. Early on, it encouraged its hosts and renters to post their experiences on social media, fostering word of mouth. As CEO Brian Chesky observed, ―Airbnb has an offering that’s really unique, and so people are deeply passionate about it, they tell one another, and Airbnb has become a noun and a verb used all over the world.‖ ―We believe that Airbnb can be much more than a marketplace that merely connects guests and hosts.‖

3. Going forward, what should Airbnb do to sustain its competitive advantage? How can it defend and improve its market position?

Suggested answer: Student answers will vary. Answers may suggest that Airbnb can sustain its competitive advantage to defend and improve its position through inventory expansion and diversification. The company already has a large global footprint and can grow further by harnessing network effects to increase the number of hosts and properties in each market, which should also increase demand. The company has diversified its inventory into all types of properties, as highlighted by the Categories campaign. It could continue adding diversified property types, perhaps even hotel rooms, and new services such as virtual concierges. The ―Only on Airbnb‖ campaign in 2023 highlighted unique properties that were listed exclusively on the platform, including a one-time booking of the Barbie Malibu Dreamhouse to

commemorate Barbie’s 60th anniversary.

Answers may also recommend one or more of the following ideas for Airbnb to sustain its competitive advantage and defend and improve its position:

   

Develop a comprehensive loyalty program Purchase an online travel agency (OTA), like Expedia, to give customers the full spectrum of accommodation options to choose from Create a subscription program akin to a timeshare where for a flat annual fee guests get a set number of room nights they can book Create an influencer network designed to convert guests who have never tried Airbnb before

Marketing Spotlight: American Express 1. Evaluate American Express in terms of its competitors. How has its positioning changed over time? Where does American Express face the most competition now?

Suggested answer: Since it began to focus on credit cards in the mid-20th century, American Express has competed most directly with the two other major credit card companies: Visa and Mastercard. Relative to these two competitors, American Express has consistently sought to position itself as an exclusive card with unmatched member benefits. For example, in 1966 it introduced the Gold Card, which featured a higher line of credit, and marketed it to executives. The company maintained this exclusive image through its advertising, impeccable customer service, and cardmember benefits like access to coveted promotions and events. It introduced a campaign with the slogan ―Membership Has Its Privileges‖ in 1987 to convey the unique benefits of being a cardmember, and consistently used this slogan over the next decade.

While maintaining its overall exclusive positioning over time, the company has also competed with Visa and Mastercard by expanding its card portfolio, the types of purchases it encourages for its cards, and the cardmember benefits it offers. For example, American Express changed the color of its original charge card from ―Travelers Cheque‖ purple to ―money green‖ in 1969 to better reflect the everyday purchases its customers were using the card for. Next, the company introduced the now famous ―Don’t Leave Home Without It‖ in the early 1970s, which reinforced using the card for everyday purchases. To counter Visa’s ―It’s Everywhere You Want to Be‖ messaging, American Express further expanded its association with everyday spending in the 1990s by adding more credit cards and co-branded cards and signing more merchants. In 2023, the company delivered record annual revenue of $61 billion and had 141 million total cards-in-force.

To communicate the transformation that had taken place during the 1990s, the company launched a corporate ad campaign called ―Do More‖ that featured its cards, travel, and personal banking services. As part of the Do More campaign, the company created a series of ads that used humorous settings to highlight Visa’s limitations. The campaign also included a series of ads starring Jerry Seinfeld that featured his unique brand of situational comedy to highlight the expanded array of merchants that accepted the card, like gas stations, supermarkets, corner stores, and the post office.

In consistently combatting fierce competition, American Express has had an important additional advantage—the strong brand that the company has developed and nurtured over the years. Year after year, Kantar BrandZ and Interbrand rank American Express in the top 50 ―Most Valuable Brands in the World,‖ Fortune ranks American Express as one of the top ―Most Admired Companies,‖ and J.D. Power ranks American Express as the top U.S. credit card company for customer satisfaction. American Express is committed to providing customers with outstanding service anywhere in the world.

Student answers may vary regarding where American Express faces the most competition. One possible answer is that the most competition comes from other leading premium rewards credit cards like Chase

Sapphire, which target the Millennial and GenZ cohorts. Another potential answer is that the biggest competitive threat is alternative forms of payment including payment apps like Venmo and Apple Pay and ―buy now, pay later‖ services like Affirm and Klarna.

To address these direct and indirect competitive challenges, American Express increased sign-up bonuses, augmented spending rewards, built integrations with payment apps, acquired reservation app Resy, emphasized its premium cards, tripled the number of accepting merchants globally, and offered perks such as credits for Uber rides and Disney streaming services that are squarely aimed at Millennial and GenZ consumers. These efforts met with success, and in 2023, Millennial and GenZ consumers together comprised over 75 percent of new American Express Platinum and Gold consumer accounts. That year, the company delivered record annual revenue of $61 billion and had 141 million total cards-in-force.

2. How has American Express grown its cardmember base while maintaining its premium positioning? What recommendations would you make in order to maximize growth without sacrificing its premium image?

Suggested answer: The previous answer contains context on how American Express grew to 141 million total cards-in-force through the years while maintaining its premium positioning and expanding its appeal to respond to competition from Visa and Mastercard. In addition, the company expanded its cardmember base while maintaining its premium positioning by building a leadership position in cards for corporations and small businesses, both of which could have high spend on credit cards. American Express introduced its Corporate Card in the 1960s and rebranded its Small Business Services division as ―OPEN: The Small Business Network‖ in the 1990s, adding benefits such as flexible payments, as well as special offers, partnerships, and resources for small businesses. On the consumer side, following a 2004 legal victory that enabled it to pursue relationships with any bank, American Express partnered with banks such as MBNA, Citigroup, UBS, and USAA to issue its premium cards and expand its customer base.

Student answers will vary in terms of recommendations to maximize growth without sacrificing its premium image. Answers may recommend American Express continue to focus on an affluent customer base and cards that carry an annual fee, broaden its marketing focus to bring in new affluent customers, and woo small businesses with ramped-up rewards and new technological innovations. Answers may also suggest that the company continue to appeal to Millennials and GenZ. One company executive summarized American Express’ success with younger consumers by saying, ―Amex is becoming the card for an entirely new generation . . . which means we capture a longer relationship over their lifetime and grow with them into their peak spending years.‖ The company can continue to refresh its benefits and messaging to retain these customers and add more members like them.

3. How should American Express continue to differentiate itself from the competition?

What new products or services would you recommend?

Suggested answer: Student answers will vary. Answers may suggest that American Express continue to reinforce its premium positioning by refreshing its collection of exclusive offers, perks and experiences.

One example would be to expand its airline partnerships to offer access to additional airport lounges.

Answers may recommend that since the bulk of new card signups come from Millennials and GenZ, the company should continue to add new card products, features and member benefits to appeal to consumers from those generations. An example could be adding features to make online and mobile payments seamless, similar to payment apps. In addition, answers may highlight that a key to American Express’s success has been its customer service, so the company could find new ways to differentiate with customer service. For example, it could expand its concierge services to lower card tiers.

DETAILED CHAPTER OUTLINE Opening vignette: Growth is essential for the success of any firm. To be a long-term market leader is the goal of any marketer. Today’s challenging marketing circumstances often dictate

that companies frequently reformulate their marketing strategies and offerings. Economic conditions change, competitors launch new assaults, and buyer interest and requirements evolve. One of the most competitive and challenging sectors is technology, as AMD has experienced in their up-and-down history. Semi-conductor maker AMD has executed a remarkable turnaround from being almost competed out of existence to achieving a market capitalization of roughly $450 billion, which exceeds that of rival Intel and making inroads in AI with runaway market leader Nvidia This chapter examines growth, the role competition plays, I . Assessing Growth Opportunities A. Growth Opportunities i. Assessing growth opportunities includes planning new businesses, downsizing, and terminating older businesses.

ii. If there is a gap between future desired sales and projected sales, corporate management will need to develop or acquire new businesses to fill it. iii. There are two main considerations in assessing growth opportunities.

a. The first concerns the types of products and markets a company should focus on. b. The second involves the ways in which a company can manage its product—market growth strategy over time.

A. Product–Market Growth Strategies

i. The Product–Market Growth framework outlines four key sales-growth strategies that tie the company’s customer segments to opportunities for product development. ii. The framework evaluates the strategic growth opportunities for a firm in terms of current and new products and markets. See Fig. 17.1. a. The market-penetration strategy, which involves growing sales of the company’s current offerings to its existing customers, is often the easiest to implement. b. A company can use a market-development strategy. First, it might identify potential user groups. Second, it might seek additional distribution channels. Third, the company might sell in new locations. c. In a product-development strategy, a company could develop new product features, offer different sets of benefits at different price tiers, or research an alternative technology to develop a viable substitute for its current products. d. Growth via a diversification strategy makes sense when good opportunities exist outside the present businesses—i.e., the industry is highly attractive, and the company has the right mix of business strengths to succeed. iii. Several types of diversification: a. Concentric strategy: seek new products that have technological or marketing synergies with existing product lines b. Horizontal strategy: produce complementary products c. Conglomerate strategy: seek new businesses with no relationship to current technology, products, or markets B. Growth Through Mergers and Acquisitions i. A company can grow by increasing output and enhancing revenues and profits internally, organic growth, or through mergers and acquisitions. ii. Product development and diversification can involve both organic growth and growth by mergers and acquisitions. iii. A business can increase sales and profits through backward, forward, or horizontal integration within its industry. iv. To grow, a company might acquire suppliers to gain more control. v. It might acquire profitable wholesalers or retailers.

vi. The company might acquire one or more competitors. vii. If these new sources do not deliver the desired sales volume, the company must consider diversification.

viii. A company must prune, harvest, or divest itself of tired old businesses to release resources and reduce costs.

C. Growth Through Innovation and Imitation i. Theodore Levitt argues that a strategy of product imitation might be as profitable as a strategy of product innovation. ii. In ―innovative imitation,‖ the innovator bears the expense of developing the new product, getting it into distribution, and informing and educating the market.

Section 1.02 iii. Another firm can come along and copy or improve on the new product. iv. Many companies prefer to follow rather than challenge the market leader. v. Followers must define a growth path, but not invite competitive retaliation. vi. Three broad strategies: a. Cloner. The cloner emulates the leader’s products, name, and packaging with slight variations. b. Imitator. The imitator copies some things from the leader but differentiates on packaging, advertising, pricing, or location. c. Adapter. The adapter takes the leader’s products and adapts or improves them. vii. Follower strategies are not to be confused with illegal and unethical follower strategies.

II. Gaining Market Position A. Market Position i. An important function of marketing is to drive the growth of company sales and revenue. ii. Good marketing can help to attract consumers, induce them to try the company’s products, and promote word of mouth and diffusion. iii. A company’s market position is defined on three dimensions: a. Share of market—Market share is measured by the company’s sales revenue or the number of company units sold relative to the total revenue or total units sold in a specific market. b. Share of mind—This is defined by the percentage of customers who regard the company as the first company that comes to mind in a specific industry. c. Share of heart—The percentage of customers who name the company as the company from which they would prefer to buy a specific product. iv. Companies that make steady gains in mind share and heart share will inevitably make gains in market share and profitability. v. A market leader has the largest market share and usually leads in price changes, new-product introductions, distribution coverage, and promotional intensity. vi. Although marketers assume well-known brands are distinctive in consumers’ minds, unless a dominant firm enjoys a legal monopoly, it must maintain constant vigilance.

vii. To gain and defend market position, a. a firm might grow sales from current customers. b. it might expand total market demand by creating new markets. c. it must protect its current share through effective defensive and offensive actions.

A. Growing Sales to Current Customers i. Marketers can try to increase the amount, level, or frequency of consumption.

They can sometimes boost the amount through packaging or product redesign.

ii. Identifying New Occasions for Usage. A marketing program can communicate the appropriateness and advantages of using the brand. iii. Another opportunity to increase usage arises when consumers’ perceptions of their usage differ from reality. iv. Other approaches provide consumers information about first using the product or replacing it and gauging product performance. v. Identifying New Uses. The second approach is to identify completely new and different applications.

B. Creating New Markets i. Gaining a Pioneering Advantage. Studies show that a market pioneer can gain great advantage. ii. The pioneer’s brand also establishes what attributes the product class should possess. iii. Researchers have identified five factors underpinning long-term market leadership: a. Vision of a mass market b. Persistence c. Relentless innovation d. Financial commitment e. Strategic assets iv. Speeding up innovation is essential in an age of shortened product life cycles. v. Marketers have identified several weaknesses among the failing pioneers: a. New products were too crude, improperly positioned, or appeared before there was strong demand. b. Product-development costs exhausted resources. c. A lack of resources to compete against larger firms and managerial incompetence. vi. Successful imitators offered lower prices, improved the product, or used market power to overtake the pioneer. vii. Identifying Niche Markets. An alternative to being a follower in a large market is to be a leader in a small market, or niche market viii. The niche marketer achieves high margin, whereas the mass marketer achieves high volume. ix. The guiding principle in successful nichemanship is specialization.

a. Customer specialist. The firm specializes in one type of end-use customer. b. Product or service specialist. The firm carries or produces only one product line or product. x. Nichers have three tasks: creating new markets, expanding current markets, and protecting their market position. xi. The risk is that the niche might dry up or be attacked. xii. Because niches can weaken, the firm must continually create new ones.

C. Expanding Existing Markets i. When the total market expands, the dominant firm usually gains the most. ii. In targeting new customers, the firm should not lose sight of existing ones.

III. Defending the A. Market Position i. While trying to expand total market size, a dominant firm must actively defend its current business. ii. Comprehensive solutions increase competitive strength and value to customers so that they feel appreciative or even privileged to be a customer, not trapped or taken advantage of. a. Marketing Insight: Market leaders may also have to defend against market

challengers, who are likely to employ one or more of a variety of different strategies to try to gain market share as described in iii. In satisfying customer needs, there are three responses: a. A responsive marketer finds a stated need and fills it. b. An anticipative marketer looks ahead to needs customers may have in the near future. c. A creative marketer discovers solutions that customers did not ask for but to which they enthusiastically respond. iv. Proactive companies create new offers to serve unmet—and maybe even unknown—consumer needs. v. The aim of defensive strategy is to reduce the probability of attack, divert attacks to less-threatened areas, and lessen their intensity. a. A leader would like to do anything it legally and ethically can to reduce competitors’ ability to launch a new product, secure distribution, and gain consumer awareness, trial, and repeat. b. In any strategy, speed of response can make an important difference to profit. vi. Six defense strategies: a. Position defense. Position defense means occupying the most desirable position in consumers’ minds, making the brand almost impregnable. b. Flank defense. The market leader should erect outposts to protect a weak front or support a possible counterattack. c. Preemptive defense. A more aggressive maneuver is to attack first, perhaps with guerrilla action across the market—hitting one competitor here, another there—and keeping everyone off balance. d. Counteroffensive defense. In a counteroffensive, the market leader can meet the attacker frontally and hit its flank or launch a pincer movement so the attacker will have to pull back to defend itself. e. Repositioning defense. In a repositioning defense, the leader stretches its domain over new territories through market broadening and market diversification. f. Contraction defense. Sometimes large companies can no longer defend all their territory. In planned contraction (also called strategic withdrawal), they give up weaker markets and reassign resources to stronger ones.

IV. Product Life-Cycle Marketing Strategies (See Fig. 17.2) A. Four key assumptions:

i. ii. iii. iv.

Products have a limited life.

Product sales pass through distinct stages, each posing different challenges, opportunities, and problems to the seller.

Profits rise and fall at different stages of the product life cycle.

Products require different marketing, financial, manufacturing, purchasing, and human resource strategies in each life-cycle stage. See Fig. 17.2.

B. The Concept of a Product Life Cycle

i. ii. iii. iv. v. vi. vii. viii.

Most product life cycles are portrayed as bell-shaped curves, typically divided into four stages: introduction, growth, maturity, and decline. (Table 17.1) Introduction—A period of slow sales growth as the product is introduced in the market. Profits are nonexistent because of the heavy expenses of product introduction.

Growth—A period of rapid market acceptance and substantial profit improvement.

Maturity—A slowdown in sales growth because the product has achieved acceptance by most potential buyers. Profits stabilize or decline because of increased competition.

Decline—Sales show a downward drift and profits erode.

Growth-slump-maturity pattern characteristic of small kitchen appliances like bread makers and toaster ovens.

Cycle-recycle pattern describes the sales of new drugs.

Scalloped PLC is where sales pass through a succession of life cycles based on the discovery of new product characteristics, uses, or users.

C. Introduction Stage

i. ii. iii.

Slow sales growth Negative or low profits High promotional expenditures

iv. v. vi. vii.

Inform potential consumers Induce product trial Secure distribution in retail outlets Higher prices

D. Growth Stage i. Rapid climb in sales. Early adopters like the product, and additional consumers start buying it. New competitors enter, attracted by the opportunities. They introduce new product features and expand distribution. ii. Prices stabilize or fall slightly, depending on how fast demand increases. iii. Companies maintain marketing expenditures or raise them slightly to meet competition and continue to educate the market. Sales rise much faster than marketing expenditures, causing a welcome decline in the marketing-to-sales ratio. iv. Profits increase as marketing costs are spread over a larger volume, and unit manufacturing costs fall faster than price declines, owing to the producerlearning effect. v. Firms must watch for a change to a decelerating rate of growth in order to prepare new strategies. vi. To sustain rapid market share growth now, the firm:

a. Improves product quality and adds new features and improved styling b. Adds new models and flanker products (of different sizes, flavors, and so forth) to protect the main product c. Enters new market segments d. Increases its distribution coverage and enters new distribution channels e. Shifts from awareness and trial communications to preference and loyalty communications f. Lowers prices to attract the next layer of price-sensitive buyers E. Maturity Stage i. Most products are in this stage of the life cycle, which normally lasts longer than the preceding ones. ii. The maturity stage divides into three phases: growth, stable, and decaying maturity.

a. In the first, sales growth starts to slow. There are no new distribution channels to fill. New competitive forces emerge. b. In the second phase, sales per capita flatten because of market saturation. Most potential consumers have tried the product, and future sales depend on population growth and replacement demand. c. In the third phase, decaying maturity, the absolute level of sales starts to decline, and customers begin switching to other products. iii. This third phase poses the most challenges. The sales slowdown creates overcapacity in the industry, which intensifies competition. Weaker competitors withdraw. a. A few giants dominate—perhaps a quality leader, a service leader, and a cost leader—and they profit mainly through high volume and lower costs. b. Surrounding them is a multitude of market nichers, including market specialists, product specialists, and customizing firms. c. The question is whether to struggle to become one of the big three and achieve profits through high volume and low cost or to pursue a niching strategy and profit through low volume and high margins.

Sometimes the market will divide into low- and high-end segments, and market shares of firms in the middle will steadily erode. d. AI and Marketing: The Future of Competition. Artificial intelligence is transforming virtually all industries iv. Market Growth. A company can expand the number of users through either or both of the following strategies: a. Convert nonusers. This approach is also referred to as primary demand stimulation. b. Attract competitors’ customers. This approach is often referred to as steal-share strategy. v. A company can increase the usage rates among current users through the

following strategies: a. Increase the number of usage occasions. For example, Campbell’s began promoting its soups for usage in the summer. Heinz might recommend using vinegar to clean windows. b. Increase consumption on each occasion. For example, Heinz designed larger, upside-down containers of ketchup to make it easier for users to squeeze out and use more ketchup. c. Create new usage occasions. For example, GlaxoSmithKline might promote Tums antacid as a calcium supplement. Arm & Hammer might promote the use of baking soda as an odor remover for refrigerators and kitchen sinks. vi. Managers also try to stimulate sales by improving quality, features, or style. a. Product modification. Quality improvement increases functional performance by launching a ―new and improved‖ product. b. Feature improvement adds size, weight, materials, supplements, and accessories that expand the product’s performance, versatility, safety, or convenience. c. Style improvement increases the product’s esthetic appeal.

F. Decline Stage i. Sales decline for a number of reasons, including technological advances, shifts in consumer tastes, and increased domestic and foreign competition. ii. All can lead to overcapacity, increased price cutting, and profit erosion. iii. As sales and profits decline, some firms withdraw. iv. Harvesting and Divesting. Gradually reducing a product or business’s costs while trying to maintain sales. a. The first step is to cut R&D costs and plant and equipment investment. b. The company might also reduce product quality, sales force size, marginal services, and advertising expenditures, ideally without letting customers, competitors, and employees know what is happening. c. Harvesting is difficult to execute, yet many mature products warrant this strategy. v. If the company can’t find any buyers, it must decide whether to liquidate the brand quickly or slowly. It must also decide how much inventory and service to maintain for past customers. vi. Eliminating Weak Products a. Besides being unprofitable, weak products consume a disproportionate amount of management’s time, require frequent price and inventory adjustments, incur expensive setup for what are usually short production runs, draw advertising and sales force attention better used to make healthy products more profitable, and cast a negative shadow on company image. b. Maintaining them also delays the aggressive search for replacement products, creating a lopsided product mix long on yesterday’s breadwinners and short on tomorrow’s.

G. Alternative Product Life Cycle Patterns

i. The product life cycle theory critics claim that patterns are too variable in shape and duration to be generalized and that marketers can seldom tell what stage their product is in. ii. A product may appear mature when it has actually reached a plateau prior to another upsurge. iii. Three alternative patterns are shown in Fig. 17.3. a. Figure 17.3(a) shows a growth–slump–maturity pattern, which is characteristic of small kitchen appliances. Sales grow when the product is first introduced and then fall. b. The cycle–recycle pattern in Fig. 17.3(b) often describes the sales of new drugs.

The pharmaceutical company aggressively promotes its new drug, producing the first cycle. Later, sales start declining, and another promotion push produces a second cycle. c. In the scalloped pattern shown in Fig. 17.3(c), sales pass through a succession of life cycles reflecting the discovery of new product characteristics, uses, or users. iv. Two categories of product life cycles: fads and trends.

a. A fad is ―unpredictable, short-lived, and without social, economic, and political significance.‖ b. A trend is a direction or sequence of events with momentum and durability. v. Firms need to visualize a market’s evolutionary path as it is affected by new

18

needs, competitors, technology, channels, and other developments, and change product and brand positioning to keep pace.

CHAPTER

DEVELOPING NEW MARKET OFFERINGS

LEARNING OBJECTIVES After studying this chapter, you should be able to: 18.1 Explain how companies develop new offerings.

18.2 Explain how companies generate new ideas.

18.3 Describe how companies create and validate a prototype.

18.4 Summarize the key aspects of designing a business model for a new offering.

18.5 Explain how companies implement new offering strategies.

18.6 Discuss the key steps in commercially deploying a new offering.

CHAPTER SUMMARY 1. Innovation is the key to developing viable new offerings. Innovation can involve a new technology, a new approach to brand building, a new pricing mechanism, a new way of managing incentives, new channels of communication, or a novel distribution method. Innovative offerings disrupt existing business models and make companies that fail to adapt to changing market conditions superfluous by devising new ways to create market value.

2. Successful new-product development requires the company to establish an effective organization for managing the development process, which can include product managers (of either the new product or existing products), committees, departments, or venture teams. Increasingly, companies are adopting cross-functional teams, connecting to individuals and organizations outside the company through crowdsourcing and other means, and developing multiple product concepts.

3. New-product development is an iterative process of discovering a novel idea and translating this idea into a viable, successful market offering. New-product development is represented as a sequence of actions (stages) separated by hurdles (gates) that the new offering must overcome. The stage-gate approach divides the innovation process into five key stages—idea generation, concept development, business-model design, offering development, and commercial deployment— separated by gates that serve to validate the actions taken in the previous step.

4. Two popular frameworks examine customers’ reaction to new offerings. Rogers’ model depicts the number of new adoptions, rather than total adoptions, at a given point in time and divides customers into five categories—innovators, early adopters, early majority, late majority, and laggards—based on the timing of new-product adoption. Building on Rogers’ model, Moore’s model argues that in the case of technology products, the adoption of innovations is a discontinuous process marked by distinct adoption gaps, the largest of which is the gap between the early adopters (enthusiasts and visionaries) and the mainstream market.

5. Innovation begins with generating an idea that pinpoints an unmet market need and suggests a novel way to address this need. There are two basic methods of idea generation: top-down idea generation, which begins with identifying a market opportunity, and bottom-up idea generation, which starts with an invention and then

seeks to identify an unmet market need that it will satisfy. Top-down idea generation is the preferred approach for developing new offerings.

6. Concept development embodies a potentially viable idea by creating an initial version, or prototype, of the company’s offering. Concept development aims to reduce market and implementation risk by designing the offering in an expeditious and resource-efficient way. Concept development typically evolves from a description of the product’s core features to a scaled-down prototype that features the offering’s core functionality.

7. Designing the business model involves three key components: identifying the target market, articulating the offering’s value proposition in that market, and delineating the key attributes of the market offering. The target market delineates the market in which a company’s offering aims to create value. The value proposition describes the value that the company plans to create for target customers, collaborators, and its stakeholders. The market offering defines the ways—product, service, brand, price, incentives, communication, and distribution—in which the company will create, communicate, and deliver market value.

8. Offering implementation turns the conceptualized offering into an actual offering that is ready for market launch. Implementation involves gathering the necessary resources to put the business model into action and develop the market offering.

9. Commercialization informs target customers about the company’s offering and makes the offering available to these customers. To minimize risk and resources, companies initially deploy the offering in selected (primary) markets and, upon its success, expand the availability of the offering to the entire target market.

Market expansion ramps up the facilities involved in the offering’s production, promotes the offering to all target customers, and ensures that the offering is available to the entire target market.

OPENING THOUGHT Students will be challenged in understanding the new-product process if they are new to the science of marketing. Students, like the general population, believe that new products are just ―thought-up‖ and created!

Therefore, the first barrier to effective learning in this chapter is to outline and detail the new-product process.

An instructor can use examples from his/her experience in the creation of new products or he/she can set up as an in-class or outside-of-class experiment, the ―creation‖ of a new product by the class or in groups.

Secondly, the consumer-adoption process may be new to some students who have not had any consumer buying behavior classes. This section of the chapter allows for the most discussion: Are you a heavy user? Or do you know someone who is an ―early adopter‖—someone who must have the latest gimmick? When involving the students in the examination(s) of their own lives or the lives of family/friends, the stages of the adoption process can begin to play a more meaningful role.

Finally, personal influence—the effect that another person has on our willingness to try products—should be a concept familiar to the students. The instructor’s challenge here is to show the students (or make them aware if they have not been aware) that personal influence is a powerful determinant of behavior. The marketer must be cognizant of personal influence in designing a marketing campaign. At this point, class discussion can focus on the ethics of designing marketing campaigns to reach influential opinion-makers to promote products and/or services.

TEACHING STRATEGY AND CLASS ORGANIZATION PROJECTS

28. At this point in the semester-long Marketing Plan project, there should be a brief write-up by the students as to the consumer-adoption process for their new product. How will the consumer learn about their new product and how quickly will they adopt it? Will the product be targeted to the heavy users and early adopters first, then early and late majorities? What is their estimated time for full adoption?

Identify three new products (introduced to the consumer and/or business markets within the last year) and classify them as either: a new-to-the-world product, a new product line, an addition to the existing product line, an improvement and/or revision of existing product(s), or a repositioning of an existing item. For each product selected, identify what challenges you think the developing company faced in marketing this product. What rate of diffusion and consumer adoption do you foresee for these new products?

ASSIGNMENTS Set up a project in which students (individually or in groups) observe consumers using products such as automobiles, use of the internet, use of the ―mall,‖ etc. to see if they can come up with some ideas from their observations.

New products fail at a disturbing rate. Recent studies put the rate at 95 percent in the United States and 90 percent in Europe. In small groups (five students suggested as the maximum), find three products that have ―failed‖ (been introduced then withdrawn from the market by the company) and suggest the cause or causes of these product failures. A listing of some of the reasons why new products fail can be found in the chapter.

In the opening vignette of the chapter, Dyson is noted for being one of the most innovative companies. Other innovative companies exist as well. In a small group, find at least three U.S. companies that have introduced numerous new products into the marketplace over the last two years. What characteristics do all of these companies share? What has been their success rate?

Apple’s iPod® and iPhone® have been successful new product introductions for the company. It has been suggested that the introduction of iPhone and iPod was targeted at the ―innovators‖—technology enthusiasts and ―early adopters.‖ Question: Can the iPhone and iPod continue their rate of diffusion throughout the adoption curve and reach the early majorities and late majorities users? Or will they become stuck appealing to just those two first segments? In your answer, carefully review the sales, pricing, and products recently introduced by competitors of Apple.

The consumer-adoption process is similar to the product life cycle in its stages of introduction, growth, expansion, and decline. For example, by the time a product reaches the late majority, the product is also entering the latter stages of the product life cycle and price and promotion become increasingly important to maintaining sales. Overlaying these two graphs, comment on what their similarity means for marketers. Why do you think that the length of the adoption process and the product life cycle stages are similar? What does this similarity say about consumer buying practices? What lessons must marketers understand, in terms of new product launches, about these two?

The chapter presents the stage-gate approach for new-product development. In small groups, and using the techniques described, develop at least three ―new ideas‖ for products and services. Your group can use ―lateral marketing‖ techniques as well. Share these new ideas with others in the class and conduct an informal poll of which ideas have the most merit for future development.

Companies find good ideas by researching competitors’ products and services. For this exercise, select a consumer product category (shampoos, soft drinks, snack foods, etc.), purchasing many of the available items in this category. Suggest some incremental innovations that you would like to see for the products/category chosen. For example, would you prefer a different form of bottling for shampoos? A different flavor for soft drinks—beer flavored cola, for example. Do any of the items in your research have glaring weaknesses as in its cleaning properties, smell, or taste that a company can improve upon? Why is competitive research so important for companies to undertake?

END-OF-CHAPTER SUPPORT

Marketing Spotlight: Samsung

1. What are some of Samsung’s greatest competitive strengths? What role have new products played in contributing to the company’s success?

Suggested answer: Samsung has a number of competitive strengths, and three of the greatest strengths are design, product quality, and competitive pricing. Together, these strengths formed a differentiated value proposition that ―kick-started the evolution‖ of Samsung. As Samsung invested heavily in design and innovation, held high quality standards, and offered affordable prices, many of its products—from memory chips to LCD TVs —gained significant market share and became industry leaders in their respective categories.

Beginning in the 1990s, the company began using its design prowess to introduce innovative new products that helped fuel its success. In 1999 it debuted a campaign titled ―Samsung DigitAll: Everyone’s Invited‖ to showcase its suite of innovative digital products, including the first watch with a built-in mobile phone, and the first mobile phones with built-in MP3 players. Samsung consistently poured money into R&D, for example budgeting $40 billion between 2005 and 2010. It continued to introduce new innovative designs across a wide range of consumer electronic products and digitally equipped appliances like TVs, refrigerators, washers and dryers, and stoves under the Samsung brand.

By 2006, it was the biggest and most profitable consumer electronics company.

Samsung Electronics’ mobile phone business became the company’s primary growth driver. Samsung’s Galaxy phone, which was introduced in 2009 as the company’s first Android device, made it a formidable competitor to the iPhone. In 2011, it launched the Galaxy S Note phone, which created a new category called the ―phablet‖ by combining a smartphone with a tablet. In the third quarter of 2011, Samsung overtook Apple to become the world’s largest smartphone maker, a position it retained for more than a decade.

Samsung continued to innovate with its portfolio of consumer electronics products. It introduced a new model of flatscreen TV in 2017 called The Frame, which was designed to mount on a wall and display artwork or photography when it wasn’t projecting TV content. In 2019, the company introduced a new phone called the Galaxy Z Fold that contained two display screens that could be opened side-by-side to create a bigger screen or folded one atop the other. By 2020, Samsung had become the world’s fifth-most-valuable brand on Interbrand’s annual ranking. The company’s long history of new product innovation was instrumental in building its brand. With sales of $198 billion in 2023 and more than 270,000 employees in over 70 countries, Samsung Electronics continued to be a leader in the highly competitive consumer electronics industry.

2. What is Samsung’s approach to developing new products? What changes, if any, would you make to its approach?

Suggested answer: Samsung’s approach to developing new products is rooted in human-centered design. Lee Kun-Hee, the son of Samsung’s founder, believed that to become a leading brand, the company needed to prioritize product design, which he foresaw as ―the ultimate

battleground for global competition in the 21st century.‖ He therefore established in the late 1980s ―a design-focused culture that would support world-class innovation.‖ The company introduced a design philosophy of ―Inspired by humans, creating the future‖ in 1996, which united its designers in a common purpose.

The company’s success with televisions illustrates the power of its approach to design-led innovation. When its designers conducted ethnographic research with TV owners in 2003, they realized that since TVs were off more than they were on, consumers would value betterlooking TVs. Samsung redesigned its flatscreen TVs to prioritize ―visually stunning‖ aesthetics and sold one million units of the new models in the first six months. Samsung became the top-selling TV manufacturer globally in 2006, a position it retains to this day.

Student answers will vary regarding changes to its approach. Some answers may argue that because the company has overall been successful with new products, it should not make any changes to its approach. Other answers may suggest the company find ways to increase the pace of innovation to move ahead of competitors. Some answers may point to the disastrous launch of the fire-prone Galaxy Note 7 to recommend the company focus on quality above all else in its product development.

Answers could also note that Samsung should place less emphasis on consumer research, because often consumers cannot articulate what new products they want in a given category until they can experience them.

Still other answers may suggest that the company trim its product portfolio to focus its innovation only on its biggest segments: phones, chips, and TVs.

3. What new product areas would you recommend Samsung move into next?

Suggested answer: Student answers will vary. Some answers may note the potential rise of AI in suggesting that Samsung deeply integrate AI into its products, perhaps even developing a new type of device that functions as an AI assistant. Other answers could recommend Samsung develop the next wave of immersive virtual- and mixed-reality technology, to innovate beyond today’s headsets. Answers may also suggest other product areas for Samsung to move into including gaming consoles; ―smart home‖ categories like smart speakers, home security, and thermostats. In 2024, Samsung introduced its Galaxy S24 family of phones to include on-device AI, which enabled the phones to run generative AI code without having to send data to and from the cloud.

Marketing Spotlight: Virgin Group

1. What are Virgin’s key brand strengths? How well do these strengths apply to the diverse range of brands Group in its portfolio?

Suggested answer: Several of Virgin’s key brand strengths include innovation, customer-centricity, irreverence and social responsibility.

The Virgin Group’s purpose is ―to change business for good.‖ To deliver this change, it looks for new opportunities in markets with underserved, overcharged customers and complacent competition. Founder Richard Branson explained, ―Wherever we find them, there is a clear opportunity area for Virgin to do a much better job than the competition. We introduce trust, innovation, and customer friendliness where they don’t

exist.‖ Virgin’s approach of finding opportunities where it could do things differently and better than competitors enabled it to take its brand across many categories. The irreverent Virgin name and Branson’s larger-than-life personality help sell the company’s diverse portfolio of products and services. The nonprofit foundation Virgin Unite, which tackles global social and environmental problems with an entrepreneurial approach, is emblematic of the Virgin Group’s purpose to change business for good.

These different strengths each apply to varying degrees across the more than 40 brands in Virgin’s portfolio. All of the brands are designed to deliver a high degree of customer-centricity. Most of Virgin’s brands involve innovation with their business model, service approach, or new products. For example, Virgin Atlantic was the first to offer seat-back TVs for all passengers, a full-service bar with stools on the plane, a premium economy section, and limousine airport transfers for first class (―upper class‖ in Virgin parlance) passengers. These touches were all adopted by many other airlines.

By virtue of being united by the Virgin name, associated with Branson’s public persona, and typically being challenger brands entering an existing market to disrupt it, nearly all Virgin brands possess a degree of irreverence. One exception might be Virgin Pure filtered water systems, which uses a more conventional positioning in its market. The Virgin Group overall has a strong association with social responsibility because of Branson’s personal philanthropy and Virgin’s corporate responsibility efforts. Many Virgin brands, however, do not have a direct association with social responsibility, like Virgin wines, its casino brands, and Virgin Galactic.

2. How successful do you think Virgin is in pursuing a social and sustainability mission while operating for-profit companies in areas like online betting, alcoholic beverages, and transportation?

Suggested answer: Student answers will vary. Some will argue that because of the prominence of Branson’s philanthropy and advocacy, combined with the extensive corporate social responsibility efforts of Virgin Unite, Virgin is very effective at pursuing its social and sustainability mission even while operating brands that do not directly align to the mission. Those answers may further suggest that the earnings from Virgin’s betting, alcohol, and transportation business help fund its social responsibility work.

Others will take the other side of the argument by suggesting that Virgin’s betting, alcohol and transportations businesses undermine its social responsibility work. For example, critics have noted the tension inherent in a company pursuing sustainability initiatives while operating carbon-emission-intensive businesses like airlines, cruise ships and space travel.

3. How would you grow the Virgin brand in the future? Would you trim its portfolio to focus it, or expand it?

Suggested answer: Student answers will vary. Some answers may recommend that Virgin keep growing the brand by staying with its proven formula of experimenting with new categories to see which ones work best. Over the

years, Virgin has launched over 400 companies worldwide across industries as diverse as airlines, telecommunications, wine, health and wellness, financial services, casinos and space travel. Students may note that today the company has around 40 companies in its portfolio.

The rough math of those numbers suggests that for every 10 companies it launches, it is successful long term. By 2024, the Virgin Group employed about 60,000 people in more than 35 countries. Students may conclude that in order to grow, Virgin needs to keep experimenting abundantly and expand its portfolio in order to find the winning paths to growth.

Other answers may argue that a 10 percent success rate is too low and a waste of resources. Answers may further argue that after all its experimentation with products and businesses, Virgin should have a keen sense of what works best and can deliver future growth by focusing its portfolio. For example, Virgin can focus on the brands that have the highest future earning potential and divert all its resources to them, shutting down the lower-potential brands. In 2024, Virgin Galactic risked being delisted from the New York Stock Exchange because its share price was trading below a dollar for an extended period. Still, Virgin Group had built several successful multi-billion-dollar brands in its portfolio.

DETAILED CHAPTER OUTLINE Opening vignette: The development of new offerings shapes a company’s future. Without investing in developing new offerings, a company is destined to rely on acquiring new products developed by other companies to ensure sustained growth. The development of new offerings is the engine that drives a company’s success, enabling it to challenge industry norms and apply imaginative solutions that engage and delight customers. One company that definitely understands how to shape not only its own future, but also that of its customers, is Dyson Corporation. Dyson designed a vacuum cleaner that relied on centrifugal force to separate the dirt from the air. The vacuum cleaner was more effective at picking up dirt than traditional vacuum cleaners. Dyson revolutionized another product category that had not seen any change over the years— the electric fan. Thus, the following discussion is relevant not only to new products and services but also to the development of the business models of an enterprise.

I. The Process of Developing New Product Offering A. New Product Offering

i. Innovation is the key to developing viable new offerings. Innovation is not limited to the development of new products or services. ii. It can involve a new technology, a new approach to brand building, a new pricing mechanism, a new way of managing incentives, new channels of communication, or a novel distribution method. iii. Innovation is particularly important in industries that are characterized by high technological uncertainty, high market uncertainty, fierce competition, high investment costs, and short product life cycles. iv. Innovative offerings disrupt existing business models and make companies that fail to adapt to changing market conditions superfluous by devising new ways to create market value.

A. The Innovation Imperative i. In an economy characterized by rapid change, continuous innovation is a necessity.

ii. Companies that fail to develop new products leave themselves vulnerable to:

a. changing customer needs and tastes b. shortened product life cycles c. increased domestic and foreign competition d. lack of awareness of the potential market opportunities opened up by new technologies iii. Highly innovative firms are able to repeatedly identify and quickly seize new market opportunities. iv. Firms create a positive attitude toward innovation and risk taking, ―routinize‖ the innovation process, practice teamwork, and allow their people to experiment and even fail. v. Innovation ranges from minor improvements or revisions of existing products to new-to-the-world items that create an entirely new market. vi. Most established companies focus on incremental innovation, entering new

markets by tweaking products for new customers, using variations on a core product to stay one step ahead of the market, and creating interim solutions for industry-wide problems. vii. Minor variations of existing products are the focus because it is difficult to predict which products will transform a market. viii. Many companies pursue new-to-the-world innovations although they are associated with great risk and cost. ix. New product success:

a. can improve the corporate image b. create a greater sustainable competitive advantage for the company c. produce significant financial rewards x. Successful new-product launches are exceptions rather than the rule. xi. New products fail at rates estimated to be as high as 95 percent because of:

a. b. c. d. e. f. g. h. i. j.

Ignored or misinterpreted market research Overestimates of market size High development costs Poor product performance Inadequate pricing Ineffective communication Insufficient distribution support Proactive competitive response Lack of organizational support for the new offering Inadequate return on the company’s investment

xii. The new offering fails to create superior value for its target customers in a way that sufficiently benefits the company and its collaborators.

B. Managing Innovation

i. Creating an environment that fosters innovation and encourages the development of new products is paramount. Popular approaches include: a. Departments in charge of current offerings. A common approach to foster and manage innovation is to assign responsibility for developing new products and services to managers in charge of a given product category, brand, or market. b. New-product departments. Large companies often establish a new-product department headed by a manager with substantial authority and access to top management. c. Innovation centers. Some firms open innovation centers in new geographic locations to better design new products for those regions. d. Venture teams. Another approach to driving innovation involves assigning newproduct development to venture teams. These intrapreneurs are relieved of other duties and given a separate budget and a longer time frame than is typical.

e. Communities of practice. Another arrangement for new-product development involves creating forums in which employees from different departments are encouraged to share their knowledge and skills. f. Cross-functional teams. Creating project-specific teams combining different skill sets is another popular approach to fostering innovation.

C. The Stage-Gate Approach to Developing New Offerings i. Many top companies use the stage-gate system to divide the innovation process into stages, with a gate or checkpoint at the end of each stage. ii. The ultimate goal of using a stage-gate approach to new-product development is to ensure market success in a way that minimizes risk and optimizes allocation of the company’s resources.

iii. The stage-gate framework is a streamlined version that comprises five stages (See Fig. 18.1): a. Idea generation: uncovering an unmet customer need and coming up with an idea about how to fulfill this need better than the available alternatives. b. Concept development: the development of an initial version (prototype) of the offering that has the core functionality of the proposed offering. c. Business-model design: the validated concept then becomes the core of a business model. d. Offering development: to fulfill the needs of its target customers and create value, the company develops the resources to create the offering and develop a marketready version. e. Commercial deployment: the offering is commercially deployed, making it available to customers. iv. The stage-gate approach has three aims. To develop: a. a desirable offering that target customers will find attractive b. a technologically feasible offering that the company will find doable c. a viable offering that will create value for the company and its collaborators. d. AI and Marketing: New Product Innovation. Artificial Intelligence developments are likely to profoundly affect how firms progress through each of the stages.

D. The Stage-Gate Approach to Developing New Offerings: An Illustration i. Consider a food-processing company introducing a new product that will increase its market presence and revenue. a. Idea Generation and Validation. After exploring a number of alternative ideas, the company decides to focus on creating a powder to add to milk to increase its nutritional value and taste. b. Concept Development and Validation. The company has to articulate the specific attributes: product formulation, brand name, incentives, communicating, and delivery. c. Business-Model Design and Validation. The company must make the case for why customers will buy the company’s offering and its benefits. d. Offering Implementation and Market Testing. The company creates the product and conducts a market test. e. Commercial Deployment. To minimize risk and the initial outlay of resources, the company chooses to deploy its product in selected markets. f. Marketing Insight: Understanding the Adoption of Innovations outlines two frameworks that help marketers understand how consumers adopt new products.

II. Idea Generation A. Generating Viable Ideas

i. Top-down idea generation begins with identifying a market opportunity followed by developing an offering specifically designed to address this opportunity.

ii. Bottom-up idea generation starts with an invention and then seeks to identify an unmet market need. The invention is driven by technological innovation rather than by an identified market need. iii. Top-down innovation is the preferable method of idea generation, identifying value-creation opportunities.

B. Idea Validation i. Idea validation examines the key assumptions of an idea to determine its soundness. ii. This process involves assessing the offering’s: a. Desirability: whether the offering successfully addresses an important unmet customer need b. Viability: whether the offering will simultaneously benefit the company iii. Companies are prone to two types of errors when they evaluate proposed ideas. See Fig. 18.2. a. The first error involves the failure to reject an idea that has little or no merit. b. The second error is based on an opposite miscalculation—the rejection of a good idea.

C. Market Research Tools for Ideas Generation and Validation (See Fig. 18.3) i. Exploratory research is a mainstay of idea generation and validation. ii. Common market research tools for idea generation and validation: a. Observing customers. Examining people’s behavior in their natural environment can be an effective way to gain insights into customer needs. b. Interviewing customers. Questioning customers to uncover their unmet needs and gather insights about novel ways in which these needs can be met. c. Interviewing employees. Employees can be a source of ideas for developing new products and services. d. Interviewing experts. Firms tap external sources of new ideas, including scientists, engineers, patent attorneys, university and commercial laboratories, industrial consultants and publications. e. Analyzing the competition. Companies find good ideas by researching the products and services of other companies. f. Crowdsourcing lets companies engage outsiders in the new-product development process and receive either unique expertise or a different perspective on a problem.

III. Concept Development A. Prototyping i. The prototype is a working model of the offering that aims to flesh out the original idea and weed out problems before the offering is created. ii. Concept development typically evolves from a description of the product’s core features into the scaled-down prototype that introduces the offering’s core concepts to target consumers. iii. There are two types of prototype tests: alpha testing, which involves an evaluation of the product within the firm, and beta testing, which tests the product with customers.

B. Concept Validation i. Concept validation assesses the soundness of the core concept by addressing the technological feasibility of the offering and the way target customers view its desirability. ii. Concept development and validation are guided by experimental studies designed to test the prototypes.

iii. Another approach is conjoint analysis, asking respondents to evaluate different attributes to determine the value that consumers place on specific attributes of an offering.

IV. Business-Model Design A. Designing the Business Model (See Fig. 18.4) i. Business-model design also takes the offering’s viability—its value-creating capacity—into consideration, in addition to concept development’s focus on the technological feasibility and the desirability of the offering . ii. Designing the business model involves three key components. a. The target market is the market in which the company has chosen to create value with its offering. b. The value proposition details the type of value that the company plans to create for its target customers and collaborators. c. The market offering describes how the company will create, communicate, and deliver value to its target customers, collaborators, and the company stakeholders.

B. Business-Model Validation

i. Business-model validation aims to assess the offering’s ability to create market value on three key dimensions: a. Desirability indicates the extent to which target customers perceive the offering to be attractive. b. Feasibility indicates the extent to which the company can create an offering that delivers the functionality desired by customers. c. Viability indicates the extent to which an offering can create value for the company. ii. Demand forecasts are built on one of three information bases: what people say, what people do, or what people have done.

V. Offering Implementation A. Developing the Core Resources i. To succeed, a company must have the necessary resources to implement its business model.

ii. To gain the resources, a company might adopt one of two different strategies. a. First, the company might create resources by developing assets and capabilities or by acquiring resources from a third party. b. Alternatively, rather than building its own resources, a company might choose to collaborate with other entities.

B. Developing the Market Offering

i. Turning the prototype into a market-ready commodity involves creating the final product and service but also: a. Building the brand b. Setting both retail and wholesale prices c. Determining the type of sales promotions to be used d. Developing a plan to effectively communicate the benefits of the offering e. Making it available to target customers ii. The development of an offering often involves advanced prototyping and market testing to ensure that the offering will succeed in creating market value. iii. Many companies skip test marketing despite its benefits and rely on faster and more economical testing methods. iv. The development of a streamlined version of the offering—referred to as a minimum viable offering—enables the company to test the offering’s market performance before proceeding to develop the full-scale offering.

VI. Commercial Deployment A. Selective Market Deployment

i. Commercialization informs target customers about the company’s offering and makes the offering available to these customers. ii . The selective market deployment approach allows for testing in a natural environment to observe how target customers, competitors, and company collaborators react to the offering. iii. The subset of target customers to which the offering will initially be made available is referred to as the primary target. iv. Some products catch on immediately (e.g., roller blades), whereas others take a long time to gain acceptance (e.g., diesel engine autos).

B. Market Expansion i. Expanding the market to include all customers for whom the company’s offering aims to create value is the next logical step after the company’s offering has been successfully launched in its primary target market. ii. Market expansion involves three activities: a. Ramping up the facilities involved in the offering’s production b. Promoting the offering to all target customers c. Ensuring that the offering is available to the entire target market iii. Broader markets usually involve a wider range of customers, which necessitates introducing variants to accommodate the different needs and preferences of target customers.

CHAPTER

19

BUILDING CUSTOMER LOYALTY

LEARNING OBJECTIVES After studying this chapter, you should be able to: 19.1 Explain how a company should balance its acquisition and retention efforts.

19.2 Discuss how a company can manage customer satisfaction and loyalty.

19.3 Describe how companies manage customer relationships.

19.4 Discuss how a company should manage customer lifetime value.

CHAPTER SUMMARY 1. Customer loyalty reflects a deeply held commitment to patronize a particular product, service, or brand for future purchase and consumption occasions. Loyalty is a continuum, with different levels of loyalty varying in terms of their strength and ranging from satisfaction with the company’s offering to advocacy and evangelism.

2.

3.

4.

Customer satisfaction is the key to building customer loyalty. Satisfaction is a person’s feelings of pleasure or disappointment that result from comparing the actual performance of a product or service to expectations. Recognizing that high satisfaction leads to high customer loyalty, companies must ensure that they meet or exceed customer expectations.

Customer satisfaction, product and service quality, and company profitability are intimately connected.

Higher levels of quality result in higher levels of customer satisfaction, which support higher prices and (often) lower costs.

To ensure sustainable growth, a company must not only attract new customers; it must also keep them and increase their business. Losing profitable customers can dramatically affect a firm’s profits. Three of the

most effective strategies for building customer loyalty are interacting closely with customers, developing loyalty programs, and building brand communities.

5. Customer relationship management (CRM) is the process of carefully managing detailed information about individual customers and all customer touch points to maximize loyalty. The ultimate goal of CRM is to develop programs to attract and retain the right customers and to meet the individual needs of valued customers. Popular strategies for enhancing customer relationship management include customization, customer empowerment, customer word of mouth, and customer complaints.

6. Customer lifetime value (CLV) reflects the monetary equivalent of the value that customers will create for the company during their tenure with the company.

CLV can refer to the value created by an individual customer, or it can refer to the cumulative value created by all of the company’s customers—the sum of lifetime values of all customers. The aim of customer relationship management is to produce high customer lifetime value.

7. A company should aim to build customer value across all occasions on which a customer encounters its products, services, or brands—from actual experience to personal or mass communication to casual observation. Companies that fail to consistently deliver superior customer value are likely to see their customer base eroding over time.

8. Marketing managers must calculate the customer lifetime value of their customer base to understand the profit implications. Customer profitability analysis helps marketers identify their most valued customers and develop strategies to create value for these customers in a way that fosters long-term customer loyalty. When measuring customer lifetime value, it is important to take into account not only

the monetary value each customer is likely to directly generate for the company but also the strategic value this customer will create by endorsing the company and its offerings to others.

OPENING THOUGHT Although most students understand the concept of ―buying,‖ some will have difficulty in understanding the differences between total customer value and total customer cost. It will be beneficial for long-term understanding and retention to cover what the definition is and what it is not. Secondly, the distinction between satisfaction and total customer satisfaction for the consumer might be challenging for some students. Some students may have a hard time understanding the distinction between perception and expectation. Finally, it might be necessary to reemphasize the concepts of Customer Relationship Management (CRM), customer databases, and database mining often in the lecture. However, most of the students today are proficient in internet usage and can cite examples of relationship marketing from their own favorite sites such as Amazon.com.

TEACHING STRATEGY AND CLASS ORGANIZATION PROJECTS C) At this point in the semester-long marketing plan project, students should have completed their value proposition for the fictional product, defined how they will deliver satisfaction and maintain customer loyalty.

D) Have students (in groups or individually) select a local firm in their community, or a local division of a national firm, and seek permission to interview their corporate executives on their corporation’s definition of customer satisfaction, loyalty, and what their particular firm does to foster such customer relations. This project can be combined with the project on marketing research and as such, students can create questionnaires suitable for mailing to these executives. The students can then present these findings to the class in a group or by individual presentations. This could be a full-semester project or limited to a few weeks of the semester.

ASSIGNMENTS Key manufacturers and others must be concerned with how customers view products (customer satisfaction perceptions) being disseminated throughout the ―electronic world‖ via the internet. No longer can one discount the ―power of the mouse‖ for affecting potential customers. In small groups, students are to select a particular firm or product and are to research what is being said on the internet regarding this company/product. What effects does this type of dissemination of consumer opinions via the internet have on the company’s marketing strategies? What can the company do to stem the tide of such comments? How does a company defend itself against blatantly untrue consumer opinions?

Have each of the students read Michael Tsiros, Vikas Mittal, William T. Ross Jr., ―The Role of Attributions in Customer Satisfaction: A Reexamination,‖ Journal of Consumer Research, 31 (September), 2004, pp. 476–483, and comment on their findings.

Customer relationship management is a current business ―buzz word.‖ Customer Relationship management: https://www.investopedia.com/terms/c/customer_relation_management.asp Retrieved on March 18, 2021.

Students can be directed to do an internet research project from named marketing/business journals on the subject of customer relations management (the chapter’s endnotes can provide a good source of leads for the students). Each student can be directed to research, read, and compile a report on their findings from a minimum of five articles from five different marketing and business magazines, such as Fortune. The student’s report is to comment on how these articles compare, complement, or contrast the material contained in this chapter.

The research firm J.D. Powers and Associates (jdpower.com) lists eight categories of products for consumers to research before purchasing the product or service. Breaking up the class into eight groups, have the students research the top performers for each category and be able to share their findings as to what characteristics, policies, procedures, and vision these top rated companies have in common. Is there a ―common‖ link among all of the winners? Are there differences? In terms of the material contained in this chapter, how would you explain these similarities and differences?

END-OF-CHAPTER SUPPORT Marketing Spotlight: Starbucks

1. What are the keys to Starbucks’ success? How did it achieve its global leadership position?

Suggested answer: One of the key ways Starbucks succeeded in becoming the largest coffee chain, and the second largest food and beverage chain after McDonald’s, was by skillfully adapting the Italian coffeehouse tradition first in the U.S. and then globally to over 86 markets. Founder Howard Schultz aimed to blend Italian elegance with casual U.S. informality. He envisioned Starbucks as an ―affordable luxury‖ for its customers, a comfortable, sociable gathering spot that served as a ―third place‖ bridging the workplace and home.

Starbucks combined high-quality coffee with relentless commitment to providing customers with the richest possible sensory experience in terms of all five senses, which together drove drive repeat visits.

Another key to success was that early on, the company did not spend on advertising, instead growing primarily via word-of-mouth and PR. The iconic Starbucks cup featuring the company’s logo was a significant source of ―free‖ advertising as customers walked around drinking their coffees. The company later began investing heavily in digital, and combined its rewards program with its app in 2011, adding the convenient feature of ordering and paying ahead of time on the mobile app and picking up in-store. This feature drove significant usage of the app, and by mobile order and pay surpassed 30 percent of all Starbucks transactions. By 2023, Starbucks Rewards had more than 75 million members worldwide. Starbuck’s has nearly 7,000 stores in China, which generated about 9 percent of 2023 revenues.

A third key to success was that over time, Starbucks expanded its range of beverages and food for customers to enjoy in its stores, at home, and on the go. An additional driver of the company’s success is its commitment to social responsibility. Starbucks gives back to its community in many ways. Through the years, Starbucks has invested more than $100 million in collaborative farmer programs and activities. Starbucks has made sustainability a priority. Starbucks set a goal for its cups to be ―100% compostable, recyclable, or reusable; sourced from 50% recycled materials; and made using 50% less virgin fossil fuel derived sources by 2030.‖ The company’s commitment to corporate social responsibility reflects its imperative that Starbucks ―stands for something more than just profitability.‖

2. How does Starbucks cultivate strong customer loyalty?

Suggested answer: Starbucks cultivates strong customer loyalty first and foremost through the experience of the brand. From the very beginning, Starbucks set out to be a different kind of company—one that not only celebrated coffee and its rich tradition but also conveyed a feeling of connection and a sense of community. The company thought through every detail in its stores, from the taste and aroma of the coffee, the feel of the chairs, the music in the air and the art on the walls. Regular customers embraced the fact that drink orders could be customized to specific preferences, and that they had a relationship with their well-trained baristas. These relationships reflected Starbucks’ belief that ―when we exceed the expectations of our people, they in turn exceed the expectations of our customers.‖ By 2002, Starbucks’ core customers were visiting 18 times a month on average. No U.S. retailer had a higher frequency of customer visits. In 2023, the company employed more than 400,000 partners.

Starbucks further fueled repeat patronage by introducing the Starbucks Card in 2001. Customers loaded money onto the card, which enabled faster payment in-store. The company enhanced the value of the card by introducing the Starbucks Rewards loyalty program for cardholders in 2008. The rewards included free refills on brewed coffee, one free customization with every drink order, and a free

drink for each pound of coffee beans purchased. Customers also earned points, called ―stars,‖ with every purchase. The stars could be redeemed for beverages, food and merchandise. Rewards members visited more frequently and spent more, in part because they took advantage of more customization options. By 2019, 40 percent of Starbucks’ revenue came from members of its rewards program. Loyalty members embraced the convenience of mobile-order-and pay, especially during the morning rush. In the U.S. by 2024, more than 60 percent of morning business came from Rewards members, the vast majority of whom order via the app. In 2024, Starbucks surpassed Subway to became the world’s second-largest food and beverage chain after McDonald’s, as measured by number of stores.

3. How would you grow Starbucks over the next five years?

Suggested answer: Student answers may vary. Answers may note that the company has significant runway to grow internationally, given that only 26 percent of sales occurred outside North America. Answers may also highlight Starbucks’ digital investment as a major growth driver, especially given that the company announced plans to invest $600 million over the next three years to ―further digitize our stores and better target customers in more personalized ways.‖ In addition, answers may recommend Starbucks continue to innovate and expand its beverage portfolio, to give existing customers a new reason to come in and new customers a reason to try Starbucks.

Finally, answers may identify Starbucks’ packaged coffee and teas, often sold in grocery stores, as a potential growth lever, given that today it makes up only 4 percent of sales.

Marketing Spotlight: Accor

1. What have been the keys to Accor’s growth?

Suggested answer: Several of the key ways Accor has achieved growth in the highly competitive hospitality industry are by expanding its brand portfolio, growing its footprint, modernizing its digital experience, and evolving its loyalty program. From the beginning, the company has regularly created or acquired different hotel chains at different price tiers to offer a broad selection to travelers. To further increase the breadth and depth of its portfolio, starting in 2010 Accor began shifting its operating strategy from owning hotels to franchising and managing hotel properties. This ―asset-light‖ strategy allowed Accor to open new properties at a rapid rate, often in new markets. By 2020, Accor had sold 96 percent of its hotels and increased the percentage of its hotels outside Europe to almost 60 percent from only 20 percent in 2015. Today, Accor manages more than 40 hotel brands offering 822,000 hotel rooms, a roughly 60 percent increase over 2010. Today Accor is the seventh-largest hotel group in the world by number of rooms, operating more than 5,600 hotels with over 800,000 rooms in more than 110 countries.

The company has stayed competitive and successful by investing heavily in modernizing its digital experience. It introduced a streamlined website and mobile application, customers can easily book, check into, and review a hotel room with a click of a button.

Accor’s upgraded its CRM database to allow employees to deliver a

personalized experience to every guest. In addition, Accor embarked on a major overhaul of both its loyalty program and its brand in 2019, combining them into a new brand called ALL, which stood for Accor Live Limitless. With the unveiling of the new ALL loyalty program, the company introduced new premium status tiers to keep pace with competition, added new benefits like earning points for dining in hotel restaurants, and added new hotel brands to the program. It also introduced a new ALL app and website where guests could browse and book stays and experiences across three categories: Live, Work and Play.

2. What role has Accor’s digital strategy played in its ability to gain and retain loyal customers?

Suggested answer: As mentioned in the previous answer, Accor has invested heavily in modernizing its digital experience. This digital investment has enabled it to gain and retain loyal customers. To increase direct bookings, Accor invested heavily in its website, mobile application, social media accounts, and digital advertising to connect with customers in personalized ways. In addition, Accor set out to improve the customer experience, starting with booking the trip and ending after the hotel stay. Accor’s attempts to improve its digital hospitality contained both consumer-focused and employeefocused elements.

One signature initiative Accor undertook to enhance its digital capabilities was centralizing its customer relationship management databases into one single platform, called ―Voice of the Guests.‖ The new database aided employees in providing personalized service for guests and featured a recommendation engine that automatically generated custom offers to customers based on their profile and traveling behavior. In addition, Accor streamlined its customer experience to include one-click booking, online check-in and checkout, targeted offers, and a personalized welcome service. The welcome service enabled guests to check in online two days in advance, saving time when they arrive at the hotel. Accor reported that over 93 percent of customers who tried the welcome service wanted to use it again. In addition, the company introduced its revamped ALL loyalty program and booking site, as discussed in the previous answer.

3. How would you grow the Accor business from here?

Suggested answer: Student answers will vary. Some answers may highlight the value of putting even more resources in digital communications and experiences across Accor’s three categories of Live, Work and Play. The Work and Play categories in particular are very fragmented and Accor has an opportunity to drive growth by consolidating disparate offerings under its brand. Students may note Accor’s extensive history of acquiring hotel brands to spur growth and suggest Accor continue its acquisition strategy. Finally, other answers may reflect on the significant growth of Airbnb and recommend Accor invest more in its ―onefinestay‖ vacation rental brand to accelerate growth.

DETAILED CHAPTER OUTLINE

Opening vignette: Generating a sale is the beginning of building and managing customer relationships for the purpose of creating a loyal customer base. Cultivating loyal customers is a priority for market-driven companies that seek to gain and defend their market position.

Without building customer loyalty, a company will have to constantly invest in acquiring new customers to replace disloyal customers. Nintendo is a classic example of a company that has achieved long-term success by building a highly loyal and engaged customer base. Customercentered companies are using technology to connect with customers and build customer relationships I.

Managing Customer Acquisition and Retention A. Acquisition and Retention i. The ability to effectively acquire new customers and retain existing ones has a direct impact on the company’s bottom line. ii. A company must have a clear understanding of the customer acquisition funnel and effectively balance its customer acquisition and retention efforts A. The Customer Acquisition Funnel i. There are five phases of the customer acquisition funnel. See Fig. 19.1. a. Awareness: the gateway to customers’ interaction with the company’s offering b. Appeal: a process of selective elimination c. Ask: customers seek additional information about the offerings d. Act: a transition from information gathering and evaluation to an action e. Advocate: customers’ reactions following their consumption experience B. Balancing Customer Acquisition and Customer Retention i. Effective management of customer acquisition and retention involves clear understanding of customer conversion and retention rates. a. By calculating conversion rates—the percentages of customers at the different stages who move to the next stage—managers identify any barrier to building a loyal customer base. b. The customer acquisition funnel emphasizes the importance of attracting new customers and retaining existing ones. ii. Satisfied customers are the company’s customer relationship capital. The customer base is the number and value of customers who will do business with the new firm if the company were sold. a. To reduce the defection rate, the company must define and measure its retention rate.

II. Managing Customer Satisfaction and Loyalty A. Satisfaction and Loyalty i. Loyalty is a deeply held commitment to rebuy or repatronize a preferred product or service in the future despite situational influences and marketing efforts having the potential to cause switching behavior. a. Customer loyalty can be thought of as a continuum, with different levels of loyalty varying in strength. b. Loyalty can range from satisfaction with the company’s offering to advocacy and evangelism from customers who think of the offering as a part of their own identity and feel responsible for its success. ii. Customer satisfaction is the key to building customer loyalty.

A. Understanding Customer Satisfaction i. Satisfaction is a person’s feeling of pleasure or disappointment that results from comparing a product or service’s perceived performance (or outcome) to expectations.

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a. If the performance or experience falls short of expectations, the customer is dissatisfied. b. If it matches expectations, the customer is satisfied. c. If it exceeds expectations, the customer is highly satisfied or delighted. d. Customer assessments of product or service performance depend on many factors, including the type of loyalty relationship the customer has with the brand. e. Although the customer-centered firm seeks to create high customer satisfaction, increasing customer satisfaction by lowering price or increasing services may result in lower profits. f. Expectations result from past buying experience, friends’ and associates’ advice, public information and discourse, and marketers’ and competitors’ information and promises. ii. If a company raises expectations too high, the buyer will be disappointed.

If it sets expectations too low, it won’t attract enough buyers. iii. For customer-centric companies, customer satisfaction is both a goal and a marketing tool iv. AI and Marketing: Customer Experience describes how artificial intelligence is transforming the customer experience in multiple ways.

B. Product and Service Quality as a Driver of Customer Satisfaction i. Satisfaction depends on product and service quality. a. Quality is the totality of features and characteristics of a product or service that bear on its ability to satisfy stated or implied needs. ii. This is clearly a customer-centered definition. The seller has delivered quality whenever its product or service meets or exceeds customers’ expectations iii. A company that satisfies most of its customers’ needs most of the time is a high-quality company, but performance and consistency differ: a. Performance reflects the overall functionality of a company’s products and services. b. Consistency reflects the degree to which a company’s performance remains at the same level over time. iv. Higher levels of quality result in higher levels of customer satisfaction, which support higher prices and (often) lower costs. v. Marketing plays an especially important role in helping companies identify and deliver high-quality goods and services to target customers. Marketing tasks: a. Correctly identify customers’ needs and requirements. b. Communicate customer expectations properly to product designers. c. Make sure customers’ orders are filled correctly and on time. d. Check that customers have received proper instructions, training, and technical assistance in the use of the product. e. Stay in touch with customers after the sale to ensure they are, and remain, satisfied. f. Gather customer ideas for product and service improvements and convey them to the appropriate departments.

C. Measuring Customer Satisfaction i. Firms measure customer satisfaction regularly for customer retention.

A highly satisfied customer: a. stays loyal longer b. buys more as the company introduces new and upgraded products

c. d. e. f. g.

talks favorably to others about the company and its products pays less attention to competing brands is less sensitive to price offers product or service ideas to the company Costs less to serve than new customers because transactions can become routine. ii. Customers define good performance differently. iii. Periodic surveys can track customers’ overall satisfaction directly and ask additional questions to measure:

a. repurchase intention b. likelihood or willingness to recommend the company and brand c. specific attributes or benefits related to customer satisfaction. iv. Companies need to monitor their competitors. They can monitor their customer loss rate and contact those who have stopped buying or hire mystery shoppers to pose as buyers and report on strong and weak points. v. Marketing Insight: Net Promoter Score and Customer Satisfaction describes a highly influential tool to measure and manage customer satisfaction.

D. Building Customer Loyalty i. Too many companies suffer from high customer defection. ii. Prioritizing customer retention by building customer loyalty is more effective than trying to acquire customers who leave when they find a better deal. iii. Companies that want to build loyalty should: a. Interact closely with customers b. Develop loyalty programs/frequency programs/club membership programs c. Build brand communities—specialized communities of consumers and employees whose identification and activities focus around the brand, characterized by: o A connection to the brand, company, product or other community members o Shared rituals, stories, and traditions that help convey the meaning of the community o A shared moral responsibility or duty to both the community as a whole and individual community members o Brand communities can rise organically from brand users or can be company-sponsored/facilitated. iv. Recommendations for making online brand communities more effective: a. Enhance the timeliness of information exchanged. b. Enhance the relevance of information posted. c. Extend the conversation. d. Increase the frequency of information exchanged.

III. Managing Customer Relationships A. Customer Relationships i. Companies are using information about customers to build long-term relationships. ii. Customer relationship management is the process of carefully managing detailed information about individual customers and all customer ―touch points‖ to maximize loyalty. iii. Customer value management focuses on the analysis of individual data on prospects and customers to develop marketing strategies to acquire and retain customers and drive customer behavior.

iv. Based on what they know about each valued customer, they can customize market offerings, services, programs, messages, and media. v. Strategies for enhancing customer relationship management: a. Customization b. Customer empowerment c. Managing customer word of mouth d. Dealing with customer complaints.

A. Customization i. Customization makes the company’s offering as personally relevant as possible to as many customers as possible. ii. To customize the consumer experience, companies use call centers, online, digital, and mobile tools plus artificial intelligence and data analytics to foster contact between company and customer. iii. To develop an effective customer relationship management program, marketers must know their customers. iv. Permission marketing is the practice of marketing to consumers only after gaining their expressed permission. a. Permission marketing implies that marketers can develop consumer relationships by sending messages only when the consumers wish to be engaged with the brand. b. Permission marketing presumes that consumers know what they want, even though they often have undefined, ambiguous, or conflicting preferences.

B.

Customer Empowerment

i. Customer empowerment, means that companies must strengthen their relationship with customers and engage with them in new ways. ii. Customers are empowered to become evangelists and demonstrate their passion. iii. Although new technologies help customers assist or become involved in a

brand’s marketing, they can also help them avoid marketing (e.g., web browsers feature ad-blocking). iv. To successfully exploit the potential of social media, companies need to design experiences that deliver tangible value in return for customers’ time, attention, endorsement, and data. v. Many businesses overlook social media’s capabilities for: a. delivering customer value while capturing customer insights b. monitoring the brand c. conducting research d. soliciting new-product ideas.

C. Managing Customer Word of Mouth i. Recommendations from other consumers are becoming an increasingly important decision factor. ii. In an atmosphere of heightening mistrust of some companies and their advertising, online customer ratings and reviews play a growing role in the customer buying process. a. Companies recognize the power of consumer reviews and have begun to display them in their stores (e.g., Best Buy). b. Marketers may benefit from tracking social media traffic to identify popular blogs. c. Online word of mouth is especially critical for small brands. iii. When consumers can better learn the advantages and disadvantages of products through negative reviews, fewer product returns may result, saving

retailers and producers money.

D. Dealing with Customer Complaints i. Customers whose complaints are satisfactorily resolved tell five people about the good treatment they received. ii. The average dissatisfied customer gripes to 11 people! iii. Each person who is told about a negative experience will tell other people, so the number exposed to bad word of mouth may grow exponentially. iv. The following practices help recover customer goodwill: a. Set up a seven-day, 24-hour, toll-free hotline (by phone, fax, or e-mail). b. Contact the complaining customer as quickly as possible. c. Identify the true source of customer dissatisfaction before seeking a solution. d. Accept responsibility for the customer’s disappointment. e. Resolve the complaint swiftly to the customer’s satisfaction. v. Firms worry about the negative effects of cranky customers communicating online; however, marketers contend that the positives of social media outweigh the negatives. vi. One strategy is to shape the public image during quiet times and leverage that goodwill in paid or other media during difficult times.

IV. Managing Customer Lifetime Value A. Customer Lifetime Value i. The 80-20 rule states that 80 percent or more of the company’s profits come from the top 20 percent of its customers. ii. Companies need to concern themselves with and how efficiently they create value from the customers and prospects available. a. It’s not always the largest customers who demand considerable service and deep discounts or who yield the most profit. b. The smallest customers pay full price and receive minimal service, but the costs of transacting with them can reduce their profitability. c. Midsize customers who receive good service and pay nearly full price are often the most profitable.

A. The Concept of Customer Lifetime Value (CLV) i. CLV reflects the monetary equivalent of the value that customers create for the company during their tenure. ii. CLV can refer to the value created by a customer, or it can refer to the value created by all of the customers—―the sum of lifetime values of all customers.‖ a. Customer lifetime value is also called customer equity. iii. Customer profitability analysis is conducted with activity-based costing, which identifies the real costs for serving each customer—the costs of products and services based on the resources they consume. a. Companies that fail to measure their costs correctly fail to measure their profit correctly and can misallocate their marketing effort.

B. Customer Brand Equity i. The customer equity perspective focuses on bottom-line financial value and yields quantifiable measures of financial performance.

ii. The brand equity perspective emphasizes strategic issues in managing brands and creating and leveraging brand awareness and image with customers. a. Researchers argue that a focus on either brand equity or customer equity depends on the way a company creates market value.

iii. The distinction between focusing on brand or customer equity is attributed to the following factors: a. Firms that utilize subscription models—such as health clubs—are more likely to find value in customer equity; firms without contractual services focus on brand equity.

b. Companies that identify their customers and assess their profitability focus on customer equity; companies without a link between a customer’s behavior and performance outcomes focus on brand equity. c. Companies that produce self-expressive products such as cars focus on brand equity. d. Companies that cannot obtain customer-level data or have direct contact with their customers focus on brand equity. e. Service-oriented companies are more likely to focus on customer equity than are product-oriented firms.

C. Building Customer Lifetime Value

i. Winning companies improve that value by excelling at strategies like the following: a. Improving customer service. b. Engaging customers. c. Enhancing the growth potential of each customer. d. Managing unprofitable customers. e. Rewarding the most profitable customers. ii. A company should build customer value across all of its touch points—any occasion when a customer encounters the brand and product.

D. Creating Customer Loyalty by Building Trust

i. Trust is established and maintained via three important building blocks: a. One building block is competence. Companies and brands build competence trust when the job is completed effectively. b. Another building block is honesty. Firms build honesty trust by telling the truth and keeping promises. c. A third building block is benevolence. Companies and brands build benevolence trust when they demonstrate concern about the interests of customers and employees. ii. Research has shown that each of the three building blocks is differentially affected by positive and negative information. iii. Trust is more important early in the relationship and becomes less important once a relationship is established a. Once trust is established, companies and brands benefit from the trust that employees and customers have. iv. The life-time value of long-term customers is high, and perceptions of trust violations in long-term relationships have more negative effects than violations in shorter-term relationships.

E. Measuring Customer Lifetime Value i. Customer lifetime value is calculated as the net present value of the stream of future profits expected over the customer’s lifetime purchases. ii. Can add up to thousands of dollars or even run to six figures iii. Customer lifetime value calculations provide a formal quantitative framework for planning customer investment, and they help marketers adopt a long-term perspective. iv. Common factors in CLV models include: a. the revenues generated from a given customer b. the cost of acquiring and servicing this customer c. the probability of customer repeat buying in the future d. the customer’s likely tenure with the company

e. the discount rate (cost of capital for the firm). v. Marketers who use customer lifetime value concepts take into account the short-term, brand-building marketing activities that help increase customer loyalty. vi. A customer’s value to a company depends on the likelihood of making referrals and engaging in positive word of mouth.

CHAPTER

20

TAPPING INTO GLOBAL MARKETS

LEARNING OBJECTIVES After studying this chapter, you should be able to: 20.1 Explain how companies decide whether to go abroad.

20.2 Discuss the factors that companies consider in deciding which global markets to enter.

20.3 Summarize the strategies companies use to enter global markets.

20.4 Explain how companies can adapt their marketing strategies for global markets.

CHAPTER SUMMARY 1. Going abroad involves two major types of risks: general risks associated with entering a new market and specific risks associated with doing business in a different country.

When deciding to go abroad, a company must carefully assess the risk–reward ratio for each global market it considers entering.

2. Deciding whether to go abroad is the first of several decisions a company must make when developing its global strategy. If the company has concluded that going abroad is indeed the best course of action, it must then make a set of more specific decisions, including which markets to enter, how best to enter these markets, the specific marketing program for each market, and the most effective way to structure the marketing organization in each country.

3. Once a company decides to target a particular country, it must choose the best mode of entry with its brands. Its broad choices are indirect exporting, direct exporting, licensing, joint ventures, and direct investment, ordered in terms of ascending commitment, risk, control, and profit potential.

4. An important decision for a company entering a new global market is to what extent it will adapt its marketing strategy to local conditions. A standardized marketing program worldwide promises the greatest consistency across individual countries. In contrast, an adapted marketing program tailors a company’s offering to the specifics of each country.

5. Developing global product strategies requires knowing what types of products or services are easily standardized and what adaptation strategies are appropriate. In deciding how extensively to adapt their marketing programs at the product level, firms can pursue a strategy of straight extension, product adaptation, or product invention.

6. When entering global markets, a company must also decide how to position its

brand and whether or how much to adapt the brand to the specifics of each particular market. It also must consider the country-of-origin effects that are likely to influence the way the brand is perceived in the particular market.

7. A company can benefit from adapting its price and communication strategies to the local market. The level of adaptation can vary from minor variations in the marketing program to entirely different pricing and communication policies for each target country.

8. At the distribution level, firms need to take a whole-channel view of distributing products to the final users. Firms must always consider the cultural, social, political, technological, environmental, and legal limitations they face in other countries.

OPENING THOUGHT In today’s multicultural world, students will have been exposed to products marketed across geographic or national boundaries, so the student’s ability to grasp this concept should be straightforward. What could present a challenge is the extent of marketing planning and detail needed by the firm in making their marketing decisions nationally and internationally.

The instructor is encouraged to open up the class discussions to students from other nations present in the class, and to ask these students to describe the shopping experiences in their homeland. Students with international business or international marketing experiences should be especially encouraged to present to the class descriptions of what marketing is like outside of the United States.

TEACHING STRATEGY AND CLASS ORGANIZATION PROJECTS 1. If the project is to be exported to another country, then student’s submissions regarding how the product is to be distributed should be included here, otherwise this begins the presentation phase of the project, and student groups should begin their presentations to the class.

2. The instructor is encouraged to challenge the students by assigning students to find their favorite product’s corporate office. Examples may include Nestlé, Nike, Suzuki, Nokia, Ben & Jerry’s, and others. Beyond just discovering examples of global or international firms, students should uncover via financial information, the origin of sales by country. Such an exercise will provoke interesting classroom discussions as the students begin to realize the global nature of business in today’s international marketplace.

ASSIGNMENTS Have students read the March 8, 2014 Economist article titled ―Business in emerging markets: Submerging hopes,‖―at http://www.economist.com/news/leaders/21598640-boom-emerging-marketinvestment-rich-world-firms-has-led-plenty. Ask students how marketers should balance current risks, and lower than expected returns, with future potential. Share student comments in class.

Major marketers are using the power of the internet to engage in global e-

commerce. Visit a foreign website for an American company and evaluate the similarities and differences between the U.S. website and its foreign website. What differences/similarities strike you as significant? Could the differences be readily adapted to other foreign countries?

Finding free information about trade and exporting has never been easier.

Websites such as www.cia.gov, www.ita.doc.gov, www.exim.gov, and www.sba.gov provide valuable information for marketers. Visit each site and compile a list of information that you, as a marketer, might find valuable in deciding how to market internationally.

Some famous ―blunders‖―in international marketing. Students should research these examples (and find others) and provide insight into why they think such ―blunders‖―were allowed to occur. This can lead to a classroom discussion into the complexity facing many firms in international and multi-cultural marketing.

Have the students prepare an international campaign and marketing plan for one consumer product. Ask them to, decide on how much to adapt their marketing strategy to local conditions.

Students should pick an international corporation and in researching the products sold by the firm overseas, see if there are some significant differences in brand characteristics for each country. For example, Pringles, Always, and Toyota have made some changes in product features, packaging, channels, and pricing in different global markets. The assignment is for the students to provide additional examples of products changed to suit the country’s consumers while at the same time, maintaining the international brand name.

END-OF-CHAPTER SUPPORT Marketing Spotlight: IKEA 1. What are IKEA’s brand strengths? How did it grow to be the world’s largest furniture retailer?

Suggested answer: IKEA’s success can be partly attributed to building a unique business model and adapting it to different markets. Another of IKEA’s brand strengths is its skillful, insight-driven marketing, which has helped the company to accelerate its expansion across the world and become a relevant competitor in each market.

IKEA’s business model is based on mass production of the same types of low-cost products, which allows it to benefit from large economies of scale. By securing low costs from suppliers, IKEA charges low prices to consumers. Products are designed to be sleek, functional, and minimalistic to appeal to the greatest number of budget-minded shoppers.

IKEA keeps its prices low by having customers assemble the furniture themselves. A 2023 campaign from the Middle East titled ―Proudly Second Best‖―used touching humor to convey that while IKEA supported new parents by offering affordable highchairs and cribs, it understood that parents are the real heroes and their babies naturally preferred to eat on their laps rather than in IKEA furniture.

As it expanded into new markets, IKEA identified strategic challenges in each market and tailored its offering to overcome them. After entering the U.S., the company found it was selling an unusually large number of vases. It turned out Americans were buying vases because they found IKEA’s drinking glasses too small, so the company created larger drinking glasses for the American market.

IKEA’s award-winning advertising campaigns through the years helped the company build its brand. In 2024 it introduced its first-ever global brand campaign, called ―Do Try This at Home.‖―The company complemented its global and national campaigns with local campaigns that used geotargeted digital channels like social media and paid search to target shoppers with news and deals from individual stores by city. IKEA was able to prove through measurement that ―relevant messaging combined with hyper-local targeting resonate with people’s needs, which directly translates to incremental in-store returns.‖―

2. What has IKEA done well to reach consumers in different markets? What else could it be doing?

Suggested answer: IKEA has had an effective approach to reach consumers in different markets, in more than 60 countries, balancing global consistency with local relevance in its retailing and marketing. The company employs extensive market research in order to tailor its offering to different markets. For example, it conducts ethnographic research, sending its researchers into the homes of consumers in the countries it operates in, to understand their needs, behaviors and budgets. When research showed that the DIY packaging of IKEA products met with a negative reception in China, IKEA began offering delivery and assembly, for a fee. In addition, the company historically ran different national brand campaigns in different countries, which enabled it to customize the message for maximum local relevance.

With its in-store display rooms, IKEA shows how the same products can appeal to different regional customers. For instance, display rooms in Japan and Amsterdam may feature exactly the exact same beds, cabinets, and bookshelves. However, Japanese displays might pair the beds and cabinets with tatami mats. The Dutch display will have slanted ceilings, reflecting local architecture. U.S. rooms, on the other hand, fill beds with pillows and sheets.

In response to the increasing urbanization of the global population, the company began opening smaller stores in urban centers, as opposed to its traditional stores in suburbs and exurbs beyond the suburbs. The urban stores are about a quarter of the size and carry about a quarter of the inventory of a full-size IKEA. By 2024 the company had 26 of these ―downtown‖―IKEA stores.

Student answers will vary in terms of ideas for what else IKEA could be doing to reach consumers in different markets. Some answers may suggest IKEA build more ―downtown‖―stores, to align with demographic shifts as the world’s population urbanizes, and to enable the company to open stores in more markets at a faster rate. Other answers may recommend IKEA leverage its low-cost supply chain to further customize the product assortment by market. Students may also recommend IKEA revert from its global campaign back to market-specific campaigns, to increase the local relevance.

3. How would you grow IKEA into the future? Would you change anything with the balance of global consistency with local customization?

Suggested answer: Student answers will vary on how to grow IKEA and whether to change the global-local balance. Some answers may recommend

IKEA open more locations, since its 470 stores in 60 countries leaves room for expansion within less saturated existing countries or into new countries. As referenced in the previous answer, opening more ―downtown‖―stores would enable the company to open stores in more markets at a faster rate. Other answers may suggest IKEA invest heavily in its e-commerce capabilities, to enable it to reach many more potential customers in each market without having to expand its store footprint. Students may also recommend IKEA move into more categories beyond home goods, such as consumer electronics, clothing, or hardware.

Answers in favor of IKEA adopting more global consistency may point to the fact that the company does sell a number of globally consistent pieces, and that its first global campaign was a success. The company could take the cost savings it generates by taking a more globally consistent approach and pass it on to customers or invest it in growth levers like its digital marketing.

Answers in favor of IKEA adding more local customization may highlight the fact that the company’s research consistently shows the need to tailor the product lineup and store decor to local tastes. Even the company’s first global campaign had hyper-local targeting to maximize relevance. Answers may argue that enhancing its local customization would enable IKEA to accelerate growth in priority markets and with priority segments.

Marketing Spotlight: HSBC 1. What are HSBC’s brand strengths? How did those strengths enable it to become a leading global financial services institution?

Suggested answer: Some of HSBC’s brand strengths are its international scale, its local knowledge, and its creative marketing. Over the years, the bank has pioneered many modern banking practices in different countries. The company grew around the world through acquisition and expansion, and by the early 21st century, it was one of the largest banks in the world, with more than 6,500 offices in over 79 countries and territories. In 2002, the company introduced its well-known slogan ―The World’s Local Bank,‖―which it used in its marketing for the next decade. Sir John Bond, HSBC’s former chairman, said, ―Our position as the world’s local bank enables us to approach each country uniquely, blending local knowledge with a worldwide operating platform.‖ To reinforce its local knowledge and global footprint, HSBC pioneered the use of airport jet bridges as an out-of-home advertising channel.

The company launched this ad type in 2001 when it became the exclusive jet bridge advertiser at London’s three airports. Within a decade, it had expanded its jet bridge program to 48 airports in 24 countries. The ads helped HSBC target a core audience of global business travelers. The ads stood out because they prominently appeared in a space that historically did not contain advertising. Moreover, because HSBC ran the same campaign in different airports around the world, the ads reinforced its global positioning. As an HSBC executive explained, ―When you get off a plane or on a plane, you have that same first image. It's a powerful first image.―Then in the early 2020s, HSBC began using its corporate purpose—‖Opening up a world of opportunity‖—as its slogan.

HSBC’s brand strengths enabled it to grow into one of the world’s biggest banks by creatively reinforcing its unique positioning of global scale matched with local expertise. While the company has reduced its global footprint by selling off parts of its business in Europe and North and South America to expand in higher-growth markets in Asia and the Middle East, it has kept its identity as a global bank, serving around 42 million customers in 62 countries and territories, and is the world’s largest trade finance bank.

2. What were the risks and benefits of HSBC’s positioning itself as the “World’s Local Bank”?

Suggested answer: Student answers will vary. Answers may highlight risks including the fact that the credibility of that positioning could be eroded if the company reduced its global footprint, which did happen; that other banks with a global footprint could make a similar claim; that it could open the company to criticism from anti-globalization advocates; and that running the same campaign globally did not sufficiently respect local tastes.

Answers may also highlight benefits including the fact that it was a memorable and unique positioning in the highly competitive—and conservative—finance industry, where many banks have positionings that do not stand out; the positioning succinctly and effectively conveyed the brand’s key strengths of global scale and local knowledge; lent itself to creative marketing that highlighted the interesting nuances of different cultures; and that a globally consistent campaign could lead to increased brand awareness and cost efficiencies. Answers discussing the benefits may also suggest that HSBC did not need to move away from the positioning, since it is still a major global bank with significant local operations in 62 markets. The bank has made a pledge to achieve net-zero carbon emissions in its operations by 2030 and in its financing portfolio by 2050.

3. How would you grow the HSBC brand into the future?

Suggested answer: Student answers will vary. Some answers will recommend that after reducing its geographic footprint, HSBC has room to expand it to at least its former size. Other answers will suggest HSBC maintain its focus on expanding only in high-growth markets. It launched in 2024 a new standalone consumer app called Zing, through which users could send cross-border payments. Students may also recommend HSBC make a major push into cross-border payments, for example by building up its Zing app, acquiring other global payments providers, and potentially moving into cryptocurrency given its cross-border applications. Other answers may suggest HSBC complement its own sustainability commitments by becoming a global leader in sustainable finance for its clients.

DETAILED CHAPTER OUTLINE Opening vignette: Although opportunities to compete in international markets are significant, the risks can be high. Companies selling in global industries have no choice, however, but to internationalize their operations. Some marketers, like Hyundai, are finding international success in an increasingly smaller and more multicultural world. Hyundai vehicles are sold

in over 200 countries. The company employs more than 110,000 people around the globe and has manufacturing and research facilities worldwide. In this chapter, we review the major decisions involved in expanding into global markets.

I. Deciding Whether to Go Abroad A. Deciding to Go Global i. Several factors draw companies into the international arena.

a. b. c. d. e. f.

Better profit opportunities Larger customer base to achieve economies of scale Reduced dependence on one market Counterattack global competitors in home markets Customers abroad require international service Ideas, products, and services can be transferred from one market into another market ii. If the domestic market were large enough, many companies would remain domestic because of the following factors: a. need to learn other languages and laws b. need to deal with volatile currencies c. need to face political and legal uncertainties d. need to resign products to suit different customer needs and expectations e. need to address variations in shopping habits f. need to gain social acceptance g. no communication and distribution infrastructure iii. Going abroad involves two major types of risks. a. General risks associated with entering a new market: o Risk of not understanding foreign preferences o Failure to offer a competitively attractive product o Failure to build effective supply and distribution networks o Failure to promote the offering in an effective and cost-efficient manner b. Specific risks associated with doing business in a different country: o Lack of business culture understanding o Underestimating foreign regulations; incurring unexpected costs o Lack of managers with international experience o Commercial laws can change, currency can be devalued, an expropriation of foreign property could occur iv. Deciding whether to go abroad is the first of several decisions a company must make when developing its global strategy. See Fig. 20.1.

II. Deciding Which Markets to Enter A. Determining How Many Markets to Enter i. Waterfall approach: gradually entering countries in sequence ii. Sprinkler approach: entering many countries simultaneously

iii. The company must choose what countries to enter based on the product and on geography, income, population, and political climate. iv. It may make sense to go into markets where competitors have already entered to force them to defend their market share, as well as to learn how they are marketing in that environment.

B. Evaluating Potential Markets

a. Physical proximity: neighboring countries are popular because entry costs are lower, and control and understanding are higher. b. Cultural proximity: more familiar language, laws, and culture can determine choices but may cause companies to overlook better markets and fail to realize real

differences. c. High market attractiveness, low market risk, and a competitive advantage are important. i. Successfully entering developing markets requires a special set of skills and plans, along with the ability to do a number of things differently and well. ii. Many firms from developed markets are using lessons from developing markets to better compete in their home markets.

III. Deciding How to Enter the Market A. Entering the Market i. A company must choose the best mode of entry for its brands: indirect exporting, direct exporting, licensing, joint ventures, and direct investment.

See Fig. 20.2.

B.

Indirect and Direct Export i. Indirect exporters work through independent intermediaries.

a. Domestic-based export merchants buy the manufacturer’s products and then sell them abroad. b. Domestic-based export agents, including trading companies, seek and negotiate foreign purchases for a commission. c. Cooperative organizations conduct exporting activities for several producers— often of primary products such as fruits or nuts—and are partly under their administrative control. d. Export-management companies agree to manage a company’s export activities for a fee. ii.

Indirect export has two advantages:

a. Less investment b. Less risk iii. Direct exporting has relatively higher risk and return, and happens in several ways: a. Domestic-based export department or division, where a service function may evolve into an export department. b. Overseas sales branch or subsidiary might handle sales, distribution, warehousing, promotion, displays and customer service. c. Traveling export sales representatives travel to find businesses. d. Foreign-based distributors or agents can hold limited or exclusive rights to represent the company.

e. Successful companies adapt their websites to provide country-specific content and services to their highest-potential international markets in the local language.

C. Licensing i. Licensing is a simple way to engage in international marketing.

a. Foreign company gets a license to use a manufacturing process, trademark, patent, trade secret, or other item of value for a fee or royalty b. Licensor gets market entry at little risk; licensee gets production expertise or wellknown product or brand name c. Licensor has less control than if it had its own production and sales facilities, gives up profits, and may create a competitor when the contract ends d. Best strategy is to lead in innovation so licensee will continue to depend on the licensor e. Licensing arrangements include management contracts, contract manufacturing, and franchising.

D.

Joint Ventures i. Joint ventures involve foreign investors and local investors. a. May be necessary or desirable for economic or political reasons b. Foreign firm might lack the financial, physical, or managerial resources to undertake the venture alone, or the foreign government might require joint ownership as a condition for entry c. Partners might disagree over investment, marketing, or other policies. d. Good partners share ―brand values‖―that help maintain brand consistency across markets.

E. Direct Investment i. Direct investment is direct ownership and has advantages. a. Cost economies through cheaper labor or raw materials, government incentives, and freight savings b. Stronger image in the host country because it creates jobs c. Deeper relationship with the government, customers, local suppliers, and distributors, enabling it to better adapt its products to the local environment d. Full control over investment and can develop manufacturing and marketing policies that serve its long-term international objectives e. Access to the market in case the host country insists that locally purchased goods must have domestic content f. A disadvantage is the firm exposes a large investment to risks like blocked or devalued currencies, worsening markets, or expropriation. ii. Acquisition of local brands is another way of entering an international market.

a. Acquisition can couple the benefits of having a local presence with access to advanced technologies, proprietary know-how, and state-of-the-art manufacturing processes. b. Rather than forming a partnership, a firm may choose to acquire another firm. c. Acquisition represents a longer-term commitment by the company to maintain a presence in the country in which the acquired company operates.

IV.

Deciding on the Global Marketing Program A. Standardization i. Standardized Marketing Program (lowest costs) a. Advantages: economies of scale in production and distribution, lower marketing costs, power and scope, consistency in brand image, ability to leverage good ideas quickly and efficiently, uniformity of marketing practices b. Disadvantages: ignores differences in consumer needs, wants, usage patterns, response to marketing programs and activities, brand and product development, competitive environment, legal environment, marketing institutions, administrative procedures c. Marketing Insight: Global Similarities and Differences offers insight into the homogeneity and heterogeneity found across countries.

ii. At the other extreme is a localized marketing program in which the company, consistent with the marketing concept, believes consumer needs vary and tailors its marketing to each target group.

B.

Global Product Strategies

i. There are three basic global product strategies: straight extension, product adaptation, and product innovation. ii. Straight Extension

a. Straight extension introduces the product in the foreign market without any change. b. This strategy requires no additional research and development expense, manufacturing retooling, or promotional modification. c. Straight extension has been successful for cameras, consumer electronics, and many machine tools. d. High-end products benefit from standardization because quality and prestige often can be marketed similarly across countries. e. Culture and wealth factors influence how quickly a new product takes off in a country, though adoption and diffusion rates are becoming more alike across countries over time. f. Food and beverage marketers find it more challenging to standardize. iii. Product Adaptation a. Product adaptation alters the product to meet local conditions or preferences. b. Regional, country, city, and retailer versions can also be used. c. Product invention can be backward or forward. d. Brand element adaptation can include brand names.

iv. Product Invention. Rather than using or adapting its current products, a company might choose to develop new products for its global markets. v. Dealing with Counterfeit Products. As companies develop global supply chain networks and move production farther from home, the possible occasions for corruption, fraud, and quality control problems increase. a. Counterfeiting is estimated to cost more than a trillion dollars a year. b. Manufacturers are fighting back with software that detects fraud and automatically warns apparent violators.

C. Global Brand Strategies

i. A company must decide how to position its brand, as well as whether and how much to adapt the brand to the specifics of each particular market. ii. It must consider the country-of-origin effects that influence brand perception around the world. iii. Brand Adaptation. To launch products and services globally, marketers change brand elements. a. A brand name may require a choice between phonetic and semantic translations. b. Numbers and colors can take on special meaning in certain countries. c. Brand slogans or ad taglines sometimes need to be changed too. iv. Country-of-Origin Effects a. Mental associations and beliefs triggered by a country b. Brands weave themselves into the cultural fabric of their foreign markets. c. Foreign business can boost the local economy, and provide jobs. d. Country image can also help sell products. e. Global marketers know that buyers hold distinct attitudes and beliefs about brands or products from different countries.

D.

Global Pricing Strategies i. Price escalation adds transportation costs, tariffs, importer margins, wholesaler margins, and retailer margins. ii. Choices for setting prices: set uniform price everywhere, or set market-based price in each country.

a. A high transfer price could result in higher tariff duties but lower income taxes, but a low one could be charged with dumping to enter or win a market.

b. Countries with overcapacity, cheap currencies, and the need to export aggressively have pushed their prices down and devalued their currencies. c. Sluggish demand and reluctance to pay higher prices make selling in these markets difficult.

E. Global Communication Strategies

i. Companies vary in the extent to which they adapt their marketing communication for each local market. ii. A company can use one message everywhere, varying only the language and name. a. Communication adaptation can be at the product and communication level.

b. A company can develop a global pool of ads from which each country selects the most appropriate. c. Some companies allow their country managers to create country-specific ads. d. Adapted communications must be culturally acceptable, appropriate, and recognize laws. e. Companies also must be prepared to vary the appeal of their messages. f. Personal selling tactics might need to change.

F Global Distribution Strategies i. The multinational complains that the local distributor doesn’t invest in business growth, doesn’t follow company policy, and doesn’t share enough information. ii. The local distributor complains of insufficient corporate support, impossible goals, and confusing policies. iii. The multinational must choose the right distributors, invest in them, and set performance goals to which both parties can agree. a. Distribution channels vary considerably across countries. b. Much foreign retailing is in the hands of small, independent retailers. c. Markups are high, but the real price comes down through haggling. d. Breaking bulk, a function of intermediaries, perpetuates long channels of distribution, a major obstacle to large-scale retailing in developing countries. e. Nevertheless, retailers are moving into global markets, offering the opportunity to sell across more countries and challenging local distributors and retailers. iv. Many multinationals are plagued by the gray market, which diverts branded products from authorized distribution channels either in-country or across international borders. a. Often a company finds some enterprising distributors buying more than they can sell in their own country and reshipping the goods to another country to take advantage of price differences. o Gray markets create a free-rider problem, making legitimate distributors’ investments in supporting a manufacturer’s product less productive and selective distribution systems more intensive to reduce the number of gray market possibilities. b. They harm distributor relationships, tarnish the manufacturer’s brand equity, and undermine the integrity of the distribution channel.

CHAPTER

21

ENVIRONMENT, SOCIAL, AND GOVERNANCE ISSUES IN MARKETING MARKETING

LEARNING OBJECTIVES After studying this chapter, you should be able to: 21.1 Discuss the societal impact of marketing.

21.2 Explain how companies manage environmental issues.

21.3 Identify the strategies that companies use to address social issues.

21.4 Describe the corporate governance issues in developing marketing strategies.

CHAPTER SUMMARY 1. The most admired companies in the world abide by high standards of business and marketing guidelines that dictate serving people’s interests, as well as their own. ESG refers to how an organization performs in terms of its environmental impact, social impact, and corporate governance. Raising the level of socially responsible marketing calls for pursuing a triple bottom line that focuses on the community and the environment, in addition to corporate profits.

2. Many aspects of ―green‖ culture, from organic products or ingredients to recyclability, have gone mainstream, as consumers increasingly turn to digital devices to learn about the environment and share their green experiences.

Sustainability—the ability to meet humanity’s needs without harming future generations—now tops many corporate agendas. Major corporations outline in great detail how they improve the long-term impact of their actions on communities and the environment 3. Achieving socially responsible growth calls for marketers to invest resources to create value for the community in which a company operates. There are several domains in which community-based corporate social responsibility typically occurs: improving the workplace, engaging in corporate philanthropy, supporting low-income communities, fostering cause marketing, and engaging in social marketing.

4. A growing number of companies focus on the largest but poorest group of the world’s population—commonly referred to as the bottom of the pyramid—in the belief that they can profitably serve these customers, while at the same time promoting social change.

5. Pursuing a triple bottom line poses challenges for profit-driven companies, because at the expense of corporate profits. To ensure a meaningful commitment to corporate social responsibility, a company must find the right balance between profitability and societal benefits and ensure that the chosen efforts to promote social responsibility are reflected in the company’s culture and value system and have the buy-in of the company stakeholders

OPENING THOUGHT This chapter sums up the concept of marketing in today’s environment. Marketing must be involved in all elements of the company’s operations and work closely with its suppliers, channel partners, with the understanding that each element or function provides an opportunity to market the product to the ultimate consumer. In many ways, this chapter focuses on the ―management‖ of marketing in terms of the ability of the marketing personnel to work with cooperation and to encourage customer focus by each discipline. Marketers today must also be concerned for the welfare of society as a whole. Finally, marketers must focus their attention to the implementation process of solving marketing opportunities.

Students engaged in disciplines outside of marketing may present differing opinions of the value of their discipline to the overall health of the organization. The instructor’s challenge is to demonstrate how a holistic approach is preferable or even necessary in today’s (and more so for the future) competitive environment. Companies that do not/will not adopt such a view are likely to find that they are not competitive in the future.

TEACHING STRATEGY AND CLASS ORGANIZATION PROJECTS 5. At this point in the semester-long marketing plan project, this chapter is the second of two parts of oral presentations of the student’s projects. Students should emphasize here how, specifically, their marketing plans contain a holistic view of the marketing process.

6. The concept of ―internal marketing‖ is prevalent now in popular books and magazines.

Students should read and review at least four sources from the internet and comment on what additional information, techniques, and formulas for success they have discovered. How does this information compare, contrast, or add to the information contained in the chapter? What is the future of ―internal marketing‖ and why are companies so intent on succeeding?

ASSIGNMENTS Successful holistic marketers have integrated relationship marketing, internal marketing, and social marketing into their organizations. Students should choose three companies that they believe practice holistic marketing and then defend their choices by outlining the marketing programs of the selected companies.

Some companies, like the Newman’s Own Brand, have built a business model on social responsibility. Students should find three other examples of such socially responsible firms and comment on whether or not they see ―social responsibility‖ as a need component for marketing in the future.

Specifically, knowing what we now know about consumer-buying behavior, is ―socially responsible‖ a determinant for future success—is it a mega-trend?

Or just a trend?

Have students read Lily Zheng, “We’re Entering the Age of Corporate Social Justice,‖ Harvard Business Review, November 2020. Retrieved on March 23, 2021 from: https://hbr.org/2020/06/were-entering-the-age-of-corporate-social-justice Have the students read Michael F. Porter and Mark R. Kramer, ―Strategy & Society,‖ Harvard Business Review, December 2006, pp. 78–82; Clayton M. Christense, Heiner Baumann, Rudy Ruggles, and Thomas M. Stadtler, ―Disruption Innovation for Social Change,‖ Harvard Business Review, December 2006, pp. 94–101, and report on their findings. In particular, ask the students to comment on the sustainability of these concepts into the 21st century.

Students should research and find two examples of a successful causemarketing program currently available in their area and evaluate whether or not they believe that this cause-marketing program is (a) building the firm’s brand awareness; (b) enhancing brand image; (c) establishing brand credibility; (d) evoking brand feelings; (e) creating a sense of brand community; and (f) eliciting brand engagement. Students should be able to defend their opinions citing financial, market share, stock price growth, and other definitive measures.

Drawing a clear line between normal marketing practices and unethical behavior is not easy. Ask students to identify two firms in the area that they feel are or have demonstrated unethical behavior (although not illegal, per se). Do they believe that such practices will not be successful for the firm in the future, and if so, why? Do all of the students in the class agree with this assertion? Or on the other hand, do they believe that the examples offered are just ―creative‖ marketing?

END-OF-CHAPTER SUPPORT Marketing Spotlight: Patagonia

1. How has Patagonia built its brand over time? What are the key brand ingredients that helped it become a leader in outdoor apparel?

Suggested answer: Patagonia has become one of the most successful outdoor brands and a global leader in sustainability that many other companies look to for inspiration. Founder Yvon Chouinard’s twin passions for making quality outdoor gear and apparel and for protecting the environment fueled Patagonia’s mission to ―Make the best product, cause no unnecessary harm, and use business to inspire and implement solutions to the environmental crisis.‖ Several of the key brand ingredients that helped it become a leader in outdoor apparel include its name and logo, its innovative designs, the high quality of its products, and its deep commitment to sustainability.

The company chose Patagonia as its brand name because it evoked the natural beauty of the Patagonia region of Argentina and Chile. The logo design reinforced the link to Patagonia by combining visual elements of the blue sea, jagged mountains and expansive sky found there. The company has a long history of innovating with its products, like the Synchilla synthetic fleece sweater that provided insulation and didn’t absorb moisture. It also introduced a moisture-wicking, fast-drying fabric for long underwear called Capilene. In 1994, Patagonia created Synchilla fleece made from recycled soda bottles, which earned it an estimated $5 million worth of free press coverage. The company has long offered what it calls its ―Ironclad Guarantee,‖ which guaranteed the product would perform to the customer’s satisfaction, or Patagonia would repair, replace or refund the item. The company’s repair facility in Reno, Nevada is the largest garment repair facility in the U.S., and repairs more than 100,000 items annually.

Chouinard described the company’s focus on social responsibility by saying ―From 1994 to today, the major effort at Patagonia has been to clean up our supply chain including the use of organic natural fibers and recycled synthetics, less toxic dyes and chemicals, better labor practices, and finally, taking responsibility for our product from birth to rebirth.‖ In 2011, it ran what some commentators consider its most famous campaign, a full-page ad in the New York Times on Black Friday (the big U.S. shopping day after Thanksgiving) with a photo of one of its fleeces and the headline ―Don’t Buy This Jacket.‖ The copy tallied the environmental cost of the jacket and urged consumers ―to buy less and reflect before you spend a dime on this jacket or anything else.‖ Patagonia sharpened its focus on sustainability when in 2018 it

rewrote its corporate purpose to the new articulation: ―We’re in business to save our home planet.‖ The company established an even stronger commitment to sustainability in 2022 when the Chouinard family restructured Patagonia, putting all of their shares in two entities—a trust and a nonprofit—designed to protect the planet.

2. Describe the role of social responsibility in how Patagonia built its business. What are the benefits and limitations of its approach to social responsibility?

Suggested answer: As discussed in the previous answer, social responsibility—sustainability in particular—has been a core brand strength for Patagonia for decades. Today, Patagonia’s sustainability efforts span every aspect of its business. The company has worked for decades to minimize its environmental impact by using more sustainable materials in its manufacturing; reducing emissions and waste in its owned-and-operated offices, distributions centers, and shipping; and ensuring environmental responsibility from its suppliers. The company saw it especially necessary to take action given that the apparel industry ―is responsible for up to 10 percent of the global greenhouse gases emitted in the world.‖ In Spring 2024, 90 percent of Patagonia’s fabrics by weight were made with preferred materials like organic cotton, recycled polyester and nylon, and hemp. Patagonia has also set ambitious milestones to further reduce its environmental impact: eliminating virgin petroleum material in its products and using packaging that is 100 percent reusable, home compostable, renewable or easily recyclable by 2025, and achieving net-zero carbon emissions across its entire business by 2040. The company has given $230 million away to date to fund causes dedicated to protecting the planet.

Student answers may vary about the benefits and limitations of its approach to social responsibility. Answers may highlight benefits to the company including the goodwill it generates by aligning with the values of its target audience of outdoor enthusiasts; the free publicity it earns with its actions and advocacy; and lower energy costs. Answers may also highlight societal benefits including the direct impact of Patagonia lowering its carbon footprint and donating to environmental causes; the influence on consumers being more conscious about their consumption; and the broader benefits of other companies getting inspired to follow Patagonia’s example.

Answers may note limitations including the challenge in its new corporate structure of aligning the interests of its profit-making side with its non-profit side; the tension between its commitment to reducing environment impact and an energy-intensive apparel business model that succeeds when people consume its products; and the fact that its political activities may alienate certain consumers that might otherwise be open to its message about sustainability. In a 2023 survey, conducted by Axios and Harris Poll, Patagonia remains committed to its purpose of saving our home planet. Patagonia ranked as the most reputable company in the U.S.

3. How would you continue to grow Patagonia’s profits, which now flow to its nonprofit, while honoring its commitment to sustainability?

Suggested answer: Student answers will vary. Answers may note that Patagonia has carefully honed its business model over decades to deliver consistent profits that can fund its sustainability commitment. The company does not pursue growth for growth’s sake, but rather is ―in business to save our home planet.‖ Answers may also highlight that Patagonia has created something of a virtuous cycle, where many consumers buy its products because of its sustainability efforts, which enable it to fund more sustainability efforts, which leads to more customer loyalty and new customer acquisition. Answers could recommend that the company augment the growth of this virtuous cycle by increasing its advertising budget, which has historically been less than one percent of revenues. Students may also suggest the company expand by doing one or more of the following: going deeper into categories like athleisure and casual wear; adding new categories like apparel for other outdoor sports like golf, cycling, footwear; developing more gear for the sports it makes apparel for; expanding its retail and catalog presence into more markets.

Marketing Spotlight: Tiffany & Co.

1. How did Tiffany become a leading luxury brand? What are its brand strengths?

Suggested answer: Tiffany has built one of the most enduring luxury brands with brand strengths that include exceptional quality, iconic reputation, classic but contemporary style, savvy marketing communications, and social responsibility. Tiffany’s first store quickly became the go-to destination for fashionable ladies looking for high-quality jewels and timepieces. In the 1880s, the company developed a new six-prong setting for diamond rings, which became the standard for engagement rings to this day.

In addition to a catalog, Tiffany promoted its jewelry with newspaper and magazine ads that featured artistic images of its jewelry, first in black-and-white and later in color. The company also used PR to reach its audience. The company nurtured relationships with fashion magazines such that by the middle of the 20th century, ―you couldn’t even crack open a magazine without seeing models draped in Tiffany jewelry,‖ as one observer noted. The company earned one of the most memorable product placements when its Fifth Avenue flagship store ―starred‖ in the titular role of the 1961 film Breakfast at Tiffany’s.

Tiffany & Co.’s social and environmental missions have become a valuable aspect of its brand image, and its strict usage of diamonds and precious metals that are ethically sourced is an integral part of the brand’s promise. The company employs a zero-tolerance policy toward purchasing conflict diamonds, and in 2006 it helped to establish the Initiative for Responsible Mining Assurance (IRMA), which became the world’s first certification system for responsible mining of all mined materials. Tiffany has released collections that support various environmental initiatives, such as the Save the Wild jewelry line, with 100 percent of profits donated to Africa’s Elephant Crisis Fund. In 2020, it became the first global luxury jeweler to disclose the country of origin of newly sourced diamonds with an initiative called the ―Diamond Craft Journey.‖ Since its founding in 2000, The Tiffany Foundation has donated more than $100

million to fund conservation efforts, sustainable mining practices, and programs in the decorative arts.

The company has kept its classic designs fresh by partnering with globally famous celebrities on exclusive collections. In 2021, Tiffany collaborated with Beyoncé and Jay-Z on a series of campaigns, starting with the ―About Love‖ campaign. In 2023, Tiffany created a collection in honor of Beyoncé’s RENAISSANCE world tour and donated 100 percent of the proceeds to the About Love scholarship program for HBCU students. Tiffany introduced other collaborations targeting young consumers, including a jewelry collection with Pharrell Williams, the Men’s Creative Director for LVMH’s Louis Vuitton brand and a limited edition of Nike’s Air Force 1 sneaker with a Tiffany Blue swoosh.

2. What role do Tiffany’s social responsibility efforts play in its marketing? Would you change anything about the company’s approach to responsibility?

Suggested answer: Tiffany’s social responsibility efforts have played a large part in its marketing. As noted in the previous answer, the company’s social and environmental missions have become a valuable aspect of its brand promise. Tiffany & Co. traces its diamonds and metals to the source and ensures that mining locations practice responsible operations.

The company has been vocal in its opposition to mines that threaten local ecosystems. In 2004, Tiffany took out a full-page ad in the Washington Post to voice its opposition to a proposed mine in Montana. In recent years, management has trained salespeople to educate customers on how Tiffany’s sourcing methods differ from those of competitor jewelers.

Tiffany has embedded its mission of sustainability into both its retail locations and its product packaging, using energy-efficient LED lighting in stores and recycled materials in its signature blue packaging. Tiffany’s social and environmental missions have become a valuable aspect of its brand image, and its strict usage of diamonds and precious metals that are ethically sourced is an integral part of the brand’s promise. In 2023, it unveiled a full renovation of its flagship Fifth Avenue store, called ―The Landmark,‖ The company’s commitment to social responsibility has become an important element of its brand.

Student answers may vary on the topic of changing anything about the company’s approach to responsibility. Answers in favor of increasing its commitment to responsibility may note that given Tiffany’s involvement in the mining industry, it is incumbent on the company to do even more to protect its workers and mitigate its environmental impact. Answers in favor of de-emphasizing responsibility may note that mining is one of the most environmentally destructive practices, so Tiffany is lacking authenticity as a brand by effectively engaged in greenwashing.

3. How would you accelerate growth for Tiffany?

Suggested answer: Student answers may vary. Answers may highlight the fact that analysts credit Tiffany as being LVMH’s biggest source of

growth since the 2021 acquisition, so the company’s current strategy is effective at driving growth. Answer may share other ideas for accelerating growth include opening more flagship stores, adding more exclusive collaborations, developing a line of more affordable jewelry to draw in younger consumers, and investing in its e-commerce operations to reach more consumers.

DETAILED CHAPTER OUTLINE Opening vignette: Healthy long-term growth for a brand requires marketers to engage in a host of marketing activities and satisfy a broad set of constituents and objectives. In doing so, marketers must consider the societal impact of their actions. Corporate social responsibility has become a priority for many organizations and is ingrained in their business models. Some organizations, such as Unilever, embrace this vision of social responsibility. One of the biggest marketing spenders in the world with advertising expenses approaching $ billion annually, Unilever has gained an industry reputation as a highly skilled and principled marketer of consumer goods as evidenced by their success with Dove beauty products.

Brands with a strong social purpose were driving three-quarters of Unilever’s growth.

Successful marketing requires effective relationship marketing, integrated marketing, internal marketing, and performance marketing.

I. The Social Impact of Marketing A. Corporate Social Responsibility i. Effective marketing must be matched by the corporate social responsibility, cause marketing, social marketing and sustainability ii. Three factors have contributed to the increased importance of corporate social responsibility in business a. Changes in the physical and social context b. Pressure to implement socially responsible polices c. Market opportunity iii. Companies engage in prosocial activities and invest in corporate social responsibility for the following reasons: a. Creating societal benefits is an element of the corporate culture and the company’s value system. b. Differentiating themselves appeals to consumers and collaborators who favor companies that exhibit civic virtues and care about creating value for society. c. Building a bank of public goodwill offsets criticisms and deals with crises. d. Increasing employee loyalty creates investor goodwill. iv. Many companies focus on the so-called triple bottom line—people (social component), planet (sustainability component), and profit (monetary component).

D. Cause Marketing i. Cause-related marketing links the firm’s contributions toward a designated cause to customers engaging directly or indirectly in revenue-producing transactions with the firm. ii. A successful cause-marketing program can:

a. b. c. d.

improve social welfare create differentiated brand positioning build strong consumer bonds enhance the company’s public image

e. f. g. h. i.

create a reservoir of goodwill boost internal morale galvanize employees drive sales increase the firm’s market value.

iii.

Associating a company’s brands with a relevant cause can benefit the company in several ways:

a. b. c. d. e. f.

builds brand awareness enhances brand image establishes brand credibility evokes brand feelings creates a sense of brand community elicits brand engagement

iv. Cause-related marketing backfires if consumers question the link between the product and the cause or see the firm as self-serving and exploitive or if consumers do not think a company is consistent and sufficiently responsible in all its behavior. v.

To avoid backlash, some firms take a soft-sell approach to their cause marketing. vi. Many companies focus on one or a few causes to maximize impact, but limiting support may not result in a transfer of positive feelings to the firm.

E. Social Marketing

i. Social marketing is similar to cause marketing in that both aim to benefit the community in which the company operates. ii. Social marketing aims to further a cause, such as ―say no to drugs‖ or ―exercise more and eat better.‖ iii. Social marketing influences behavioral change for social good by using a marketing planning process that involves a well-defined audience segment. a. Choosing the right goal or objective for a social marketing program is critical. b. The planning process follows many of the same steps as for traditional products and services. c. They should have a clearly defined goal, a well-articulated strategy, and meaningful tactics. iv. Social marketing is related to brand activism, in which a company takes a stand on an important social, economic, environmental, or political issue (e.g., Nike’s support of NFL players kneeling during the national anthem).

II. Managing Sustainability A. Sustainability i. Sustainability: the ability to meet humanity’s needs without harming future generations.

ii. Sustainability is a direct consequence of corporate social responsibility. It reflects a company’s general attitude to conduct business in a way that benefits society at large. iii. Sustainability is the ultimate goal and the key outcome of a company’s socially responsible behavior. iv. Sustainability has been linked to measuring a company’s progress on three key dimensions. a. Protecting the environment b. Social impact c. Corporate governance (referred to as ESG): environmental impact, social impact, corporate governance.

d. The key difference is that while sustainability is often referred to as the ultimate goal a company aims to achieve, ESG is used in reference to a system of performance metrics used to monitor and report a company’s progress towards sustainability.

III. Environmental Issues in Marketing A. Environmental issues are rapidly becoming a priority as corporations try to reduce the impact of human activity on the environment. i. Marketing Insight: Environmental Concerns in the Water Industry shows how entire industries are being transformed by environmental issues. ii. Many aspects of ―green‖ culture have gone mainstream. iii. Environmental issues play an increasingly important role in product design. iv. Interest in sustainability has resulted in greenwashing, providing misleading information or giving a false impression that products or practices are environmentally friendly without living up to that promise. v. Socially responsible marketing recognizes the need to integrate environmental issues into the firm’s strategic plans.

IV. Social Issues in Marketing A. Domains i. Domains in which community-based corporate social responsibility occur: a. improving the workplace b. engaging in corporate philanthropy c. supporting low-income communities d. fostering cause marketing e. engaging in social marketing.

B. Creating a Diverse, Equitable, and Inclusive Work Environment i. To implement corporate social responsibility in the workplace, companies focus on: a. Fair compensation that offers wages consistent with the industry norms and is sufficient to meet basic living requirements. b.

Work–life balance that ensures employees can allocate time to other aspects of their lives—family, personal interests, socializing, and leisure activities. c. Diversity that is promoted by avoiding artificial barriers or distinctions based on factors such as race, ethnicity, religion, and culture. d. A safe and healthful working environment that protects employees against workplace violence and work-related illnesses. e. Employee development that is fostered by investing resources in training and advancing employees. ii. Treating employees fairly and ethically is important for global businesses with different labor laws. iii. Applying the same principles to global subsidiaries as to domestic operations is the mark of a socially responsible organization.

C. Corporate Philanthropy

i. Corporate philanthropy is rising, as firms believe that corporate social responsibility in the form of cause marketing and volunteerism programs are the ―smart thing to do.‖ ii. Corporate giving can have a positive impact in at least three domains: a. enhancing company image b. enhancing customer loyalty c. enhancing perceived product performance. iii. Consumers view companies engaged in corporate philanthropy as warmer, more compassionate, more ethical, more likable and trustworthy, and less blameworthy in corporate crises.

iv. A company’s reputation for social responsibility tends to: a. enhance consumer loyalty b. increase customer satisfaction c. decrease consumer price sensitivity d. increase their brand commitment. v. Doing good can indeed help companies do well. vi. Cause marketing or ―consumption philanthropy‖ may: a. replace virtuous actions with less thoughtful consumer buying b. reduce emphasis on real solutions c. deflect attention from the fact that markets create many social problems.

D. Service Low-Income Communities i. The bottom of the pyramid (BOP) is a socioeconomic concept used in reference to the largest but poorest group of the world’s population, who live on less than $4 a day. ii. A ―low-price, low-margin, high-volume‖ business model is the key to successfully appealing to lower-income consumers in developing markets. iii. The transfer of innovations from developing to developed markets is reverse innovation. iv. Reverse innovation adopts solutions from a developing market to achieve cheaper alternatives in a developed market. v. Reverse innovation can involve public policy benefits, which can transform industries through:

a. ultra-low-cost transportation b. renewable energy c. clean water d. micro-finance e. affordable health care f. low-cost housing. vi. Getting the marketing equation right in developing markets can pay big dividends.

IV. Governance Issues in Marketing A. Governance

i. In some cases it is not easy to draw a clear line between normal marketing practices and unethical behavior . B. Developing Ethical Marketing Communications i. To break through the clutter of messaging faced by consumers, some advertisers push the boundaries of what is ethical and legal. ii. Advertisers must not make false claims, use false demonstrations, or create ads with the capacity to deceive, even if no one is actually deceived.

a. Sellers in the United States are legally obligated to avoid bait-and-switch advertising that attracts buyers under false pretenses. b. It’s illegal for salespeople to misinform consumers or mislead them about the advantages of buying a product. c. Marketing communication can generate public controversy when marketers take unfair advantage of vulnerable groups (such as children) or disadvantaged groups (such as low-income, ethnic minority residents), or promote potentially harmful products. d. A key area of concern for many consumer-protection advocates is the millions of kids who are online.

C. Managing Customer Privacy

i. Consumers are aware of cookies, profiles, and other online tools that let

e-commerce businesses know their identity and shopping habits. ii. Consumers are concerned by the extent to which companies gather information about them. a. One concern is that a company’s ability to pinpoint a person’s location enables marketers to track consumers’daily routines, frequently visited establishments, and movements within a retail store. b. The exploding amount of digital data online can be collected, bought, and sold by advertisers, marketers, ad networks, data brokers, website publishers, social networks, and online tracking and targeting companies. c. Research shows that more people, especially older consumers, are refusing to reveal private information online. d. Consumers accept more privacy intrusions because they don’t realize what information they are giving out. e. AI and Marketing: Social Responsibility. Artificial intelligence is heightening privacy concerns. iii. Consumers increasingly want to know where, when, how, and why they are being watched online.

iv. The data-tracking firm, Acxiom maintains a database on about 260 million U.S. individuals and over 190 million households.